##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|                                            |  |                                                                                         
|------------------------------------------- |  | ----------------------------------------------------------------------------------------
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|                                           
|For the fiscal year ended December 31, 2004

Encore Acquisition Company


(Exact name of registrant as specified in its charter)


|                                                                                             |  |                              |  |                                      
|-------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -------------------------------------
|Delaware                                                                                     |  | 001-16295                    |  | 75-2759650                           
|(State or other jurisdiction
    of incorporation)                                           |  | (Commission
    File Number) |  | (IRS Employer
    Identification No.)
|                                                                                            
|777 Main Street
    Suite 1400
    Fort Worth, Texas(Address of principal executive offices) |  |                              |  | 76102(Zip Code)                      

Registrants telephone number, including area code:


(817) 877-9955


Securities registered pursuant to Section 12(b) of the
Act:


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|Common Stock        |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act:


None


þ o


o


þ o


|                                                                                                                                                                                                                                |  |   |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ----------- | 
|Aggregate market value of the voting and non-voting common stock
    held by non-affiliates of the Registrant as of June 30,
    2004 (the last business day of Registrants most recently
    completed second fiscal quarter) |  | $ | 848,026,610 | 
|Number of shares of Common Stock, $0.01 par value,
    outstanding as of February 28, 2005                                                                                                                                      |  |   | 32,861,474  | 

DOCUMENTS INCORPORATED BY REFERENCE












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ENCORE ACQUISITION COMPANY


2004 ANNUAL REPORT ON FORM 10-K


TABLE OF CONTENTS


|                                                                       |  |                                                                                                                      |  |      |    |  |  | 
|---------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  |  | 
|                                                                       |  |                                                                                                                      |  | Page |   
|                                                                       |  |                                                                                                                      |  |      |   
|PART I                                                                
|Items 1 and 2.                                                         |  | Business and Properties                                                                                              |  |      | 2  | 
|Item 3.                                                                |  | Legal Proceedings                                                                                                    |  |      | 17 | 
|Item 4.                                                                |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 17 | 
|                                                                      
|PART II                                                               
|Item 5.                                                                |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 18 | 
|Item 6.                                                                |  | Selected Financial Data                                                                                              |  |      | 19 | 
|Item 7.                                                                |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 20 | 
|Item 7A.                                                               |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 48 | 
|Item 8.                                                                |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 53 | 
|Item 9.                                                                |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 85 | 
|Item 9A.                                                               |  | Controls and Procedures                                                                                              |  |      | 85 | 
|Item 9B.                                                               |  | Other Information                                                                                                    |  |      | 87 | 
|                                                                      
|PART III                                                              
|Item 10.                                                               |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 87 | 
|Item 11.                                                               |  | Executive Compensation                                                                                               |  |      | 87 | 
|Item 12.                                                               |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 87 | 
|Item 13.                                                               |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 88 | 
|Item 14.                                                               |  | Principal Accountant Fees and Services                                                                               |  |      | 88 | 
|                                                                      
|PART IV                                                               
|Item 15.                                                               |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 89 | 
|Form of Restricted Stock Award-Executive                              
|Form of Stock Option Agreement (Nonqualified)                         
|Form of Stock Option Agreement (Incentive)                            
|Form of Indemnification Agreement for Directors and Executive Officers
|Table of 2005 Base Salaries for Executive Officers                    
|Subsidiaries of the Company                                           
|Consent of Ernst & Young LLP                                          
|Consent of Miller and Lents, Ltd.                                     
|Certification of Pricipal Executive Officer                           
|Certification of Principal Financial Officer                          
|Certification of Principal Executive Officer                          
|Certification of Principal Financial Officer                          





1



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##### Table of Contents








PART I





Items 1 and 2.     Business and
Properties


General


Our Business.


Most Valuable Asset.


Recent Acquisitions.


Cortez Oil & Gas, Inc.




Overton.




2



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##### Table of Contents





Drilling.


Oil and Natural Gas Production and Reserves.




|                         |       |                    |         |         |         |  |               |            |  |  |         |               |  |            |     |      |         |  |        |           |  |  |     |      |  |  |      |      | 
|------------------------ | ----- | ------------------ | ------- | ------- | ------- |  | ------------- | ---------- |  |  | ------- | ------------- |  | ---------- | --- | ---- | ------- |  | ------ | --------- |  |  | --- | ---- |  |  | ---- | ---- | 
|                         |       | Proved Reserves at |         |         |         |  | Average Daily |            |  |  |         | Average Daily |  |            |     |      |        
|                         |       | December 31,       |         |         | Percent |  |               | Production |  |  | Percent |               |  | Production |     |      | Percent |  |        | Pro-Forma | 
|                         |       | 2004               |         |         | of      |  |               | for 2004   |  |  | of      |               |  | Q4 2004(2) |     |      | of      |  |        | R/P       | 
|                         |       | (MBOE)             |         |         | Total   |  |               | (BOE/d)    |  |  | Total   |               |  | (BOE/d)    |     |      | Total   |  |        | Index(2)  | 
|                         |       |                    |         |         |         |  |               |            |  |  |         |               |  |            |     |      |         |  |        |           | 
|Cedar Creek Anticline(1) |       |                    | 113,873 |         |         |  | 66%           |            |  |  | 13,660  |               |  |            | 55% |      |         |  | 13,518 |           |  |  | 52% |      |  |  | 23.0 |     
|Permian Basin            |       |                    | 29,336  |         |         |  | 17%           |            |  |  | 5,368   |               |  |            | 22% |      |         |  | 6,023  |           |  |  | 23% |      |  |  | 13.3 |     
|Mid-Continent            |       |                    | 22,835  |         |         |  | 13%           |            |  |  | 3,359   |               |  |            | 14% |      |         |  | 4,441  |           |  |  | 17% |      |  |  | 14.1 |     
|Rockies                  |       |                    | 7,009   |         |         |  | 4%            |            |  |  | 2,278   |               |  |            | 9%  |      |         |  | 2,114  |           |  |  | 8%  |      |  |  | 9.1  |     
|                         |       |                    |         |         |         |  |               |            |  |  |         |               |  |            |     |      |         |  |        |           | 
|                         | Total |                    |         | 173,053 |         |  |               | 100%       |  |  |         | 24,665        |  |            |     | 100% |         |  |        | 26,096    |  |  |     | 100% |  |  |      | 18.1 | 
|                         |       |                    |         |         |         |  |               |            |  |  |         |               |  |            |     |      |         |  |        |           | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our CCA properties, which produce mainly from porous dolomites
    drilled on 40 to 80 acre spacing intervals, have longer
    reserve lives than our other properties because the low
    permeability level encountered within those producing intervals
    require a longer time to produce the reserves in place. This
    results in a lower production decline rate.                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(2) | R/ P index is a ratio used by management and the oil and natural
    gas industry to analyze the length of time the Companys
    reserves can generate cash flows at current production levels.
    This calculation is derived by dividing our total proved
    reserves into our production. In calculating the pro forma R/P
    index, we annualized our fourth quarter 2004 production because
    it includes production from both the Cortez and Overton
    acquisitions for the entire quarter. We believe this approach
    more accurately reflects our R/P index. Based on full year 2004
    production, our R/P index was 22.8 for Cedar Creek Anticline,
    14.9 for Permian Basin, 18.6 for Mid-Continent, 8.4 for Rockies,
    and 19.2 for all properties.

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|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |        |        | 
|------------------------------------- | --------------------------------- | ------------------------------- | --- | ------ | ---------- |  | --- | ------ | ------ |  | ------- | ------ | ------ |  | --- | ------ | ------ | 
|                                      |                                   | Year Ended December 31,         |     |        |           
|                                      |                                   |                                 |     |        | Three Year | 
|                                      |                                   | 2004                            |     |        | 2003       |  |     | 2002   |        |  | Average |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Acquisition Reserve Replacement Ratio |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Acquisitions of minerals-in-place |                                 |     | 22,239 |            |  |     | 6,257  |        |  |         | 15,461 |        |  |     | 43,957 |       
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 9,027  |            |  |     | 8,110  |        |  |         | 7,399  |        |  |     | 24,536 |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Acquisition reserve replacement ratio |                                   |                                 | 246 | %      |            |  | 77  | %      |        |  | 209     | %      |        |  | 179 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Development Reserve Replacement Ratio |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Extensions and discoveries        |                                 |     | 8,768  |            |  |     | 5,182  |        |  |         | 13,546 |        |  |     | 27,496 |       
|                                      | Improved recovery                 |                                 |     | 11,812 |            |  |     | 12,744 |        |  |         |       |        |  |     | 24,556 |       
|                                      | Revisions of estimates            |                                 |     | (1,629 | )          |  |     | (3,493 | )      |  |         | 2,719  |        |  |     | (2,403 | )     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total development program       |     |        | 18,951     |  |     |        | 14,433 |  |         |        | 16,265 |  |     |        | 49,649 | 
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 9,027  |            |  |     | 8,110  |        |  |         | 7,399  |        |  |     | 24,536 |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Development reserve replacement ratio |                                   |                                 | 210 | %      |            |  | 178 | %      |        |  | 220     | %      |        |  | 202 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total Reserve Replacement Ratio |     |        |            |  |     |        |        |  |         |        |        |  |     |        |        | 
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Acquisitions of minerals-in-place |                                 |     | 22,239 |            |  |     | 6,257  |        |  |         | 15,461 |        |  |     | 43,957 |       
|                                      | Extensions and discoveries        |                                 |     | 8,768  |            |  |     | 5,182  |        |  |         | 13,546 |        |  |     | 27,496 |       
|                                      | Improved recovery                 |                                 |     | 11,812 |            |  |     | 12,744 |        |  |         |       |        |  |     | 24,556 |       
|                                      | Revisions of estimates            |                                 |     | (1,629 | )          |  |     | (3,493 | )      |  |         | 2,719  |        |  |     | (2,403 | )     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total reserve additions         |     |        | 41,190     |  |     |        | 20,690 |  |         |        | 31,726 |  |     |        | 93,606 | 
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 9,027  |            |  |     | 8,110  |        |  |         | 7,399  |        |  |     | 24,536 |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Total reserve replacement ratio       |                                   |                                 | 456 | %      |            |  | 255 | %      |        |  | 429     | %      |        |  | 381 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       

Business Strategies






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain an active development drilling program. Our
    technological expertise, combined with our proficient field
    operations and reservoir engineering, has allowed us to increase
    production and reserves on our properties through development
    drilling, workovers, waterflood enhancements, recompletions, and
    tertiary projects. Our plan is to maintain an inventory of
    exploitation and development projects that provide us ongoing
    drilling activity. Each year, we budget a portion of internally
    generated cash flow to secondary and tertiary recovery projects
    whose results will not be seen until future years.
|
| |  | Maximize existing reserves and production through
    high-pressure air injection. In addition to conventional
    development drilling, we utilize high-pressure air injection
    techniques on certain                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | properties to enhance our growth. High-pressure air injection
    (HPAI) involves using compressors to inject air into
    producing oil and natural gas formations in order to displace
    remaining resident hydrocarbons and force them under pressure to
    a common lifting point for production. We believe that the HPAI
    programs on our CCA properties will generate a higher rate of
    return than other tertiary processes and can be applied
    throughout our CCA properties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Expand our reserves, production, and drilling inventory
    through a disciplined acquisition program. We will continue
    to pursue acquisitions of properties with similar upside
    potential to our current portfolio of producing properties.
    Using the experience of our management team, we have developed
    and refined an acquisition program designed to increase our
    reserves and to complement our core properties, while providing
    upside potential. We have a staff of engineering and geoscience
    professionals who manage our core properties and use their
    experience and expertise to target and evaluate attractive
    acquisition opportunities. Following an acquisition, our
    technical professionals seek to enhance the value of the new
    assets through a proven development and exploitation program. We
    will continue to evaluate acquisition opportunities in 2005 with
    the same disciplined commitment to acquire assets that fit our
    portfolio and create value for our shareholders.
|
| |  | Explore for reserves. With the current high-priced
    commodity environment, we believe modest exploration programs
    can provide a rate of return comparable or superior to property
    acquisitions in certain areas. We seek to acquire undeveloped
    acreage and/or enter into drilling arrangements to explore in
    areas that complement our portfolio of properties. In keeping
    with our exploitation focus, the exploration projects are
    expected to set up multi-well exploitation projects if
    successful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Operate in a cost effective, efficient, and safe manner.
    As of December 31, 2004, we operated properties
    representing approximately 85% of our proved reserves, which
    allows us to control capital allocation, operate in a safe
    manner, and control timing of investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Challenges to Implementing Our Strategy.


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Business Activities




Properties  Principal Areas of Operations


|                      |       |                     |       |                           |                      |  |       |                      |  |  |         |       |     |         |     |                |        |  |         |         |  |  |           |         |  |         |         |         |  |   |         |           |  |  |     |      | 
|--------------------- | ----- | ------------------- | ----- | ------------------------- | -------------------- |  | ----- | -------------------- |  |  | ------- | ----- | --- | ------- | --- | -------------- | ------ |  | ------- | ------- |  |  | --------- | ------- |  | ------- | ------- | ------- |  | - | ------- | --------- |  |  | --- | ---- | 
|                      |       |                     |       | Proved Reserve Quantities |                      |  | PV-10 |                     
|                      |       | Net Production 2004 |       |                           | at December 31, 2004 |  |       | at December 31, 2004 | 
|                      |       |                     |       |                           |                      |  |       |                      | 
|                      |       |                     |       | Natural                   |                      |  |       |                      |  |  | Natural |       |     |         |     |               
|                      |       | Oil                 |       |                           | Gas                  |  |       | Total                |  |  |         |       | Oil |         |     | Gas            |        |  | Total   |         |  | 
|                      |       | (MBbls)             |       |                           | (MMcf)               |  |       | (MBOE)               |  |  | Percent |       |     | (MBbls) |     |                | (MMcf) |  |         | (MBOE)  |  |  | Amount(1) |         |  | Percent |        
|                      |       |                     |       |                           |                      |  |       |                      |  |  |         |       |     |         |     |                |        |  |         |         |  |  |           |         |  |         |        
|                      |       |                     |       |                           |                      |  |       |                      |  |  |         |       |     |         |     | (In thousands) |        |  |        
|Cedar Creek Anticline |       |                     | 4,795 |                           |                      |  | 1,228 |                      |  |  | 4,999   |       |     |         | 55% |                |        |  | 110,802 |         |  |  | 18,426    |         |  |         | 113,873 |         |  | $ | 977,136 |           |  |  | 60% |     
|Permian Basin         |       |                     | 1,049 |                           |                      |  | 5,490 |                      |  |  | 1,965   |       |     |         | 22% |                |        |  | 15,693  |         |  |  | 81,858    |         |  |         | 29,336  |         |  |   | 340,659 |           |  |  | 21% |     
|Mid-Continent         |       |                     | 61    |                           |                      |  | 7,011 |                      |  |  | 1,229   |       |     |         | 14% |                |        |  | 1,283   |         |  |  | 129,310   |         |  |         | 22,835  |         |  |   | 226,472 |           |  |  | 14% |     
|Rockies               |       |                     | 774   |                           |                      |  | 360   |                      |  |  | 834     |       |     |         | 9%  |                |        |  | 6,270   |         |  |  | 4,436     |         |  |         | 7,009   |         |  |   | 80,202  |           |  |  | 5%  |     
|                      |       |                     |       |                           |                      |  |       |                      |  |  |         |       |     |         |     |                |        |  |         |         |  |  |           |         |  |         |        
|                      | Total |                     |       | 6,679                     |                      |  |       | 14,089               |  |  |         | 9,027 |     |         |     | 100%           |        |  |         | 134,048 |  |  |           | 234,030 |  |         |         | 173,053 |  |   | $       | 1,624,469 |  |  |     | 100% | 
|                      |       |                     |       |                           |                      |  |       |                      |  |  |         |       |     |         |     |                |        |  |         |         |  |  |           |         |  |         |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The pretax present value of estimated future revenues to be
    generated from the production of proved reserves, net of
    estimated production and future development costs; using prices
    and costs as of the date of estimation without future
    escalation; without giving effect to hedging activities,
    non-property related expenses such as general and administrative
    expenses, debt service, and depletion, depreciation, and
    amortization; and discounted using an annual discount rate of
    10%. Giving effect to hedging transactions and using prices as
    of the date of estimation, our PV-10 value would have been
    decreased by $58.8 million at December 31, 2004. The
    Standardized Measure at December 31, 2004 is
    $1.2 billion. Standardized Measure differs from PV-10 by
    $458.9 million because Standardized Measure includes the
    effect of asset retirement obligations and future income taxes.

Operations




Proved Reserves




6



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|                          |                     |                    |           |           |           |   |         |         |           |   |         |         |         | 
|------------------------- | ------------------- | ------------------ | --------- | --------- | --------- | - | ------- | ------- | --------- | - | ------- | ------- | ------- | 
|                          |                     | As of December 31, |          
|                          |                     |                    |          
|                          |                     | 2004               |           |           | 2003      |   |         | 2002    |          
|                          |                     |                    |           |           |           |   |         |         |          
|Oil (Bbls)                |                     |                    |           |           |           |   |         |         |           |   |         |        
|                          | Developed           |                    |           | 97,114    |           |   |         | 92,377  |           |   |         | 93,945  |        
|                          | Undeveloped         |                    |           | 36,934    |           |   |         | 25,355  |           |   |         | 17,729  |        
|                          |                     |                    |           |           |           |   |         |         |          
|                          |                     | Total              |           |           | 134,048   |   |         |         | 117,732   |   |         |         | 111,674 | 
|                          |                     |                    |           |           |           |   |         |         |          
|Natural Gas (Mcf)         |                     |                    |           |           |           |   |         |         |           |   |         |        
|                          | Developed           |                    |           | 156,919   |           |   |         | 104,767 |           |   |         | 82,217  |        
|                          | Undeveloped         |                    |           | 77,111    |           |   |         | 34,183  |           |   |         | 17,601  |        
|                          |                     |                    |           |           |           |   |         |         |          
|                          |                     | Total              |           |           | 234,030   |   |         |         | 138,950   |   |         |         | 99,818  | 
|                          |                     |                    |           |           |           |   |         |         |          
|Combined (BOE)            |                     |                    |           |           |           |   |         |         |           |   |         |        
|                          | Developed           |                    |           | 123,267   |           |   |         | 109,838 |           |   |         | 107,648 |        
|                          | Undeveloped         |                    |           | 49,786    |           |   |         | 31,052  |           |   |         | 20,662  |        
|                          |                     |                    |           |           |           |   |         |         |          
|                          |                     | Total(1)           |           |           | 173,053   |   |         |         | 140,890   |   |         |         | 128,310 | 
|                          |                     |                    |           |           |           |   |         |         |          
|PV-10(2)                  |                     |                    |           |           |           |   |         |         |           |   |         |        
|                          | Developed           |                    | $         | 1,296,201 |           |   | $       | 844,873 |           |   | $       | 732,823 |        
|                          | Undeveloped         |                    |           | 328,268   |           |   |         | 176,201 |           |   |         | 132,281 |        
|                          |                     |                    |           |           |           |   |         |         |          
|                          |                     | Total              |           | $         | 1,624,469 |   |         | $       | 1,021,074 |   |         | $       | 865,104 | 
|                          |                     |                    |           |           |           |   |         |         |          
|Standardized Measure(3)   |                     | $                  | 1,165,619 |           |           | $ | 736,939 |         |           | $ | 624,718 |        
|                          |                     |                    |           |           |           |   |         |         |          
|Reserve price assumptions |                     |                    |           |           |           |   |         |         |           |   |         |        
|                          | Oil ($/Bbl)         |                    | $         | 43.46     |           |   | $       | 32.55   |           |   | $       | 31.20   |        
|                          | Natural gas ($/Mcf) |                    |           | 6.19      |           |   |         | 5.83    |           |   |         | 4.79    |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Volumetric reserves attributed to the net profits interests in
    our CCA properties were 24,774 MBOE, 20,623 MBOE, and
    16,262 MBOE, respectively, at December 31, 2004, 2003,
    and 2002. See  Net Profits Interests on
    page 14. The volumes attributed to the net profits
    interests, which reduce our reserves on a BOE-for-BOE basis,
    will fluctuate from period to period primarily based on
    commodity prices and the level of planned development
    expenditures.                                                                                                                                                                                                                                                                                           
|   
|(2) | The pretax present value of estimated future revenues to be
    generated from the production of proved reserves; net of
    estimated future production and future development costs; using
    prices and costs as of the date of estimation without future
    escalation; without giving effect to hedging activities,
    non-property related expenses such as general and administrative
    expenses, debt service, and depletion, depreciation, and
    amortization; and discounted using an annual discount rate of
    10%. Giving effect to hedging transactions and using prices as
    of the date of estimation, our PV-10 value would have been
    $1.6 billion at December 31, 2004, $997.2 million
    at December 31, 2003, and $860.6 million at
    December 31, 2002.
|   
|(3) | Estimated future cash inflows to be generated from the
    production and sale of proved oil and natural gas reserves, net
    of estimated future production and development costs, asset
    retirement obligations and future income tax expenses,
    discounted at 10% per annum to reflect the timing of future
    cash flows. Standardized Measure differs from PV-10 by
    $458.9 million because Standardized Measure includes the
    effect of asset retirement obligations and future income taxes.                                                                                                                                                                                                                                                                            

7



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##### Table of Contents









Production and Price History




|                          |                                                                              |                         |   |        |      |  |   |        |  |  |   |        | 
|------------------------- | ---------------------------------------------------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                          |                                                                              | Year Ended December 31, |  
|                          |                                                                              |                         |  
|                          |                                                                              | 2004                    |   |        | 2003 |  |   | 2002   | 
|                          |                                                                              |                         |   |        |      |  |   |        | 
|Production:               |                                                                              |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (MBbls)                                                                  |                         |   | 6,679  |      |  |   | 6,601  |  |  |   | 6,037  | 
|                          | Natural gas (MMcf)                                                           |                         |   | 14,089 |      |  |   | 9,051  |  |  |   | 8,175  | 
|                          | Combined (MBOE)                                                              |                         |   | 9,027  |      |  |   | 8,110  |  |  |   | 7,399  | 
|Average Daily Production: |                                                                              |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (Bbls/d)                                                                 |                         |   | 18,249 |      |  |   | 18,085 |  |  |   | 16,540 | 
|                          | Natural gas (Mcf/d)                                                          |                         |   | 38,493 |      |  |   | 24,798 |  |  |   | 22,397 | 
|                          | Combined (BOE/d)                                                             |                         |   | 24,665 |      |  |   | 22,218 |  |  |   | 20,273 | 
|Average Prices:           |                                                                              |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (per Bbl)                                                                |                         | $ | 33.04  |      |  | $ | 26.72  |  |  | $ | 22.34  | 
|                          | Natural gas (per Mcf)                                                        |                         |   | 5.53   |      |  |   | 4.83   |  |  |   | 3.16   | 
|                          | Combined (per BOE)                                                           |                         |   | 33.07  |      |  |   | 27.14  |  |  |   | 21.72  | 
|Average Costs per BOE:    |                                                                              |                         |   |        |      |  |   |        |  |  |   |       
|                          | Lease operations expense                                                     |                         | $ | 5.22   |      |  | $ | 4.67   |  |  | $ | 4.15   | 
|                          | Production, ad valorem, and severance taxes                                  |                         |   | 3.36   |      |  |   | 2.71   |  |  |   | 2.12   | 
|                          | Depletion, depreciation, and amortization                                    |                         |   | 5.38   |      |  |   | 4.13   |  |  |   | 4.67   | 
|                          | General and administrative (excluding non-cash stock based
    compensation) |                         |   | 1.22   |      |  |   | 1.07   |  |  |   | 0.83   | 

8



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##### Table of Contents



Producing Wells




|                      |       |           |       |         |                   |  |       |          |         |  |       |     |  |       |     |     |          |  |       |       |  |  |     |     | 
|--------------------- | ----- | --------- | ----- | ------- | ----------------- |  | ----- | -------- | ------- |  | ----- | --- |  | ----- | --- | --- | -------- |  | ----- | ----- |  |  | --- | --- | 
|                      |       | Oil Wells |       |         | Natural Gas Wells | 
|                      |       |           |       |         |                   | 
|                      |       |           |       | Average |                   |  |       |          | Average | 
|                      |       | Gross     |       |         | Net               |  |       | Working  |         |  | Gross |     |  | Net   |     |     | Working  | 
|                      |       | Wells     |       |         | Wells             |  |       | Interest |         |  | Wells |     |  | Wells |     |     | Interest | 
|                      |       |           |       |         |                   |  |       |          |         |  |       |     |  |       |     |     |          | 
|Cedar Creek Anticline |       |           | 700   |         |                   |  | 614.5 |          |         |  | 88%   |     |  |       | 13  |     |          |  | 4.6   |       |  |  | 35% |    
|Permian Basin         |       |           | 1,416 |         |                   |  | 364.8 |          |         |  | 26%   |     |  |       | 444 |     |          |  | 177.1 |       |  |  | 40% |    
|Rockies               |       |           | 546   |         |                   |  | 299.3 |          |         |  | 55%   |     |  |       |    |     |          |  |      |       |  |  | 0%  |    
|Mid-Continent         |       |           | 112   |         |                   |  | 14.4  |          |         |  | 13%   |     |  |       | 524 |     |          |  | 103.3 |       |  |  | 20% |    
|                      |       |           |       |         |                   |  |       |          |         |  |       |     |  |       |     |     |          | 
|                      | Total |           |       | 2,774   | (1)               |  |       | 1,293.0  |         |  |       | 47% |  |       |     | 981 | (1)      |  |       | 285.0 |  |  |     | 29% | 
|                      |       |           |       |         |                   |  |       |          |         |  |       |     |  |       |     |     |          | 






|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our total wells include 1,595 operated wells and 2,160
    non-operated wells. At December 31, 2004, 13 of our wells
    have multiple completions.

Acreage




|                    |       |         |         |         |         |  |         |         | 
|------------------- | ----- | ------- | ------- | ------- | ------- |  | ------- | ------- | 
|                    |       | Gross   |         |         | Net     | 
|                    |       | Acreage |         |         | Acreage | 
|                    |       |         |         |         |         | 
|Developed acreage   |       |         | 350,489 |         |         |  | 179,387 |        
|Undeveloped acreage |       |         | 562,241 |         |         |  | 398,042 |        
|                    |       |         |         |         |         | 
|                    | Total |         |         | 912,730 |         |  |         | 577,429 | 
|                    |       |         |         |         |         | 

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##### Table of Contents



Drilling Results




|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     |  |     |     |  |  |      |      | 
|------------------------------ | ----------------- | ----------------------- | --- | --- | ---- |  | ----- | ----- |  |  | --- | --- |  | ----- | ----- | ----- | --- |  | --- | --- |  |  | ---- | ---- | 
|                               |                   | Year Ended December 31, |    
|                               |                   |                         |    
|                               |                   | 2004                    |     |     | 2003 |  |       | 2002  | 
|                               |                   |                         |     |     |      |  |       |       | 
|                               |                   | Gross                   |     |     | Net  |  |       | Gross |  |  | Net |     |  | Gross |       |       | Net | 
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|Development Wells              |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     |  |     |     |  |  |      |     
|Productive                     |                   |                         | 203 |     |      |  | 135.5 |       |  |  | 137 |     |  |       | 103.0 |       |     |  | 109 |     |  |  | 95.3 |     
|Non-productive                 |                   |                         | 1   |     |      |  | 0.6   |       |  |  | 1   |     |  |       | 0.7   |       |     |  |    |     |  |  |     |     
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|                               | Total development |                         |     | 204 |      |  |       | 136.1 |  |  |     | 138 |  |       |       | 103.7 |     |  |     | 109 |  |  |      | 95.3 | 
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|Exploratory Wells              |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     |  |     |     |  |  |      |     
|Productive                     |                   |                         | 32  |     |      |  | 29.7  |       |  |  |    |     |  |       |      |       |     |  |    |     |  |  |     |     
|Non-productive                 |                   |                         | 4   |     |      |  | 3.9   |       |  |  |    |     |  |       |      |       |     |  |    |     |  |  |     |     
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|                               | Total development |                         |     | 36  |      |  |       | 33.6  |  |  |     |    |  |       |       |      |     |  |     |    |  |  |      |     | 
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|All Wells Drilled              |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     |  |     |     |  |  |      |     
|Total productive wells drilled |                   |                         | 235 |     |      |  | 165.2 |       |  |  | 137 |     |  |       | 103.0 |       |     |  | 109 |     |  |  | 95.3 |     
|Total dry holes drilled        |                   |                         | 5   |     |      |  | 4.5   |       |  |  | 1   |     |  |       | 0.7   |       |     |  |    |     |  |  |     |     
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 
|                               | Grand total       |                         |     | 240 |      |  |       | 169.7 |  |  |     | 138 |  |       |       | 103.7 |     |  |     | 109 |  |  |      | 95.3 | 
|                               |                   |                         |     |     |      |  |       |       |  |  |     |     |  |       |       |       |     | 

Present Activities








Delivery Commitments and Marketing






10



---



##### Table of Contents







Competition




Federal and State Regulations




Federal Regulation of Natural Gas.




Federal Regulation of Oil.


State Regulation.


Federal, State or Native American Leases.


11



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##### Table of Contents



Environmental Regulations.


Operating Hazards and Insurance






Employees




Principal Executive Office




Available Information


www.encoreacq.com www.sec.gov


www.encoreacq.com




12



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##### Table of Contents







Properties




| |                                  
| | ---------------------------------
| | Nature of Our Ownership Interests





| |                                                                
| | ---------------------------------------------------------------
| | Cedar Creek Anticline Properties  Montana and
    North Dakota









| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | additional acquisition of interests;                                               
|
| |  | detailed attention to the existing wellbores;                                      
|
| |  | the addition of strategically positioned new horizontal and
    vertical wellbores;
|
| |  | the application of horizontal re-entry drilling in existing
    wellbores;         
|
| |  | waterflood enhancements; and                                                       
|
| |  | implementation of our high-pressure air injection program.                         



13



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##### Table of Contents







High-pressure air injection.










Net Profits Interests.


14



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##### Table of Contents







| |                                                         
| | --------------------------------------------------------
| | Permian Basin Properties  West Texas and New
    Mexico







| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Mid-Continent Properties  Oklahoma, Arkansas,
    East Texas, North Texas, Kansas, and North Louisiana



| |                                            
| | -------------------------------------------
| | Oklahoma, Arkansas, North Texas, and Kansas





| |                                        
| | ---------------------------------------
| | ArkLaTx North Louisiana and East Texas







15



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##### Table of Contents





| |                                                                
| | ---------------------------------------------------------------
| | Rocky Mountain Properties  North Dakota,
    Montana, and Utah



| |                        
| | -----------------------
| | Lodgepole North Dakota







| |                    
| | -------------------
| | Bell Creek Montana





| |                    
| | -------------------
| | Paradox Basin Utah





| |                     
| | --------------------
| | Shallow Gas Montana





16



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##### Table of Contents



Title to Properties








| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | royalties, overriding royalties, net profit interests, and other
    burdens under oil and natural gas leases;                                                                                                                                 
|
| |  | contractual obligations, including, in some cases, development
    obligations arising under operating agreements, farmout
    agreements, production sales contracts, and other agreements
    that may affect the properties or their titles;
|
| |  | liens that arise in the normal course of operations, such as
    those for unpaid taxes, statutory liens securing unpaid
    suppliers and contractors, and contractual liens under operating
    agreements;                                  
|
| |  | pooling, unitization and communitization agreements,
    declarations, and orders; and                                                                                                                                                         
|
| |  | easements, restrictions, rights-of-way, and other matters that
    commonly affect property.                                                                                                                                                   








|        |                  
|------- | -----------------
|ITEM 3. | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | Submission of Matters to a Vote of Security Holders



17



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##### Table of Contents






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|                           |  |      |       |  |     |   |       | 
|-------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                           |  | High |       |  | Low |  
|                           |  |      |       |  |     |  
|2004                       |  |      |       |  |     |   |       | 
|Quarter ended December 31  |  | $    | 36.88 |  |     | $ | 30.56 | 
|Quarter ended September 30 |  |      | 34.75 |  |     |   | 25.49 | 
|Quarter ended June 30      |  |      | 31.50 |  |     |   | 24.81 | 
|Quarter ended March 31     |  |      | 28.85 |  |     |   | 23.65 | 
|2003                       |  |      |       |  |     |   |       | 
|Quarter ended December 31  |  | $    | 25.28 |  |     | $ | 19.60 | 
|Quarter ended September 30 |  |      | 22.15 |  |     |   | 17.80 | 
|Quarter ended June 30      |  |      | 20.01 |  |     |   | 17.00 | 
|Quarter ended March 31     |  |      | 19.35 |  |     |   | 16.63 | 



Dividends


3 8 1 4


18



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                      |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |         |  
|----------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------- | ------- | -------- | ---- | - | ------- | -------- | - | - | ------- | -------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                      |                                                                              | Year Ended December 31, |        
|                                                      |                                                                              |                         |        
|                                                      |                                                                              | 2004                    |         |          | 2003 |   |         | 2002     |   |   | 2001    |          |   | 2000 |        
|                                                      |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Consolidated Statement of
    Operations Data:        |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|Revenues(1):                                          |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Oil                                                                          |                         | $       | 220,649  |      |   | $       | 176,351  |   |   | $       | 134,854  |   |      | $       | 105,768 |   |   | $       | 92,441  |  
|                                                      | Natural gas                                                                  |                         |         | 77,884   |      |   |         | 43,745   |   |   |         | 25,838   |   |      |         | 30,149  |   |   |         | 16,509  |  
|                                                      |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Total revenues                                        |                                                                              | $                       | 298,533 |          |      | $ | 220,096 |          |   | $ | 160,692 |          |   | $    | 135,917 |         |   | $ | 108,950 |        
|                                                      |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Net income (loss)                                     |                                                                              | $                       | 82,147  |          |      | $ | 63,641  | (2)      |   | $ | 37,685  |          |   | $    | 16,179  | (3)     |   | $ | (2,135  | )(4)   
|                                                      |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Net income (loss) per common share:                   |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Basic                                                                        |                         | $       | 2.62     |      |   | $       | 2.11     |   |   | $       | 1.25     |   |      | $       | 0.56    |   |   | $       | (0.09   | )
|                                                      | Diluted                                                                      |                         |         | 2.58     |      |   |         | 2.10     |   |   |         | 1.25     |   |      |         | 0.56    |   |   |         | (0.09   | )
|Weighted average number of common shares outstanding: |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Basic                                                                        |                         |         | 31,393   |      |   |         | 30,102   |   |   |         | 30,031   |   |      |         | 28,718  |   |   |         | 22,806  |  
|                                                      | Diluted                                                                      |                         |         | 31,825   |      |   |         | 30,333   |   |   |         | 30,161   |   |      |         | 28,723  |   |   |         | 22,806  |  
|Consolidated Statement of Cash
    Flows Data:        |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|Cash provided by (used by):                           |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Operating activities                                                         |                         | $       | 171,821  |      |   | $       | 123,818  |   |   | $       | 91,509   |   |      | $       | 80,212  |   |   | $       | 44,508  |  
|                                                      | Investing activities                                                         |                         |         | (433,470 | )    |   |         | (153,747 | ) |   |         | (159,316 | ) |      |         | (89,583 | ) |   |         | (99,236 | )
|                                                      | Financing activities                                                         |                         |         | 262,321  |      |   |         | 17,303   |   |   |         | 80,749   |   |      |         | 8,610   |   |   |         | 49,107  |  
|Production:                                           |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Oil (Bbls)                                                                   |                         |         | 6,679    |      |   |         | 6,601    |   |   |         | 6,037    |   |      |         | 4,935   |   |   |         | 3,961   |  
|                                                      | Natural gas (Mcf)                                                            |                         |         | 14,089   |      |   |         | 9,051    |   |   |         | 8,175    |   |      |         | 8,078   |   |   |         | 4,303   |  
|                                                      | Combined (BOE)                                                               |                         |         | 9,027    |      |   |         | 8,110    |   |   |         | 7,399    |   |      |         | 6,281   |   |   |         | 4,678   |  
|Average Sales Price:                                  |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Oil ($/Bbl)                                                                  |                         | $       | 33.04    |      |   | $       | 26.72    |   |   | $       | 22.34    |   |      | $       | 21.43   |   |   | $       | 23.34   |  
|                                                      | Natural gas ($/Mcf)                                                          |                         |         | 5.53     |      |   |         | 4.83     |   |   |         | 3.16     |   |      |         | 3.73    |   |   |         | 3.84    |  
|                                                      | Combined ($/BOE)                                                             |                         |         | 33.07    |      |   |         | 27.14    |   |   |         | 21.72    |   |      |         | 21.64   |   |   |         | 23.29   |  
|Costs per BOE:                                        |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |         |   |   |         |        
|                                                      | Lease operations                                                             |                         | $       | 5.22     |      |   | $       | 4.67     |   |   | $       | 4.15     |   |      | $       | 4.00    |   |   | $       | 3.99    |  
|                                                      | Production, ad valorem, and severance taxes                                  |                         |         | 3.36     |      |   |         | 2.71     |   |   |         | 2.12     |   |      |         | 2.20    |   |   |         | 3.24    |  
|                                                      | Depletion, depreciation, and amortization                                    |                         |         | 5.38     |      |   |         | 4.13     |   |   |         | 4.67     |   |      |         | 5.05    |   |   |         | 4.72    |  
|                                                      | General and administrative (excluding non-cash stock based
    compensation) |                         |         | 1.22     |      |   |         | 1.07     |   |   |         | 0.83     |   |      |         | 0.80    |   |   |         | 0.93    |  

19



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|                 |                   |                         |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |  |  |        | 
|---------------- | ----------------- | ----------------------- |  | ------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- |  |  |  | ------ | 
|                 |                   | Year Ended December 31, | 
|                 |                   |                         | 
|                 |                   | 2004                    |  |         | 2003 |  |  | 2002    |  |  | 2001 |         |  | 2000 | 
|                 |                   |                         |  |         |      |  |  |         |  |  |      |         |  |      | 
|Proved Reserves: |                   |                         |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |  |  |       
|                 | Oil (Bbls)        |                         |  | 134,048 |      |  |  | 117,732 |  |  |      | 111,674 |  |      |  | 91,369  |  |  |  | 78,910 | 
|                 | Natural gas (Mcf) |                         |  | 234,030 |      |  |  | 138,950 |  |  |      | 99,818  |  |      |  | 75,687  |  |  |  | 72,970 | 
|                 | Combined (BOE)    |                         |  | 173,053 |      |  |  | 140,890 |  |  |      | 128,310 |  |      |  | 103,983 |  |  |  | 91,072 | 

|                                 |  |                    |           |   |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         |  
|-------------------------------- |  | ------------------ | --------- | - | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | -
|                                 |  | As of December 31, |          
|                                 |  |                    |          
|                                 |  | 2004               |           |   | 2003 |   |         | 2002 |  |   | 2001    |  |  | 2000 |        
|                                 |  |                    |           |   |      |   |         |      |  |   |         |  |  |      |        
|Consolidated Balance Sheet Data: |  |                    |           |   |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         |  
|Working capital                  |  | $                  | (15,566   | ) |      | $ | (52     | )    |  | $ | 12,489  |  |  | $    | 1,107   |  |  | $ | (15,275 | )
|Total assets                     |  |                    | 1,123,400 |   |      |   | 672,138 |      |  |   | 549,896 |  |  |      | 402,000 |  |  |   | 343,756 |  
|Total debt                       |  |                    | 379,000   |   |      |   | 179,000 |      |  |   | 166,000 |  |  |      | 79,107  |  |  |   | 162,045 |  
|Stockholders equity             |  |                    | 473,575   |   |      |   | 358,975 |      |  |   | 296,266 |  |  |      | 269,302 |  |  |   | 147,811 |  






|    |                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the years ended December 31, 2004, 2003, 2002, 2001,
    and 2000 we reduced revenue for the payments of the net profits
    interests by $12.6 million, $5.8 million,
    $2.0 million, $2.8 million, and $11.5 million,
    respectively.                                                                                                       
|   
|(2) | Net income for the year ended December 31, 2003 includes a
    $0.9 million cumulative effect of accounting change, which
    affects its comparability with other periods presented. See Pro
    Forma amounts presented in Note 5. Asset Retirement
    Obligations to the accompanying consolidated financial
    statements.                    
|   
|(3) | Net income for the year ended December 31, 2001 includes
    $9.6 million of non-cash compensation expense,
    $4.3 million of bad debt expense, $1.6 million of
    impairment of oil and natural gas properties, and a
    $(0.9) million cumulative effect of accounting change,
    which affects its comparability with other periods presented.
|   
|(4) | Net income for the year ended December 31, 2000 includes
    $26.0 million of non-cash compensation expense, which
    affects its comparability with other periods presented.                                                                                                                                                                        






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion and analysis of our consolidated
financial position and results of operations should be read in
conjunction with our financial statements and notes and the
supplemental oil and natural gas disclosures included elsewhere
in this Report. The following discussion and analysis contains
forward-looking statements, including, without limitation,
statements relating to our plans, strategies, objectives,
expectations, intentions, and resources. The words
anticipate, estimate,
expect, project, intend,
plan, believe, should and
similar expressions identify forward-looking statements. Actual
results could differ materially from those stated in the
forward-looking statements. We do not undertake to update,
revise or correct any of the forward-looking information unless
required to do so under the federal securities laws. Readers are
cautioned that such forward-looking statements should be read in
conjunction with our disclosures under the headings:
Special Note Regarding Forward-Looking
Statements beginning on page 41 and Factors
That May Affect Future Results and Financial Condition
beginning on page 42.


Overview




20



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##### Table of Contents











2004 Highlights






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Oil and natural gas reserves increased 23% to 173 MMBOE.
    During 2004, we added 41.2 MMBOE, replacing 456% of the
    9.0 MMBOE produced in 2004. See Business and
    Properties  General  Oil and Natural Gas
    Production and Reserves on page 3 for the calculation
    of our reserve replacement ratio. Oil reserves accounted for 77%
    of total proved reserves, and 71% of proved reserves are
    developed. The estimated pretax present value of our reserves
    increased by 59% to over $1.6 billion (using a 10% discount
    rate and constant year end prices of $43.46 for oil and $6.19
    for natural gas). The Standardized Measure at December 31,
    2004 is $1.2 billion. Standardized Measure differs from
    PV-10 by $458.9 million, because Standardized Measure
    includes the effect of asset retirement obligations and future
    income taxes.
|
| |  | Production volumes for 2004 increased 11% to 9.0 MMBOE
    (24,665 BOE per day) compared with 2003 production of
    8.1 MMBOE (22,218 BOE per day). Oil represented 74% and 81%
    of our total production in 2004 and 2003, respectively. The
    increase in production is due to our continued successful
    development and exploitation program as well as acquisitions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Net income for 2004 increased to $82.1 million, or
    $2.58 per diluted share, on revenues of
    $298.5 million. This compares to 2003 net income of
    $63.6 million, or $2.10 per diluted share, on revenues
    of $220.1 million. For 2004, cash flow from operations
    increased 39% to $171.8 million                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

21



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | from $123.8 million in cash flow from operations in 2003.
    The increase in net income and cash flow from operations in 2004
    was primarily a result of higher production and higher commodity
    prices throughout the year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | We invested $187.6 million in development, exploitation,
    and exploration projects during 2004, including
    $39.6 million in our high-pressure air injection projects
    in the Little Beaver unit and the Pennel unit of the CCA. In
    2004, we drilled 168 gross operated productive wells and
    67 gross non-operated productive wells, for a total of
    235 gross productive wells for the year. On a net basis, we
    drilled 156.4 operated productive wells and participated in 8.8
    non-operated productive wells in 2004. Out of the 168
    (156.4 net) operated productive wells, 12 (11.5 net)
    wells were service wells. We also drilled 5 (4.5 net)
    non-productive wells in 2004, of which 4 (3.9 net) were
    exploratory wells.
|
| |  | We acquired natural gas producing properties and undeveloped
    leases in the Overton Field located in Smith County, Texas,
    additional interests in Elm Grove Field, and all of the capital
    stock of Cortez Oil & Gas, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | On April 2, 2004, we issued and sold $150.0 million of
    61/4% Senior
    Subordinated Notes due April 15, 2014. We received
    approximately $146.4 million after paying all costs
    associated with the offering. The net proceeds were used to fund
    the acquisition of Cortez and repay amounts outstanding under
    our revolving credit facility.                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | On June 10, 2004, we issued and sold 2,000,000 shares
    of our common stock to the public at a price of $26.95 per
    share. The net proceeds of the offering, after underwriting
    discounts and commissions and other expenses, were
    $52.9 million. We used the net proceeds of this offering to
    repay indebtedness under our revolving credit facility and for
    general corporate purposes.                                                                                                                                                                                                                                                                                                                                                         
|
| |  | On June 30, 2004, we filed a new universal shelf
    registration statement on Form S-3 with the SEC. The
    registration statement, which was declared effective by the SEC
    on July 9, 2004, allows us to issue an aggregate of
    $500 million of common stock, preferred stock, senior debt
    and subordinated debt.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | On August 19, 2004, we improved our financial flexibility
    and liquidity by amending and restating our credit facility and
    increasing our borrowing base from $270 million to
    $400 million. At December 31, 2004, we had
    $79 million outstanding under the revolving credit
    facility, $30 million in outstanding letters of credit, and
    $291 million available.                                                                                                                                                                                                                                                                                                                                                                                 

Results of Operations


Comparison of 2004 to
2003




22



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##### Table of Contents



Revenues and Production.


|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |   |         |        |  |   |       |      | 
|-------------------- | -------------------------- | ----------------------- | ------- | ------- | ------ | - | ----- | ---------- |  | - | ------- | ------- |  | ------- | ----- | ----- | ------ | - | ------- | ------ |  | - | ----- | ---- | 
|                     |                            | Year Ended December 31, |         |         |        |   |      
|                     |                            |                         |         |         |        |   |      
|                     |                            | 2004                    |         |         | 2003   |   |       | Difference | 
|                     |                            |                         |         |         |        |   |       |            | 
|                     |                            | Revenue                 |         |         | $/Unit |   |       | Revenue    |  |   | $/Unit  |         |  | Revenue |       |       | $/Unit |  
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Revenues:            |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |   |         |        |  |   |       |     
|Oil wellhead         |                            | $                       | 255,394 |         |        | $ | 38.24 |            |  | $ | 190,203 |         |  | $       | 28.82 |       |        | $ | 65,191  |        |  | $ | 9.42  |     
|Oil hedges           |                            |                         | (34,745 | )       |        |   | (5.20 | )          |  |   | (13,852 | )       |  |         | (2.10 | )     |        |   | (20,893 | )      |  |   | (3.10 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Oil Revenues         |                         | $       | 220,649 |        |   | $     | 33.04      |  |   | $       | 176,351 |  |         | $     | 26.72 |        |   | $       | 44,298 |  |   | $     | 6.32 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Natural gas wellhead |                            | $                       | 81,112  |         |        | $ | 5.76  |            |  | $ | 45,218  |         |  | $       | 5.00  |       |        | $ | 35,894  |        |  | $ | 0.76  |     
|Natural gas hedges   |                            |                         | (3,228  | )       |        |   | (0.23 | )          |  |   | (1,473  | )       |  |         | (0.17 | )     |        |   | (1,755  | )      |  |   | (0.06 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Natural Gas Revenues |                         | $       | 77,884  |        |   | $     | 5.53       |  |   | $       | 43,745  |  |         | $     | 4.83  |        |   | $       | 34,139 |  |   | $     | 0.70 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Combined wellhead    |                            | $                       | 336,506 |         |        | $ | 37.28 |            |  | $ | 235,421 |         |  | $       | 29.03 |       |        | $ | 101,085 |        |  | $ | 8.25  |     
|Combined hedges      |                            |                         | (37,973 | )       |        |   | (4.21 | )          |  |   | (15,325 | )       |  |         | (1.89 | )     |        |   | (22,648 | )      |  |   | (2.32 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Combined Revenues    |                         | $       | 298,533 |        |   | $     | 33.07      |  |   | $       | 220,096 |  |         | $     | 27.14 |        |   | $       | 78,437 |  |   | $     | 5.93 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  

|                   |  |            |        |         |        |   |       |            |         |  |        |  |  |            |       |  |        |  |       |  |  |   |       | 
|------------------ |  | ---------- | ------ | ------- | ------ | - | ----- | ---------- | ------- |  | ------ |  |  | ---------- | ----- |  | ------ |  | ----- |  |  | - | ----- | 
|                   |  |            |        | Average |        |   |       |            | Average |  |        |  |  | Average    |      
|                   |  |            |        | NYMEX   |        |   |       |            | NYMEX   |  |        |  |  | NYMEX      |      
|                   |  | Production |        |         | $/Unit |   |       | Production |         |  | $/Unit |  |  | Production |       |  | $/Unit | 
|                   |  |            |        |         |        |   |       |            |         |  |        |  |  |            |       |  |        | 
|Other data:        |  |            |        |         |        |   |       |            |         |  |        |  |  |            |       |  |        |  |       |  |  |   |       | 
|Oil (MBbls)        |  |            | 6,679  |         |        | $ | 41.26 |            |         |  | 6,601  |  |  | $          | 31.04 |  |        |  | 78    |  |  | $ | 10.22 | 
|Natural Gas (MMcf) |  |            | 14,089 |         |        |   | 6.11  |            |         |  | 9,051  |  |  |            | 5.50  |  |        |  | 5,038 |  |  |   | 0.61  | 
|Combined (MBOE)    |  |            | 9,027  |         |        |   |       |            |         |  | 8,110  |  |  |            |       |  |        |  | 917   |  |  |   |       | 









23



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Expenses.


|                         |                                                                              |              |   |        |      |  |   |            |   |  |   |        | 
|------------------------ | ---------------------------------------------------------------------------- | ------------ | - | ------ | ---- |  | - | ---------- | - |  | - | ------ | 
|                         |                                                                              | Year Ended   |   |        |     
|                         |                                                                              | December 31, |   |        |     
|                         |                                                                              |              |   |        |     
|                         |                                                                              | 2004         |   |        | 2003 |  |   | Difference |  
|                         |                                                                              |              |   |        |      |  |   |            |  
|Expenses (in thousands): |                                                                              |              |   |        |      |  |   |            |   |  |   |       
|                         | Lease operations                                                             |              | $ | 47,142 |      |  | $ | 37,846     |   |  | $ | 9,296  | 
|                         | Production, ad valorem, and severance taxes                                  |              |   | 30,313 |      |  |   | 22,013     |   |  |   | 8,300  | 
|                         | Depletion, depreciation, and amortization                                    |              |   | 48,522 |      |  |   | 33,530     |   |  |   | 14,992 | 
|                         | Exploration                                                                  |              |   | 3,907  |      |  |   |           |   |  |   | 3,907  | 
|                         | General and administrative (excluding non-cash stock based
    compensation) |              |   | 10,982 |      |  |   | 8,680      |   |  |   | 2,302  | 
|                         | Non-cash stock based compensation                                            |              |   | 1,770  |      |  |   | 614        |   |  |   | 1,156  | 
|                         | Derivative fair value (gain) loss                                            |              |   | 5,011  |      |  |   | (885       | ) |  |   | 5,896  | 
|                         | Other operating                                                              |              |   | 5,028  |      |  |   | 3,481      |   |  |   | 1,547  | 
|                         | Interest                                                                     |              |   | 23,459 |      |  |   | 16,151     |   |  |   | 7,308  | 
|                         | Current and deferred income tax provision                                    |              |   | 40,492 |      |  |   | 36,102     |   |  |   | 4,390  | 
|Expenses (per BOE):      |                                                                              |              |   |        |      |  |   |            |   |  |   |       
|                         | Lease operations                                                             |              | $ | 5.22   |      |  | $ | 4.67       |   |  | $ | 0.55   | 
|                         | Production, ad valorem, and severance taxes                                  |              |   | 3.36   |      |  |   | 2.71       |   |  |   | 0.65   | 
|                         | Depletion, depreciation, and amortization                                    |              |   | 5.38   |      |  |   | 4.13       |   |  |   | 1.25   | 
|                         | Exploration                                                                  |              |   | 0.43   |      |  |   |           |   |  |   | 0.43   | 
|                         | General and administrative (excluding non-cash stock based
    compensation) |              |   | 1.22   |      |  |   | 1.07       |   |  |   | 0.15   | 
|                         | Non-cash stock based compensation                                            |              |   | 0.20   |      |  |   | 0.08       |   |  |   | 0.12   | 
|                         | Derivative fair value (gain) loss                                            |              |   | 0.56   |      |  |   | (0.11      | ) |  |   | 0.67   | 
|                         | Other operating                                                              |              |   | 0.56   |      |  |   | 0.43       |   |  |   | 0.13   | 
|                         | Interest                                                                     |              |   | 2.60   |      |  |   | 1.99       |   |  |   | 0.61   | 
|                         | Current and deferred income tax provision                                    |              |   | 4.49   |      |  |   | 4.45       |   |  |   | 0.04   | 

Lease operations expense.


24



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##### Table of Contents





Production, ad valorem, and severance taxes.




Depletion, depreciation, and amortization
(DD&A) expense.




Exploration expense.




General and administrative (G&A) expense.




25



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##### Table of Contents





Non-cash stock based compensation expense.




|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       |  |       |       |  |  |        |         | 
|------------- | ----- | --------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ----- | ----- |  |  | ------ | ------- | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2005            |        |        | 2006 |  |        | 2007   |  |  | 2008   |        |  | 2009 |        |        | Total | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 23,775 |        |      |  | 23,775 |        |  |  | 23,774 |        |  |      |       |        |       |  |      |       |  |  | 71,324 |        
|2003          |       |                 |       |        |      |  | 13,772 |        |  |  | 13,772 |        |  |      | 13,772 |        |       |  |      |       |  |  | 41,316 |        
|2004          |       |                 | 19,423 |        |      |  | 19,423 |        |  |  | 22,690 |        |  |      | 3,268  |        |       |  | 3,267 |       |  |  | 68,071 |        
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 43,198 |      |  |        | 56,970 |  |  |        | 60,236 |  |      |        | 17,040 |       |  |       | 3,267 |  |  |        | 180,711 | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 



|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       |  |        |        |  |  |        |        | 
|------------- | ----- | --------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------ | ------ | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2005            |        |        | 2006 |  |        | 2007   |  |  | 2008   |        |  | 2009 |        |        | Total | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 11,488 |        |      |  | 11,488 |        |  |  | 11,488 |        |  |      |       |        |       |  |       |        |  |  | 34,464 |       
|2003          |       |                 |       |        |      |  |       |        |  |  |       |        |  |      |       |        |       |  |       |        |  |  |       |       
|2004          |       |                 |       |        |      |  |       |        |  |  | 19,231 |        |  |      | 19,231 |        |       |  | 19,231 |        |  |  | 57,693 |       
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 11,488 |      |  |        | 11,488 |  |  |        | 30,719 |  |      |        | 19,231 |       |  |        | 19,231 |  |  |        | 92,157 | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 





Derivative fair value (gain) loss.


3 8


26



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##### Table of Contents





|                                   |                                                  |                                   |   |       |           |  |   |            |      |   |   |       |       | 
|---------------------------------- | ------------------------------------------------ | --------------------------------- | - | ----- | --------- |  | - | ---------- | ---- | - | - | ----- | ----- | 
|                                   |                                                  | Year Ended                        |   |       |          
|                                   |                                                  | December 31,                      |   |       |          
|                                   |                                                  |                                   |   |       | Increase/ | 
|                                   |                                                  | 2004                              |   |       | 2003      |  |   | (Decrease) |     
|                                   |                                                  |                                   |   |       |           |  |   |            |     
|Designated cash flow hedges:       |                                                  |                                   |   |       |           |  |   |            |      |   |   |      
|                                   | Ineffectiveness  Commodity contracts            |                                   | $ | 5,018 |           |  | $ | 818        |      |   | $ | 4,200 |      
|Undesignated derivative contracts: |                                                  |                                   |   |       |           |  |   |            |      |   |   |      
|                                   | Mark-to-market (gain) loss  Interest rate swap  |                                   |   | 272   |           |  |   | (2,098     | )    |   |   | 2,370 |      
|                                   | Mark-to-market (gain) loss  Commodity contracts |                                   |   | (279  | )         |  |   | 395        |      |   |   | (674  | )    
|                                   |                                                  |                                   |   |       |           |  |   |            |     
|                                   |                                                  | Derivative fair value (gain) loss |   | $     | 5,011     |  |   | $          | (885 | ) |   | $     | 5,896 | 
|                                   |                                                  |                                   |   |       |           |  |   |            |     



Other operating expense.




Interest expense. 1 4 1 4




|                                    |       |      |        |        |      |   |        |            |  |   |        |       | 
|----------------------------------- | ----- | ---- | ------ | ------ | ---- | - | ------ | ---------- |  | - | ------ | ----- | 
|                                    |       | 2004 |        |        | 2003 |   |        | Difference | 
|                                    |       |      |        |        |      |   |        |            | 
|83/8% senior
    subordinated notes |       | $    | 12,563 |        |      | $ | 12,563 |            |  | $ |       |      
|61/4% senior
    subordinated notes |       |      | 7,005  |        |      |   |       |            |  |   | 7,005  |      
|Revolving credit facility           |       |      | 1,565  |        |      |   | 453    |            |  |   | 1,112  |      
|Hedge loss amortization             |       |      | 546    |        |      |   | 1,910  |            |  |   | (1,364 | )    
|Debt issuance cost amortization     |       |      | 969    |        |      |   | 714    |            |  |   | 255    |      
|Fees and other                      |       |      | 811    |        |      |   | 511    |            |  |   | 300    |      
|                                    |       |      |        |        |      |   |        |            | 
|                                    | Total |      | $      | 23,459 |      |   | $      | 16,151     |  |   | $      | 7,308 | 
|                                    |       |      |        |        |      |   |        |            | 

Income tax expense.


27



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Comparison of 2003 to
2002




Revenues and Production.


|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |   |         |        |  |   |       |      | 
|-------------------- | -------------------------- | ----------------------- | ------- | ------- | ------ | - | ----- | ---------- |  | - | ------- | ------- |  | ------- | ----- | ----- | ------ | - | ------- | ------ |  | - | ----- | ---- | 
|                     |                            | Year Ended December 31, |         |         |        |   |      
|                     |                            |                         |         |         |        |   |      
|                     |                            | 2003                    |         |         | 2002   |   |       | Difference | 
|                     |                            |                         |         |         |        |   |       |            | 
|                     |                            | Revenue                 |         |         | $/Unit |   |       | Revenue    |  |   | $/Unit  |         |  | Revenue |       |       | $/Unit |  
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Revenues:            |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |   |         |        |  |   |       |     
|Oil wellhead         |                            | $                       | 190,203 |         |        | $ | 28.82 |            |  | $ | 141,119 |         |  | $       | 23.38 |       |        | $ | 49,084  |        |  | $ | 5.44  |     
|Oil hedges           |                            |                         | (13,852 | )       |        |   | (2.10 | )          |  |   | (6,265  | )       |  |         | (1.04 | )     |        |   | (7,587  | )      |  |   | (1.06 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Oil Revenues         |                         | $       | 176,351 |        |   | $     | 26.72      |  |   | $       | 134,854 |  |         | $     | 22.34 |        |   | $       | 41,497 |  |   | $     | 4.38 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Natural gas wellhead |                            | $                       | 45,218  |         |        | $ | 5.00  |            |  | $ | 24,803  |         |  | $       | 3.03  |       |        | $ | 20,415  |        |  | $ | 1.97  |     
|Natural gas hedges   |                            |                         | (1,473  | )       |        |   | (0.17 | )          |  |   | 1,035   |         |  |         | 0.13  |       |        |   | (2,508  | )      |  |   | (0.30 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Natural Gas Revenues |                         | $       | 43,745  |        |   | $     | 4.83       |  |   | $       | 25,838  |  |         | $     | 3.16  |        |   | $       | 17,907 |  |   | $     | 1.67 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|Combined wellhead    |                            | $                       | 235,421 |         |        | $ | 29.03 |            |  | $ | 165,922 |         |  | $       | 22.42 |       |        | $ | 69,499  |        |  | $ | 6.61  |     
|Combined hedges      |                            |                         | (15,325 | )       |        |   | (1.89 | )          |  |   | (5,230  | )       |  |         | (0.70 | )     |        |   | (10,095 | )      |  |   | (1.19 | )   
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  
|                     | Total Combined Revenues    |                         | $       | 220,096 |        |   | $     | 27.14      |  |   | $       | 160,692 |  |         | $     | 21.72 |        |   | $       | 59,404 |  |   | $     | 5.42 | 
|                     |                            |                         |         |         |        |   |       |            |  |   |         |         |  |         |       |       |        |  

|                   |  |            |       |         |        |   |       |            |         |  |        |  |  |            |       |  |        |  |     |  |  |   |      | 
|------------------ |  | ---------- | ----- | ------- | ------ | - | ----- | ---------- | ------- |  | ------ |  |  | ---------- | ----- |  | ------ |  | --- |  |  | - | ---- | 
|                   |  |            |       | Average |        |   |       |            | Average |  |        |  |  | Average    |      
|                   |  |            |       | NYMEX   |        |   |       |            | NYMEX   |  |        |  |  | NYMEX      |      
|                   |  | Production |       |         | $/Unit |   |       | Production |         |  | $/Unit |  |  | Production |       |  | $/Unit | 
|                   |  |            |       |         |        |   |       |            |         |  |        |  |  |            |       |  |        | 
|Other data:        |  |            |       |         |        |   |       |            |         |  |        |  |  |            |       |  |        |  |     |  |  |   |      | 
|Oil (MBbls)        |  |            | 6,601 |         |        | $ | 31.04 |            |         |  | 6,037  |  |  | $          | 26.08 |  |        |  | 564 |  |  | $ | 4.96 | 
|Natural Gas (MMcf) |  |            | 9,051 |         |        |   | 5.50  |            |         |  | 8,175  |  |  |            | 3.36  |  |        |  | 876 |  |  |   | 2.14 | 
|Combined (MBOE)    |  |            | 8,110 |         |        |   |       |            |         |  | 7,399  |  |  |            |       |  |        |  | 711 |  |  |   |      | 





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Expenses.


|                         |                                                                              |                                             |  |        |        |  |  |            |        |  |  |        |       | 
|------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------- |  | ------ | ------ |  |  | ---------- | ------ |  |  | ------ | ----- | 
|                         |                                                                              | Year Ended                                  |  |        |       
|                         |                                                                              | December 31,                                |  |        |       
|                         |                                                                              |                                             |  |        |       
|                         |                                                                              | 2003                                        |  |        | 2002   |  |  | Difference |       
|                         |                                                                              |                                             |  |        |        |  |  |            |       
|Expenses (in thousands): |                                                                              |                                             |  |        |        |  |  |            |        |  |  |       
|                         | Production                                                                  |                                             |  |        |        |  |  |            |        |  |  |        |      
|                         |                                                                              | Lease operations                            |  | $      | 37,846 |  |  | $          | 30,678 |  |  | $      | 7,168 | 
|                         |                                                                              | Production, ad valorem, and severance taxes |  |        | 22,013 |  |  |            | 15,653 |  |  |        | 6,360 | 
|                         | Depletion, depreciation, and amortization                                    |                                             |  | 33,530 |        |  |  | 34,550     |        |  |  | (1,020 | )    
|                         | General and administrative (excluding non-cash stock based
    compensation) |                                             |  | 8,680  |        |  |  | 6,150      |        |  |  | 2,530  |      
|                         | Non-cash stock based compensation                                            |                                             |  | 614    |        |  |  |           |        |  |  | 614    |      
|                         | Derivative fair value (gain) loss                                            |                                             |  | (885   | )      |  |  | (900       | )      |  |  | 15     |      
|                         | Other operating                                                              |                                             |  | 3,481  |        |  |  | 2,045      |        |  |  | 1,436  |      
|                         | Interest                                                                     |                                             |  | 16,151 |        |  |  | 12,306     |        |  |  | 3,845  |      
|                         | Current and deferred income tax provision                                    |                                             |  | 36,102 |        |  |  | 22,616     |        |  |  | 13,486 |      
|Expenses (per BOE):      |                                                                              |                                             |  |        |        |  |  |            |        |  |  |       
|                         | Production                                                                  |                                             |  |        |        |  |  |            |        |  |  |        |      
|                         |                                                                              | Lease operations                            |  | $      | 4.67   |  |  | $          | 4.15   |  |  | $      | 0.52  | 
|                         |                                                                              | Production, ad valorem, and severance taxes |  |        | 2.71   |  |  |            | 2.12   |  |  |        | 0.59  | 
|                         | Depletion, depreciation, and amortization                                    |                                             |  | 4.13   |        |  |  | 4.67       |        |  |  | (0.54  | )    
|                         | General and administrative (excluding non-cash stock based
    compensation) |                                             |  | 1.07   |        |  |  | 0.83       |        |  |  | 0.24   |      
|                         | Non-cash stock based compensation                                            |                                             |  | 0.08   |        |  |  |           |        |  |  | 0.08   |      
|                         | Derivative fair value (gain) loss                                            |                                             |  | (0.11  | )      |  |  | (0.12      | )      |  |  | 0.01   |      
|                         | Other operating                                                              |                                             |  | 0.43   |        |  |  | 0.28       |        |  |  | 0.15   |      
|                         | Interest                                                                     |                                             |  | 1.99   |        |  |  | 1.66       |        |  |  | 0.33   |      
|                         | Current and deferred income tax provision                                    |                                             |  | 4.45   |        |  |  | 3.06       |        |  |  | 1.39   |      

Lease operations expense.


Production, ad valorem, and severance taxes.


Depletion, depreciation, and amortization
(DD&A) expense.


29



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General and administrative (G&A) expense.


Non-cash stock based compensation expense.




Derivative fair value gain/loss.


3 8


Other operating expense.


Interest expense. 3 8


30



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|                                    |       |      |        |        |      |   |       |            |  |   |        |       | 
|----------------------------------- | ----- | ---- | ------ | ------ | ---- | - | ----- | ---------- |  | - | ------ | ----- | 
|                                    |       | 2003 |        |        | 2002 |   |       | Difference | 
|                                    |       |      |        |        |      |   |       |            | 
|83/8% senior
    subordinated notes |       | $    | 12,563 |        |      | $ | 6,488 |            |  | $ | 6,075  |      
|Revolving credit facility           |       |      | 453    |        |      |   | 2,260 |            |  |   | (1,807 | )    
|Hedge settlements                   |       |      |       |        |      |   | 1,249 |            |  |   | (1,249 | )    
|Hedge loss amortization             |       |      | 1,910  |        |      |   | 1,619 |            |  |   | 291    |      
|Debt issuance cost amortization     |       |      | 714    |        |      |   | 314   |            |  |   | 400    |      
|Fees and other                      |       |      | 511    |        |      |   | 376   |            |  |   | 135    |      
|                                    |       |      |        |        |      |   |       |            | 
|                                    | Total |      | $      | 16,151 |      |   | $     | 12,306     |  |   | $      | 3,845 | 
|                                    |       |      |        |        |      |   |       |            | 

Income tax expense.


Description of Critical Accounting Estimates




| |                               
| | ------------------------------
| | Oil and Natural Gas Properties

Successful efforts method.






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Unproved Properties.


Oil and Natural Gas Reserves.


Impairment.


Depletion, Depreciation, and Amortization
(DD&A).


Goodwill




Net Profits Interests




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| |                    
| | -------------------
| | Revenue Recognition





| |             
| | ------------
| | Income Taxes

Section 43 Credits.




| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The project involves the application of one or more
    qualified tertiary recovery methods that is reasonably expected
    to result in more than an insignificant increase in the amount
    of crude oil that ultimately will be recovered;
|
| | 2. The project is located within the United States;                                                                                                                                                                                              
|
| | 3. The first injection of liquids, gases, or other matter
    for the project occurs after December 31, 1990; and                                                                                                                                
|
| | 4. The project is certified by a petroleum engineer.                                                                                                                                                                                             





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Tangible Property. Any amount paid for tangible
    property that is an integral part of a qualified enhanced oil
    recovery project, and with respect to which depreciation is
    allowable.   
|
| | 2. Intangible Drilling and Development Costs.
    Intangible drilling cost with respect to which the taxpayer may
    make an intangible drilling costs deduction election under Code
    Sec. 263(c).
|
| | 3. Qualified Tertiary Injectant Expenses. Any
    qualified tertiary injectant expenses for which a deduction is
    allowable under any Code section.                                                



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Effective Tax Rate.




| |                         
| | ------------------------
| | Stock-based Compensation



|             |                                                  |                         |   |        |      |  |   |        |  |  |   |        | 
|------------ | ------------------------------------------------ | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                                  | Year Ended December 31, |  
|             |                                                  |                         |  
|             |                                                  | 2004                    |   |        | 2003 |  |   | 2002   | 
|             |                                                  |                         |   |        |      |  |   |        | 
|As Reported: |                                                  |                         |   |        |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         | $ | 1,108  |      |  | $ | 381    |  |  | $ |       | 
|             | Net income                                       |                         |   | 82,147 |      |  |   | 63,641 |  |  |   | 37,685 | 
|             | Basic net income per share                       |                         |   | 2.62   |      |  |   | 2.11   |  |  |   | 1.25   | 
|             | Diluted net income per share                     |                         |   | 2.58   |      |  |   | 2.10   |  |  |   | 1.25   | 
|Pro Forma:   |                                                  |                         |   |        |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         | $ | 2,289  |      |  | $ | 1,929  |  |  | $ | 1,277  | 
|             | Net income                                       |                         |   | 80,966 |      |  |   | 62,093 |  |  |   | 36,408 | 
|             | Basic net income per share                       |                         |   | 2.58   |      |  |   | 2.06   |  |  |   | 1.21   | 
|             | Diluted net income per share                     |                         |   | 2.54   |      |  |   | 2.05   |  |  |   | 1.21   | 





| |                               
| | ------------------------------
| | Hedging and Related Activities





34



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| |                         
| | ------------------------
| | New Accounting Standards





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Capital Resources, Capital Commitments, and Liquidity




| |                                          
| | -----------------------------------------
| | Capital Resources and Capital Commitments





| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | Development, exploitation, and exploration of our existing oil
    and natural gas properties
|
| |  | High-pressure air injection programs on our CCA properties                                   
|
| |  | Acquisitions of oil and natural gas properties                                               
|
| |  | Leasehold and acreage costs                                                                  
|
| |  | Other general property and equipment                                                         
|
| |  | Funding of necessary working capital                                                         
|
| |  | Payment of contractual obligations                                                           



|                               |                                            |       |   |         |         | 
|------------------------------ | ------------------------------------------ | ----- | - | ------- | ------- | 
|                               |                                            | 2005  |  
|                               |                                            |       |  
|Budgeted Capital Expenditures: |                                            |       |   |        
|                               | Development, exploitation, and exploration |       | $ | 191,500 |        
|                               | HPAI                                       |       |   | 26,000  |        
|                               | Leasehold and acreage acquisition          |       |   | 4,000   |        
|                               | Other PP&E                                 |       |   | 1,500   |        
|                               |                                            |       |  
|                               |                                            | Total |   | $       | 223,000 | 
|                               |                                            |       |  



Development, Exploitation, and Exploration.


|                                                         |                              |                         |   |         |         |  |   |        |        |  |   |        |        | 
|-------------------------------------------------------- | ---------------------------- | ----------------------- | - | ------- | ------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                         |                              | Year Ended December 31, |  
|                                                         |                              |                         |  
|                                                         |                              | 2004                    |   |         | 2003    |  |   | 2002   |       
|                                                         |                              |                         |   |         |         |  |   |        |       
|Development, Exploitation, and Exploration Expenditures: |                              |                         |   |         |         |  |   |        |        |  |   |       
|                                                         | Development and exploitation |                         | $ | 117,464 |         |  | $ | 86,078 |        |  | $ | 73,671 |       
|                                                         | HPAI                         |                         |   | 39,628  |         |  |   | 12,899 |        |  |   | 6,642  |       
|                                                         | Exploration                  |                         |   | 30,546  |         |  |   |       |        |  |   |       |       
|                                                         |                              |                         |   |         |         |  |   |        |       
|                                                         |                              | Total                   |   | $       | 187,638 |  |   | $      | 98,977 |  |   | $      | 80,313 | 
|                                                         |                              |                         |   |         |         |  |   |        |       



High-Pressure Air Injection.


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Acquisitions, Leasehold and Acreage Costs.


|                                           |                             |                         |   |         |         |  |   |        |        |  |   |        |        | 
|------------------------------------------ | --------------------------- | ----------------------- | - | ------- | ------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                           |                             | Year Ended December 31, |  
|                                           |                             |                         |  
|                                           |                             | 2004                    |   |         | 2003    |  |   | 2002   |       
|                                           |                             |                         |   |         |         |  |   |        |       
|Acquisitions, Leasehold and Acreage Costs: |                             |                         |   |         |         |  |   |        |        |  |   |       
|                                           | Acquisitions                |                         | $ | 204,907 |         |  | $ | 54,484 |        |  | $ | 78,158 |       
|                                           | Leasehold and acreage costs |                         |   | 33,926  |         |  |   | 117    |        |  |   | 391    |       
|                                           |                             |                         |   |         |         |  |   |        |       
|                                           |                             | Total                   |   | $       | 238,833 |  |   | $      | 54,601 |  |   | $      | 78,549 | 
|                                           |                             |                         |   |         |         |  |   |        |       













Other General Property and Equipment.




Working Capital.


37



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Contractual Obligations.


|                             |  |                        |         |  |      |   |        |           |  |   |           |  |  |            |         |  |  |   |         | 
|---------------------------- |  | ---------------------- | ------- |  | ---- | - | ------ | --------- |  | - | --------- |  |  | ---------- | ------- |  |  | - | ------- | 
|                             |  | Payments Due by Period |        
|Contractual Obligations and  |  |                        |        
|Commercial Commitments       |  | Total                  |         |  | 2005 |   |        | 2006-2007 |  |   | 2008-2009 |  |  | Thereafter |        
|                             |  |                        |         |  |      |   |        |           |  |   |           |  |  |            |        
|83/8% Notes(1)               |  | $                      | 244,219 |  |      | $ | 12,563 |           |  | $ | 25,125    |  |  | $          | 25,125  |  |  | $ | 181,406 | 
|61/4% Notes(1)               |  |                        | 239,063 |  |      |   | 9,375  |           |  |   | 18,750    |  |  |            | 18,750  |  |  |   | 192,188 | 
|Revolving Credit Facility(1) |  |                        | 87,814  |  |      |   | 2,768  |           |  |   | 5,535     |  |  |            | 79,511  |  |  |   |        | 
|Derivative Obligations(2)    |  |                        | 53,501  |  |      |   | 22,885 |           |  |   | 19,203    |  |  |            | 11,413  |  |  |   |        | 
|Development Commitments(3)   |  |                        | 16,321  |  |      |   | 15,421 |           |  |   | 600       |  |  |            | 300     |  |  |   |        | 
|Operating Leases(4)          |  |                        | 12,561  |  |      |   | 1,329  |           |  |   | 2,932     |  |  |            | 2,902   |  |  |   | 5,398   | 
|                             |  |                        |         |  |      |   |        |           |  |   |           |  |  |            |        
|Totals                       |  | $                      | 653,479 |  |      | $ | 64,341 |           |  | $ | 72,145    |  |  | $          | 138,001 |  |  | $ | 378,992 | 
|                             |  |                        |         |  |      |   |        |           |  |   |           |  |  |            |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Amounts included in the table above include both principal and
    projected interest payments. See information presented in
    Note 7. Indebtedness to the accompanying
    consolidated financial statements for additional information
    regarding our long-term debt.                                                                                                                                                                                                                                                                      
|   
|(2) | Derivative obligations represent liabilities for derivatives
    that were valued as of December 31, 2004. The ultimate
    settlement amounts of the remaining portions of our derivative
    obligations are unknown because they are subject to continuing
    market risk. See Item 7A. Quantitative and
    Qualitative Disclosures about Market Risk and
    Note 12. Financial Instruments to the
    accompanying consolidated financial statements for additional
    information regarding our derivative obligations.                
|   
|(3) | Development commitments represent authorized purchases,
    $14.5 million of which represents work in process and is
    accrued at December 31, 2004. At December 31, 2004, we
    had $125.1 million of authorized purchases not placed to
    vendors (authorized AFEs) which were not accrued at year-end,
    but are budgeted for and expected to be made during 2005 unless
    circumstances change. Development commitments in the above table
    also include minimum transmission payments for electricity and
    compression services.
|   
|(4) | Operating leases represent office space and equipment
    obligations that have remaining non-cancelable lease terms in
    excess of one year. See Note 4. Commitments and
    Contingencies to the accompanying consolidated financial
    statements for additional information regarding our operating
    leases.                                                                                                                                                                                                                            

Investing Activities.


38



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##### Table of Contents







Operating Activities.




Financing Activities. 1 4 1 4










39



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##### Table of Contents



Liquidity








|                                             |  |                     |                |  |                    |  |                    | 
|-------------------------------------------- |  | ------------------- | -------------- |  | ------------------ |  | ------------------ | 
|Ratio of Total Outstanding to Borrowing Base |  | Eurodollar Loans(a) |                |  | Base Rate Loans(b) | 
|                                             |  |                     |                |  |                    | 
|Less than .40 to 1                           |  |                     | LIBOR + 1.000% |  |                    |  | Base Rate + 0.000% | 
|From .40 to 1 but less than .75 to 1         |  |                     | LIBOR + 1.250% |  |                    |  | Base Rate + 0.000% | 
|From .75 to 1 but less than .90 to 1         |  |                     | LIBOR + 1.500% |  |                    |  | Base Rate + 0.250% | 
|.90 to 1 or greater                          |  |                     | LIBOR + 1.750% |  |                    |  | Base Rate + 0.500% | 






|    |  |                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The LIBOR rate is equal to the rate determined by Bank of
    America, N.A. to be the British Bankers Association Interest
    Settlement Rate for deposits in dollars for a similar interest
    period (either one, two, three or six months, or such other
    period as selected by Encore, subject to availability at each
    lender).
|   
|(b) |  | The Base Rate is calculated as the highest of (1) the
    annual rate of interest announced by Bank of America, N.A. as
    its prime rate and (2) the federal funds
    effective rate plus 0.5%.                                                                                                                                        





3 8 1 4 3 8 1 4


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Book capitalization.


Inflation and Changes in Prices






|                                  |  |         |       |  |             |   |      |          |  |   |       | 
|--------------------------------- |  | ------- | ----- |  | ----------- | - | ---- | -------- |  | - | ----- | 
|                                  |  | Oil     |       |  | Natural Gas |   |      | Combined | 
|                                  |  | ($/Bbl) |       |  | ($/Mcf)     |   |      | ($/BOE)  | 
|                                  |  |         |       |  |             |   |      |          | 
|Net Price Realization with Hedges |  |         |       |  |             |   |      |          |  |   |       | 
|Year ended December 31, 2004      |  | $       | 33.04 |  |             | $ | 5.53 |          |  | $ | 33.07 | 
|Year ended December 31, 2003      |  |         | 26.72 |  |             |   | 4.83 |          |  |   | 27.14 | 
|Year ended December 31, 2002      |  |         | 22.34 |  |             |   | 3.16 |          |  |   | 21.72 | 
|Average Wellhead Price            |  |         |       |  |             |   |      |          |  |   |       | 
|Year ended December 31, 2004      |  | $       | 38.24 |  |             | $ | 5.76 |          |  | $ | 37.28 | 
|Year ended December 31, 2003      |  |         | 28.82 |  |             |   | 5.00 |          |  |   | 29.03 | 
|Year ended December 31, 2002      |  |         | 23.38 |  |             |   | 3.03 |          |  |   | 22.42 | 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS




41



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| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expected capital expenditures and the focus of our capital
    program;                                                                                                                                      
|
| |  | areas of future growth;                                                                                                                                                                                      
|
| |  | our drilling program;                                                                                                                                                                                        
|
| |  | future horizontal development, secondary development and
    tertiary recovery potential;                                                                                                                    
|
| |  | the implementation of our high-pressure air injection program,
    the ability to expand the program to other parts of the CCA and
    the effects thereof;                                                  
|
| |  | the completion of current HPAI projects and the effects thereof;                                                                                                                                             
|
| |  | anticipated prices for oil and natural gas;                                                                                                                                                                  
|
| |  | projected revenues; lifting costs; lease operations expenses;
    production, ad valorem and severance taxes; DD&A expense;
    general and administrative expenses; other operating expenses;
    and taxes;
|
| |  | timing and amount of future production of oil and natural gas;                                                                                                                                               
|
| |  | expected hedging positions and payments related to hedging
    contracts (including the effectiveness thereof);                                                                                              
|
| |  | expectations regarding working capital, cash flow and
    anticipated liquidity;                                                                                                                             
|
| |  | projected borrowings under our revolving credit
    facility; and                                                                                                                                            
|
| |  | marketing of oil and natural gas.                                                                                                                                                                            



FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL
CONDITION


You should read carefully the following factors and all other
information contained in this Report. If any of the risks and
uncertainties described below or elsewhere in this Report
actually occur, our business, financial condition or results of
operations could be materially adversely affected. In that case,
the trading price of our common stock could decline, and an
investor may lose all or part of his investment.




| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Oil and natural gas prices are volatile and sustained
    periods of low prices could materially and adversely affect our
    financial condition and results of operations.



42



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| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the supply of domestic and foreign oil and natural gas;                                                                                         
|
| |  | the ability of members of the Organization of Petroleum
    Exporting Countries to agree upon and maintain oil prices and
    production levels;
|
| |  | political instability or armed conflict in oil or natural gas
    producing regions;                                                            
|
| |  | the level of consumer demand;                                                                                                                   
|
| |  | weather conditions;                                                                                                                             
|
| |  | the price and availability of alternative fuels;                                                                                                
|
| |  | domestic and foreign governmental regulations and taxes;                                                                                        
|
| |  | domestic political developments; and                                                                                                            
|
| |  | worldwide economic conditions.                                                                                                                  





| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reserve estimates depend on many assumptions that may
    prove to be inaccurate. Any material inaccuracies in our reserve
    estimates or underlying assumptions could cause the quantities
    and net present value of our reserves to be overstated.









| |                                                                         
| | ------------------------------------------------------------------------
| | The results of high pressure air injection techniques are
    uncertain.



43



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| |                                        
| | ---------------------------------------
| | We may be required to take write downs.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our acquisition strategy subjects us to numerous risks
    that could adversely affect our results of operations.







| |   |                                               
| | - | ----------------------------------------------
| |  | recoverable reserves;                         
|
| |  | future oil and natural gas prices;            
|
| |  | operating costs; and                          
|
| |  | potential environmental and other liabilities.







| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | The failure to properly manage growth through acquisitions
    could adversely affect our results of operations.





| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | diversion of management attention from existing operations;                              
|
| |  | unexpected losses of key employees, customers and suppliers of
    the acquired business;

44



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| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | conforming the financial, technological and management
    standards, processes, procedures and controls of the acquired
    business with those of our existing operations; and
|
| |  | increasing the scope, geographic diversity and complexity of our
    operations.                                                                                                





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | A substantial portion of our producing properties is
    located in one geographic area.





| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Derivative instruments expose us to risks of financial
    loss in a variety of circumstances.





| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a counterparty to our derivative instruments is unable to
    satisfy its obligations;                                                                                  
|
| |  | production is less than expected; or                                                                                                                                    
|
| |  | there is an adverse change in the expected differential between
    the underlying price in the derivative instrument and actual
    prices received for our production.







| |                                                                
| | ---------------------------------------------------------------
| | Drilling oil and natural gas wells is a high-risk
    activity.







| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | The failure to replace our reserves could adversely affect
    our financial condition.



45



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##### Table of Contents







| |                                                                                 
| | --------------------------------------------------------------------------------
| | We have limited control over the activities on properties
    we do not operate.





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business involves many operating risks that can cause
    substantial losses; insurance may be unavailable or inadequate
    to protect us against these risks.







| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Terrorist activities and the potential for military and
    other actions could adversely affect our business.





| |                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our development and exploitation operations require
    substantial capital, and we may be unable to obtain needed
    financing on satisfactory terms.



46



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| |                                                                   
| | ------------------------------------------------------------------
| | The loss of key personnel could adversely affect our
    business.





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The marketability of our oil and natural gas production is
    dependent upon transportation facilities over which we have no
    control.





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition in the oil and natural gas industry is
    intense, and many of our competitors have greater financial,
    technological and other resources than we do.





| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | acquiring desirable producing properties or new leases for
    future exploration;        
|
| |  | marketing our oil and natural gas production;                                             
|
| |  | integrating new technologies; and                                                         
|
| |  | acquiring the equipment and expertise necessary to develop and
    operate our properties.





| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We are subject to complex federal, state and local laws
    and regulations that could adversely affect our business.



47



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|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Hedging policy.


Counterparties.




Commodity price sensitivity.




48



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##### Table of Contents







| |                                              
| | ---------------------------------------------
| | Oil Derivative Contracts at December 31, 2004

|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ------------ | ------ |  | --------- | - | ----- | ---------- |  |  | --------- |  |  | ----------- | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily        |        |  | Floor     |   |       | Daily      |  |  | Cap       |  |  | Daily       |       |  | Swap      |  |       | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |       | Cap Volume |  |  | Price     |  |  | Swap Volume |       |  | Price     |  |       | Value          | 
|Period           |  | (Bbls)       |        |  | (per Bbl) |   |       | (Bbls)     |  |  | (per Bbl) |  |  | (Bbls)      |       |  | (per Bbl) |  |       | (In thousands) | 
|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                | 
|Jan. - June 2005 |  |              | 15,500 |  |           | $ | 27.55 |            |  |  | 3,500     |  |  | $           | 31.89 |  |           |  | 1,000 |                |  | $ | 25.12 |  |  | $ | (10,259 | )
|July - Dec. 2005 |  |              | 12,500 |  |           |   | 27.84 |            |  |  | 2,500     |  |  |             | 31.07 |  |           |  | 1,000 |                |  |   | 25.12 |  |  |   | (6,810  | )
|Jan. - June 2006 |  |              | 3,000  |  |           |   | 32.50 |            |  |  | 1,000     |  |  |             | 29.88 |  |           |  | 2,000 |                |  |   | 25.03 |  |  |   | (6,296  | )
|July - Dec. 2006 |  |              | 1,000  |  |           |   | 27.50 |            |  |  | 1,000     |  |  |             | 29.88 |  |           |  | 2,000 |                |  |   | 25.03 |  |  |   | (6,928  | )
|Jan. - Dec. 2007 |  |              |       |  |           |   |      |            |  |  |          |  |  |             |      |  |           |  | 2,000 |                |  |   | 25.11 |  |  |   | (9,104  | )



| |                                                          
| | ---------------------------------------------------------
| | Natural Gas Derivative Contracts at December 31,
    2004

|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                |  |   |      |  |  |   |        |  
|---------------- |  | ------------ | ------ |  | --------- | - | ---- | ---------- |  |  | --------- |  |  | ----------- | ---- |  | --------- |  | ------ | -------------- |  | - | ---- |  |  | - | ------ | -
|                 |  | Daily        |        |  | Floor     |   |      | Daily      |  |  | Cap       |  |  | Daily       |      |  | Swap      |  |        | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |      | Cap Volume |  |  | Price     |  |  | Swap Volume |      |  | Price     |  |        | Value          | 
|Period           |  | (Mcf)        |        |  | (per Mcf) |   |      | (Mcf)      |  |  | (per Mcf) |  |  | (Mcf)       |      |  | (per Mcf) |  |        | (In thousands) | 
|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                | 
|Jan. - Dec. 2005 |  |              | 10,000 |  |           | $ | 4.84 |            |  |  | 5,000     |  |  | $           | 5.97 |  |           |  | 12,500 |                |  | $ | 4.96 |  |  | $ | (4,998 | )
|Jan. - Dec. 2006 |  |              | 5,000  |  |           |   | 4.85 |            |  |  | 5,000     |  |  |             | 5.68 |  |           |  | 12,500 |                |  |   | 5.02 |  |  |   | (5,690 | )
|Jan. - Dec. 2007 |  |              |       |  |           |   |     |            |  |  |          |  |  |             |     |  |           |  | 10,000 |                |  |   | 4.99 |  |  |   | (2,309 | )



Interest rate sensitivity. 3 8 1 4




| |                                                           
| | ----------------------------------------------------------
| | Interest Rate Derivative Contract at December 31,
    2004

|                     |  |               |  |               |  |             |               |        |          |                   |        |                |  |   |     | 
|-------------------- |  | ------------- |  | ------------- |  | ----------- | ------------- | ------ | -------- | ----------------- | ------ | -------------- |  | - | --- | 
|                     |  |               |  |               |  |             |               |        |          | Fair Market Value |       
|                     |  |               |  |               |  |             |               |        |          | at December 31,   |       
|                     |  |               |  |               |  |             |               | Encore |          |                   | 2004   |               
|Notional Swap Amount |  | Start Date    |  | End Date      |  | Encore Pays |               |        | Receives |                   |        | (In thousands) | 
|                     |  |               |  |               |  |             |               |        |          |                   |        |                | 
|(In thousands)       |  |               |  |               |  |             |               |        |          |                  
|$80,000              |  | June 25, 2002 |  | June 15, 2005 |  |             | LIBOR + 3.89% |        |          |                   | 8.375% |                |  | $ | 462 | 

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GLOSSARY OF OIL AND NATURAL GAS TERMS




Bbl.


Bcf.


Bbl/ D.


BOE.


BOE/ D.


Completion.


Delay Rentals.


Developed Acreage.


Development Well.


Exploratory Well.


Gross Acres or Gross Wells.


High-pressure air injection (HPAI).


Horizontal Drilling.


Lease Operations Expense.


MBbl.


MBOE.


Mcf.


Mcf/ D.


Mcfe.


MMBOE.


MMBtu.


50



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##### Table of Contents



MMcf.


Net Acres or Net Wells.


Net Production.


NYMEX.


Oil.


Operating Income.


Operator.


Present Value of Future Net Revenues or Present Value or
PV-10.


Proved Developed Reserves.


Proved Reserves.


Proved Undeveloped Reserves.


Reserve-To-Production Index or R/ P Index.


Royalty.


Standardized Measure.


Tertiary Recovery.


51



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##### Table of Contents



Unit.


Waterflood.


Working Interest.


52



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##### Table of Contents








|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

|                                                                                                             |  |  |    | 
|------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Report of Independent Registered Public
    Accounting Firm                                                  |  |  | 54 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                             |  |  | 55 | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2004, 2003, and 2002              |  |  | 56 | 
|Consolidated Statement of
    Stockholders Equity for the Years Ended December 31,
    2004, 2003, and 2002 |  |  | 57 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2004, 2003, and 2002              |  |  | 58 | 
|Notes to Consolidated Financial
    Statements                                                               |  |  | 59 | 
|Supplemental Information                                                                                     |  |  | 80 | 

53



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control 
Integrated Framework




| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





54



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ENCORE ACQUISITION COMPANY





CONSOLIDATED BALANCE SHEETS


|                                                                   |                                                                                                                  |                                            |         |           |           |  |         |          |         | 
|------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | --------- | --------- |  | ------- | -------- | ------- | 
|                                                                   |                                                                                                                  | December 31,                               |        
|                                                                   |                                                                                                                  |                                            |        
|                                                                   |                                                                                                                  | 2004                                       |         |           | 2003      | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | (In thousands                              |        
|                                                                   |                                                                                                                  | except share data)                         |        
|ASSETS                                                            
|Current assets:                                                    |                                                                                                                  |                                            |         |           |           |  |         |         
|                                                                   | Cash and cash equivalents                                                                                        |                                            | $       | 1,103     |           |  | $       | 431      |        
|                                                                   | Accounts receivable                                                                                              |                                            |         | 43,839    |           |  |         | 27,640   |        
|                                                                   | Inventory                                                                                                        |                                            |         | 6,550     |           |  |         | 6,019    |        
|                                                                   | Derivatives                                                                                                      |                                            |         | 2,665     |           |  |         | 5,588    |        
|                                                                   | Deferred taxes                                                                                                   |                                            |         | 11,118    |           |  |         | 3,592    |        
|                                                                   | Other                                                                                                            |                                            |         | 5,842     |           |  |         | 1,673    |        
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total current assets                       |         |           | 71,117    |  |         |          | 44,943  | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|Properties and equipment, at cost  successful efforts
    method: |                                                                                                                  |                                            |         |           |           |  |         |         
|                                                                   | Proved properties                                                                                                |                                            |         | 1,134,220 |           |  |         | 739,288  |        
|                                                                   | Unproved properties                                                                                              |                                            |         | 29,740    |           |  |         | 921      |        
|                                                                   | Accumulated depletion, depreciation, and amortization                                                            |                                            |         | (171,691  | )         |  |         | (124,646 | )      
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  |                                            | 992,269 |           |           |  | 615,563 |         
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   | Other property and equipment                                                                                     |                                            |         | 10,425    |           |  |         | 3,831    |        
|                                                                   | Accumulated depreciation                                                                                         |                                            |         | (3,551    | )         |  |         | (2,586   | )      
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  |                                            | 6,874   |           |           |  | 1,245   |         
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|Goodwill                                                           |                                                                                                                  |                                            | 37,995  |           |           |  |        |         
|Other                                                              |                                                                                                                  |                                            | 15,145  |           |           |  | 10,387  |         
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total assets                               |         | $         | 1,123,400 |  |         | $        | 672,138 | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                              
|Current liabilities:                                               |                                                                                                                  |                                            |         |           |           |  |         |         
|                                                                   | Accounts payable                                                                                                 |                                            | $       | 24,375    |           |  | $       | 10,668   |        
|                                                                   | Accrued lease operations expense                                                                                 |                                            |         | 3,408     |           |  |         | 2,507    |        
|                                                                   | Accrued development capital                                                                                      |                                            |         | 14,643    |           |  |         | 9,302    |        
|                                                                   | Derivatives                                                                                                      |                                            |         | 24,270    |           |  |         | 8,026    |        
|                                                                   | Production and severance taxes payable                                                                           |                                            |         | 9,106     |           |  |         | 5,365    |        
|                                                                   | Other                                                                                                            |                                            |         | 10,881    |           |  |         | 9,127    |        
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total current liabilities                  |         |           | 86,683    |  |         |          | 44,995  | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|Derivatives                                                        |                                                                                                                  |                                            | 31,477  |           |           |  | 3,514   |         
|Future abandonment cost                                            |                                                                                                                  |                                            | 6,601   |           |           |  | 5,341   |         
|Deferred taxes                                                     |                                                                                                                  |                                            | 146,064 |           |           |  | 80,313  |         
|Long-term debt                                                     |                                                                                                                  |                                            | 379,000 |           |           |  | 179,000 |         
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total liabilities                          |         |           | 649,825   |  |         |          | 313,163 | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|Commitments and contingencies                                      |                                                                                                                  |                                            |        |           |           |  |        |         
|Stockholders equity:                                              |                                                                                                                  |                                            |         |           |           |  |         |         
|                                                                   | Preferred stock, $.01 par value, 5,000,000 shares
    authorized, none issued and outstanding                    |                                            |         |          |           |  |         |         |        
|                                                                   | Common stock, $.01 par value, 60,000,000 shares
    authorized, 32,654,798 and 30,335,693 issued and outstanding |                                            |         | 327       |           |  |         | 303      |        
|                                                                   | Additional paid-in capital                                                                                       |                                            |         | 314,736   |           |  |         | 253,865  |        
|                                                                   | Deferred compensation                                                                                            |                                            |         | (4,603    | )         |  |         | (2,528   | )      
|                                                                   | Retained earnings                                                                                                |                                            |         | 199,512   |           |  |         | 117,365  |        
|                                                                   | Accumulated other comprehensive income                                                                           |                                            |         | (36,397   | )         |  |         | (10,030  | )      
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total stockholders equity                 |         |           | 473,575   |  |         |          | 358,975 | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 
|                                                                   |                                                                                                                  | Total liabilities and stockholders equity |         | $         | 1,123,400 |  |         | $        | 672,138 | 
|                                                                   |                                                                                                                  |                                            |         |           |           | 



55



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                           |                                                                              |                                             |         |         |        |   |         |         |        |   |         |         |        | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                                           |                                                                              | Year Ended December 31,                     |        
|                                                                           |                                                                              |                                             |        
|                                                                           |                                                                              | 2004                                        |         |         | 2003   |   |         | 2002    |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|                                                                           |                                                                              | (In thousands except per share data)        |        
|Revenues:                                                                  |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Oil                                                                          |                                             | $       | 220,649 |        |   | $       | 176,351 |        |   | $       | 134,854 |       
|                                                                           | Natural gas                                                                  |                                             |         | 77,884  |        |   |         | 43,745  |        |   |         | 25,838  |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total revenues                                                             |                                                                              |                                             | 298,533 |         |        |   | 220,096 |         |        |   | 160,692 |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Expenses:                                                                  |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Production                                                                  |                                             |         |         |        |   |         |         |        |   |         |         |       
|                                                                           |                                                                              | Lease operations                            |         |         | 47,142 |   |         |         | 37,846 |   |         |         | 30,678 | 
|                                                                           |                                                                              | Production, ad valorem, and severance taxes |         |         | 30,313 |   |         |         | 22,013 |   |         |         | 15,653 | 
|                                                                           | Depletion, depreciation, and amortization                                    |                                             |         | 48,522  |        |   |         | 33,530  |        |   |         | 34,550  |       
|                                                                           | Exploration                                                                  |                                             |         | 3,907   |        |   |         |        |        |   |         |        |       
|                                                                           | General and administrative (excluding non-cash stock based
    compensation) |                                             |         | 10,982  |        |   |         | 8,680   |        |   |         | 6,150   |       
|                                                                           | Non-cash stock based compensation                                            |                                             |         | 1,770   |        |   |         | 614     |        |   |         |        |       
|                                                                           | Derivative fair value (gain) loss                                            |                                             |         | 5,011   |        |   |         | (885    | )      |   |         | (900    | )     
|                                                                           | Other operating                                                              |                                             |         | 5,028   |        |   |         | 3,481   |        |   |         | 2,045   |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total expenses                                                             |                                                                              |                                             | 152,675 |         |        |   | 105,279 |         |        |   | 88,176  |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Operating income                                                           |                                                                              |                                             | 145,858 |         |        |   | 114,817 |         |        |   | 72,516  |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Other income (expenses):                                                   |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Interest                                                                     |                                             |         | (23,459 | )      |   |         | (16,151 | )      |   |         | (12,306 | )     
|                                                                           | Other                                                                        |                                             |         | 240     |        |   |         | 214     |        |   |         | 91      |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total other income (expenses)                                              |                                                                              |                                             | (23,219 | )       |        |   | (15,937 | )       |        |   | (12,215 | )      
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before income taxes and cumulative effect of accounting
    change  |                                                                              |                                             | 122,639 |         |        |   | 98,880  |         |        |   | 60,301  |        
|Current income tax benefit (provision)                                     |                                                                              |                                             | (1,913  | )       |        |   | (991    | )       |        |   | 745     |        
|Deferred income tax provision                                              |                                                                              |                                             | (38,579 | )       |        |   | (35,111 | )       |        |   | (23,361 | )      
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before cumulative effect of accounting change                       |                                                                              |                                             | 82,147  |         |        |   | 62,778  |         |        |   | 37,685  |        
|Cumulative effect of accounting change, net of income taxes                |                                                                              |                                             |        |         |        |   | 863     |         |        |   |        |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Net income                                                                 |                                                                              | $                                           | 82,147  |         |        | $ | 63,641  |         |        | $ | 37,685  |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before cumulative effect of accounting change per common
    share: |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Basic                                                                        |                                             | $       | 2.62    |        |   | $       | 2.09    |        |   | $       | 1.25    |       
|                                                                           | Diluted                                                                      |                                             |         | 2.58    |        |   |         | 2.07    |        |   |         | 1.25    |       
|Net income per common share:                                               |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Basic                                                                        |                                             | $       | 2.62    |        |   | $       | 2.11    |        |   | $       | 1.25    |       
|                                                                           | Diluted                                                                      |                                             |         | 2.58    |        |   |         | 2.10    |        |   |         | 1.25    |       
|Weighted average common shares outstanding:                                |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Basic                                                                        |                                             |         | 31,393  |        |   |         | 30,102  |        |   |         | 30,031  |       
|                                                                           | Diluted                                                                      |                                             |         | 31,825  |        |   |         | 30,333  |        |   |         | 30,161  |       



56



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY


|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |         |  
|----------------------------------- | ----------------------------------------------------------------------- | -------------------------------- | ------ | --- | ------ | - | ---------- | ------- |  | - | -------- | ----- | - | ------------ | -------- | - | --------- | - | ------ | ------------- | - | - | ------------- | ------ |  | - | ------- | ------- | - | - | -------- | ------- | -
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   | Accumulated  |          |   |          
|                                    |                                                                         | Shares of                        |        |     |        |   | Additional |         |  |   |          |       |   | Retained     |          |   | Other     |   |        | Total         |  
|                                    |                                                                         | Common                           |        |     | Common |   |            | Paid-In |  |   | Treasury |       |   | Deferred     |          |   | Earnings  |   |        | Comprehensive |   |   | Stockholders |       
|                                    |                                                                         | Stock                            |        |     | Stock  |   |            | Capital |  |   | Stock    |       |   | Compensation |          |   | (Deficit) |   |        | Income        |   |   | Equity        |       
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|                                    |                                                                         | (In thousands except share data) |       
|Balance at December 31, 2001        |                                                                         |                                  | 30,030 |     |        | $ | 300        |         |  | $ | 248,786  |       |   | $            |         |   |           | $ |       |               |   | $ | 16,039        |        |  | $ | 4,177   |         |   | $ | 269,302  |        
|Exercise of stock options           |                                                                         |                                  | 4      |     |        |   |           |         |  |   | 51       |       |   |              |         |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   | 51       |        
|Issuance of restricted stock        |                                                                         |                                  | 129    |     |        |   | 2          |         |  |   | 2,394    |       |   |              |         |   |           |   | (2,396 | )             |   |   |              |        |  |   |        |         |   |   |         |        
|Components of comprehensive income: |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               | 37,685 |  |   |         |        |   |   |          | 37,685  |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $6,602)  |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               |       |  |   |         | (10,772 | ) |   |          | (10,772 | )
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Total comprehensive income          |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   | 26,913   |        
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Balance at December 31, 2002        |                                                                         |                                  | 30,163 |     |        |   | 302        |         |  |   | 251,231  |       |   |              |         |   |           |   | (2,396 | )             |   |   | 53,724        |        |  |   | (6,595  | )       |   |   | 296,266  |        
|Exercise of stock options           |                                                                         |                                  | 145    |     |        |   | 1          |         |  |   | 1,974    |       |   |              |         |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   | 1,975    |        
|Issuance of Common Stock            |                                                                         |                                  | 9,060  |     |        |   | 91         |         |  |   | 175,383  |       |   |              |         |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   | 175,474  |        
|Purchase of Treasury Stock          |                                                                         |                                  |       |     |        |   |           |         |  |   |         |       |   |              | (175,560 | ) |           |   |       |               |   |   |              |        |  |   |        |         |   |   | (175,560 | )      
|Cancellation of Treasury Stock      |                                                                         |                                  | (9,060 | )   |        |   | (91        | )       |  |   | (175,469 | )     |   |              | 175,560  |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   |         |        
|Deferred compensation:              |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |        
|                                    | Issuance of restricted Common Stock                                     |                                  |        | 45  |        |   |            |        |  |   |          | 927   |   |              |          |  |           |   |        | (927          | ) |   |               |       |  |   |         |        |   |   |          |        |  
|                                    | Amortization of expense                                                 |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        | 614           |   |   |               |       |  |   |         |        |   |   |          | 614     |  
|                                    | Other changes                                                           |                                  |        | (17 | )      |   |            |        |  |   |          | (181  | ) |              |          |  |           |   |        | 181           |   |   |               |       |  |   |         |        |   |   |          |        |  
|Components of comprehensive income: |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               | 63,641 |  |   |         |        |   |   |          | 63,641  |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $2,105)  |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               |       |  |   |         | (3,435  | ) |   |          | (3,435  | )
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Total comprehensive income          |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   | 60,206   |        
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Balance at December 31, 2003        |                                                                         |                                  | 30,336 |     |        |   | 303        |         |  |   | 253,865  |       |   |              |         |   |           |   | (2,528 | )             |   |   | 117,365       |        |  |   | (10,030 | )       |   |   | 358,975  |        
|Exercise of stock options           |                                                                         |                                  | 202    |     |        |   | 2          |         |  |   | 4,119    |       |   |              |         |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   | 4,121    |        
|Issuance of Common Stock            |                                                                         |                                  | 2,000  |     |        |   | 20         |         |  |   | 52,909   |       |   |              |         |   |           |   |       |               |   |   |              |        |  |   |        |         |   |   | 52,929   |        
|Deferred compensation:              |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |        
|                                    | Issuance of restricted Common Stock                                     |                                  |        | 126 |        |   |            | 2       |  |   |          | 3,371 |   |              |          |  |           |   |        | (3,373        | ) |   |               |       |  |   |         |        |   |   |          |        |  
|                                    | Amortization of expense                                                 |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        | 1,770         |   |   |               |       |  |   |         |        |   |   |          | 1,770   |  
|                                    | Other changes                                                           |                                  |        | (9  | )      |   |            |        |  |   |          | 472   |   |              |          |  |           |   |        | (472          | ) |   |               |       |  |   |         |        |   |   |          |        |  
|Components of comprehensive income: |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               | 82,147 |  |   |         |        |   |   |          | 82,147  |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $15,757) |                                  |        |    |        |   |            |        |  |   |          |      |   |              |          |  |           |   |        |              |   |   |               |       |  |   |         | (26,367 | ) |   |          | (26,367 | )
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Total comprehensive income          |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |        |  |   |         |         |   |   | 55,780   |        
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       
|Balance at December 31, 2004        |                                                                         |                                  | 32,655 |     |        | $ | 327        |         |  | $ | 314,736  |       |   | $            |         |   |           | $ | (4,603 | )             |   | $ | 199,512       |        |  | $ | (36,397 | )       |   | $ | 473,575  |        
|                                    |                                                                         |                                  |        |     |        |   |            |         |  |   |          |       |   |              |          |   |           |   |        |               |   |   |               |       



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        |   |          |          |        |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------- | -------- | -------- | ------- | - | -------- | -------- | ------ | - | -------- | -------- | ------ | -
|                                                                                      |                                                                  | Year Ended December 31,                        |         
|                                                                                      |                                                                  |                                                |         
|                                                                                      |                                                                  | 2004                                           |          |          | 2003    |   |          | 2002     |       
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       
|                                                                                      |                                                                  | (In thousands)                                 |         
|Operating activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |        |   |          |         
|Net income                                                                            |                                                                  | $                                              | 82,147   |          |         | $ | 63,641   |          |        | $ | 37,685   |         
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                  |                                                |          |          |         |   |          |          |        |   |          |         
|                                                                                      | Depletion, depreciation, and amortization                        |                                                |          | 48,522   |         |   |          | 33,530   |        |   |          | 34,550   |       
|                                                                                      | Dry hole expense                                                 |                                                |          | 2,086    |         |   |          |         |        |   |          |         |       
|                                                                                      | Deferred taxes                                                   |                                                |          | 38,579   |         |   |          | 35,111   |        |   |          | 23,361   |       
|                                                                                      | Non-cash stock based compensation                                |                                                |          | 1,770    |         |   |          | 614      |        |   |          |         |       
|                                                                                      | Cumulative effect of accounting change                           |                                                |          |         |         |   |          | (863     | )      |   |          |         |       
|                                                                                      | Non-cash derivative fair value (gain) loss                       |                                                |          | 12,449   |         |   |          | (165     | )      |   |          | (1,239   | )     
|                                                                                      | Other non-cash                                                   |                                                |          | 1,456    |         |   |          | 1,293    |        |   |          | 177      |       
|                                                                                      | Loss on disposition of assets                                    |                                                |          | 271      |         |   |          | 322      |        |   |          | 254      |       
|                                                                                      | Changes in operating assets and liabilities:                     |                                                |          |          |         |   |          |          |        |   |          |          |       
|                                                                                      |                                                                  | Accounts receivable                            |          |          | (10,719 | ) |          |          | (5,602 | ) |          |          | (5,695 | )
|                                                                                      |                                                                  | Other current assets                           |          |          | (7,220  | ) |          |          | (8,592 | ) |          |          | (3,161 | )
|                                                                                      |                                                                  | Other assets                                   |          |          | (5,568  | ) |          |          | (2,024 | ) |          |          | 2,177  |  
|                                                                                      |                                                                  | Accounts payable and other current liabilities |          |          | 8,048   |   |          |          | 6,553  |   |          |          | 3,400  |  
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       
|Cash provided by operating activities                                                 |                                                                  |                                                | 171,821  |          |         |   | 123,818  |          |        |   | 91,509   |         
|Investing activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |        |   |          |         
|                                                                                      | Proceeds from disposition of assets                              |                                                |          | 703      |         |   |          | 1,295    |        |   |          | 226      |       
|                                                                                      | Purchases of other property and equipment                        |                                                |          | (7,594   | )       |   |          | (1,464   | )      |   |          | (680     | )     
|                                                                                      | Acquisition of oil and natural gas properties                    |                                                |          | (116,316 | )       |   |          | (54,601  | )      |   |          | (78,549  | )     
|                                                                                      | Acquisition of Cortez Oil & Gas, Inc. (net of cash
    acquired) |                                                |          | (123,808 | )       |   |          |         |        |   |          |         |       
|                                                                                      | Development of oil and natural gas properties                    |                                                |          | (186,455 | )       |   |          | (98,977  | )      |   |          | (80,313  | )     
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       
|Cash used by investing activities                                                     |                                                                  |                                                | (433,470 | )        |         |   | (153,747 | )        |        |   | (159,316 | )       
|Financing activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |        |   |          |         
|                                                                                      | Proceeds from issuance of common stock                           |                                                |          | 53,900   |         |   |          | 176,127  |        |   |          |         |       
|                                                                                      | Purchase of treasury stock                                       |                                                |          |         |         |   |          | (175,560 | )      |   |          |         |       
|                                                                                      | Offering costs paid                                              |                                                |          | (971     | )       |   |          | (653     | )      |   |          |         |       
|                                                                                      | Proceeds from issuance of
    83/8% notes                        |                                                |          |         |         |   |          |         |        |   |          | 150,000  |       
|                                                                                      | Proceeds from issuance of
    61/4% notes                        |                                                |          | 150,000  |         |   |          |         |        |   |          |         |       
|                                                                                      | Payments for debt issuance costs                                 |                                                |          | (4,808   | )       |   |          | (125     | )      |   |          | (6,195   | )     
|                                                                                      | Exercise of stock options                                        |                                                |          | 2,756    |         |   |          | 1,975    |        |   |          | 51       |       
|                                                                                      | Proceeds from long-term debt                                     |                                                |          | 328,500  |         |   |          | 112,500  |        |   |          | 144,000  |       
|                                                                                      | Payments on long-term debt                                       |                                                |          | (278,500 | )       |   |          | (99,500  | )      |   |          | (206,000 | )     
|                                                                                      | Cash overdrafts                                                  |                                                |          | 11,444   |         |   |          | 2,539    |        |   |          |         |       
|                                                                                      | Payments on note payable                                         |                                                |          |         |         |   |          |         |        |   |          | (1,107   | )     
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       
|Cash provided by financing activities                                                 |                                                                  |                                                | 262,321  |          |         |   | 17,303   |          |        |   | 80,749   |         
|Increase (decrease) in cash and cash equivalents                                      |                                                                  |                                                | 672      |          |         |   | (12,626  | )        |        |   | 12,942   |         
|Cash and cash equivalents, beginning of period                                        |                                                                  |                                                | 431      |          |         |   | 13,057   |          |        |   | 115      |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       
|Cash and cash equivalents, end of period                                              |                                                                  | $                                              | 1,103    |          |         | $ | 431      |          |        | $ | 13,057   |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |       



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ENCORE ACQUISITION COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                   
|-- | --------------------------------------------------
|1. | Formation of the Company and Basis of Presentation





|   |                                           
|-- | ------------------------------------------
|2. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |            
| | -----------
| | Inventories





| |                         
| | ------------------------
| | Properties and Equipment



| |                               
| | ------------------------------
| | Oil and Natural Gas Properties





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                    
| | -------------------
| | Unproved Properties





| |                             
| | ----------------------------
| | Other Property and Equipment





| |         
| | --------
| | Goodwill





| |                           
| | --------------------------
| | Capitalization of Interest



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |           
| | ----------
| | Impairment





| |                             
| | ----------------------------
| | Asset Retirement Obligations

Accounting for Asset Retirement
Obligations.






| |                         
| | ------------------------
| | Stock-based Compensation





|             |                                                  |                         |   |        |      |  |   |        |  |  |   |        | 
|------------ | ------------------------------------------------ | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                                  | Year Ended December 31, |  
|             |                                                  |                         |  
|             |                                                  | 2004                    |   |        | 2003 |  |   | 2002   | 
|             |                                                  |                         |   |        |      |  |   |        | 
|As Reported: |                                                  |                         |   |        |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         | $ | 1,108  |      |  | $ | 381    |  |  | $ |       | 
|             | Net income                                       |                         |   | 82,147 |      |  |   | 63,641 |  |  |   | 37,685 | 
|             | Basic net income per share                       |                         |   | 2.62   |      |  |   | 2.11   |  |  |   | 1.25   | 
|             | Diluted net income per share                     |                         |   | 2.58   |      |  |   | 2.10   |  |  |   | 1.25   | 
|Pro Forma:   |                                                  |                         |   |        |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         | $ | 2,289  |      |  | $ | 1,929  |  |  | $ | 1,277  | 
|             | Net income                                       |                         |   | 80,966 |      |  |   | 62,093 |  |  |   | 36,408 | 
|             | Basic net income per share                       |                         |   | 2.58   |      |  |   | 2.06   |  |  |   | 1.21   | 
|             | Diluted net income per share                     |                         |   | 2.54   |      |  |   | 2.05   |  |  |   | 1.21   | 

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                        |  |                         |          |   |      |  |          |      |  |  |          |  
|----------------------- |  | ----------------------- | -------- | - | ---- |  | -------- | ---- |  |  | -------- | -
|                        |  | Year Ended December 31, |         
|                        |  |                         |         
|                        |  | 2004                    |          |   | 2003 |  |          | 2002 | 
|                        |  |                         |          |   |      |  |          |      | 
|Risk free interest rate |  |                         | 3.2      | % |      |  | 3.0      | %    |  |  | 3.4      | %
|Expected life           |  |                         | 6  years |   |      |  | 4  years |      |  |  | 4  years |  
|Expected volatility     |  |                         | 34.8     | % |      |  | 36.5     | %    |  |  | 46.7     | %
|Expected dividend yield |  |                         | 0.0      | % |      |  | 0.0      | %    |  |  | 0.0      | %



| |                  
| | -----------------
| | Segment Reporting







| |             
| | ------------
| | Income Taxes





| |                    
| | -------------------
| | Revenue Recognition



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |               
| | --------------
| | Shipping Costs





| |                               
| | ------------------------------
| | Hedging and Related Activities











| |                     
| | --------------------
| | Comprehensive Income





| |                 
| | ----------------
| | Use of Estimates





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                         
| | ------------------------
| | New Accounting Standards







|   |             
|-- | ------------
|3. | Acquisitions



| |                  
| | -----------------
| | 2002 Acquisitions







| |                  
| | -----------------
| | 2003 Acquisitions





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | 2004 Acquisitions

Cortez Acquisition.






|                                                                           |                                    |                                   |   |         |         |  
|-------------------------------------------------------------------------- | ---------------------------------- | --------------------------------- | - | ------- | ------- | -
|Calculation of total purchase price:                                       |                                    |                                   |   |        
|                                                                           | Cash paid to Cortez former owners |                                   | $ | 85,805  |        
|                                                                           | Cortez debt repaid                 |                                   |   | 39,449  |        
|                                                                           | Transaction costs                  |                                   |   | 1,760   |        
|                                                                           |                                    |                                   |  
|                                                                           |                                    | Total purchase price              |   | $       | 127,014 |  
|                                                                           |                                    |                                   |  
|Allocation of purchase price to the fair value of net assets
    acquired: |                                    |                                   |   |        
|                                                                           | Cash                               |                                   | $ | 3,206   |        
|                                                                           | Current assets, excluding cash     |                                   |   | 5,880   |        
|                                                                           | Proved oil and gas properties      |                                   |   | 120,503 |        
|                                                                           | Unproved oil and gas properties    |                                   |   | 3,011   |        
|                                                                           | Goodwill                           |                                   |   | 37,995  |        
|                                                                           |                                    |                                   |  
|                                                                           |                                    | Total assets acquired             |   |         | 170,595 |  
|                                                                           |                                    |                                   |  
|                                                                           | Current liabilities                |                                   |   | (5,694  | )      
|                                                                           | Non-current liabilities            |                                   |   | (996    | )      
|                                                                           | Deferred income taxes              |                                   |   | (36,891 | )      
|                                                                           |                                    |                                   |  
|                                                                           |                                    | Total liabilities assumed         |   |         | (43,581 | )
|                                                                           |                                    |                                   |  
|                                                                           |                                    | Fair value of net assets acquired |   | $       | 127,014 |  
|                                                                           |                                    |                                   |  



Overton.


65



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                              
|-- | -----------------------------
|4. | Commitments and Contingencies



| |       
| | ------
| | Leases



|           |  |   |       | 
|---------- |  | - | ----- | 
|2005       |  | $ | 1,329 | 
|2006       |  |   | 1,434 | 
|2007       |  |   | 1,498 | 
|2008       |  |   | 1,509 | 
|2009       |  |   | 1,393 | 
|Thereafter |  |   | 5,398 | 





|   |                             
|-- | ----------------------------
|5. | Asset Retirement Obligations







|             |                                     |                         |   |        |      |  |   |        |  |  |   |        | 
|------------ | ----------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                     | Year Ended December 31, |  
|             |                                     |                         |  
|             |                                     | 2004                    |   |        | 2003 |  |   | 2002   | 
|             |                                     |                         |   |        |      |  |   |        | 
|As Reported: |                                     |                         |   |        |      |  |   |        |  |  |   |       
|             | Net income                          |                         | $ | 82,147 |      |  | $ | 63,641 |  |  | $ | 37,685 | 
|             | Basic net income per common share   |                         |   | 2.62   |      |  |   | 2.11   |  |  |   | 1.25   | 
|             | Diluted net income per common share |                         |   | 2.58   |      |  |   | 2.10   |  |  |   | 1.25   | 
|Pro Forma:   |                                     |                         |   |        |      |  |   |        |  |  |   |       
|             | Net income                          |                         | $ | 82,147 |      |  | $ | 62,778 |  |  | $ | 38,035 | 
|             | Basic net income per common share   |                         |   | 2.62   |      |  |   | 2.09   |  |  |   | 1.27   | 
|             | Diluted net income per common share |                         |   | 2.58   |      |  |   | 2.07   |  |  |   | 1.26   | 



66



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |                                         |              |       |       |      |   |       |      |  
|------------------------------------------- | --------------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ---- | -
|                                            |                                         | Year Ended   |      
|                                            |                                         | December 31, |      
|                                            |                                         |              |      
|                                            |                                         | 2004         |       |       | 2003 |  
|                                            |                                         |              |       |       |      |  
|Future abandonment liability at January 1   |                                         | $            | 5,341 |       |      | $ | 4,791 |     
|                                            | Acquisition of properties               |              |       | 1,165 |      |   |       | 337  |  
|                                            | Wells drilled                           |              |       | 467   |      |   |       | 83   |  
|                                            | Accretion expense                       |              |       | 317   |      |   |       | 272  |  
|                                            | Plugging and abandonment costs incurred |              |       | (280  | )    |   |       | (100 | )
|                                            | Revision of estimates                   |              |       | (409  | )    |   |       | (42  | )
|                                            |                                         |              |       |       |      |  
|Future abandonment liability at December 31 |                                         | $            | 6,601 |       |      | $ | 5,341 |     
|                                            |                                         |              |       |       |      |  





|   |                                         
|-- | ----------------------------------------
|6. | Accounts Payable and Accrued Liabilities



|                                    |       |      |       |        |      |   |       |       | 
|----------------------------------- | ----- | ---- | ----- | ------ | ---- | - | ----- | ----- | 
|                                    |       | 2004 |       |        | 2003 |  
|                                    |       |      |       |        |      |  
|Oil and natural gas revenue payable |       | $    | 2,413 |        |      | $ | 1,176 |      
|Net profits payable                 |       |      | 558   |        |      |   | 589   |      
|Interest                            |       |      | 2,630 |        |      |   | 563   |      
|Other                               |       |      | 5,280 |        |      |   | 6,799 |      
|                                    |       |      |       |        |      |  
|                                    | Total |      | $     | 10,881 |      |   | $     | 9,127 | 
|                                    |       |      |       |        |      |  



|   |             
|-- | ------------
|7. | Indebtedness



|                          |       |      |         |         |      |   |         |         | 
|------------------------- | ----- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                          |       | 2004 |         |         | 2003 |  
|                          |       |      |         |         |      |  
|Revolving Credit Facility |       | $    | 79,000  |         |      | $ | 29,000  |        
|61/4% Notes               |       |      | 150,000 |         |      |   |        |        
|83/8% Notes               |       |      | 150,000 |         |      |   | 150,000 |        
|                          |       |      |         |         |      |  
|                          | Total |      | $       | 379,000 |      |   | $       | 179,000 | 
|                          |       |      |         |         |      |  



| |                          
| | -------------------------
| | Senior Subordinated Notes

3 8 3 8 3 8


67



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




1 4 1 4 3 8 1 4


1 4 1 4






| |                          
| | -------------------------
| | Revolving Credit Facility







|                                             |  |                     |                |  |                    |  |                    | 
|-------------------------------------------- |  | ------------------- | -------------- |  | ------------------ |  | ------------------ | 
|Ratio of Total Outstanding to Borrowing Base |  | Eurodollar Loans(a) |                |  | Base Rate Loans(b) | 
|                                             |  |                     |                |  |                    | 
|Less than .40 to 1                           |  |                     | LIBOR + 1.000% |  |                    |  | Base Rate + 0.000% | 
|From .40 to 1 but less than .75 to 1         |  |                     | LIBOR + 1.250% |  |                    |  | Base Rate + 0.000% | 
|From .75 to 1 but less than .90 to 1         |  |                     | LIBOR + 1.500% |  |                    |  | Base Rate + 0.250% | 
|.90 to 1 or greater                          |  |                     | LIBOR + 1.750% |  |                    |  | Base Rate + 0.500% | 

68



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)







|    |  |                                                                                                                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The LIBOR rate is equal to the rate determined by Bank of
    America, N.A. to be the British Bankers Association Interest
    Settlement Rate for deposits in dollars for a similar interest
    period (either one, two, three or six months, or such other
    period as selected by Encore, subject to availability at each
    lender).
|   
|(b) |  | The Base Rate is calculated as the highest of (1) the
    annual rate of interest announced by Bank of America, N.A. as
    its prime rate and (2) the federal funds
    effective rate plus 0.5%.                                                                                                                                        











|                             |  |                |        | 
|---------------------------- |  | -------------- | ------ | 
|                             |  | Commitment     |       
|Borrowings to Borrowing Base |  | Fee Percentage |       
|                             |  |                |       
|<0.40 to 1                   |  |                | 0.250% | 
|30.40 to 1< 0.90 to 1        |  |                | 0.375% | 
|30.90 to 1                   |  |                | 0.500% | 





| |                  
| | -----------------
| | Letters of Credit



69



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Long-Term Debt Maturities



|                          |        |                        |         |         |      |   |           |   |           |   |   |            |  |   |        |        |  |   |         |         | 
|------------------------- | ------ | ---------------------- | ------- | ------- | ---- | - | --------- | - | --------- | - | - | ---------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                          |        | Payments Due by Period |        
|                          |        |                        |        
|                          |        | Total                  |         |         | 2005 |   | 2006-2007 |   | 2008-2009 |   |   | Thereafter | 
|                          |        |                        |         |         |      |   |           |   |           |   |   |            | 
|83/8% Notes               |        | $                      | 150,000 |         |      | $ |          |   |           | $ |  |            |  | $ |       |        |  | $ | 150,000 |        
|61/4% Notes               |        |                        | 150,000 |         |      |   |          |   |           |   |  |            |  |   |       |        |  |   | 150,000 |        
|Revolving credit facility |        |                        | 79,000  |         |      |   |          |   |           |   |  |            |  |   | 79,000 |        |  |   |        |        
|                          |        |                        |         |         |      |   |           |   |           |   |   |            |  |   |       
|                          | Totals |                        | $       | 379,000 |      |   | $         |  |           |   | $ |           |  |   | $      | 79,000 |  |   | $       | 300,000 | 
|                          |        |                        |         |         |      |   |           |   |           |   |   |            |  |   |       







|   |      
|-- | -----
|8. | Taxes



| |             
| | ------------
| | Income Taxes



|                  |                                                      |                         |        |        |      |   |        |        |  |   |        |        | 
|----------------- | ---------------------------------------------------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                  |                                                      | Year Ended December 31, |       
|                  |                                                      |                         |       
|                  |                                                      | 2004                    |        |        | 2003 |   |        | 2002   | 
|                  |                                                      |                         |        |        |      |   |        |        | 
|Taxes related to: |                                                      |                         |        |        |      |   |        |        |  |   |        |       
|                  | Income before cumulative effect of accounting change |                         | $      | 40,492 |      |   | $      | 36,102 |  |   | $      | 22,616 | 
|                  | Cumulative effect of accounting change               |                         |        |       |      |   |        | 529    |  |   |        |       | 
|                  |                                                      |                         |        |        |      |   |        |        | 
|Total tax expense |                                                      | $                       | 40,492 |        |      | $ | 36,631 |        |  | $ | 22,616 |       
|                  |                                                      |                         |        |        |      |   |        |        | 



|                                |          |                         |        |        |        |   |        |        |        |   |        |        |        | 
|------------------------------- | -------- | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                |          | Year Ended December 31, |       
|                                |          |                         |       
|                                |          | 2004                    |        |        | 2003   |   |        | 2002   |       
|                                |          |                         |        |        |        |   |        |        |       
|Federal:                        |          |                         |        |        |        |   |        |        |        |   |        |       
|                                | Current  |                         | $      | 1,788  |        |   | $      | 991    |        |   | $      | (745   | )     
|                                | Deferred |                         |        | 35,470 |        |   |        | 32,145 |        |   |        | 21,552 |       
|                                |          |                         |        |        |        |   |        |        |       
|                                |          | Total federal           |        |        | 37,258 |   |        |        | 33,136 |   |        |        | 20,807 | 
|                                |          |                         |        |        |        |   |        |        |       
|State (net of federal benefit): |          |                         |        |        |        |   |        |        |        |   |        |       
|                                | Current  |                         |        | 125    |        |   |        |       |        |   |        |       |       
|                                | Deferred |                         |        | 3,109  |        |   |        | 2,966  |        |   |        | 1,809  |       
|                                |          |                         |        |        |        |   |        |        |       
|                                |          | Total state             |        |        | 3,234  |   |        |        | 2,966  |   |        |        | 1,809  | 
|                                |          |                         |        |        |        |   |        |        |       
|Income tax provision            |          | $                       | 40,492 |        |        | $ | 36,102 |        |        | $ | 22,616 |       
|                                |          |                         |        |        |        |   |        |        |       

70



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                           |                      |                         |         |        |      |   |        |        |  |   |        |        | 
|------------------------------------------ | -------------------- | ----------------------- | ------- | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                           |                      | Year Ended December 31, |        
|                                           |                      |                         |        
|                                           |                      | 2004                    |         |        | 2003 |   |        | 2002   | 
|                                           |                      |                         |         |        |      |   |        |        | 
|Income before income taxes                 |                      | $                       | 122,639 |        |      | $ | 98,880 |        |  | $ | 60,301 |       
|                                           |                      |                         |         |        |      |   |        |        | 
|Tax at statutory rate                      |                      | $                       | 42,923  |        |      | $ | 34,608 |        |  | $ | 21,105 |       
|State income taxes, net of federal benefit |                      |                         | 3,234   |        |      |   | 2,966  |        |  |   | 1,809  |       
|Section 29 & 43 credits                    |                      |                         | (3,816  | )      |      |   | (1,322 | )      |  |   | (632   | )     
|Change in expected future tax rate         |                      |                         | (1,854  | )      |      |   |       |        |  |   |       |       
|Perm and other                             |                      |                         | 5       |        |      |   | (150   | )      |  |   | 334    |       
|                                           |                      |                         |         |        |      |   |        |        | 
|                                           | Income tax provision |                         | $       | 40,492 |      |   | $      | 36,102 |  |   | $      | 22,616 | 
|                                           |                      |                         |         |        |      |   |        |        | 



|                                     |                                                                         |                                        |          |          |        |   |         |         |        |  
|------------------------------------ | ----------------------------------------------------------------------- | -------------------------------------- | -------- | -------- | ------ | - | ------- | ------- | ------ | -
|                                     |                                                                         | December 31,                           |         
|                                     |                                                                         |                                        |         
|                                     |                                                                         | 2004                                   |          |          | 2003   |  
|                                     |                                                                         |                                        |          |          |        |  
|Current:                             |                                                                         |                                        |          |          |        |   |         |        
|Assets:                              |                                                                         |                                        |          |          |        |   |         |        
|                                     | Unrealized hedge loss in other comprehensive income                     |                                        | $        | 10,550   |        |   | $       | 4,626   |       
|                                     | Derivative fair loss  hedges                                           |                                        |          | 568      |        |   |         |        |       
|                                     |                                                                         |                                        |          |          |        |  
|                                     |                                                                         | Total current deferred tax assets      |          |          | 11,118 |   |         |         | 4,626  |  
|                                     |                                                                         |                                        |          |          |        |  
|Liabilities:                         |                                                                         |                                        |          |          |        |   |         |        
|                                     | Derivative fair value loss                                              |                                        |          |         |        |   |         | (881    | )     
|                                     | Other                                                                   |                                        |          |         |        |   |         | (153    | )     
|                                     |                                                                         |                                        |          |          |        |  
|                                     |                                                                         | Total current deferred tax liabilities |          |          |       |   |         |         | (1,034 | )
|                                     |                                                                         |                                        |          |          |        |  
|Net current deferred tax asset       |                                                                         | $                                      | 11,118   |          |        | $ | 3,592   |        
|                                     |                                                                         |                                        |          |          |        |  
|Long-term:                           |                                                                         |                                        |          |          |        |   |         |        
|Assets:                              |                                                                         |                                        |          |          |        |   |         |        
|                                     | Alternative minimum tax                                                 |                                        | $        | 2,017    |        |   | $       | 1,972   |       
|                                     | Unrealized hedge loss in other comprehensive income                     |                                        |          | 11,522   |        |   |         | 1,453   |       
|                                     | Section 43 credits                                                      |                                        |          | 6,350    |        |   |         | 1,062   |       
|                                     | Other                                                                   |                                        |          | 1,504    |        |   |         | 251     |       
|                                     |                                                                         |                                        |          |          |        |  
|                                     |                                                                         | Total long-term deferred tax assets    |          |          | 21,393 |   |         |         | 4,738  |  
|                                     |                                                                         |                                        |          |          |        |  
|Liabilities:                         |                                                                         |                                        |          |          |        |   |         |        
|                                     | Book basis of oil and natural gas properties in excess of tax
    basis |                                        |          | (167,457 | )      |   |         | (85,051 | )     
|                                     |                                                                         |                                        |          |          |        |  
|Net long-term deferred tax liability |                                                                         | $                                      | (146,064 | )        |        | $ | (80,313 | )      
|                                     |                                                                         |                                        |          |          |        |  



71



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                              
| | -----------------------------
| | Taxes Other than Income Taxes



|                                   |       |                         |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------- | ----- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                   |       | Year Ended December 31, |       
|                                   |       |                         |       
|                                   |       | 2004                    |        |        | 2003 |   |        | 2002   | 
|                                   |       |                         |        |        |      |   |        |        | 
|Production and severance           |       | $                       | 27,491 |        |      | $ | 19,999 |        |  | $ | 14,397 |       
|Property and ad valorem            |       |                         | 2,822  |        |      |   | 2,014  |        |  |   | 1,256  |       
|Franchise, payroll and other taxes |       |                         | 868    |        |      |   | 677    |        |  |   | 383    |       
|                                   |       |                         |        |        |      |   |        |        | 
|                                   | Total |                         | $      | 31,181 |      |   | $      | 22,690 |  |   | $      | 16,036 | 
|                                   |       |                         |        |        |      |   |        |        | 



|   |                     
|-- | --------------------
|9. | Stockholders Equity



| |                                 
| | --------------------------------
| | Public Offerings of Common Stock





Shelf Registration on Form S-3.




| |                              
| | -----------------------------
| | Common Stock Option Exercises



72



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                
| | ---------------
| | Preferred Stock





|    |                           
|--- | --------------------------
|10. | Earnings Per Share (EPS)





|                                                                                   |            |                         |        |        |      |   |        |        |  |   |        |        | 
|---------------------------------------------------------------------------------- | ---------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                   |            | Year Ended December 31, |       
|                                                                                   |            |                         |       
|                                                                                   |            | 2004                    |        |        | 2003 |   |        | 2002   | 
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Numerator:                                                                         |            |                         |        |        |      |   |        |        |  |   |        |       
|Income before cumulative effect of accounting change                               |            | $                       | 82,147 |        |      | $ | 62,778 |        |  | $ | 37,685 |       
|Cumulative effect of accounting change                                             |            |                         |       |        |      |   | 863    |        |  |   |       |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|                                                                                   | Net income |                         | $      | 82,147 |      |   | $      | 63,641 |  |   | $      | 37,685 | 
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Denominator:                                                                       |            |                         |        |        |      |   |        |        |  |   |        |       
|Denominator for basic earnings per share  weighted
    average shares outstanding |            |                         | 31,393 |        |      |   | 30,102 |        |  |   | 30,031 |       
|Effect of dilutive options and dilutive restricted stock(a)                        |            |                         | 432    |        |      |   | 231    |        |  |   | 130    |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Denominator for diluted earnings per share                                         |            |                         | 31,825 |        |      |   | 30,333 |        |  |   | 30,161 |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Basic income per common share before accounting change                             |            | $                       | 2.62   |        |      | $ | 2.09   |        |  | $ | 1.25   |       
|Cumulative effect of accounting change, net of tax                                 |            |                         |       |        |      |   | 0.02   |        |  |   |       |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Basic income per common share after accounting change                              |            | $                       | 2.62   |        |      | $ | 2.11   |        |  | $ | 1.25   |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Diluted income per common share before accounting change                           |            | $                       | 2.58   |        |      | $ | 2.07   |        |  | $ | 1.25   |       
|Cumulative effect of accounting change, net of tax                                 |            |                         |       |        |      |   | 0.03   |        |  |   |       |       
|                                                                                   |            |                         |        |        |      |   |        |        | 
|Diluted income per common share after accounting change                            |            | $                       | 2.58   |        |      | $ | 2.10   |        |  | $ | 1.25   |       
|                                                                                   |            |                         |        |        |      |   |        |        | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | There were no antidilutive options or antidilutive restricted
    stock outstanding for the year ended December 31, 2004 and
    December 31, 2003. Options to
    purchase 272,177 shares of common stock were
    outstanding but not included in the above calculation of 2002
    diluted earnings per share because their effect would be
    antidilutive. Additionally, the Company issued
    129,328 shares of restricted stock at the end of 2002 which
    are not included in the calculation of 2002 diluted earnings per
    share because their effect on the shares outstanding would be
    nominal.



|    |                       
|--- | ----------------------
|11. | Employee Benefit Plans



| |            
| | -----------
| | 401(k) plan



73



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Incentive Stock Plans







| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an employee may not be awarded more than 150,000 shares of
    common stock in any calendar year;                                                                                                                                    
|
| |  | a nonemployee director may not be awarded more than
    10,000 shares of common stock in any calendar year; and                                                                                                                      
|
| |  | an employee may not receive awards consisting of cash (including
    cash awards that are granted as performance awards) in respect
    of any calendar year having a value determined on the grant date
    in excess of $1 million.





|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              |  |           |         |   |   |       |       | 
|-------------------------------- | ---------- | ----------------------- | --------- | -------- | ----------------------- | - | ----- | ----------------------- | -------- |  | ------------ | -------- | - | --------- | ----- | ----- | ------------ |  | --------- | ------- | - | - | ----- | ----- | 
|                                 |            | Year Ended December 31, |           |          | Year Ended December 31, |   |       | Year Ended December 31, |         
|                                 |            | 2004                    |           |          | 2003                    |   |       | 2002                    |         
|                                 |            |                         |           |          |                         |   |       |                         |         
|                                 |            |                         |           | Weighted |                         |   |       |                         | Weighted |  |              |          |   | Weighted  |      
|                                 |            | Number of               |           |          | Average                 |   |       | Number of               |          |  | Average      |          |   | Number of |       |       | Average      | 
|                                 |            | Options                 |           |          | Strike Price            |   |       | Options                 |          |  | Strike Price |          |   | Options   |       |       | Strike Price | 
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Outstanding at beginning of year |            |                         | 962,954   |          |                         | $ | 14.86 |                         |          |  | 1,178,511    |          |   | $         | 14.62 |       |              |  | 847,500   |         |   | $ | 13.44 |      
|                                 | Granted(a) |                         |           | 259,856  |                         |   |       | 26.13                   |          |  |              | 49,792   |   |           |       | 19.45 |              |  |           | 378,177 |   |   |       | 17.21 | 
|                                 | Forfeited  |                         |           | (6,509   | )                       |   |       | 15.74                   |          |  |              | (119,622 | ) |           |       | 16.11 |              |  |           | (43,500 | ) |   |       | 14.24 | 
|                                 | Exercised  |                         |           | (202,577 | )                       |   |       | 13.60                   |          |  |              | (145,727 | ) |           |       | 13.43 |              |  |           | (3,666  | ) |   |       | 14.00 | 
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Outstanding at end of year       |            |                         | 1,013,724 |          |                         |   | 18.00 |                         |          |  | 962,954      |          |   |           | 14.86 |       |              |  | 1,178,511 |         |   |   | 14.62 |      
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Exercisable at end of year       |            |                         | 632,514   |          |                         |   | 14.66 |                         |          |  | 581,610      |          |   |           | 13.95 |       |              |  | 324,278   |         |   |   | 13.31 |      
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 






|    |  |                                                                                                                                                                                                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | During 2004 and 2003, 25,000 and 15,000 of the options,
    respectively, were granted to non-employee directors. The
    weighted average fair value of individual options granted in
    2004 and 2003 was $10.31 and $6.38, respectively.

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |  |                     |         |          |              |  |          |              |  |   |       | 
|-------------------------------- |  | ------------------- | ------- | -------- | ------------ |  | -------- | ------------ |  | - | ----- | 
|                                 |  | Options Outstanding |        
|                                 |  |                     |        
|                                 |  |                     |         | Weighted |              |  | Weighted |             
|                                 |  | Number of           |         |          | Average Life |  |          | Average      | 
|Range of Strike Prices per Share |  | Options             |         |          | (Years)      |  |          | Strike Price | 
|                                 |  |                     |         |          |              |  |          |              | 
|$12.49 to $14.00                 |  |                     | 480,148 |          |              |  | 6.5      |              |  | $ | 13.32 | 
|$14.01 to $29.65                 |  |                     | 533,576 |          |              |  | 8.5      |              |  |   | 22.21 | 



|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       |  |       |       |  |  |        |         | 
|------------- | ----- | --------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ----- | ----- |  |  | ------ | ------- | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2005            |        |        | 2006 |  |        | 2007   |  |  | 2008   |        |  | 2009 |        |        | Total | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 23,775 |        |      |  | 23,775 |        |  |  | 23,774 |        |  |      |       |        |       |  |      |       |  |  | 71,324 |        
|2003          |       |                 |       |        |      |  | 13,772 |        |  |  | 13,772 |        |  |      | 13,772 |        |       |  |      |       |  |  | 41,316 |        
|2004          |       |                 | 19,423 |        |      |  | 19,423 |        |  |  | 22,690 |        |  |      | 3,268  |        |       |  | 3,267 |       |  |  | 68,071 |        
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 43,198 |      |  |        | 56,970 |  |  |        | 60,236 |  |      |        | 17,040 |       |  |       | 3,267 |  |  |        | 180,711 | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 



|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       |  |        |        |  |  |        |        | 
|------------- | ----- | --------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------ | ------ | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2005            |        |        | 2006 |  |        | 2007   |  |  | 2008   |        |  | 2009 |        |        | Total | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 11,488 |        |      |  | 11,488 |        |  |  | 11,488 |        |  |      |       |        |       |  |       |        |  |  | 34,464 |       
|2003          |       |                 |       |        |      |  |       |        |  |  |       |        |  |      |       |        |       |  |       |        |  |  |       |       
|2004          |       |                 |       |        |      |  |       |        |  |  | 19,231 |        |  |      | 19,231 |        |       |  | 19,231 |        |  |  | 57,693 |       
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 11,488 |      |  |        | 11,488 |  |  |        | 30,719 |  |      |        | 19,231 |       |  |        | 19,231 |  |  |        | 92,157 | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |      |        |        |       | 





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                      
|--- | ---------------------
|12. | Financial Instruments



|                               |  |                   |          |   |                   |   |          |            |  |   |            |   |  |   |          |  
|------------------------------ |  | ----------------- | -------- | - | ----------------- | - | -------- | ---------- |  | - | ---------- | - |  | - | -------- | -
|                               |  | December 31, 2004 |          |   | December 31, 2003 |  
|                               |  |                   |          |   |                   |  
|                               |  | Book Value        |          |   | Fair Value        |   |          | Book Value |  |   | Fair Value |  
|                               |  |                   |          |   |                   |   |          |            |  |   |            |  
|Cash and cash equivalents      |  | $                 | 1,103    |   |                   | $ | 1,103    |            |  | $ | 431        |   |  | $ | 431      |  
|Accounts receivable, net       |  |                   | 43,839   |   |                   |   | 43,839   |            |  |   | 27,640     |   |  |   | 27,640   |  
|Accounts payable               |  |                   | (24,375  | ) |                   |   | (24,375  | )          |  |   | (10,668    | ) |  |   | (10,668  | )
|83/8% Notes                    |  |                   | (150,000 | ) |                   |   | (166,500 | )          |  |   | (150,000   | ) |  |   | (162,750 | )
|61/4% Notes                    |  |                   | (150,000 | ) |                   |   | (148,500 | )          |  |   |           |   |  |   |         |  
|Revolving credit facility      |  |                   | (79,000  | ) |                   |   | (79,000  | )          |  |   | (29,000    | ) |  |   | (29,000  | )
|Commodity derivative contracts |  |                   | (52,394  | ) |                   |   | (52,394  | )          |  |   | (7,768     | ) |  |   | (7,768   | )
|Interest rate swaps            |  |                   | 462      |   |                   |   | 462      |            |  |   | 2,420      |   |  |   | 2,420    |  
|Plugging bond                  |  |                   | 625      |   |                   |   | 737      |            |  |   | 589        |   |  |   | 643      |  





| |                      
| | ---------------------
| | Commodity Derivatives





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                                
| | -------------------------------
| | Oil Hedges at December 31, 2004

|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ------------ | ------ |  | --------- | - | ----- | ---------- |  |  | --------- |  |  | ----------- | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily        |        |  | Floor     |   |       | Daily      |  |  | Cap       |  |  | Daily       |       |  | Swap      |  |       | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |       | Cap Volume |  |  | Price     |  |  | Swap Volume |       |  | Price     |  |       | Value          | 
|Period           |  | (Bbls)       |        |  | (per Bbl) |   |       | (Bbls)     |  |  | (per Bbl) |  |  | (Bbls)      |       |  | (per Bbl) |  |       | (In thousands) | 
|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                | 
|Jan.  June 2005 |  |              | 15,500 |  |           | $ | 27.55 |            |  |  | 3,500     |  |  | $           | 31.89 |  |           |  | 1,000 |                |  | $ | 25.12 |  |  | $ | (10,340 | )
|July  Dec. 2005 |  |              | 12,500 |  |           |   | 27.84 |            |  |  | 2,500     |  |  |             | 31.07 |  |           |  | 1,000 |                |  |   | 25.12 |  |  |   | (6,810  | )
|Jan.  June 2006 |  |              | 3,000  |  |           |   | 32.50 |            |  |  | 1,000     |  |  |             | 29.88 |  |           |  | 2,000 |                |  |   | 25.03 |  |  |   | (6,296  | )
|July  Dec. 2006 |  |              | 1,000  |  |           |   | 27.50 |            |  |  | 1,000     |  |  |             | 29.88 |  |           |  | 2,000 |                |  |   | 25.03 |  |  |   | (6,928  | )
|Jan.  Dec. 2007 |  |              |       |  |           |   |      |            |  |  |          |  |  |             |      |  |           |  | 2,000 |                |  |   | 25.11 |  |  |   | (9,104  | )



| |                                        
| | ---------------------------------------
| | Natural Gas Hedges at December 31, 2004

|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                |  |   |      |  |  |   |        |  
|---------------- |  | ------------ | ------ |  | --------- | - | ---- | ---------- |  |  | --------- |  |  | ----------- | ---- |  | --------- |  | ------ | -------------- |  | - | ---- |  |  | - | ------ | -
|                 |  | Daily        |        |  | Floor     |   |      | Daily      |  |  | Cap       |  |  | Daily       |      |  | Swap      |  |        | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |      | Cap Volume |  |  | Price     |  |  | Swap Volume |      |  | Price     |  |        | Value          | 
|Period           |  | (Mcf)        |        |  | (per Mcf) |   |      | (Mcf)      |  |  | (per Mcf) |  |  | (Mcf)       |      |  | (per Mcf) |  |        | (In thousands) | 
|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                | 
|Jan.  Dec. 2005 |  |              | 10,000 |  |           | $ | 4.84 |            |  |  | 5,000     |  |  | $           | 5.97 |  |           |  | 12,500 |                |  | $ | 4.99 |  |  | $ | (5,155 | )
|Jan.  Dec. 2006 |  |              | 5,000  |  |           |   | 4.85 |            |  |  | 5,000     |  |  |             | 5.68 |  |           |  | 12,500 |                |  |   | 5.08 |  |  |   | (5,822 | )
|Jan.  Dec. 2007 |  |              |       |  |           |   |     |            |  |  |          |  |  |             |     |  |           |  | 10,000 |                |  |   | 4.99 |  |  |   | (2,309 | )





| |                          
| | -------------------------
| | Interest Rate Derivatives

3 8


|     |       |             |      |   |             |   |      |             |  |   |             |   |  |       |      |   |  |   |        |        |  
|---- | ----- | ----------- | ---- | - | ----------- | - | ---- | ----------- |  | - | ----------- | - |  | ----- | ---- | - |  | - | ------ | ------ | -
|Year |       | 1st Quarter |      |   | 2nd Quarter |   |      | 3rd Quarter |  |   | 4th Quarter |   |  | Total |     
|     |       |             |      |   |             |   |      |             |  |   |             |   |  |       |     
|2002 |       | $           |     |   |             | $ | (59  | )           |  | $ | (806        | ) |  | $     | (754 | ) |  | $ | (1,619 | )     
|2003 |       |             | (654 | ) |             |   | (544 | )           |  |   | (414        | ) |  |       | (297 | ) |  |   | (1,909 | )     
|2004 |       |             | (212 | ) |             |   | (153 | )           |  |   | (109        | ) |  |       | (72  | ) |  |   | (546   | )     
|2005 |       |             | (40  | ) |             |   | 72   |             |  |   | 85          |   |  |       | 60   |   |  |   | 177    |       
|2006 |       |             | 22   |   |             |   | 24   |             |  |   | 29          |   |  |       | 33   |   |  |   | 108    |       
|2007 |       |             | 38   |   |             |   | 1    |             |  |   |            |   |  |       |     |   |  |   | 39     |       
|     |       |             |      |   |             |   |      |             |  |   |             |   |  |       |     
|     | Total |             |      |   |             |   |      |             |  |   |             |   |  |       |      |   |  |   | $      | (3,750 | )
|     |       |             |      |   |             |   |      |             |  |   |             |   |  |       |     

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                    |  |                 |            |  |             |        |               |          |             |  |        |  |  |   |     | 
|------------------- |  | --------------- | ---------- |  | ----------- | ------ | ------------- | -------- | ----------- |  | ------ |  |  | - | --- | 
|                    |  |                 |            |  |             | Encore |               |          | Fair Market | 
|Contract Expiration |  | Notional Amount |            |  | Encore Pays |        |               | Receives |             |  | Value  | 
|                    |  |                 |            |  |             |        |               |          |             |  |        | 
|June 2005           |  | $               | 80,000,000 |  |             |        | LIBOR + 3.89% |          |             |  | 8.375% |  |  | $ | 462 | 







| |                  
| | -----------------
| | Counterparty Risk







|    |                            
|--- | ---------------------------
|13. | Termination of Enron Hedges



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|       |       |         |       |       |             |   |       |       |  |   |       |       | 
|------ | ----- | ------- | ----- | ----- | ----------- | - | ----- | ----- |  | - | ----- | ----- | 
|       |       | Oil     |       |       | Natural Gas |   |       |      
|Period |       | Revenue |       |       | Revenue     |   |       | Total | 
|       |       |         |       |       |             |   |       |       | 
|2002   |       | $       | 2,822 |       |             | $ | 1,594 |       |  | $ | 4,416 |      
|2003   |       |         | 401   |       |             |   | 18    |       |  |   | 419   |      
|       |       |         |       |       |             |   |       |       | 
|       | Total |         | $     | 3,223 |             |   | $     | 1,612 |  |   | $     | 4,835 | 
|       |       |         |       |       |             |   |       |       | 









|    |                           
|--- | --------------------------
|14. | Related Party Transactions





|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|15. | Capitalized Costs and Costs Incurred Relating to Oil and
    Natural Gas Producing Activities



|                                                                   |                                                       |              |         |           |      |   |         |          |  
|------------------------------------------------------------------ | ----------------------------------------------------- | ------------ | ------- | --------- | ---- | - | ------- | -------- | -
|                                                                   |                                                       | December 31, |        
|                                                                   |                                                       |              |        
|                                                                   |                                                       | 2004         |         |           | 2003 |  
|                                                                   |                                                       |              |         |           |      |  
|Properties and equipment, at cost  successful efforts
    method: |                                                       |              |         |           |      |   |         |         
|                                                                   | Proved properties                                     |              | $       | 1,134,220 |      |   | $       | 739,288  |  
|                                                                   | Unproved properties                                   |              |         | 29,740    |      |   |         | 921      |  
|                                                                   | Accumulated depletion, depreciation, and amortization |              |         | (171,691  | )    |   |         | (124,646 | )
|                                                                   |                                                       |              |         |           |      |  
|                                                                   |                                                       | $            | 992,269 |           |      | $ | 615,563 |         
|                                                                   |                                                       |              |         |           |      |  

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                   |                                 |                         |         |         |         |  |        |        |         |  |        |        |         | 
|------------------ | ------------------------------- | ----------------------- | ------- | ------- | ------- |  | ------ | ------ | ------- |  | ------ | ------ | ------- | 
|                   |                                 | Year Ended December 31, |        
|                   |                                 |                         |        
|                   |                                 | 2004                    |         |         | 2003    |  |        | 2002   |        
|                   |                                 |                         |         |         |         |  |        |        |        
|                   |                                 | (In thousands)          |        
|Acquisitions       |                                 |                         |         |         |         |  |        |        |         |  |        |       
|                   | Proved properties               |                         | $       | 204,907 |         |  | $      | 54,484 |         |  | $      | 78,158 |        
|                   | Unproved properties             |                         |         | 33,926  |         |  |        | 117    |         |  |        | 391    |        
|                   | Asset retirement obligations(1) |                         |         | 1,165   |         |  |        | 337    |         |  |        |       |        
|                   |                                 |                         |         |         |         |  |        |        |        
|Total acquisitions |                                 |                         | 239,998 |         |         |  | 54,938 |        |         |  | 78,549 |       
|                   |                                 |                         |         |         |         |  |        |        |        
|Development        |                                 |                         |         |         |         |  |        |        |         |  |        |       
|                   | Drilling and exploitation       |                         |         | 157,092 |         |  |        | 98,977 |         |  |        | 80,313 |        
|                   | Asset retirement obligations(1) |                         |         | 467     |         |  |        | 83     |         |  |        |       |        
|                   |                                 |                         |         |         |         |  |        |        |        
|Total development  |                                 |                         | 157,559 |         |         |  | 99,060 |        |         |  | 80,313 |       
|                   |                                 |                         |         |         |         |  |        |        |        
|Exploration        |                                 |                         |         |         |         |  |        |        |         |  |        |       
|                   | Drilling and exploitation       |                         |         | 29,363  |         |  |        |       |         |  |        |       |        
|                   | Geological and seismic          |                         |         | 979     |         |  |        |       |         |  |        |       |        
|                   | Delay rentals                   |                         |         | 204     |         |  |        |       |         |  |        |       |        
|                   |                                 |                         |         |         |         |  |        |        |        
|Total exploration  |                                 |                         | 30,546  |         |         |  |       |        |         |  |       |       
|                   |                                 |                         |         |         |         |  |        |        |        
|                   |                                 | Total costs incurred    |         | $       | 428,103 |  |        | $      | 153,998 |  |        | $      | 158,862 | 
|                   |                                 |                         |         |         |         |  |        |        |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company adopted SFAS 143 on January 1, 2003 which
    requires us to capitalize additional asset cost equal to the
    amount of our discounted asset retirement obligation assumed in
    a property purchase or incurred in the drilling of new wells.
    Had the Company adopted SFAS 143 prior to January 1,
    2002, the Companys acquisition cost incurred on a
    pro-forma basis would have been increased by $0.7 million
    for the year ended December 31, 2002. The effect on the
    Companys development cost incurred on a pro-forma basis
    would have been insignificant.




SUPPLEMENTAL INFORMATION (unaudited)




|    |                                                       
|--- | ------------------------------------------------------
|16. | Oil & Natural Gas Producing Activities
    (unaudited)





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                  |                           |        |  |         |             |  |  |                |  |  |  |         | 
|----------------- | ------------------------- | ------ |  | ------- | ----------- |  |  | -------------- |  |  |  | ------- | 
|                  |                           | Oil    |  |         | Natural Gas |  |  | Oil Equivalent | 
|                  |                           | (MBbl) |  |         | (MMcf)      |  |  | (MBOE)         | 
|                  |                           |        |  |         |             |  |  |                | 
|December 31, 2004 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 134,048 |             |  |  | 234,030        |  |  |  | 173,053 | 
|                  | Proved developed reserves |        |  | 97,114  |             |  |  | 156,919        |  |  |  | 123,267 | 
|December 31, 2003 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 117,732 |             |  |  | 138,950        |  |  |  | 140,890 | 
|                  | Proved developed reserves |        |  | 92,377  |             |  |  | 104,767        |  |  |  | 109,838 | 
|December 31, 2002 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 111,674 |             |  |  | 99,818         |  |  |  | 128,310 | 
|                  | Proved developed reserves |        |  | 93,945  |             |  |  | 82,217         |  |  |  | 107,648 | 



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |        |         |   |             |  |         |                |  |  |         |  
|--------------------------------- |  | ------ | ------- | - | ----------- |  | ------- | -------------- |  |  | ------- | -
|                                  |  | Oil    |         |   | Natural Gas |  |         | Oil Equivalent | 
|                                  |  | (MBbl) |         |   | (MMcf)      |  |         | (MBOE)         | 
|                                  |  |        |         |   |             |  |         |                | 
|Balance, December 31, 2001        |  |        | 91,369  |   |             |  | 75,687  |                |  |  | 103,983 |  
|                                  |  |        |         |   |             |  |         |                | 
|Acquisitions of minerals-in-place |  |        | 14,555  |   |             |  | 5,434   |                |  |  | 15,461  |  
|Extensions and discoveries        |  |        | 9,605   |   |             |  | 23,643  |                |  |  | 13,546  |  
|Revisions of estimates            |  |        | 2,182   |   |             |  | 3,229   |                |  |  | 2,719   |  
|Production                        |  |        | (6,037  | ) |             |  | (8,175  | )              |  |  | (7,399  | )
|                                  |  |        |         |   |             |  |         |                | 
|Balance, December 31, 2002        |  |        | 111,674 |   |             |  | 99,818  |                |  |  | 128,310 |  
|                                  |  |        |         |   |             |  |         |                | 
|Acquisitions of minerals-in-place |  |        | 13      |   |             |  | 37,464  |                |  |  | 6,257   |  
|Extensions and discoveries        |  |        | 3,957   |   |             |  | 7,354   |                |  |  | 5,182   |  
|Improved recovery                 |  |        | 12,773  |   |             |  | (178    | )              |  |  | 12,744  |  
|Revisions of estimates            |  |        | (4,084  | ) |             |  | 3,543   |                |  |  | (3,493  | )
|Production                        |  |        | (6,601  | ) |             |  | (9,051  | )              |  |  | (8,110  | )
|                                  |  |        |         |   |             |  |         |                | 
|Balance, December 31, 2003        |  |        | 117,732 |   |             |  | 138,950 |                |  |  | 140,890 |  
|                                  |  |        |         |   |             |  |         |                | 
|Acquisitions of minerals-in-place |  |        | 7,853   |   |             |  | 86,314  |                |  |  | 22,239  |  
|Extensions and discoveries        |  |        | 4,226   |   |             |  | 27,248  |                |  |  | 8,768   |  
|Improved recovery                 |  |        | 11,826  |   |             |  | (80     | )              |  |  | 11,812  |  
|Revisions of estimates            |  |        | (910    | ) |             |  | (4,313  | )              |  |  | (1,629  | )
|Production                        |  |        | (6,679  | ) |             |  | (14,089 | )              |  |  | (9,027  | )
|                                  |  |        |         |   |             |  |         |                | 
|Balance, December 31, 2004        |  |        | 134,048 |   |             |  | 234,030 |                |  |  | 173,053 |  
|                                  |  |        |         |   |             |  |         |                | 



|                                                                       |  |              |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                       |  | December 31, |           
|                                                                       |  |              |           
|                                                                       |  | 2004         |            |   | 2003 |   |            | 2002 | 
|                                                                       |  |              |            |   |      |   |            |      | 
|Net future cash inflows                                                |  | $            | 6,651,858  |   |      | $ | 4,245,574  |      |  | $ | 3,648,515  |  
|Future production costs                                                |  |              | (2,389,359 | ) |      |   | (1,683,810 | )    |  |   | (1,448,110 | )
|Future development costs                                               |  |              | (194,746   | ) |      |   | (75,811    | )    |  |   | (63,194    | )
|Future abandonment costs                                               |  |              | (49,859    | ) |      |   | (43,641    | )    |  |   |           |  
|Future income tax expense                                              |  |              | (1,221,933 | ) |      |   | (716,869   | )    |  |   | (623,987   | )
|                                                                       |  |              |            |   |      |   |            |      | 
|Future net cash flows                                                  |  |              | 2,795,961  |   |      |   | 1,725,443  |      |  |   | 1,513,224  |  
|10% annual discount                                                    |  |              | (1,630,342 | ) |      |   | (988,504   | )    |  |   | (888,506   | )
|                                                                       |  |              |            |   |      |   |            |      | 
|Standardized measure of discounted estimated future net cash
    flows |  | $            | 1,165,619  |   |      | $ | 736,939    |      |  | $ | 624,718    |  
|                                                                       |  |              |            |   |      |   |            |      | 

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |                                                 |                         |           |          |      |   |         |          |   |   |         |          |  
|--------------------------------------- | ----------------------------------------------- | ----------------------- | --------- | -------- | ---- | - | ------- | -------- | - | - | ------- | -------- | -
|                                        |                                                 | Year Ended December 31, |          
|                                        |                                                 |                         |          
|                                        |                                                 | 2004                    |           |          | 2003 |   |         | 2002     |  
|                                        |                                                 |                         |           |          |      |   |         |          |  
|Standardized measure, beginning of year |                                                 | $                       | 736,939   |          |      | $ | 624,718 |          |   | $ | 284,309 |         
|                                        | Net change in sales prices and production costs |                         |           | 430,310  |      |   |         | 81,964   |   |   |         | 305,097  |  
|                                        | Acquisitions of minerals-in-place               |                         |           | 242,855  |      |   |         | 91,654   |   |   |         | 131,370  |  
|                                        | Extensions, discoveries, and improved recovery  |                         |           | 150,112  |      |   |         | 103,780  |   |   |         | 135,897  |  
|                                        | Revisions of quantity estimates                 |                         |           | (15,217  | )    |   |         | (25,650  | ) |   |         | 18,216   |  
|                                        | Sales, net of production costs                  |                         |           | (222,995 | )    |   |         | (151,955 | ) |   |         | (114,361 | )
|                                        | Development costs incurred during the year      |                         |           | 157,092  |      |   |         | 98,977   |   |   |         | 80,313   |  
|                                        | Accretion of discount                           |                         |           | 73,694   |      |   |         | 86,511   |   |   |         | 36,036   |  
|                                        | Change in estimated future development costs    |                         |           | (276,027 | )    |   |         | (116,859 | ) |   |         | (44,285  | )
|                                        | Net change in income taxes                      |                         |           | (145,042 | )    |   |         | (52,992  | ) |   |         | (164,334 | )
|                                        | Change in timing and other                      |                         |           | 33,898   |      |   |         | (3,209   | ) |   |         | (43,540  | )
|                                        |                                                 |                         |           |          |      |   |         |          |  
|Standardized measure, end of year       |                                                 | $                       | 1,165,619 |          |      | $ | 736,939 |          |   | $ | 624,718 |         
|                                        |                                                 |                         |           |          |      |   |         |          |  

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                                              
|--- | ---------------------------------------------
|17. | Selected Quarterly Financial Data (unaudited)



|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |      |  |   |        |      | 
|---------------------------------------------------------- | ----------------------------- | ------------------------------------- | ------ | ---- | ------ | - | ------ | ----- |  | - | ------ | ---- |  | - | ------ | ---- | 
|                                                           |                               | Quarter                               |       
|                                                           |                               |                                       |       
|                                                           |                               | First                                 |        |      | Second |   |        | Third |  |   | Fourth |     
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|                                                           |                               | (In thousands, except per share data) |       
|2004                                                       |                               |                                       |        |      |        |   |        |       |  |   |        |      |  |   |        |     
|Revenues                                                   |                               | $                                     | 59,291 |      |        | $ | 70,122 |       |  | $ | 79,252 |      |  | $ | 89,868 |     
|Operating Income                                           |                               |                                       | 30,249 |      |        |   | 34,201 |       |  |   | 38,010 |      |  |   | 43,398 |     
|Net income                                                 |                               |                                       | 16,902 |      |        |   | 17,991 |       |  |   | 21,014 |      |  |   | 26,240 |     
|Basic income per common share                              |                               |                                       | 0.56   |      |        |   | 0.59   |       |  |   | 0.65   |      |  |   | 0.81   |     
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|Diluted income per common share                            |                               |                                       | 0.55   |      |        |   | 0.58   |       |  |   | 0.64   |      |  |   | 0.80   |     
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|2003                                                       |                               |                                       |        |      |        |   |        |       |  |   |        |      |  |   |        |     
|Revenues                                                   |                               | $                                     | 55,787 |      |        | $ | 51,243 |       |  | $ | 55,724 |      |  | $ | 57,342 |     
|Operating Income                                           |                               |                                       | 31,377 |      |        |   | 26,679 |       |  |   | 28,789 |      |  |   | 27,972 |     
|Income before accounting change                            |                               |                                       | 17,115 |      |        |   | 14,233 |       |  |   | 15,768 |      |  |   | 15,662 |     
|Cumulative effect of accounting change, net of tax of $529 |                               |                                       | 863    |      |        |   |       |       |  |   |       |      |  |   |       |     
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|Net income                                                 |                               | $                                     | 17,978 |      |        | $ | 14,233 |       |  | $ | 15,768 |      |  | $ | 15,662 |     
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|Basic income per common share:                             |                               |                                       |        |      |        |   |        |       |  |   |        |      |  |   |        |     
|                                                           | Before accounting change      |                                       | $      | 0.57 |        |   | $      | 0.47  |  |   | $      | 0.52 |  |   | $      | 0.51 | 
|                                                           | Accounting change, net of tax |                                       |        | 0.03 |        |   |        |      |  |   |        |     |  |   |        |     | 
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|                                                           | After accounting change       |                                       | $      | 0.60 |        |   | $      | 0.47  |  |   | $      | 0.52 |  |   | $      | 0.51 | 
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|Diluted income per common share:                           |                               |                                       |        |      |        |   |        |       |  |   |        |      |  |   |        |     
|                                                           | Before accounting change      |                                       | $      | 0.57 |        |   | $      | 0.47  |  |   | $      | 0.52 |  |   | $      | 0.51 | 
|                                                           | Accounting change, net of tax |                                       |        | 0.02 |        |   |        |      |  |   |        |     |  |   |        |     | 
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     
|                                                           | After accounting change       |                                       | $      | 0.59 |        |   | $      | 0.47  |  |   | $      | 0.52 |  |   | $      | 0.51 | 
|                                                           |                               |                                       |        |      |        |   |        |       |  |   |        |     

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

Evaluation of Disclosure Controls and Procedures




Managements Report on Internal Control Over Financial
Reporting








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Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting






Internal Control  Integrated Framework








Internal
Control  Integrated Framework Internal Control  Integrated Framework






| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





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Changes in Internal Control over Financial Reporting









|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant



www.encoreacq.com







|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management and Related Stockholder Matters





|                                                           |  |                      |           |  |                   |                      |       |                      |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- |  | ----------------- | -------------------- | ----- | -------------------- |  |  | --------- | 
|                                                           |  | (a)                  |           |  | (b)               |                      |       | (c)                  | 
|                                                           |  |                      |           |  |                   |                      |       |                      | 
|                                                           |  |                      |           |  |                   | Number of Securities |      
|                                                           |  |                      |           |  |                   | Remaining Available  |      
|                                                           |  | Number of Securities |           |  | Weighted-Average  |                      |       | for Future Issuance  | 
|                                                           |  | to Be Issued upon    |           |  | Exercise Price of |                      |       | Under Equity         | 
|                                                           |  | Exercise of          |           |  | Outstanding       |                      |       | Compensation Plans   | 
|                                                           |  | Outstanding Options, |           |  | Options,          |                      |       | (Excluding           | 
|                                                           |  | Warrants and         |           |  | Warrants and      |                      |       | Securities Reflected | 
|                                                           |  | Rights (2)           |           |  | Rights            |                      |       | in Column (a))       | 
|                                                           |  |                      |           |  |                   |                      |       |                      | 
|Equity compensation plans approved by security holders(1)  |  |                      | 1,013,724 |  |                   | $                    | 18.00 |                      |  |  | 1,361,438 | 
|Equity compensation plans not approved by security holders |  |                      |          |  |                   |                      |      |                      |  |  |          | 
|                                                           |  |                      |           |  |                   |                      |       |                      | 
|Total                                                      |  |                      | 1,013,724 |  |                   | $                    | 18.00 |                      |  |  | 1,361,438 | 
|                                                           |  |                      |           |  |                   |                      |       |                      | 






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | The 2000 Incentive Stock Plan is the Companys only equity
    compensation plan.
|   
|(2) | Excludes 272,922 shares of restricted stock.                                     

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|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees and Services



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PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





| |                         
| | ------------------------
| | 1. Financial Statements:

|                                                                                                             |  |  |    | 
|------------------------------------------------------------------------------------------------------------ |  |  | -- | 
|Report of Independent Registered Public
    Accounting Firm                                                  |  |  | 54 | 
|Consolidated Balance Sheets as of
    December 31, 2004 and 2003                                             |  |  | 55 | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2004, 2003 and 2002               |  |  | 56 | 
|Consolidated Statement of
    Stockholders Equity for the Years Ended December 31,
    2004, 2003, and 2002 |  |  | 57 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2004, 2003 and 2002               |  |  | 58 | 
|Notes to Consolidated Financial
    Statements                                                               |  |  | 59 | 



| |                                  
| | ---------------------------------
| | 2. Financial Statement Schedules:



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All financial statement schedules have been omitted because they
    are not applicable or the required information is presented in
    the financial statements or the notes to the consolidated
    financial statements.

Exhibits




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INDEX TO EXHIBITS


|        |    |      |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ---- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |            
|No.     |    |      | Description
|        |    |      |            
|        | 3  | .1   |             | Second Amended and Restated Certificate of Incorporation of the
    Company (incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    September 30, 2001, filed with the SEC on November 7,
    2001).                                                                                                                                                                                                                                      
|        | 3  | .2   |             | Second Amended and Restated Bylaws of the Company (incorporated
    by reference to the Companys Quarterly Report on Form 10-Q
    for the fiscal quarter ended September 30, 2001, filed with
    the SEC on November 7, 2001).                                                                                                                                                                                                                                                                
|        | 4  | .1   |             | Specimen certificate of the Company (incorporated by referenced
    to Exhibit 4.1 to Registration Statement on Form S-1,
    Registration No. 333-47540, filed with the SEC on
    December 15, 2000).                                                                                                                                                                                                                                                                                          
|        | 4  | .2   |             | Indenture, dated as of June 25, 2002, among the Company,
    subsidiary guarantors party thereto and Wells Fargo Bank, N.A.
    (incorporated by reference to Exhibit 4.1 to Quarterly
    Report on Form 10-Q for the quarterly period ended June 30,
    2002, filed with the SEC on August 9, 2002).                                                                                                                                                                                          
|        | 4  | .3   |             | Form of
    83/8% Senior
    Subordinated Note to Cede & Co. or its registered
    assigns (included Exhibit A to Exhibit 4.2 above).                                                                                                                                                                                                                                                                                                                                                            
|        | 4  | .4   |             | Indenture, dated as of April 2, 2004, among the Company,
    the subsidiary guarantors party thereto and Wells Fargo Bank,
    National Association (incorporated by reference to
    Exhibit 4.1 of the Companys Registration Statement on
    Form S-4 (Registration No. 333-117025), filed with the
    SEC on June 30, 2004).                                                                                                                                                               
|        | 4  | .5   |             | Form of 6.25% Senior Subordinated Note to Cede &
    Co. or its registered assigns (included Exhibit A to
    Exhibit 4.4 above).                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .1+  |             | 2000 Incentive Stock Plan (incorporated by reference to
    Exhibit 4.1 to the Companys Registration Statement on
    Form S-8 (File No. 333-120422), filed with the SEC on
    November 12, 2004).                                                                                                                                                                                                                                                                                             
|        | 10 | .2+  |             | Employee Severance Protection Plan (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on Form
    10-Q for the quarterly period ended March 31, 2003, filed
    with the SEC on May 8, 2003).                                                                                                                                                                                                                                                                      
|        | 10 | .3+* |             | Form of Restricted Stock Award  Executive                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .4+* |             | Form of Stock Option Agreement (Nonqualified)                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10 | .5+* |             | Form of Stock Option Agreement (Incentive)                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .6*  |             | Form of Indemnification Agreement for directors and executive
    officers                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 10 | .7*+ |             | Table of 2005 Base Salaries for Executive Officers of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .8   |             | Description of Compensation Payable to Non-Management Directors
    (incorporated by reference to Exhibit 10.1 of the
    Companys Form 8-K, filed with the SEC on February 18,
    2005).                                                                                                                                                                                                                                                                                                      
|        | 10 | .9   |             | Amended and Restated Credit Agreement, dated August 19,
    2004, among the Company, Encore Operating, L.P., Bank of
    America, N.A., as Administrative Agent, Fotis Capital Corp. and
    Wachovia Bank, N.A., as Co-Syndication Agents, BNP Paribas and
    Citibank, N.A., as Co-Documentary Agents and the financial
    institutions party thereto (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on Form
    8-K, filed with the SEC on August 25, 2004).
|        | 10 | .10  |             | Registration Rights Agreement, dated August 18, 1998, by
    and among the Company and the other parties thereto
    (incorporated by reference to Exhibit 4.2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-47540), filed with the SEC on October 6, 2000).                                                                                                                                                                                                         
|        | 10 | .11  |             | Stock Purchase Agreement dated March 2, 2004 by and among
    Cortez Oil & Gas, Inc., HRM Resources, Inc., the
    Security Holders of Cortez Oil & Gas, Inc., and the
    Company (incorporated by reference to Exhibit 10.9 of the
    Companys 2003 Annual Report on Form 10-K for the year
    ended December 31, 2003).                                                                                                                                                                    
|        | 10 | .12  |             | Purchase and Sale Agreement, dated as of April 26, 2004,
    among Dale Resources, L.L.C. et. al. and Encore Operating, L.P.
    (incorporated by reference to Exhibit 2.1 of the
    Companys Form 8-K, filed with the SEC on June 23,
    2004).                                                                                                                                                                                                                                              

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|        |    |     |             |                                                                                                                                                                                                                                                        
|------- | -- | --- | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |     |            
|No.     |    |     | Description
|        |    |     |            
|        | 10 | .13 |             | Purchase and Sale Agreement, dated as of April 26, 2004,
    between Overton Pipeline Company L.P. and EAP Energy Services,
    L.P. (incorporated by reference to Exhibit 2.2 of the
    Companys Form 8-K, filed with the SEC on June 23,
    2004).
|        | 21 | .1* |             | Subsidiaries of the Company.                                                                                                                                                                                                                           
|        | 23 | .1* |             | Consent of Ernst & Young LLP                                                                                                                                                                                                                           
|        | 23 | .2* |             | Consent of Miller and Lents, Ltd.                                                                                                                                                                                                                      
|        | 24 | .1* |             | Power of Attorney (included on the signature page of this
    report).                                                                                                                                                                                 
|        | 31 | .1* |             | Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
    Officer)                                                                                                                                                                               
|        | 31 | .2* |             | Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
    Officer)                                                                                                                                                                               
|        | 32 | .1* |             | Section 1350 Certification (Principal Executive Officer)                                                                                                                                                                                               
|        | 32 | .2* |             | Section 1350 Certification (Principal Financial Officer)                                                                                                                                                                                               






|  |                                                                  
|- | -----------------------------------------------------------------
|* | Filed herewith                                                   
| 
|+ | Management contract or compensatory plan, contract or arrangement



91



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SIGNATURES






| |                           
| | --------------------------
| | Encore Acquisition Company



| |    |                   
| | -- | ------------------
| | By | /s/ I. Jon Brumley

| |                        
| | -----------------------
| |                        
| | I. Jon Brumley         
| | Chief Executive Officer





|                                             |  |                                                                                                                        |  |  |  | 
|-------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Signature                                    |  | Title or Capacity                                                                                                      |  | 
|                                             |  |                                                                                                                        |  | 
|                                            
|/s/ I. Jon BrumleyI.
    Jon Brumley         |  | Chairman of the Board, Chief Executive Officer, and Director
    (Principal Executive Officer)                         |  | 
|                                            
|/s/ Jon S. BrumleyJon
    S. Brumley         |  | President and Director                                                                                                 |  | 
|                                            
|/s/ Roy W. JagemanRoy
    W. Jageman         |  | Chief Financial Officer, Treasurer, Executive Vice President and
    Corporate Secretary (Principal Financial Officer) |  | 
|                                            
|/s/ Robert C. ReevesRobert
    C. Reeves     |  | Vice President, Controller and Assistant Corporate Secretary
    (Principal Accounting Officer)                        |  | 
|                                            
|/s/ Martin C. BowenMartin
    C. Bowen       |  | Director                                                                                                               |  | 
|                                            
|/s/ Ted
    Collins, Jr.Ted
    Collins, Jr. |  | Director                                                                                                               |  | 

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|                                                 |  |                   |  |  |  | 
|------------------------------------------------ |  | ----------------- |  |  |  | 
|Signature                                        |  | Title or Capacity |  | 
|                                                 |  |                   |  | 
|                                                
|/s/ Ted A. GardnerTed
    A. Gardner             |  | Director          |  | 
|                                                
|/s/ John V. GenovaJohn
    V. Genova             |  | Director          |  | 
|                                                
|/s/ Howard H. NewmanHoward
    H. Newman         |  | Director          |  | 
|                                                
|/s/ James A.
    Winne IIIJames
    A. Winne III |  | Director          |  | 

93