##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                             
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to           .                                 

Commission file number: 001-14256



---

Westport Resources Corporation

(Exact name of Registrant as specified in its
charter)


|                                             |  |                                     
|-------------------------------------------- |  | ------------------------------------
|Nevada                                       |  | 13-3869719                          
|(State of incorporation or
    organization) |  | (I.R.S. Employer Identification No.)

1670 Broadway, Suite 2800

Denver, Colorado 80202


(Address of principal executive
offices)


(Zip code)


(Registrants telephone number including
area code):

(303) 573-5404


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

|                                                                 |  |                                          
|---------------------------------------------------------------- |  | -----------------------------------------
|Each Class                                                       |  | Name of Each Exchange on Which Registered
|                                                                 |  |                                          
|Common Stock, par value $.01 per share                           |  | New York Stock Exchange                  
|6 1/2% Convertible Preferred Stock, par
    value $.01 per share |  | New York Stock Exchange                  

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

None


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     Yes þ          No o

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

The aggregate market value of the voting and
non-voting common stock held by non-affiliates of the Registrant
as of June 30, 2003 (the last business day of the
Registrants most recently completed second fiscal quarter)
was approximately $779,556,005. The number of shares of the
Registrants common stock outstanding as of March 3,
2004, was 67,716,290.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the definitive proxy statement for the
Registrants 2003 annual meeting of stockholders are
incorporated by reference into Part III of this
Form 10-K.



---






---










TABLE OF CONTENTS

|                                                      |  |                                                                                           |     |      |    | 
|----------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | --- | ---- | -- | 
|Item No.                                              |  |                                                                                           |     | Page |   
|                                                      |  |                                                                                           |     |      |   
|SPECIAL NOTE REGARDING
    FORWARD-LOOKING STATEMENTS |  |                                                                                           | 1   |     
|                                                     
|                                                      |  | PART I                                                                                    |     |      |    | 
|ITEM 1.                                               |  | BUSINESS                                                                                  |     |      | 2  | 
|ITEM 2.                                               |  | PROPERTIES                                                                                |     |      | 26 | 
|ITEM 3.                                               |  | LEGAL PROCEEDINGS                                                                         |     |      | 34 | 
|ITEM 4.                                               |  | SUBMISSION OF MATTERS TO A
    VOTE OF SECURITY HOLDERS                                   |     |      | 34 | 
|                                                     
|                                                      |  | PART II                                                                                   |     |      |    | 
|ITEM 5.                                               |  | MARKET FOR REGISTRANTS
    COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                 |     |      | 35 | 
|ITEM 6.                                               |  | SELECTED FINANCIAL DATA                                                                   |     |      | 36 | 
|ITEM 7.                                               |  | MANAGEMENTS DISCUSSION
    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |     |      | 38 | 
|ITEM 7A.                                              |  | QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK                            |     |      | 54 | 
|ITEM 8.                                               |  | FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA                                           |     |      | 57 | 
|ITEM 9.                                               |  | CHANGES IN AND DISAGREEMENTS
    WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE  |     |      | 57 | 
|ITEM 9A.                                              |  | CONTROLS AND PROCEDURES                                                                   |     |      | 57 | 
|                                                     
|                                                      |  | PART III                                                                                  |     |      |    | 
|ITEM 10.                                              |  | DIRECTORS AND EXECUTIVE
    OFFICERS OF THE REGISTRANT                                    |     |      | 58 | 
|ITEM 11.                                              |  | EXECUTIVE COMPENSATION                                                                    |     |      | 58 | 
|ITEM 12.                                              |  | SECURITY OWNERSHIP OF
    CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |     |      | 58 | 
|ITEM 13.                                              |  | CERTAIN RELATIONSHIPS AND
    RELATED TRANSACTIONS                                        |     |      | 58 | 
|ITEM 14.                                              |  | PRINCIPAL ACCOUNTING FEES
    AND SERVICES                                                |     |      | 58 | 
|                                                     
|                                                      |  | PART IV                                                                                   |     |      |    | 
|ITEM 15.                                              |  | EXHIBITS, FINANCIAL
    STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                      |     |      | 58 | 
|SIGNATURES                                            |  |                                                                                           | 64  |     
|INDEX TO CONSOLIDATED
    FINANCIAL STATEMENTS        |  |                                                                                           | F-1 |     
|Change in Control Severance Protection Agreement     
|Consent of KPMG LLP                                  
|Consent of Ryder Scott Company, L.P.                 
|Consent of Netherland, Sewell & Associates, Inc.     
|Certification Pursuant to Section 302 - CEO          
|Certification Pursuant to Section 302 - CFO          
|Certification Pursuant to Section 906 - CEO          
|Certification Pursuant to Section 906 - CFO          



i



---



##### Table of Contents






SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS

Our disclosure and analysis in this report,
including information incorporated by reference, includes
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, or
Securities Act, Section 21E of the Securities Exchange Act
of 1934, as amended, or Exchange Act, and the Private Securities
Litigation Reform Act of 1995, that are subject to risks and
uncertainties. Forward-looking statements give our current
expectations and projections relating to our December 18,
2003 acquisition of South Texas properties and the financial
condition, results of operations, plans, objectives, future
performance and business of Westport Resources Corporation and
its subsidiaries. You can identify these statements by the fact
that they do not relate strictly to historical or current facts.
These statements may include words such as
anticipate, estimate,
expect, project, intend,
plan, believe and other words and
expressions of similar meaning in connection with any discussion
of the timing or nature of future operating or financial
performance or other events. All statements other than
statements of historical facts included in this report that
address activities, events or developments that we expect,
believe or anticipate will or may occur in the future are
forward-looking statements including, among other things,
statements relating to:



| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | amount, nature and timing of capital expenditures;                                  
|
| |  | projected drilling of wells;                                                        
|
| |  | timing and amount of future production of oil and
    natural gas;                  
|
| |  | operating costs and other expenses;                                                 
|
| |  | cash flow, anticipated liquidity and prospects
    for growth;                      
|
| |  | estimates of proved reserves and exploitation and
    exploration opportunities; and
|
| |  | marketing of oil and natural gas.                                                   

These forward-looking statements are based on our
expectations and beliefs concerning future events affecting us
and are subject to uncertainties and factors relating to our
operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Although we
believe that the expectations reflected in our forward-looking
statements are reasonable, we do not know whether our
expectations will prove correct. Any or all of our
forward-looking statements in this report may turn out to be
wrong. They can be affected by inaccurate assumptions we might
make or by known or unknown risks and uncertainties. Many
factors mentioned in our discussion in this report, including
the risks outlined under Risk Factors, will be
important in determining future results. Actual future results
may vary materially. Because of these factors, we caution that
investors should not place undue reliance on any of our
forward-looking statements. Further, any forward-looking
statement speaks only as of the date on which it is made, and
except as required by law we undertake no obligation to update
any forward-looking statement to reflect events or circumstances
after the date on which it is made or to reflect the occurrence
of anticipated or unanticipated events or circumstances.

1



---



##### Table of Contents






PART I






|        |         
|------- | --------
|ITEM 1. | BUSINESS

About Westport

Unless otherwise indicated or the context
otherwise requires, all references in this report to
Westport, the Company, us,
our, or we are to Westport Resources
Corporation, a Nevada corporation, and its consolidated
subsidiaries. We have provided definitions for some of the oil
and natural gas industry terms used in this report in the
Glossary of Oil and Natural Gas Terms beginning on
page 23.

We are an independent energy company engaged in
oil and natural gas production, exploitation, acquisition and
exploration activities primarily in the United States. Based
upon publicly reported production levels during the fourth
quarter of 2003, we are among the 20 largest domestic
independent exploration and production companies. Our reserves
and operations are concentrated in the following divisions:
Northern, comprised primarily of properties in North Dakota and
Wyoming; Western, comprised of properties in Utah; Southern,
comprised primarily of properties in Oklahoma, Texas and
Louisiana; and Gulf of Mexico, which includes our offshore
properties. We focus on maintaining a balanced portfolio of
lower-risk, long-lived primarily onshore reserves and
higher-margin shorter lived Gulf Coast and Gulf of Mexico
reserves to provide a diversified cash flow foundation for our
exploitation, acquisition and exploration activities.

On December 18, 2003, we closed, effective
as of December 1, 2003, an acquisition of producing
properties, undeveloped leasehold, seismic data, exploration
projects and other assets in South Texas, also referred to as
the South Texas Acquisition, for approximately
$341.7 million. The acquired assets complement a growing
core area for us in South Texas. The South Texas Acquisition
increased our reserves by approximately 13%, raised our
production by approximately 15% and replaced approximately 125%
of our 2003 production. Approximately 97% of the acquired proved
reserves are natural gas and 61% are proved developed. We have
identified additional exploitation and exploration potential on
the 90,358 net acres of acquired leasehold. The South Texas
Acquisition was funded from existing cash and borrowings under
our revolving credit facility.

Over the last several years acquisitions,
subsequent exploitation and exploration activity have fueled the
growth of our reserves, production and cash flow. From
December 31, 1997 to December 31, 2003, primarily as a
result of these investments, we increased our estimated proved
reserves from 197 Bcfe to 1,781 Bcfe, and our average
daily production increased from 66 Mmcfe/d to
455 Mmcfed/d, yielding compound annual growth rates of
approximately 44% and 38% respectively. Our reserve to
production ratio increased to approximately 10 years at year-end
2003.

Notwithstanding our rapid growth, we have
maintained a disciplined approach to the control of costs. Over
the six-year period ending December 31, 2003, we have
reduced our per unit cost structure from $1.32 per Mcfe to
$1.14 per Mcfe for the aggregate of lease operating
expenses, transportation costs, production taxes and general and
administrative costs. We have accomplished this while
maintaining a strong balance sheet and significant financial
flexibility.

We believe that our exploitation and exploration
inventory and our acquisition expertise, together with our
operating experience and cost structure, provide us with the
ability to generate substantial cash flow and position us for
future growth. We operate approximately 77% of the net present
value of our reserves, allowing us to better manage expenses,
capital allocation and the decision-making processes related to
all aspects of exploitation and exploration activities. For the
year ended December 31, 2003, we generated oil and natural
gas sales of $814 million. Our capital expenditures for
2003 were approximately $298 million (including
$17.0 million of expensed geological and geophysical
costs), which does not include acquisitions. We expect that our
total 2004 capital budget, excluding acquisitions, will be
approximately $370 million, 73% of which has been allocated
to exploitation. We anticipate drilling between 400 and
450 wells during 2004.

2



---



##### Table of Contents



As of December 31, 2003, our estimated
proved reserves of 1,781 Bcfe had a pre-tax net present
value, discounted at 10%, of approximately $3.5 billion
based on year end New York Mercantile Exchange, or NYMEX,
prices of $32.55 per barrel of oil and $5.83 per Mmbtu
of natural gas. Approximately 65% of our reserves were
classified as proved developed as of December 31, 2003. The
following table sets forth the volume and net present value of
our estimated proved reserves as of December 31, 2003 and a
summary of our fourth quarter 2003 production by division:

|               |  |                   |       |  |                           |                      |             |               |  |  |         |  |  |         |         |  |           |  |     |            |  |  |         |  |  |   |         |  |  |  |       |  
|-------------- |  | ----------------- | ----- |  | ------------------------- | -------------------- | ----------- | ------------- |  |  | ------- |  |  | ------- | ------- |  | --------- |  | --- | ---------- |  |  | ------- |  |  | - | ------- |  |  |  | ----- | -
|               |  |                   |       |  |                           |                     
|               |  |                   |       |  |                           | At December 31, 2003 |            
|               |  |                   |       |  |                           |                      |            
|               |  |                   |       |  |                           |                      |             |              
|               |  |                   |       |  |                           | Net Present Value    |            
|               |  | Quarter Ended     |       |  | Proved Reserve Quantities |                      |             | Before Income | 
|               |  | December 31, 2003 |       |  |                           |                      |             | Taxes(2)      | 
|               |  | Average Net Daily |       |  |                           |                      |             |              
|               |  | Production        |       |  |                           |                      | Natural Gas |               |  |  |         | 
|               |  |                   |       |  | Crude Oil                 |                      |             | Natural Gas   |  |  | Liquids |  |  | Total   |         |  | Amount    |  |     |           
|Division       |  | Mmcfe/d           |       |  | Percent                   |                      |             | (Mmbbl)       |  |  | (Bcf)   |  |  | (Mmbbl) |         |  | (Bcfe)(1) |  |     | (Millions) |  |  | Percent | 
|               |  |                   |       |  |                           |                      |             |               |  |  |         |  |  |         |         |  |           |  |     |            |  |  |         | 
|Northern       |  |                   | 104.0 |  |                           |                      | 22.1        | %             |  |  | 29.6    |  |  |         | 153.7   |  |           |  |    |            |  |  | 331.5   |  |  | $ | 580.5   |  |  |  | 16.6  | %
|Western(2)     |  |                   | 83.8  |  |                           |                      | 17.8        |               |  |  | 0.7     |  |  |         | 654.5   |  |           |  |    |            |  |  | 658.4   |  |  |   | 873.7   |  |  |  | 25.1  |  
|Southern(3)    |  |                   | 162.0 |  |                           |                      | 34.3        |               |  |  | 33.0    |  |  |         | 449.8   |  |           |  | 0.1 |            |  |  | 648.5   |  |  |   | 1,511.8 |  |  |  | 43.4  |  
|Gulf of Mexico |  |                   | 121.6 |  |                           |                      | 25.8        |               |  |  | 6.9     |  |  |         | 91.9    |  |           |  | 1.5 |            |  |  | 142.4   |  |  |   | 519.6   |  |  |  | 14.9  |  
|               |  |                   |       |  |                           |                      |             |               |  |  |         |  |  |         |         |  |           |  |     |            |  |  |         | 
|Total          |  |                   | 471.4 |  |                           |                      | 100.0       | %             |  |  | 70.2    |  |  |         | 1,349.9 |  |           |  | 1.6 |            |  |  | 1,780.8 |  |  | $ | 3,485.6 |  |  |  | 100.0 | %
|               |  |                   |       |  |                           |                      |             |               |  |  |         |  |  |         |         |  |           |  |     |            |  |  |         | 



---



|    |  |                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------
|(1) |  | Mmbbls converted to Bcfe at a six to one
    conversion.                                                                             
|   
|(2) |  | Excludes value attributable to the gathering and
    compression assets of Westport Field Services, LLC, one of our
    subsidiaries.
|   
|(3) |  | Includes production from the South Texas
    properties from December 19, 2003 through December 31,
    2003.                        

Our Strategy

Our strategy is to grow our reserve base and
production, maintain our diversified risk profile and expand our
investment opportunities primarily by executing on lower-risk
exploitation projects and acquisitions. Although our emphasis is
on exploitation and acquisition activities, we will continue
drilling potentially higher-impact exploration prospects,
thereby balancing risks while maintaining significant potential
for growth. To accomplish this strategy, we will:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | enhance our exploitation activity by allocating
    approximately 75% of our capital budget to exploitation to
    increase production and enhance our reserve base;                        
|
| |  | continue our acquisition activity to achieve
    greater immediate cash flow and expand our exploitation
    inventory;                                                                     
|
| |  | continue to generate and drill an extensive
    prospect inventory by applying current technology and leveraging
    our significant operational capabilities and acreage
    inventory; and
|
| |  | maintain financial flexibility and a conservative
    capital structure through prudent financial and hedging
    activities.                                                               

Company History

Westport was formed by the April 7, 2000
merger of Westport Oil and Gas Company, Inc., which we refer to
as Westport Oil and Gas, and Equitable Production (Gulf)
Company, which we refer to as EPGC, an indirect, wholly owned
subsidiary of Equitable Resources, Inc. As a result of the
merger, Westport Oil and Gas became a wholly owned subsidiary of
EPGC, which subsequently changed its name to Westport Resources
Corporation, and the stockholders of Westport Oil and Gas became
the majority stockholders of EPGC. The senior management team of
Westport Oil and Gas became the management team for the combined
company, complemented by certain key managers from EPGC. The
April 2000 merger was accounted for using purchase accounting
with Westport Oil and Gas as the surviving

3



---



##### Table of Contents



accounting entity. Westport began consolidating
the results of EPGC with the results of Westport Oil and Gas as
of the April 7, 2000 closing date.


On August 21, 2001, the stockholders of
Belco Oil and Gas Corp., or Belco, approved an agreement and
plan of merger, dated as of June 8, 2001, between Belco and
Westport. Pursuant to this agreement, Westport was merged with
and into Belco, with Belco surviving and changing its name to
Westport Resources Corporation. The 2001 merger was accounted
for as a purchase transaction for financial accounting purposes
with Westport as the surviving accounting entity. Westport began
consolidating the results of Belco with its results as of the
August 21, 2001 closing date.

We are incorporated under the laws of the State
of Nevada. Our principal offices are located at
1670 Broadway Street, Suite 2800, Denver, Colorado
80202. Our telephone number is (303) 573-5404, and our web
site can be found at www.westportresourcescorp.com.

Purchasers and Marketing

Our oil and natural gas production is principally
sold to marketers and other purchasers having access to nearby
pipeline facilities or is transported under our transportation
agreements to expand our marketing opportunities. In areas where
there is no practical access to pipelines, oil is trucked to
storage facilities. Our marketing of oil and natural gas can be
affected by factors beyond our control, the effects of which
cannot be accurately predicted. For 2003, our largest purchaser
was Duke Energy, which accounted for 14% of our oil and natural
gas sales. No other purchasers accounted for more than 10% of
our oil and natural gas sales. We do not believe that the loss
of any of our purchasers, including Duke Energy, would have a
material adverse effect on our business or operations.

We periodically enter into commodity derivative
contracts (future contracts, swaps or options) in order to
(i) reduce the effect of the volatility of price changes on
the commodities we produce and sell, (ii) support our
annual capital budgeting and expenditure plans and
(iii) lock in prices to protect the economics related to
certain capital projects. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operation for a description of our hedging
activities, Item 7A. Quantitative and Qualitative
Disclosures About Market Risk and Note 3 of the Notes
to Consolidated Financial Statements included in
Item 8. Financial Statements and Supplementary
Data for information concerning the impact to revenues
during 2003, 2002 and 2001 from our commodity derivative
activities, our open derivative positions and related prices.

Seasonality

Demand for natural gas has historically been
seasonal, with peak demand and typically higher prices occurring
during the colder winter months.

Competition

We compete with major and independent oil and
natural gas companies. Because oil and natural gas are
commodities that are sold by hundreds of competitors, we cannot
identify with certainty which of our competitors are material
competitors. Some of our competitors have substantially greater
financial and other resources than we do. In addition, larger
competitors may be able to absorb the burden of any changes in
Federal, state and local laws and regulations more easily than
we can, which would adversely affect our competitive position.
Our competitors may be able to pay more for exploratory
prospects and producing oil and natural gas properties and may
be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than we can. Further, these
companies may enjoy technological advantages and may be able to
implement new technologies more rapidly than we can. Our ability
to explore for oil and natural gas prospects and to acquire
additional properties in the future will depend upon our ability
to conduct operations, to evaluate and select suitable
properties, implement advanced technologies and to consummate
transactions in this highly competitive environment.

4



---



##### Table of Contents



Regulation

Federal Regulation of Sales and
Transportation of Natural Gas.Historically, the transportation and sale for resale of natural
gas in interstate commerce have been regulated pursuant to the
Natural Gas Act of 1938, or NGA, the Natural Gas Policy Act of
1978 and the regulations promulgated thereunder by the Federal
Energy Regulatory Commission, or the FERC. In the past, the
Federal government has regulated the prices at which natural gas
could be sold. Deregulation of natural gas sales by producers
began with the enactment of the Natural Gas Policy Act. In 1989,
Congress enacted the Natural Gas Wellhead Decontrol Act, which
removed all remaining NGA and Natural Gas Policy Act price and
non-price controls affecting producer sales of natural gas
effective January 1, 1993. Congress could, however, reenact
price controls in the future.

Our sales of natural gas are affected by the
availability, terms and cost of pipeline transportation. The
price and terms for access to pipeline transportation remain
subject to extensive Federal regulation. Commencing in April
1992, the FERC issued Order No. 636 and a series of related
orders, which required interstate pipelines to provide
open-access transportation on a basis that is equal for all
natural gas suppliers. The FERC has stated that it intends for
Order No. 636 to foster increased competition within all
phases of the natural gas industry. Although Order No. 636
does not directly regulate our production and marketing
activities, it does affect how buyers and sellers gain access to
the necessary transportation facilities and how we and our
competitors sell natural gas in the marketplace. The courts have
largely affirmed the significant features of Order No. 636
and the numerous related orders pertaining to individual
pipelines.

In subsequent action, the FERC issued Order
No. 637 and a series of related orders, which are intended
to institute incremental reforms to the Order No. 636
regulatory model. The FERCs stated purpose in Order
No. 637 is to improve the efficiency of the market
and to provide captive customers with the opportunity to reduce
their cost of holding long-term pipeline capacity while
continuing to protect against the exercise of market
power. Order No. 637, among other things,
(i) authorizes pipelines to implement peak and off-peak
rates for short-term services and term-differentiated rates,
(ii) requires pipelines to offer enhanced imbalance
management services and to implement netting and trading of
transportation imbalances, (iii) limits the use of pipeline
penalties, and (iv) provides increased transparency through
enhanced posting of transactional information on pipelines
websites. Order No. 637 was implemented through compliance
filings by pipelines, on which shippers were afforded the
opportunity to comment. The FERC has now issued a number of
orders in pipeline compliance proceedings, resolving most of the
issues raised by the compliance filings. Pipeline interests and
other parties challenged certain aspects of Order No. 637
on judicial review. In a decision issued in 2002, the
U.S. Court of Appeals for the District of Columbia Circuit
upheld almost all material aspects of Order No. 637.

The Outer Continental Shelf Lands Act, or OCSLA,
requires that all pipelines operating on or across the Outer
Continental Shelf, or OCS, provide open-access,
nondiscriminatory service. In mid-2000, the FERC issued Order
Nos. 639 and 639-A, imposing reporting requirements on natural
gas pipelines operating on the OCS that are not subject to
regulation under the NGA. The stated purpose of these reporting
requirements was to provide transparency for shippers on OCS
natural gas pipelines in order to aid in detecting
discriminatory conduct. Pipeline interests challenged the
reporting requirements before the U.S. District Court for
the District of Columbia on the ground that Congress did not
delegate rulemaking authority to the FERC to implement the
nondiscrimination requirement in Section 5(f) of the OCSLA.
In January 2002, the District Court ruled in the pipelines
favor, entering a permanent injunction against the OCS pipeline
reporting requirements. The D.C. Circuit affirmed the District
Courts order in October 2003. As a result, further
implementation and enforcement of the nondiscrimination
requirement in Section 5(f) of the OCSLA will fall on the
Minerals Management Service of the U.S. Department of
Interior. At this juncture, the Minerals Management Service has
taken no action to indicate how it will implement and enforce
Section 5(f) of OCSLA.

Commencing in May 1994, the FERC issued a series
of orders that, among other matters, slightly broadened the
types of facilities that would be found to be non-jurisdictional
gathering facilities and

5



---



##### Table of Contents



reaffirmed that, except in situations in which
the gatherer acts in concert with an interstate pipeline
affiliate to frustrate the FERCs transportation policies,
it does not have pervasive jurisdiction over natural gas
gathering facilities and services, and that such facilities and
services located in state jurisdictions are most properly
regulated by state authorities. This FERC action may further
encourage regulatory scrutiny of natural gas gathering by state
agencies. We do not believe that we will be affected by these
developments any differently than other natural gas producers,
gatherers and marketers.


Concurrently with the transfer of gathering
facilities onshore, a number of interstate pipelines requested
authority to have their facilities on the OCS declared a
non-jurisdictional gathering. Many of the pipelines on the OCS
are large-capacity lines that move up to one Bcf of natural gas
per day. Although the jurisdictional test for OCS facilities is
somewhat different from the test used onshore, the general trend
since 1994 has been toward an increasing number of facilities
being viewed as non-jurisdictional gathering by the FERC. A
major test case involving the Sea Robin Pipeline system was
decided by a panel of the U.S. Court of Appeals for the
D.C. Circuit in August 2002. A two-judge majority upheld the
FERCs central point of aggregation test for
determining jurisdictional status of OCS pipelines. Under that
test, the dividing line between non-jurisdictional gathering and
jurisdictional transportation is generally identified as being
located at the last major fork on the pipeline before it goes
onshore. Although producer interests have now sought review of
the D.C. Circuits decision before the United States
Supreme Court, certiorari was denied in October 2003. As a
result of the D.C. Circuits decision, producers on the OCS
could be exposed to higher rates for gathering services over
formerly jurisdictional facilities downstream of production
platforms.

In a related development, the FERC addressed a
complaint by an OCS natural gas producer in 2002 stemming from
the transfer by an interstate pipeline of formerly
jurisdictional facilities on the OCS to a non-regulated
gathering affiliate. Soon after receiving the facilities, the
non-regulated affiliate instituted a three-fold rate increase to
certain shippers. In an order issued in September 2002, the FERC
determined that the gathering affiliate and the interstate
pipeline had acted in concert to frustrate the effective
regulation of transportation of natural gas interstate commerce
on the pipeline. The FERC reasserted jurisdiction over the
gathering affiliate and directed it to institute a prospective
reduction in rates to a cost-of-service rate. The FERCs
order is now being challenged on rehearing in the
U.S. Court of Appeals for the D.C. Circuit. Because the
FERCs order involves an untested legal theory, it is not
possible to predict the extent to which the FERC will be
permitted, if at all, to reassert jurisdiction over former
jurisdictional facilities that have been found to be used for
non-jurisdictional gathering.

If the FERC ultimately decides that it should
regulate fewer OCS facilities under the NGA and such
determination is upheld on judicial review, or if it is
determined that the FERCs jurisdiction over crude oil and
natural gas transportation on the OCS is more limited than
previously asserted, we could face higher transmission costs for
our OCS natural gas production and, possibly, reduced access to
OCS transmission capacity. If we successfully develop our
offshore exploration projects, we expect to own and operate
facilities that we believe will be gathering lines. If the FERC
should decide to classify lines on the OCS that traditionally
have been viewed as gathering lines as jurisdictional
transmission lines, our OCS facilities could be subject to
regulation as interstate pipelines. However, given the limited
scope of such facilities, it is not expected that such
regulation would have a material impact on our business or
operations.

Additional proposals and proceedings that might
affect the natural gas industry are pending before Congress, the
FERC and the courts. The natural gas industry historically has
been heavily regulated; therefore, we can offer you no assurance
that the less stringent regulatory approach recently pursued by
the FERC and Congress will continue.

Federal and Tribal
Leases.A substantial portion of
our operations are located on Federal oil and natural gas
leases, which are administered by the Bureau of Land Management
(onshore) and Minerals Management Service (offshore) of the
U.S. Department of the Interior and other agencies. Such
leases are issued through competitive bidding, contain
relatively standardized terms and require compliance with
detailed Bureau of Land Management and Minerals Management
Service regulations and orders pursuant

6



---



##### Table of Contents



to the Mineral Lands Leasing Act, OCSLA and other
Federal statutes (which are subject to interpretation and change
by the agencies charged with their administration).


For offshore operations, lessees must obtain
Minerals Management Service, or MMS, approval for exploration
plans and exploitation and production plans prior to the
commencement of such operations. In addition to permits required
from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency), lessees must
obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore
production facilities located on the OCS to meet stringent
engineering and construction specifications. The MMS also has
regulations, and a recently issued policy statement, restricting
the flaring or venting of natural gas, and prohibiting the
flaring of liquid hydrocarbons and oil without prior
authorization. MMS, working together with the Department of
Justice, has recently taken aggressive action against another
offshore lessee based on allegations that the lessee had
conducted unauthorized flaring and venting of natural gas; MMS
issued a news release on August 5, 2003, stating that its
investigation into this matter resulted in the lessee making a
$49 million settlement payment. Similarly, the MMS has
promulgated other regulations governing the plugging and
abandonment of wells located offshore and the installation and
removal of all production facilities. To cover the various
obligations of lessees on the OCS, the MMS generally requires
that lessees have substantial net worth or post bonds or other
acceptable assurances that such obligations will be met. The
cost of these bonds or other surety can be substantial, and
there is no assurance that bonds or other surety can be obtained
in all cases. Under some circumstances, the MMS may require any
of our operations on Federal leases to be suspended or
terminated. Any such suspension or termination could materially
adversely affect our financial condition and results of
operations.

In 2003, MMS issued a Notice which articulated
the agencys policy concerning the volume of production
that a lessee must have to maintain an offshore lease beyond its
primary term. Although the standard that the MMS announced is
generally consistent with standards applicable under state law,
it is not yet clear how the agency will apply this standard. It
is possible that MMS may impose requirements for lease
maintenance activities that could have a material adverse effect
on our operations and financial condition.

The United States Department of Transportation,
or DOT, through its Office of Pipeline Safety, also imposes
certain requirements on parties responsible for transportation
pipelines associated with platforms located on the OCS. The MMS
and DOT have entered into a Memorandum of Understanding
regarding the agencies respective authority over offshore
operations, and the MMS has adopted regulations implementing the
Memorandum of Understanding by specifying the dividing point for
any given pipeline at which MMS regulatory authority ends and
DOT authority begins.

The MMS has entered into a series of Memoranda of
Understanding with other Federal agencies, such as the
Environmental Protection Agency, the Coast Guard and the
Occupational Safety and Health Administration, providing for the
MMS to undertake certain inspection and, in some cases,
enforcement responsibility for the respective regulatory
mandates of these agencies. Those agencies do, however, retain
varying degrees of jurisdiction over OCS operations to establish
and enforce regulatory requirements.

In recent years, the MMS has modified its
regulations to, among other things, (i) impose the duty on
any lessee of an offshore lease to meet end-of-lease obligations
if the designated operator is unable to do so,
(ii) establish joint and several liability for plugging and
abandonment of wells, removal of platforms and other facilities,
and clearance of well and platform locations, among OCS lessees,
assignees and assignors, thus creating residual liability in
certain parties for these decommissioning obligations,
(iii) increase the level of bond coverage for drilling deep
stratigraphic test wells and (iv) allow the MMS Regional
Director to require, on a case-by-case basis, posting of
additional bonds or other security in order to increase the
amount of coverage for end-of-lease obligations or certain other
operations. MMS carefully monitors lease abandonment liabilities
and routinely requires lessees to furnish supplemental bonds to
secure such liabilities. These requirements may operate to
substantially increase our current bonding liabilities, and may
also impact our residual liabilities, both with respect to
existing leases acquired from third parties and with respect to
leases that we may acquire or dispose of in the future.

7



---



##### Table of Contents



Effective June 1, 2000, the MMS adopted
regulations that changed significantly the valuation of crude
oil for royalty payments on onshore and offshore Federal leases.
These rules retained the concept of gross proceeds for
calculating royalties on production sold to third parties in
arms-length transactions, but added a new provision
expressly requiring lessees to market oil at no cost to the
Federal Government. Moreover, oil sold in non-arms-length
contracts is to be valued using index pricing methods or other
benchmarking procedures to determine a deemed arms-length
price. The rules define non-arms-length sales to include
sales to affiliates, certain exchange transactions, sales
pursuant to certain call provisions, and other transactions. The
breadth of these definitions and the new duty to market
provision could cause certain sales by us to be impacted and
might in some cases lead the MMS to claim royalty on a deemed
value higher than that which we actually receive for our oil.
The new regulations, were challenged judicially, and in August
2003 the MMS proposed a series of amendments to these rules
(concerning, among other things, the indices used and the
calculation of location adjustments to index values), but MMS
has not finalized the amendments to the rules. MMS is expected
to finalize the amendments in early 2004. The judicial challenge
is still pending, but is currently inactive, and the outcome of
this challenge is not known.

In a series of regulations and rulings over the
past several years, the MMS has also taken an expansive view of
the lessees duty to market natural gas on behalf of the
Federal government as lessor. For example, a rule promulgated in
1997 disallowed the deductibility of certain transportation
costs from the calculation of royalty on natural gas sold off
Federal leases, including marketer fees, cash out and other
pipeline imbalance penalties and long-term storage fees.
Although these regulations and rulings were challenged
judicially, in 2002 that challenge was in large part rejected.
Based on the new gas regulations, MMS may disallow deductions
from royalty value of certain costs alleged to be marketing
costs, or require certain costs to be added back to the royalty
base, in effect imposing royalty obligations based on values
established in sales occurring downstream of our leases.

The MMS has also previously proposed natural gas
valuation rules similar to those described above for oil royalty
valuation that would value gas sold in certain non-arms
length transactions in accordance with defined indices or other
benchmarks. Those proposed rules were withdrawn in 1997, but in
2003 the MMS held a series of public workshops to discuss
changes to its gas valuation rules, including changes to index
based valuation methodologies. MMS is expected to publish
proposed rules in early 2004. The potential effect of such
rules, as with the revised oil royalty valuation rules, may be
to move the valuation point downstream for purposes of royalty
calculation and thereby to impose a royalty obligation on a
deemed value higher than proceeds realized by the lessee from
sales netted back to the wellhead. We cannot currently predict
how the final form of any of these rules could impact our
royalty obligations.

Our leases in the Ouray field in our Western
division are issued by the Ute Indian tribe and are subject to a
variety of regulations and orders by the Tribe, the Bureau of
Indian Affairs of the U.S. Department of the Interior, and
the State of Utah, some of which are duplicative, relating to
operational matters.

State, Tribal and Local Regulation of
Drilling and Production.We own
interests in properties located in the Louisiana state waters
off the Gulf of Mexico and on state lands in the states in which
we operate. We also own interests on private lands that are
subject to regulation by state and local governments.

State regulations govern operational matters such
as permits and bonds for drilling, reclamation and plugging,
spacing and pooling of wells, and reporting requirements. The
states in which we operate or plan to operate also have a
variety of statutes and regulations governing conservation
matters, ranging from establishment of maximum rates of
production from oil and gas wells to the proration of production
to the market demand for oil and natural gas to the limitation
on ceiling prices for gas sold within the state. Such regulation
could be applied to restrict the rate at which our wells produce
oil or gas below the rate at which such wells would otherwise be
produced, and the amount or timing of our revenues could thereby
be adversely affected.

8



---



##### Table of Contents



In recent years, pressure has increased in states
in which we have been active to increase regulation of the oil
and natural gas industry at the local government level. Such
local regulation in general is aimed at increasing the
involvement of local governments in the permitting of oil and
natural gas operations, requiring additional restrictions or
conditions on the conduct of operations to reduce the impact on
the surrounding community and increasing financial assurance
requirements. Accordingly, such regulation has the potential to
delay and increase the cost, or even in some cases to prohibit
entirely, our drilling activities.

A significant amount of our Uinta Basin
properties in our Western Division are located within the Uintah
and Ouray Indian Reservations. As a result, our interests and
operations therein are subject to the jurisdiction of various
Tribal authorities.

Oil Price Controls and Transportation
Rates.Our sales of crude oil,
condensate and natural gas liquids are not currently regulated
and are made at market prices. Effective as of January 1,
1995, the FERC implemented regulations establishing an indexing
system for transportation rates for oil that could increase the
cost of transporting oil to the purchaser. We do not believe
that these regulations affect us any differently than other oil
producers, gatherers and marketers.

Environmental
Regulations.Our operations, which
include the storage of oil and other hazardous materials, are
subject to numerous laws and regulations governing the discharge
of materials into the environment or otherwise relating to
environmental protection, including those listed below. We could
incur substantial costs, including cleanup costs, fines and
civil or criminal sanctions, as a result of violations of or
liabilities under environmental laws or non-compliance with
environmental permits required at our facilities. Public
interest in the protection of the environment has increased
dramatically in recent years. Drilling in some areas both
offshore and onshore has been opposed by environmental groups
and, in some areas, has been restricted. Westports
Northern and Western Divisions include substantial amounts of
Federal and Indian acreage. In recent years, environmental
groups have brought lawsuits against federal agencies
challenging various aspects of the leasing, development and
production of oil and gas. These lawsuits have caused
disruptions in the approval process for new wells and may
continue to affect our pace of development. To the extent laws
are enacted or other governmental action is taken that prohibits
or restricts drilling or otherwise imposes environmental
protection requirements that result in increased costs to the
oil and natural gas industry, our business and prospects could
be adversely affected.

The drilling for and production, handling,
transportation and disposal of oil, natural gas and by-products
are subject to extensive regulation under Federal, state and
local environmental laws. In most instances, the applicable
regulatory requirements relate to water and air pollution
control and oilfield management measures, permitting
requirements, or restrictions on operations in environmentally
sensitive areas such as coastal zones, wetlands and wildlife
habitat. These requirements increase our cost of doing business,
delay or preclude operations, and create potential liability to
governmental agencies or third parties for environmental damage.
For example, environmental regulation may in some circumstances
impose strict liability for environmental
contamination, rendering an owner or operator or other person
with a connection to a property liable for environmental and
natural resource damages and cleanup cost without regard to
negligence or fault on the part of such person. In addition,
state laws often require some form of remedial action to prevent
pollution from former operations, such as closure of inactive
pits and plugging of abandoned wells, and such liability can be
imposed on successor owners. In connection with our
acquisitions, we generally perform environmental assessments. To
the extent we have identified environmental liabilities in that
process, such liabilities are not material or we have negotiated
agreements requiring the sellers of the properties to undertake
the required clean-up. However, generally we are required by the
sellers to assume environmental responsibility for acquired
properties except for material liabilities identified within the
specified period following closing. We have not performed
environmental assessments on all of our properties.

Under the Comprehensive Environmental Response,
Compensation, and Liability Act, also known as the
Superfund law, as well as similar state statutes, an
owner or operator of real property or a person who arranges for
disposal of hazardous substances may be liable for the costs of
removing or remediating

9



---



##### Table of Contents



hazardous substance contamination. Liability may
be imposed on a current owner or operator and certain other
owners or operators without regard to fault and for the entire
cost of the cleanup. It is not uncommon for neighboring
landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous
substances released into the environment. However, we are not
aware of any current claims under the Superfund law or similar
state statutes against us.


The Oil Pollution Act of 1990, or OPA, and
regulations thereunder impose liability on responsible
parties, including the owner or operator of a facility or
vessel, or the lessee or permittee of the area in which an
offshore facility is located, for oil removal costs and
resulting public and private damages relating to oil spills in
United States waters. The OPA assigns liability to
responsible parties for oil removal costs and a
variety of public and private damages. While liability limits
apply in some circumstances, a party cannot take advantage of
liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a Federal
safety, construction or operating regulation, or if the party
fails to report a spill or to cooperate fully in the cleanup.
Few defenses exist to the liability imposed by the OPA. Even if
applicable, the liability limits for offshore facilities require
the responsible party to pay all removal costs, plus up to
$75 million in other damages. The OPA also requires a
responsible party to submit proof of its financial
responsibility to cover environmental cleanup and restoration
costs that could be incurred in connection with an oil spill and
to prepare oil spill contingency plans. We believe we are in
compliance in all material respects with these requirements.

The Federal Water Pollution Control Act, or
FWPCA, imposes restrictions and strict controls regarding the
discharge of produced waters and other oil and gas wastes into
regulated water of the U.S., which include nearly all streams,
tributaries and adjacent wetlands. Permits must be obtained to
discharge fill material or other pollutants and to conduct
construction activities in regulated waters and wetlands. The
FWPCA and similar state laws provide for civil, criminal and
administrative penalties for any unauthorized discharges of
pollutants and unauthorized discharges of reportable quantities
of oil and other hazardous substances. Many state discharge
regulations and the Federal National Pollutant Discharge
Elimination System generally limit and may otherwise prohibit
the discharge of produced water and sand, drilling fluids, drill
cuttings and certain other substances related to the oil and gas
industry into coastal or offshore waters. Although the costs to
comply with zero discharge mandates under Federal or state law
may be significant, the entire industry is expected to
experience similar costs and we believe that these costs will
not have a material adverse impact on our results of operations
or financial position. In 1992, the Environmental Protection
Agency adopted regulations requiring certain oil and gas
exploration and production facilities to obtain permits for
storm water discharges, which requirement will cause the entire
industry to incur additional costs associated with the treatment
of storm water run-off and developing and implementing related
storm water pollution prevention plans.

The Endangered Species Act, or ESA, seeks to
ensure that activities do not jeopardize endangered or
threatened animal, fish and plant species, nor destroy or modify
the critical habitat of such species. Under the ESA, seismic,
exploration and production operations, as well as actions by
Federal agencies, may not significantly impair or jeopardize the
species or its habitat. The ESA provides for criminal penalties
for willful violations of the Act. Other statutes provide
protection to animal and plant species and may apply to our
operations, such as the Marine Mammal Protection Act, or MMPA,
the Migratory Bird Treaty Act, and the National Historic
Preservation Act. The ESA and the MMPA prohibit taking of
endangered species, including all sea turtle species found in
the Gulf of Mexico, and all marine mammal species, except in
accordance with specific incidental take statements or permits
issued pursuant to each statute. Following formal ESA
consultation between the MMS and NOAA Fisheries in 2002
regarding marine mammal and endangered species implications of
exploration and production activities attendant to Gulf of
Mexico OCS lease sales, the MMS has issued a series of Notices
to Lessees, or NTLs, regarding the conduct of seismic
operations, culminating with NTL 2004-G01, pertaining to
incidental takes of sea turtles and whale species. NTL 2004-G01
applies to any seismic operations conducted in water depths of
200 meters or greater in Central and Western Gulf of Mexico, and
to all water depths in the Eastern Gulf of Mexico. NTL 2004-G01
requires the employment of two trained visual observers during
seismic operations to watch for sea turtles or whales within an
exclusion zone of 500 meters around the center

10



---



##### Table of Contents



of a seismic vessels airgun array;
shut-down of seismic operations upon sighting of one of the
affected species within the exclusion zone; initiation of
seismic operations via a gradual ramp-up procedure
to warn off any sea turtles or whales within the exclusion zone;
and specific reporting for any sightings of the affected
species. These requirements will create greater costs for OCS
exploration activities.


The National Historic Preservation Act and
related laws and regulations contain certain requirements and
restrictions to protect and preserve various historic,
archaeological and cultural resources. These laws can delay,
prevent or alter our operations in areas, such as Utah, where
such resources may exist.

We conduct remedial activities at some of our
onshore facilities as a result of spills of oil or produced
saltwater from current or historical activities. To date, the
costs of such activities have not been material. However, we
could incur significant costs at these or other sites if
additional contaminants are detected or clean-up obligations
imposed.

Our operations are also subject to the regulation
of air emissions under the Clean Air Act, comparable state and
local requirements and the OCSLA. We may be required to incur
capital expenditures to upgrade pollution control equipment or
become liable for non-compliance with applicable permits.

A large portion of our operations in the Rocky
Mountain Region is on federal public lands or involve federally
or tribally owned minerals. Those areas are subject to land
management plans and mineral development approvals by federal
and tribal land management agencies, which often contain strict
limits and requirements on oil and gas exploration and
production operations, to protect wildlife, archaeological and
cultural sites and other resources.

New initiatives regulating the disposal of oil
and gas waste are also pending or have been enacted in certain
states, including states in which we conduct operations, and
these various initiatives could have a similar impact on us.
These rules establish significant permitting, record-keeping and
compliance procedures that may require the termination of
production from marginal wells for which the cost of compliance
would exceed the value of remaining production and could lead to
the incurring of significant remediation costs for properties
found to have caused groundwater contamination or other
environmental problems.

In addition, legislation has been proposed in
Congress from time to time that would reclassify some oil and
natural gas exploration and production wastes as hazardous
wastes, which would make the reclassified wastes subject
to much more stringent handling, disposal and clean-up
requirements. This, or the imposition of other environmental
legislation, could increase our operating or compliance costs.

We believe that we are in compliance in all
material respects with current applicable environmental laws and
regulations and that continued compliance with existing
requirements will not have a material adverse impact on us.

Environmental Cleanup Claims by Private
Landowner/ Lessors.In addition to
obligations owed under federal, state, and local environmental
statutes and regulations, onshore operations on private state
lands can also lead to litigation with landowner/lessors seeking
restoration of their leased premises. A 2003 decision by the
Louisiana Supreme Court in Corbello v. Iowa
Production upheld a jury award of over $50 million
against a mineral lessee for alleged surface damages and
improper disposal of produced saltwater. The court expressly
upheld the jury award even though damages greatly exceeded the
propertys value, based on the lessees earlier
contractual commitment to reasonably restore the premises as
nearly as possible to their pre-lease condition. This decision
can be expected to contribute to an already increasing number of
lawsuits filed by landowners against their lessees seeking site
restoration, especially as older oilfields near the end of their
productive life. It is possible that lawsuits brought against us
seeking such damages could have a material adverse effect on our
operations and financial condition, although no such claims have
been brought to date.

11



---



##### Table of Contents



Operating Hazards and Insurance

The oil and natural gas business involves a
variety of operating risks, including fires, explosions,
blowouts, environmental hazards and other potential events,
which can adversely affect our operations. In addition, our
offshore operations also are subject to a variety of operating
risks peculiar to the marine environment, such as capsizing,
collisions and damage or loss from hurricanes or other adverse
weather conditions, any of which can cause substantial damage to
facilities. Any of these problems could adversely affect our
ability to conduct operations and cause us to incur substantial
losses. Such losses could reduce or eliminate the funds
available for exploration, exploitation or leasehold
acquisitions, or result in loss of properties.

In accordance with industry practice, we maintain
insurance against some, but not all, potential risks and losses.
We do not carry business interruption insurance. We may elect
not to obtain insurance for some risks if we believe the cost of
available insurance is excessive relative to the risks
presented. In addition, pollution and environmental risks
generally are not fully insurable at a reasonable cost. If a
significant accident or other event occurs and is not fully
covered by insurance, it could adversely affect us.

Title to Properties

As is customary in the oil and natural gas
industry, we make only a cursory review of title to farmout
acreage and to onshore undeveloped oil and natural gas leases
upon execution of contracts for the acquisition of leases. Prior
to the commencement of drilling operations, a thorough title
examination is conducted and curative work is performed with
respect to significant defects. We perform complete reviews of
title to Federal and state offshore lease blocks and onshore
producing properties prior to acquisition. To the extent title
opinions or other investigations reflect material title defects,
the seller of the property, rather than us, is typically
responsible for curing any such title defects at its expense. If
we were unable to remedy or cure any title defect of a nature
such that it would not be prudent to commence drilling
operations on undeveloped properties, we could suffer a loss of
our entire investment in the property. We have obtained title
opinions on substantially all of our producing properties and
believe that we have satisfactory title to such properties in
accordance with standards generally accepted in the oil and
natural gas industry. Our producing properties are subject to a
negative pledge in connection with our revolving credit facility.

Abandonment Costs

We are responsible for costs associated with the
plugging of wells, the removal of facilities and equipment and
site restoration on our oil and natural gas properties, pro rata
to our working interest. As of January 1, 2003 we adopted
SFAS No. 143 Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to record
the fair value of liabilities for retirement obligations of
acquired assets. We recorded asset retirement obligations of
approximately $59 million and a cumulative effect of change
in accounting principle on prior years of $3.4 million, net
of tax effects, in our consolidated statement of operations on
January 1, 2003. Estimates of abandonment costs and their
timing may change due to many factors, including actual drilling
and production results, inflation rates, and changes in
environmental laws and regulations. Estimated asset retirement
obligations are added to net unamortized historical oil and
natural gas property costs for purposes of computing
depreciation, depletion and amortization expense charges.

Employees

At December 31, 2003, we had
372 full-time employees. We believe that our relationships
with our employees are satisfactory. None of our employees is
covered by a collective bargaining agreement. From time to time,
we use the services of independent consultants and contractors
to perform various professional services, particularly in the
areas of construction, design, well-site surveillance,
permitting and environmental assessment.

12



---



##### Table of Contents



Risk Factors

This section describes the material risks known
to us that may adversely impact our operations and financial
results. We encourage you to consider such risks in evaluating
our business and future prospects. In addition we urge you to
perform your own investigation with respect to us and our
business. We also encourage you to read the other information
included in this report, including our financial statements and
the related notes.



| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | Oil and natural gas prices fluctuate
    widely, and low prices could harm our business.

Our results of operations are highly dependent
upon the prices of oil and natural gas. Historically, oil and
natural gas prices have been volatile and are likely to continue
to be volatile in the future. For example, our average sales
prices for oil and natural gas for the year ended
December 31, 2003 were $28.96/bbl and $4.93/Mcf before
hedging, respectively, with 2003 production totaling
166.0 Bcfe and combined oil and natural gas sales of
$813.9 million. In contrast, our average sales prices for
oil and natural gas for the year ended December 31, 2002
were $23.66/bbl and $2.94/Mcf before hedging, respectively, with
2002 production totaling 129.9 Bcfe and combined oil and
natural gas sales of $428.4 million. The prices received
for oil and natural gas production depend upon numerous factors
including, among others:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | consumer demand;                                                              
|
| |  | governmental regulations and taxes;                                           
|
| |  | the price and availability of alternative fuels;                              
|
| |  | geopolitical developments, including military
    activity in the Middle East;
|
| |  | commodity processing, gathering and
    transportation availability;          
|
| |  | the level of foreign imports of oil and natural
    gas; and                  
|
| |  | the overall economic environment.                                             

All of these factors are beyond our control. Any
significant decrease in prices for oil and natural gas could
have a material adverse effect on our financial condition,
results of operations and quantities of reserves that are
commercially recoverable. If the oil and natural gas industry
experiences significant price decreases or other adverse market
conditions in the future, we may not be able to generate
sufficient cash flow from operations to meet our obligations and
make planned capital expenditures and our borrowing base and
liquidity in general could be adversely impacted.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Our revenues may be insufficient to fund
    our operations, which may result in a decrease in production
    over time.

We expect for the foreseeable future to make
substantial capital expenditures for the acquisition,
exploration and development of oil and natural gas reserves.
Historically, we have paid for these expenditures primarily with
cash from operating activities and with proceeds from debt and
equity financings. If revenues decrease as a result of lower oil
and natural gas prices or for any other reason, we may not have
the funds available to replace our reserves or to maintain
production at current levels, which would result in a decrease
in production over time.



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our former independent public accountant,
    Arthur Andersen LLP, has been found guilty of a Federal
    obstruction of justice charge, and you may be unable to exercise
    effective remedies against it in any legal action.

Our former independent public accountant, Arthur
Andersen LLP, provided us with auditing services for prior
fiscal periods through December 31, 2001, including issuing
an audit report to our audited consolidated financial statements
included in this report. On June 15, 2002, a jury in
Houston, Texas found Arthur Andersen LLP guilty of a Federal
obstruction of justice charge arising from the Federal

13



---



##### Table of Contents



Governments investigation of Enron Corp. On
August 31, 2002, Arthur Andersen LLP ceased practicing
before the SEC. Arthur Andersen LLP has not reissued its audit
report with respect to our audited consolidated financial
statements included in this report. Furthermore, Arthur Andersen
LLP has not consented to the inclusion of its audit report in
this report. As a result, you may not have an effective remedy
against Arthur Andersen LLP in connection with a material
misstatement or omission with respect to our audited
consolidated financial statements that are included in this
report or any other filing we may make with the SEC, including,
with respect to any offering registered under the Securities
Act, any claim under Section 11 of the Securities Act. In
addition, even if you were able to assert such a claim, as a
result of its conviction and other lawsuits, Arthur Andersen LLP
may fail or otherwise have insufficient assets to satisfy claims
made by investors or by us that might arise under Federal
securities laws or otherwise relating to any alleged material
misstatement or omission with respect to our audited
consolidated financial statements.


In addition, in connection with any future
capital markets transaction in which we are required to include
financial statements that were audited by Arthur Andersen LLP,
as a result of the foregoing, investors may elect not to
participate in any such offering or, in the alternate, may
require us to obtain a new audit with respect to previously
audited financial statements. Consequently, our financing costs
may increase or we may miss attractive capital market
opportunities.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our leverage and debt service obligations
    may adversely affect our cash flow and our ability to make
    payments on our long-term debt.

As of December 31, 2003, we had total
long-term debt of $980.9 million and stockholders
equity of $1.2 billion. Our level of debt could have
important consequences to our business, including the following:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it may be more difficult for us to satisfy our
    debt repayment obligations;                                                                                                                                 
|
| |  | we may have difficulties borrowing money in the
    future for acquisitions, to meet our operating expenses or other
    purposes;                                                                             
|
| |  | the amount of our interest expense may increase
    because certain of our borrowings are at variable rates of
    interest, which, if interest rates increase, could result in
    higher interest expense;   
|
| |  | we will need to use a portion of the money we
    earn to pay principal and interest on our debt which will reduce
    the amount of money we have to finance our operations and other
    business activities;
|
| |  | we may have a higher level of debt than some of
    our competitors, which may put us at a competitive disadvantage;                                                                                           
|
| |  | we may be more vulnerable to economic downturns
    and adverse developments in our industry; and                                                                                                              
|
| |  | our debt level could limit our flexibility in
    planning for, or reacting to, changes in our business and the
    industry in which we operate.                                                              



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Any failure to meet our debt obligations
    could harm our business, financial condition and results of
    operations.

Our ability to meet our expenses and debt
obligations will depend on our future performance, which will be
affected by financial, business, economic, regulatory and other
factors. We will not be able to control many of these factors,
such as economic conditions and governmental regulation. Our
earnings may be insufficient to allow us to pay the principal
and/or interest on our debt and meet our other obligations. If
we do not have enough money, we may be required to refinance all
or part of our existing debt, sell assets, borrow more money or
raise equity. We may not be able to refinance our debt, sell
assets, borrow more money or raise equity on terms acceptable to
us, if at all. In addition, any failure to make scheduled
payments of interest and/or principal on our outstanding
indebtedness would likely result in a reduction of our credit
rating, which could harm our ability to incur additional
indebtedness on acceptable terms. Further our failure to make
scheduled payments on our outstanding indebtedness or our
failure to comply with the financial and other restrictive
covenants in our debt instruments could result in an event of
default

14



---



##### Table of Contents



under such instruments. Such a default, or any
bankruptcy resulting therefrom, could result in a default on the
notes, could delay or preclude payment of principal of, or
interest on, the notes and could otherwise adversely affect our
business, financial condition and results of operations.




| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | We may be able to incur substantially more
    debt. Additional debt could exacerbate the risks described
    above.

Together with our subsidiaries, we may be able to
incur substantially more debt in the future. The restrictions in
the indenture governing the terms of our debt relating to the
incurrence of indebtedness are subject to a number of
qualifications and exceptions, and under certain circumstances,
indebtedness incurred in compliance with these restrictions
could be substantial. Also, these restrictions do not prevent us
from incurring obligations that do not constitute indebtedness.
As of December 31, 2003, we had approximately
$164.4 million of additional borrowing capacity under our
revolving credit facility, subject to specific requirements,
including compliance with financial covenants. To the extent new
debt is added to our current debt levels, the risks described
above could substantially increase.



| |                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Indian tribes have previously challenged
    the validity of some of the Uinta Basin property interests
    covered by oil and natural gas leases in our Western Division,
    and our operations and activities on Tribal lands may be subject
    to Tribal jurisdiction.

A significant amount of the oil and natural gas
leases we acquired in December 2002, which are managed by our
Western Division, cover interests located within the Uintah and
Ouray Indian Reservations, in an area originally known as the
Uncompahgre Reservation. These leases were granted by the State
of Utah, the United States (through the Bureau of Land
Management) or holders of patents from the United States. The
Ute Indian Tribe has previously asserted various claims against
the State of Utah and the United States regarding the existence,
diminishment and/or abrogation of the Reservations
boundaries and the extent of Tribal jurisdiction over these
lands. These lawsuits raised questions as to whether the Ute
Tribe could invalidate through litigation fee patents issued by
the United States, the State of Utahs ownership of such
lands or the United States ownership of minerals subject
to the acquired leases. These issues were settled as a result of
the Ute Indian Tribe litigation. If claims of this nature were
successfully asserted in the future, we might not be able to
continue to produce hydrocarbons from or develop and exploit
these assets, which could adversely affect our business and
profitability.

In addition, the Ute Indian Tribe as a sovereign
nation has certain rights to regulate activities on Tribal
lands, to approve access to and the right to use (occupy) Tribal
lands, and to tax revenues from Tribal resources. Exercise of
such rights can result in potential delays or increased costs to
our operations on Tribal lands, which may not be foreseeable.



| |                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The geographic concentration of our Western
    Division properties subjects us to increased risk of reduction
    in revenues or curtailment of production from certain negative
    conditions.

All of the properties currently managed by our
Western Division are located in Uintah County, Utah. Conditions
such as severe weather, delays or decreases in production, the
availability of equipment, facilities or services or the
availability of capacity to transport, gather or process
production could subject us to increased risk of loss of
revenues and have a greater impact on our results of operations
since most or all of these properties could be affected by the
same event.



| |                                                                              
| | -----------------------------------------------------------------------------
| | We may not realize the anticipated benefits
    from our recent acquisitions.

Our estimates regarding the expenses and
liabilities or the increase in our reserves and production
resulting from our recent acquisitions may prove to be incorrect
or we may not be successful in integrating the recently acquired
properties into our existing business, all of which could have a
material adverse effect on our financial condition and results
of operations.

15



---



##### Table of Contents





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We may not be able to consummate future
    acquisitions or successfully integrate acquisitions into our
    business.

Our business strategy relies on growing our
reserve base through acquisitions. We may not continue to be
successful in identifying or consummating future acquisitions or
integrating acquired businesses successfully into our existing
business, or in anticipating the expenses or liabilities we will
incur in doing so. Such failures may have a material adverse
effect on future growth or results of operations.

We are continually investigating opportunities
for acquisitions. In connection with future acquisitions, the
process of integrating acquired operations into our existing
operations may result in unforeseen operating difficulties and
may require significant management attention and financial
resources that would otherwise be available for the ongoing
development or expansion of existing operations. Our ability to
make future acquisitions may be constrained by our ability to
obtain additional financing.

Acquisitions may involve a number of special
risks, including:



| |   |                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unexpected losses of key employees, customers and
    suppliers of the acquired business;                                                                                       
|
| |  | 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.                                                                                                

Possible future acquisitions could result in our
incurring additional debt and contingent liabilities, which
could have a material adverse effect on our financial condition
and operating results.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Repercussions from terrorist activities or
    armed conflict could harm our business.

Terrorist activities, anti-terrorist efforts and
other armed conflict involving the United States or its
interests abroad may adversely affect the United States and
global economies and could prevent us from meeting our financial
and other obligations. If events of this nature occur and
persist, the attendant political instability and societal
disruption could reduce overall demand for oil and natural gas,
potentially putting downward pressure on prevailing oil and
natural gas prices and causing a reduction in our revenues.
Natural gas and oil production facilities, transportation
systems and storage facilities could be direct targets of
terrorist attacks, and our operations could be adversely
impacted if infrastructure integral to our operations is
destroyed or damaged by such an attack. Costs for insurance and
other security may increase as a result of these threats, and
some insurance coverage may become more difficult to obtain if
available at all.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Our commodity price and basis differential
    risk management arrangements may limit our potential
    gains.

Commodity prices and basis differentials
significantly affect our financial condition, results of
operations, cash flows and ability to borrow funds. Oil and
natural gas prices, as well as basis differentials, are affected
by several factors that we cannot control. We attempt to manage
our exposure to oil and natural gas price volatility by entering
into commodity price risk management arrangements for a portion
of our expected production. In addition, we attempt to manage
our exposure to basis differentials between delivery points by
entering into basis swaps. In connection with the acquisition of
our Uinta Basin properties, and as required by our revolving
credit facility, we entered into a significant number of hedging
arrangements relating to the production from such properties to
help us manage our exposure. In the fourth quarter of 2003, we
entered into additional commodity price risk management
contracts in connection with the South Texas Acquisition.
Commodity price and basis differential risk management
transactions may limit our potential gains if oil and natural
gas prices were to rise substantially, or basis differentials
were to fall substantially, versus the price or basis
differential established by the arrangements. These transactions
also expose us to credit risk of non-performance by the
counter-parties to the transaction. In addition, our commodity
price and basis differential risk management transactions may

16



---



##### Table of Contents



limit our ability to borrow under our revolving
credit facility and may expose us to the risk of financial loss
in certain circumstances, including instances in which:




| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our production is less than expected;                                                                                                                        
|
| |  | there is a widening of price differentials
    between delivery points for our production and the delivery
    point assumed in non-basis hedge arrangements;
|
| |  | basis differentials tighten substantially from
    the prices established by these arrangements; or                                                          
|
| |  | the counter-parties to our contracts fail to
    perform under terms of the contracts.                                                                       

In 2003, we recorded a realized loss of $102.4
related to hedge settlements, a realized gain of
$2.7 million related to non-hedge settlements and an
unrealized gain in the non-hedge change in fair value of
derivatives of $9.5 million. No estimate of future
settlements or mark-to-market gains or losses is determinable as
such amounts are contingent upon commodity prices at the time of
production. We may experience additional gains or losses from
these activities in 2004. If commodity prices increase, our cash
settlement costs will also increase. In addition, certain of our
commodity price risk management arrangements will require us to
deliver cash collateral or other assurances of performance to
the counter-parties in the event that payment obligations with
respect to commodity price risk management transactions exceed
certain levels. As of February 19, 2004, we had
$50.9 million of letters of credit outstanding for this
purpose.

The table below shows the effect of a range of
assumed prices on future settlements of our commodity price risk
management contracts outstanding as of December 31, 2003:

Estimate of Future Settlement of Outstanding
Commodity Price Risk Management Contracts(1)

|                 |  |       |       |  |       |           |      |              |     |   |       |  |  |                |      |  |       |   |      |                |  |   |      |  |  |   |         |     
|---------------- |  | ----- | ----- |  | ----- | --------- | ---- | ------------ | --- | - | ----- |  |  | -------------- | ---- |  | ----- | - | ---- | -------------- |  | - | ---- |  |  | - | ------- | ----
|                 |  |       |       |  |       |          
|                 |  | Oil   |       |  | Gas   |           |      |             
|                 |  |       |       |  |       |           |      |             
|                 |  |       |       |  |       |           |      |              |     |  
|                 |  |       |       |  |       | Northwest |      |              | CIG |   |       | 
|                 |  |       |       |  |       |           |      |              |     |   |       | 
|                 |  | NYMEX |       |  | NYMEX |           |      | Differential |     |   | Price |  |  | Differential   |      |  | Price |   |      | Settlements(2) | 
|                 |  |       |       |  |       |           |      |              |     |   |       |  |  |                |      |  |       |   |      |                | 
|                 |  |       |       |  |       |           |      |              |     |   |       |  |  | (In thousands) |     
|Price Deck No. 1 |  | $     | 30.00 |  |       | $         | 5.00 |              |     | $ | 1.60  |  |  | $              | 3.40 |  |       | $ | 1.75 |                |  | $ | 3.25 |  |  | $ | (57,657 | )(3)
|Price Deck No. 2 |  | $     | 18.00 |  |       | $         | 3.00 |              |     | $ | 0.51  |  |  | $              | 2.49 |  |       | $ | 0.66 |                |  | $ | 2.34 |  |  | $ | 155,635 | (3) 



---



|    |                                                                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of our commodity price risk management
    contracts outstanding as of December 31, 2003 expire by
    December 31, 2006.                                                                                                                             
|   
|(2) | Settlements were calculated based on the assumed
    high (Price Deck No. 1) and low (Price Deck No. 2) oil
    and natural gas prices on NYMEX, Northwest Pipeline Rocky
    Mountain Index, or Northwest, and Colorado Interstate Gas Index,
    or CIG.
|   
|(3) | Settlements were calculated based on the
    assumption that oil and natural gas prices will remain constant
    during the life of each contract.                                                                                                        



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Exploration is a high-risk activity. The
    seismic data and other advanced technologies we use are
    expensive and cannot eliminate exploration risks, which could
    cause us to lose all or a portion of our investment in any
    exploration activity.

Our oil and natural gas operations are subject to
the economic risks typically associated with drilling
exploratory wells. In conducting exploration activities, we may
drill unsuccessful wells and experience losses and, if oil and
natural gas are discovered, we may be unable to economically
produce or satisfactorily market such oil and natural gas. The
new wells we drill may fail to be productive and we may be
unable to recover all or any portion of our investment. The
presence of unanticipated pressure or irregularities in
formations, miscalculations or accidents may cause our
exploration activities to be unsuccessful, resulting in a total
loss of our investment in such activities. The cost of drilling,
completing and operating wells is often uncertain. Our drilling
operations may be curtailed, delayed or canceled as a result of
numerous factors, many of which may be beyond our control,
including unexpected drilling

17



---



##### Table of Contents



conditions, title problems, weather conditions,
compliance with environmental and other governmental
requirements and shortages or delays in the delivery of
equipment and services.


We rely to a significant extent on seismic data
and other advanced technologies in conducting our exploration
activities. Even when used and properly interpreted, seismic
data and visualization techniques only assist geoscientists in
identifying subsurface structures and hydrocarbon indicators.
Such data is not conclusive in determining if hydrocarbons are
present or economically producible. The use of seismic data and
other technologies also requires greater pre-drilling
expenditures than traditional drilling strategies. We could
incur losses as a result of these expenditures.



| |                                                                    
| | -------------------------------------------------------------------
| | Failure to replace reserves may negatively
    affect our business.

Our future success depends upon our ability to
find, develop or acquire additional oil and natural gas reserves
that are economically recoverable. Our proved reserves generally
decline when reserves are produced, unless we conduct successful
exploration or development activities or acquire properties
containing proved reserves, or both. We may not be able to find,
develop or acquire additional reserves on an economic basis.
Furthermore, if oil and natural gas prices increase, our finding
costs for additional reserves could also increase.



| |                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reserve estimates are inherently uncertain.
    Any material inaccuracies in our reserve estimates or
    assumptions underlying our reserve estimates, such as the
    discount rate used, could cause the quantities and net present
    value of our reserves to be overstated.

There are numerous uncertainties inherent in
estimating quantities of proved reserves, including many factors
beyond our control that could cause the quantities and net
present value of our reserves to be overstated. The reserve
information included or incorporated by reference in this report
represents estimates based on reports prepared or audited by
independent petroleum engineers and prepared by our internal
engineers. Reserve engineering is not an exact science.
Estimates of economically recoverable oil and natural gas
reserves and of future net cash flows necessarily depend upon a
number of variable factors and assumptions, any of which may
cause these estimates to vary considerably from actual results,
such as:



| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | historical production from the area compared with
    production from other producing areas;                      
|
| |  | assumed effects of regulation by governmental
    agencies;                                                       
|
| |  | assumptions concerning future oil and natural gas
    prices, future operating costs and capital expenditures; and
|
| |  | estimates of future severance and excise taxes
    and workover and remedial costs.                               

Estimates of reserves based on risk of recovery
and estimates of expected future net cash flows prepared or
audited by different engineers, or by the same engineers at
different times, may vary substantially. Actual production,
revenues and expenditures with respect to our reserves will
likely vary from estimates, and the variance may be material.
The net present values referred to in this report should not be
construed as the current market value of the estimated oil and
natural gas reserves attributable to our properties. In
accordance with requirements of the SEC, the estimated
discounted net cash flows from proved reserves are generally
based on prices and costs as of the date of the estimate,
whereas actual future prices and costs may be materially higher
or lower.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many of our competitors have greater
    financial, technological and other resources than we have, which
    could make it difficult for us to effectively compete with other
    companies in our industry.

We operate in the highly competitive areas of oil
and natural gas exploitation, exploration and acquisition. The
oil and natural gas industry is characterized by rapid and
significant technological

18



---



##### Table of Contents



advancements and introductions of new products
and services using new technologies. We face intense competition
from major and independent oil and natural gas companies in each
of the following areas:




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

Many other companies have financial,
technological and other resources substantially greater than our
own. These companies may be able to pay more for exploratory
prospects and productive oil and natural gas properties and may
be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than our financial or human
resources permit. Further, many of our competitors may enjoy
technological advantages over us and may be able to implement
new technologies more rapidly than we can. Our ability to
explore for oil and natural gas and to acquire additional
properties in the future will depend upon our ability to
successfully conduct operations, implement advanced
technologies, evaluate and select suitable properties and
consummate transactions in this highly competitive environment.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to complex laws and
    regulations, including environmental and safety regulations,
    that can adversely affect the cost, manner or feasibility of
    doing business.

Our operations and facilities are subject to
certain Federal, state, Tribal and local laws and regulations
relating to the exploration for, and the development, production
and transportation of, oil and natural gas, as well as
environmental and safety matters. Future laws or regulations,
any adverse change in the interpretation of existing laws and
regulations, or our failure to comply with existing legal
requirements may harm our business, results of operations and
financial condition. We may be required to make large and
unanticipated capital expenditures to comply with environmental
and other governmental regulations, such as:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | land use restrictions;                                                                                         
|
| |  | drilling bonds and other financial responsibility
    requirements;                                            
|
| |  | spacing of wells;                                                                                              
|
| |  | unitization and pooling of properties;                                                                         
|
| |  | habitat and endangered species protection,
    reclamation and remediation, and other environmental protection;
|
| |  | protection and preservation of historic,
    archaeological and cultural resources;                            
|
| |  | safety precautions;                                                                                            
|
| |  | operational reporting; and                                                                                     
|
| |  | taxation.                                                                                                      

Under these laws and regulations, we could be
liable for:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | personal injuries;                                                                                   
|
| |  | property and natural resource damages;                                                               
|
| |  | oil spills and releases or discharges of
    hazardous materials;                                    
|
| |  | well reclamation costs;                                                                              
|
| |  | remediation and clean-up costs and other
    governmental sanctions, such as fines and penalties; and
|
| |  | other environmental damages.                                                                         

19



---



##### Table of Contents



Our operations could be significantly delayed or
curtailed and our costs of operations could significantly
increase as a result of regulatory requirements or restrictions.
We are unable to predict the ultimate cost of compliance with
these requirements or their effect on our operations.



| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We cannot control activities on properties
    we do not operate and may have limited ability to influence
    operations on such properties to control associated
    costs.

Other companies operate approximately 23% of the
net present value of our reserves and we have limited ability to
exercise influence over operations for these properties or their
associated costs. Our dependence on the operator and other
working interest owners for these projects and our limited
ability to influence operations and associated costs could
prevent the realization of our targeted returns on capital in
drilling or acquisition activities. The success and timing of
drilling and exploitation activities on properties operated by
others, therefore, depend upon a number of factors that will be
outside our control, including:



| |   |                                                          
| | - | ---------------------------------------------------------
| |  | timing and amount of capital expenditures;               
|
| |  | the operators expertise and financial
    resources;    
|
| |  | approval of other participants in drilling
    wells; and
|
| |  | selection of technology.                                 



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inability or unwillingness to fund our
    capital expenditures may result in reduction or forfeiture of
    our interests in some of our non-operated
    projects.

Where we are not the majority owner or operator
of a particular oil and natural gas project, we may have no
control over the timing or amount of capital expenditures
associated with such project. If we are unable or unwilling to
fund our capital expenditures relating to such projects when
required by the majority owner or operator, our interests in
these projects may be reduced or forfeited.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business involves many operating risks
    that may result in substantial losses. Insurance may be
    unavailable or inadequate to protect us against these
    risks.

Our operations are subject to hazards and risks
inherent in drilling for, producing and transporting oil and
natural gas, such as:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | fires;                                                                                        
|
| |  | natural disasters;                                                                            
|
| |  | explosions;                                                                                   
|
| |  | formations with abnormal pressures;                                                           
|
| |  | casing collapses;                                                                             
|
| |  | embedded oilfield drilling and service tools;                                                 
|
| |  | uncontrollable flows of underground natural gas,
    oil and formation water;                 
|
| |  | surface cratering;                                                                            
|
| |  | pipeline ruptures or cement failures; and                                                     
|
| |  | environmental hazards such as natural gas leaks,
    oil spills and discharges of toxic gases.

Any of these risks can cause substantial losses
resulting from:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | injury or loss of life;                                                    
|
| |  | damage to and destruction of property, natural
    resources and equipment;
|
| |  | pollution and other environmental damage;                                  

20



---



##### Table of Contents





| |   |                                         
| | - | ----------------------------------------
| |  | regulatory investigations and penalties;
|
| |  | suspension of operations; and           
|
| |  | repair and remediation costs.           

As protection against operating hazards, we
maintain insurance coverage against some, but not all, potential
losses. However, losses could occur for uninsurable or uninsured
risks, or in amounts in excess of existing insurance coverage.
The occurrence of an event that is not fully covered by
insurance could harm our financial condition and results of
operations.



| |                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | We are vulnerable to risks associated with
    operating in the Gulf of Mexico that could negatively impact our
    operations and financial results.

Our operations and financial results could be
significantly impacted by conditions in the Gulf of Mexico
because we explore and produce extensively in that area. As a
result of this activity, we are vulnerable to the risks
associated with operating in the Gulf of Mexico, including those
relating to:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | adverse weather conditions;                                                                      
|
| |  | oil field service costs and availability;                                                        
|
| |  | compliance with environmental and other laws and
    regulations;                                
|
| |  | remediation and other costs resulting from oil
    spills or releases of hazardous materials; and
|
| |  | failure of equipment or facilities.                                                              

In addition, we are currently conducting some of
our exploration in the deep waters (greater than approximately
1,000 feet) of the Gulf of Mexico, where operations are
more difficult and costly than in shallower waters. The deep
waters in the Gulf of Mexico lack the physical and oilfield
service infrastructure present in its shallower waters. As a
result, deep water operations may require a significant amount
of time between a discovery and the time that we can market our
production, thereby increasing the risk involved with these
operations.

Further, production of reserves from reservoirs
in the Gulf of Mexico generally declines more rapidly than from
reservoirs in many other producing regions of the world. This
results in recovery of a relatively higher percentage of
reserves from properties in the Gulf of Mexico during the
initial few years of production, and as a result, our reserve
replacement needs from new prospects may be greater there than
for our operations elsewhere. Also, our revenues and return on
capital will depend significantly on prices prevailing during
these relatively short production periods.



| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of key members of our management
    team, or difficulty attracting and retaining experienced
    technical personnel, could reduce our competitiveness and
    prospects for future success.

The successful implementation of our strategies
and handling of other issues integral to our future success will
depend, in part, on our experienced management team. The loss of
key members of our management team, including Donald D.
Wolf, our Chairman and Chief Executive Officer, and Barth E.
Whitham, our President and Chief Operating Officer, could have
an adverse effect on our business. We entered into employment
agreements with Messrs. Wolf and Whitham to secure their
employment with the Company. We do not carry key man insurance.
Our exploratory drilling success and the success of other
activities integral to our operations will depend, in part, on
our ability to attract and retain experienced explorationists,
engineers and other professionals. Competition for experienced
explorationists, engineers and some other professionals is
extremely intense. If we cannot retain our technical personnel
or attract additional experienced technical personnel, our
ability to compete could be harmed.

21



---



##### Table of Contents





| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The marketability of our production may be
    negatively affected by factors over which we may have no
    control, including general economic conditions and federal and
    state regulations and policies.

The marketability of our production depends in
part upon the availability, proximity and capacity of pipelines,
natural gas gathering systems and processing facilities. Any
significant change in market factors affecting these
infrastructure facilities could adversely impact our ability to
deliver the oil and natural gas we produce to market in an
efficient manner, which could harm our financial condition and
results of operations. We deliver oil and natural gas through
gathering systems and pipelines that we do not own. These
facilities may not be available to us in the future. Our ability
to produce and market oil and natural gas is affected and may be
also harmed by:



| |   |                                                                    
| | - | -------------------------------------------------------------------
| |  | Federal and state regulation of oil and natural
    gas production;
|
| |  | transportation, tax and energy policies;                           
|
| |  | changes in supply and demand; and                                  
|
| |  | general economic conditions.                                       



| |                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our principal stockholders own a
    significant amount of our common stock, which may give them a
    controlling influence over corporate transactions and may delay
    or prevent a change in our management or voting
    control.

Our principal stockholders include Medicor
Foundation, also referred to as Medicor, Westport Energy LLC,
also referred to as WELLC, EQT Investments, Inc., an affiliate
of Equitable Resources Inc. also referred to as EQT, and a group
of former stockholders of Belco Oil & Gas Corp., also
referred to as the Belfer Group. EQT, Medicor, the Belfer Group
and WELLC beneficially owned approximately 17.0%, 14.3%, 6.8%
and 4.8%, respectively, of our outstanding common stock as of
January 31, 2004, which collectively represented
approximately 42.9% of our outstanding common stock as of that
date. These stockholders, acting together through a termination
and voting agreement, dated as of October 1, 2003, or
otherwise, based on their current share ownership, may be able
to influence or control the outcome of the election of
directors. In addition, based on their current share ownership,
these stockholders may be able to control the adoption or
amendment of provisions in our articles of incorporation or
bylaws and the approval of mergers and other significant
corporate transactions, if they choose to act together. These
factors may also delay or prevent a change in our management or
voting control.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Our oil and gas marketing activities may
    expose us to claims from royalty owners.

In addition to marketing our oil and gas
production, our marketing activities generally include marketing
oil and gas production for royalty owners. Over the past several
years, royalty owners have commenced litigation against a number
of companies in the oil and gas production business claiming
that amounts paid for production attributable to the royalty
owners interest violated the terms of the applicable
leases and laws in various respects, including the value of
production sold, permissibility of deductions taken and accuracy
of quantities measured. Some of this litigation was commenced as
class action suits, including two class action suits filed
against Westport involving some of our Wyoming properties, and
we may be required to make payments as a result of such
litigation. In addition, our costs relating to the marketing of
oil and gas may increase as new cases are decided and the law in
this area continues to develop.

22



---



##### Table of Contents



GLOSSARY OF OIL AND NATURAL GAS
TERMS

The following are abbreviations and definitions
of certain terms commonly used in the oil and natural gas
industry and this report:

Basis
differential.The difference
between oil and natural gas prices quoted on the NYMEX and the
prices we receive at the locations we deliver our produced oil
and natural gas.

bbl.One
stock tank barrel, or 42 U.S. gallons liquid volume,
used in reference to oil or other liquid hydrocarbons.

bbl/d.One
stock tank barrel of oil or other liquid hydrocarbons per day.

Bcf.One
billion cubic feet of natural gas at standard atmospheric
conditions.

Bcfe.One
billion cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to
1 bbl of oil.

CO2 Flood or
injections.A tertiary recovery
method in which CO2 is injected into the reservoir to
enhance oil recovery.

Completion.The installation of permanent equipment for the production of
oil or natural gas.

Delay
Rentals.Fees paid to the owner of
the oil and natural gas lease prior to the commencement of
production.

Developed
Acreage.The number of acres which
are allocated or assignable to producing wells or wells capable
of production.

Development
Well.A well drilled within the
proved area of an oil or natural gas reservoir to the depth of a
strategic horizon known to be productive.

Exploitation.The continuing development of a known producing formation in a
previously discovered field. To make complete or maximize the
ultimate recovery of oil or natural gas from the field by work
including development wells, secondary recovery equipment or
other suitable processes and technology.

Exploration.The search for natural accumulations of oil and natural gas by
any geological, geophysical or other suitable means.

Exploratory
Well.A well drilled to find and
produce oil or natural gas in an unproved area, to find a new
reservoir in a field previously found to be productive of oil or
natural gas in another reservoir, or to extend a known reservoir.

Finding and Development
Costs.Capital costs incurred in
the acquisition, exploitation and exploration of proved oil and
natural gas reserves divided by proved reserve additions and
revisions to proved reserves.

Gross Acres or Gross
Wells.The total acres or wells,
as the case may be, in which we have a working interest.

Gross Producing
Wells.The total number of
producing wells in which we have a working interest.

Horizontal
Drilling.A drilling operation in
which a portion of the well is drilled horizontally within a
productive or potentially productive formation. This operation
usually yields a well which has the ability to produce higher
volumes than a vertical well drilled in the same formation.

Infill
Drilling.A drilling operation in
which one or more development wells is drilled within the proven
boundaries of a field between two or more other wells.

Injection Well or
Injection.A well which is used to
place liquids or gases into the producing zone during
secondary/tertiary recovery operations to assist in maintaining
reservoir pressure and enhancing recoveries from the field.

23



---



##### Table of Contents



Mbbl.One
thousand barrels of oil or other liquid hydrocarbons.

Mcf.One
thousand cubic feet of natural gas.

Mcfe.One
thousand cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to
1 bbl of oil.

Mineral
Interest.The property interest
that includes the right to enter to explore for, drill for,
produce, store and remove oil and natural gas from the subject
lands, or to lease to another for those purposes.

Mmbbl.One
million barrels of oil or other liquid hydrocarbons.

Mmbtu.One
million British thermal units. One British thermal unit is the
amount of heat required to raise the temperature of one pound of
water one degree Fahrenheit.

Mmbtu/d.One
million British thermal units per day.

Mmcf.One
million cubic feet of natural gas, measured at standard
atmospheric conditions.

Mmcf/d.One
million cubic feet of natural gas per day.

Mmcfe.One
million cubic feet equivalent of natural gas, calculated by
converting oil to equivalent Mcf at a ratio of 6 Mcf to
1 bbl of oil.

Mmcfe/d.One
million cubic feet equivalent of natural gas per day, calculated
by converting oil to equivalent Mcf at a ratio of 6 Mcf to
1 bbl of oil.

Net Acres or Net
Wells.Gross acres or wells
multiplied, as the case may be, by the percentage working
interest owned by us.

Net
Production.Production that is
owned by Westport less royalties and production due others.

Non-operated Working
Interest.The working interest or
fraction thereof in a lease or unit, the owner of which is
without operating rights by reason of an operating agreement.

NYMEX.New York Mercantile Exchange.

Oil.Crude
oil or condensate.

Operating
Income.Gross oil and natural gas
revenue less applicable production taxes and lease operating
expense.

Operator.The
individual or company responsible for the exploration,
exploitation and production of an oil or natural gas well or
lease.

Present Value of Future Net Revenues or
Present Value, or PV10.The pretax
present value of estimated future revenues to be generated from
the production of proved reserves calculated in accordance with
SEC guidelines, 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
non-property related expenses such as general and administrative
expenses, debt service and depreciation, depletion and
amortization, and discounted using an annual discount rate of
10%.

Proved Developed
Reserves.Proved reserves that can
be expected to be recovered through existing wells with existing
equipment and operating methods.

Proved
Reserves.The estimated quantities
of crude oil, natural gas and natural gas liquids which
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions,
i.e., prices and costs as of the date the estimate is made, as
such reserves are further defined in Rule 4-10(a)(2).

Proved Undeveloped
Reserves.Proved reserves that are
expected to be recovered from new wells on undrilled acreage or
from existing wells where a relatively major expenditure is
required for recompletion.

24



---



##### Table of Contents



Reservoir.A
porous and permeable underground formation containing a natural
accumulation of producible oil or natural gas that is confined
by impermeable rock or water barriers and is individual and
separate from other reservoirs.

Royalty.An
interest in an oil and natural gas lease that gives the owner of
the interest the right to receive a portion of the production
from the leased acreage (or of the proceeds of the sale
thereof), but generally does not require the owner to pay any
portion of the costs of drilling or operating the wells on the
leased acreage. Royalties may be either landowners
royalties, which are reserved by the owner of the leased acreage
at the time the lease is granted, or overriding royalties, which
are usually reserved by an owner of the leasehold in connection
with a transfer to a subsequent owner.

Secondary
Recovery.An artificial method or
process used to restore or increase production from a reservoir
after the primary production by the natural producing mechanism
and reservoir pressure has experienced partial depletion. Gas
injection and waterflooding are examples of this technique.

2-D Seismic.The method by which a cross-section of the earths
subsurface is created through the interpretation of reflecting
seismic data collected along a single source profile.

3-D Seismic.The method by which a three dimensional image of the
earths subsurface is created through the interpretation of
reflection seismic data collected over a surface grid. 3-D
seismic surveys allow for a more detailed understanding of the
subsurface than do conventional surveys and contribute
significantly to field appraisal, exploitation and production.

Tcf.One
trillion cubic feet of natural gas, measured at standard
atmospheric conditions.

Tertiary
Recovery.An enhanced recovery
operation that normally occurs after waterflooding in which
chemicals or gasses are used as the injectant.

Undeveloped
Acreage.Acreage held under lease,
permit, contract or option that is not in a spacing unit for a
producing well.

Waterflood.A
secondary recovery operation in which water is injected into the
producing formation in order to maintain reservoir pressure and
force oil toward and into the producing wells.

Working
Interest.An interest in an oil
and natural gas lease that gives the owner of the interest the
right to drill for and produce oil and natural gas on the leased
acreage and requires the owner to pay a share of the costs of
drilling and production operations.

25



---



##### Table of Contents








|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Properties  Principal Areas of
Operations

Our operations are concentrated in four
divisions: Northern, Western, Southern and Gulf of Mexico. We
operate approximately 77% of the net present value of our
reserves. We finance our exploitation, exploration and
acquisition activities through cash flows from operations and
through borrowings under our revolving credit facility and other
financing activities. Set forth below is summary information
concerning average daily production during the fourth quarter of
2003, estimated reserves and a pre-tax SEC net present value of
estimated proved reserves discounted at 10%, as of
December 31, 2003 in our divisions.

|               |       |                   |       |       |                           |                      |             |               |   |  |         |      |  |         |       |         |           |  |     |            |  |  |         |         |  |   |         |         |  |  |      |       |  
|-------------- | ----- | ----------------- | ----- | ----- | ------------------------- | -------------------- | ----------- | ------------- | - |  | ------- | ---- |  | ------- | ----- | ------- | --------- |  | --- | ---------- |  |  | ------- | ------- |  | - | ------- | ------- |  |  | ---- | ----- | -
|               |       |                   |       |       |                           |                     
|               |       |                   |       |       |                           | At December 31, 2003 |            
|               |       |                   |       |       |                           |                      |            
|               |       |                   |       |       |                           |                      |             |              
|               |       |                   |       |       |                           | Net Present Value    |            
|               |       | Quarter Ended     |       |       | Proved Reserve Quantities |                      |             | Before Income |  
|               |       | December 31, 2003 |       |       |                           |                      |             | Taxes(2)      |  
|               |       | Average Net Daily |       |       |                           |                      |             |              
|               |       | Production        |       |       |                           |                      | Natural Gas |               |   |  |         |     
|               |       |                   |       |       | Crude Oil                 |                      |             | Natural Gas   |   |  | Liquids |      |  | Total   |       |         | Amount    |  |     |           
|Division       |       | Mmcfe/d           |       |       | Percent                   |                      |             | (Mmbbl)       |   |  | (Bcf)   |      |  | (Mmbbl) |       |         | (Bcfe)(1) |  |     | (Millions) |  |  | Percent |        
|               |       |                   |       |       |                           |                      |             |               |   |  |         |      |  |         |       |         |           |  |     |            |  |  |         |        
|Northern       |       |                   | 104.0 |       |                           |                      | 22.1        | %             |   |  | 29.6    |      |  |         | 153.7 |         |           |  |    |            |  |  | 331.5   |         |  | $ | 580.5   |         |  |  | 16.6 | %    
|Western(2)     |       |                   | 83.8  |       |                           |                      | 17.8        |               |   |  | 0.7     |      |  |         | 654.5 |         |           |  |    |            |  |  | 658.4   |         |  |   | 873.7   |         |  |  | 25.1 |      
|Southern(3)    |       |                   | 162.0 |       |                           |                      | 34.3        |               |   |  | 33.0    |      |  |         | 449.8 |         |           |  | 0.1 |            |  |  | 648.5   |         |  |   | 1,511.8 |         |  |  | 43.4 |      
|Gulf of Mexico |       |                   | 121.6 |       |                           |                      | 25.8        |               |   |  | 6.9     |      |  |         | 91.9  |         |           |  | 1.5 |            |  |  | 142.4   |         |  |   | 519.6   |         |  |  | 14.9 |      
|               |       |                   |       |       |                           |                      |             |               |   |  |         |      |  |         |       |         |           |  |     |            |  |  |         |        
|               | Total |                   |       | 471.4 |                           |                      |             | 100.0         | % |  |         | 70.2 |  |         |       | 1,349.9 |           |  |     | 1.6        |  |  |         | 1,780.8 |  |   | $       | 3,485.6 |  |  |      | 100.0 | %
|               |       |                   |       |       |                           |                      |             |               |   |  |         |      |  |         |       |         |           |  |     |            |  |  |         |        



---



|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mmbbls converted to Bcfe at a six to one
    conversion.                                                                             
|   
|(2) | Excludes value attributable to the gathering and
    compression assets of Westport Field Services, LLC, one of our
    subsidiaries.
|   
|(3) | Includes production from the South Texas
    Acquisition from December 19, 2003 through
    December 31, 2003.                       



| |                  
| | -----------------
| | Northern Division

The Northern Division conducts operations in the
Rocky Mountain region and primarily includes the Williston,
Powder River, Big Horn, Wind River and Greater Green River
Basins. The division represented approximately 17% of our net
present value of estimated proved reserves as of
December 31, 2003, and contributed approximately 22% of our
fourth quarter 2003 net production. We have interests in
506,868 developed and 1,027,359 undeveloped gross acres and in
2,069 gross (approximately 730 net) producing wells in
this division.

Williston Basin.We
continue to focus our activities on horizontal field extensions
and growth of secondary recovery projects. Our most active
project continues to be the Wiley field. We operate this
waterflood with a 54% working interest. In 2000, we initiated a
horizontal drilling program and through December 31, 2003
have drilled 48 wells, all of which were successful. In
addition to the horizontal drilling, we increased water
injection capacity to expand our waterflood program. As a result
of this activity, average gross daily production in this field
has increased from approximately 600 bbl/d in April 2000 to over
2,700 bbl/d during the fourth quarter 2003. Over the next 12
months, we plan to drill eight to 12 additional wells in the
Wiley field while continuing to increase water injection
capacity. In addition to our work in the Wiley field we drilled
10 operated horizontal wells, nine of which were successful, in
our Horse Creek, TR, Tree Top and Bear Creek fields. In 2004, we
plan to drill horizontal development wells in our Horse Creek,
TR, Lone Butte and Putnam fields.

Greater Green River
Basin.We have interests in
approximately 397,000 gross undeveloped acres in the
Greater Green River Basin. Over the next 12 to 24 months we
expect to drill five to ten exploration wells in this basin. One
of our primary operating areas within the basin is the Moxa Arch
Complex. Production from Moxa Arch wells tends to be long-lived,
with the potential for greater than a 25 year reserve life.
We drilled 14 wells in the Moxa Arch in 2003, 13 of which
were successful. Our net

26



---



##### Table of Contents



production in fourth quarter of 2003 from the
Moxa Arch averaged 21.7 Mmcfe/d. We plan to drill 35 to 40
development wells in the Moxa Arch in 2004.


Big Horn Basin.The
Gooseberry field is our most significant property in the Big
Horn Basin. We own a 100% working interest (nearly 90% net
revenue interest) in this field, which consists of two
waterflood units. Since acquiring the field in February 1995, we
have doubled gross production from 535 bbl/d to
approximately 1,080 bbl/d in December 2003. In 2003 we drilled
four development wells and one water source well, all of which
were successful. We currently have interests in over
186,000 gross undeveloped acres in the Big Horn Basin.

Coalbed Methane.Since initiating our coalbed methane drilling in the Powder
River Basin in 2000, we have participated in 301 wells
through December 31, 2003, 297 of which have been
successful. We operate 160 of these wells. In 2003 we initiated
an eight well development project in the Big George coal within
the House Creek field. Net coalbed methane production in the
Powder River Basin averaged approximately 13.4 Mmcf/d in
fourth quarter 2003. In 2003 we initiated three additional
coalbed methane projects, one each in the Greater Green River
Basin, the Uinta Basin in northeastern Utah and the Raton Basin
of southeastern Colorado. In the Greater Green River Basin we
participated in one well in the Almond coal. In the Uinta Basin
we drilled nine wells and established production of
approximately 1.3 Mmcf/d (net) from the Navajo coal. In the
Raton Basin we began operations in early January 2004 and
drilled our first three wells in the Vermejo coal. Our coalbed
methane acreage position covers over 58,000 gross developed
acres in the Powder River Basin, over 28,500 gross
undeveloped acres in the Uinta Basin and approximately
17,300 gross undeveloped acres in the Raton Basin. In 2004
we plan to drill 15 to 20 WyoDak and 10 to 16 Big George wells
in the Powder River Basin, five to 10 wells in the Greater
Green River Basin, 10 to 15 wells in the Uinta Basin and 10
to 15 wells in the Raton Basin.



| |                 
| | ----------------
| | Western Division

The Western Division conducts operations in the
Greater Natural Buttes area of Uintah County, Utah. We acquired
these properties in December 2002, which were producing
approximately 68 Mmcfe/d net to us at the time of
acquisition. We have increased net production to an average of
84 Mmcfe/d during the fourth quarter of 2003, representing
18% of our total net production. This division contributed
approximately 25% of our net present value of estimated proved
reserves as of December 31, 2003. We have interests in
191,612 developed and 79,068 undeveloped gross acres and in
1,081 gross (approximately 831 net) producing wells in
this division.

The Natural Buttes unit has undergone a series of
downspacings from the original 320 acres per well spacing
to a current spacing of 40 acres per well. Unit wells are
characterized by established production profiles and long
reserve lives. Producing horizons range from 3,000 to
13,000 feet. Historically production has been primarily
from the Wasatch formation. In 2003, our drilling program
focused on developing the Mesa Verde potential within and
adjacent to the Natural Buttes unit. Production from this
formation is often commingled with the Wasatch. Through our high
working interest and significant level of operations we can
control drilling, completion and production of the majority of
our wells. In 2003 we drilled 83 wells, all of which were
successful and we expect to drill 95 to 105 wells in this
area in 2004.



| |                  
| | -----------------
| | Southern Division

The Southern Division conducts operations in the
onshore Gulf Coast, Permian Basin and Mid-Continent regions.
This division represented 43% of the net present value of our
estimated proved reserves as of December 31, 2003, and
contributed 34% of our fourth quarter 2003 net production.
We have interests in 582,160 developed and 182,689 undeveloped
gross acres and in 3,436 gross (approximately
1,667 net) producing wells in this division.

27



---



##### Table of Contents



Onshore Gulf Coast.Our Gulf Coast operations include producing trends in Louisiana
and the Texas Gulf Coast.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Southeast Texas
    Properties.We acquired our Southeast
    Texas properties in September 2002, which are focused in the
    Yegua, Frio, Vicksburg and Hackberry Trends. We maintained an
    active drilling program in this area during 2003, drilling two
    development wells, both of which were successful, and ten
    exploration wells, four of which were successful. Net production
    has increased from 28 Mmcfe/d at the time of acquisition to
    an average of 40.3 Mmcfe/d in the fourth quarter of 2003.
    We expect to drill 12 to 15 exploration prospects over the next
    12 to 24 months.                                                                                                                                                 
|
| |  | South Texas
    Properties.We acquired these
    properties in December 2003. At December 31, 2003 the
    proved reserves were estimated at 208 Bcfe, of which 97% is
    natural gas. These assets complement a growing core area for the
    company in South Texas and produce from the Lobo, Frio,
    Vicksburg and Wilcox Trends. The properties are currently
    producing at approximately 62.2 Mmcfe/d (net). In January
    2004, the Company initiated a four-rig drilling program. We
    expect to spend approximately $50 million in capital during
    2004 and plan to drill 30 to 35 development wells and five to 10
    exploration wells in this area during the year. The three
    largest fields are Southwest Speaks, Cage Ranch and JC Martin.



| |   |                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Southwest Speaks
    Field.The Southwest Speaks field in
    Lavaca County, Texas produces from the Frio, Yegua and Wilcox
    formations at depths ranging from 3,300 to 15,000 feet. The
    field currently produces approximately 11.9 Mmcfe/d (net).
    We expect to drill five to seven development wells and one
    exploration well in this field during 2004.
|
| |  | Cage Ranch Field.The Cage Ranch field in Brooks County, Texas produces from the
    Frio and Vicksburg formations at depths ranging from 6,500 to
    10,500 feet. The field currently produces approximately
    15.0 Mmcfe/d (net). We expect to drill five to eight
    development wells and one exploration well in 2004.                                          
|
| |  | JC Martin Field.The
    JC Martin field in Zapata County, Texas produces from the Lobo
    formation at depths ranging from 8,500 to 10,000 feet. The
    field currently produces approximately 10.3 Mmcfe/d (net).
    We expect to drill eight to ten development wells in this field
    during 2004.                                                               



| |   |                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Elm Grove Field.We
    maintained an active development drilling program in the Elm
    Grove field in 2003 by drilling 39 wells, 38 of which were
    successful. Net production averaged approximately
    18.9 Mmcfe/d in fourth quarter 2003. In 2004 we expect to
    drill 30 to 35 development wells in this field.                                
|
| |  | North Louisiana Field
    Complex.Development drilling in this
    four-field complex continues to be active. In 2003 we drilled
    20 wells, all of which were successful. Net fourth quarter
    2003 production averaged 7.5 Mmcfe/d. We anticipate
    drilling between 15 and 25 development wells in this region in
    each of the next two years.

Permian Basin.Our
principal Permian Basin activity continues to be focused on
development of the Andrews unit and the Shafter Lake
San Andres unit waterfloods.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Andrews Unit.The
    Andrews unit waterflood produces from the Wolfcamp/ Penn
    formation at approximately 8,600 feet. We have a 98.6%
    working interest in this 3,230-acre unit. During 2003 we
    continued expanding the waterflood program by drilling
    additional wells, converting wells to injectors and performing
    workovers on existing wells. As a result, gross production
    continues to increase from an 855 bbl/d average in 2000 to an
    average of nearly 1,300 bbl/d in the fourth quarter of 2003. We
    believe that production from this unit can be further enhanced
    with the use of CO2 flooding or other tertiary
    recovery methods.
|
| |  | Shafter Lake San Andres
    Unit.The Shafter Lake San Andres
    unit is a 12,880-acre unit that produces from the Grayburg and
    San Andres formations at a depth of approximately
    4,500 feet. We have an 81.4% working interest in this
    secondary recovery unit. In 2003, we drilled 10 wells on                                                                                                                                                                                                                                                                                                                                                                        

28



---



##### Table of Contents



| |  |                                                                                                                                                                    
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 10-acre spacing and plan to drill 10 to 15
    additional 10-acre wells in 2004. The unit produced an average
    of 685 gross bbl/d in the fourth quarter of 2003.

Mid-Continent.Our
Mid-Continent operations are currently focused in Oklahoma and
Kansas. Oil production is concentrated in our operated
waterfloods in Oklahoma, while natural gas production is
primarily from third party operated wells in Oklahoma and in our
operated wells in Kansas.



| |                        
| | -----------------------
| | Gulf of Mexico Division

The Gulf of Mexico Division represented 15% of
the net present value of our estimated proved reserves as of
December 31, 2003, and contributed 26% of our fourth
quarter 2003 net production. As of December 31, 2003,
we have interests in 329,229 developed and 286,793 undeveloped
gross acres and in 157 gross (approximately 45 net)
producing wells in the Gulf of Mexico.

In addition to a production base with numerous
exploitation opportunities within our developed acreage, the
Gulf of Mexico provides us with moderate-risk exploration
targets. We drilled 11 exploration wells in the Gulf of Mexico
in 2003, four of which were successful, and two development
wells , both of which were successful. We have under license 3-D
seismic data covering approximately 30,470 square miles
(approximately 3,900 blocks) and 2-D seismic data covering
150,000 linear miles within the Gulf of Mexico. In the third
quarter of 2003 we entered into an exploration agreement with
Chevron U.S.A. Inc. (a wholly owned subsidiary of
ChevronTexaco). Under this agreement the parties have identified
nine prospects, and expect to identify additional prospects over
the next two years. We plan to participate for 45% of the
interest held by Chevron U.S.A. Two unsuccessful wells were
drilled in 2003.

West Cameron Blocks
180/198.The West Cameron Blocks
180/198 complex is located 30 miles offshore in
52 feet of water. In 2003 we commenced production on one
2002 development well and drilled one unsuccessful exploration
well. The complex has produced approximately 1.7 Tcf of natural
gas and 10 Mmbbl of oil from over 20 separate producing
zones since its discovery. In fourth quarter 2003, the field
produced 36.4 Mmcfe/d net to our interest.

South Timbalier
Block 316.The South Timbalier
Block 316 is located approximately 66 miles offshore
in 400 feet of water, we discovered this field in the
fourth quarter of 2001 and commenced production in the fourth
quarter of 2003. We operate the field with a 40% working
interest. In early February 2004 the field produced
approximately 47 Mmcfe/d net to our interest.

High Island
Block 197.This field is located
approximately 28 miles offshore in 50 feet of water
and was discovered in the third quarter of 2001. We have a 25%
non-operated working interest in the field. During 2003, four
additional wells were drilled, following the discovery well,
three of which were successful. The field commenced production
in May 2002. In the fourth quarter of 2003 the field averaged
11.3 Mmcfe/d net to our interest.

Ship Shoal
Block 94.Ship Shoal
Block 94 is located approximately 15 miles offshore in
20 feet of water. We discovered this field in the first
quarter of 2003 and operate the field with a 60% working
interest. The field commenced production in the third quarter of
2003 and averaged 8.9 Mmcfe/d net to our interest in the
fourth quarter of 2003.

Galveston
Block 352.We drilled a
successful exploratory well in the spring of 2002 and put the
well on production in August of that year. We drilled a second
well in 2003, which commenced production in the third quarter.
We operate the wells with a 67% working interest. In the fourth
quarter of 2003 the field averaged 5.4 Mmcfe/d net to our
interest.

West Cameron
Block 73.This field is located
approximately 12 miles offshore in 33 feet of water
and was discovered in the second quarter of 2003. We have a 30%
non-operated working interest in the field. The field commenced
production in the fourth quarter of 2003 and is currently
producing 4.1 Mmcfe/d net to our interest.

High Island
Block 84.This field is located
approximately 23 miles offshore in 50 feet of water
and was discovered in the third quarter of 2001. We drilled
three development wells in the block during 2002.

29



---



##### Table of Contents



We operate this field with an approximate 51.6%
working interest. Production commenced from the field in June
and we added a fourth well in late 2003. In the fourth quarter
of 2003 the field averaged 3.2 Mmcfe/d net to our interest.


Green Canyon
Block 640.We have a 3.7%
overriding royalty interest in the Green Canyon Block 640,
part of the 2002 Tahiti discovery drilled by ChevronTexaco.
Facility design and development is ongoing. A production test is
expected in 2004.

Proved Reserves

The following table sets forth estimated proved
reserves for the periods indicated:

|                                             |             |                    |           |           |           |     |           |           |           |     |         |         |         | 
|-------------------------------------------- | ----------- | ------------------ | --------- | --------- | --------- | --- | --------- | --------- | --------- | --- | ------- | ------- | ------- | 
|                                             |             |                   
|                                             |             | As of December 31, |          
|                                             |             |                    |          
|                                             |             | 2003               |           |           | 2002      |     |           | 2001      |          
|                                             |             |                    |           |           |           |     |           |           |          
|Oil (Mbbls)                                  |             |                    |           |           |           |     |           |           |           |     |         |        
|                                             | Developed   |                    |           | 57,474    |           |     |           | 60,576    |           |     |         | 51,068  |        
|                                             | Undeveloped |                    |           | 12,754    |           |     |           | 18,593    |           |     |         | 17,588  |        
|                                             |             |                    |           |           |           |     |           |           |          
|                                             |             | Total              |           |           | 70,228    |     |           |           | 79,169    |     |         |         | 68,656  | 
|                                             |             |                    |           |           |           |     |           |           |          
|Natural Gas (Mmcf)                           |             |                    |           |           |           |     |           |           |           |     |         |        
|                                             | Developed   |                    |           | 812,791   |           |     |           | 676,365   |           |     |         | 401,106 |        
|                                             | Undeveloped |                    |           | 537,147   |           |     |           | 425,018   |           |     |         | 115,050 |        
|                                             |             |                    |           |           |           |     |           |           |          
|                                             |             | Total              |           |           | 1,349,938 |     |           |           | 1,101,383 |     |         |         | 516,156 | 
|                                             |             |                    |           |           |           |     |           |           |          
|Natural Gas Liquids (Mbbls)                  |             |                    |           |           |           |     |           |           |           |     |         |        
|                                             | Developed   |                    |           | 1,155     |           |     |           | 378       |           |     |         | 119     |        
|                                             | Undeveloped |                    |           | 426       |           |     |           | 154       |           |     |         | 199     |        
|                                             |             |                    |           |           |           |     |           |           |          
|                                             |             | Total              |           |           | 1,581     |     |           |           | 532       |     |         |         | 318     | 
|                                             |             |                    |           |           |           |     |           |           |          
|Total (Mmcfe)                                |             |                    | 1,780,794 |           |           |     | 1,579,589 |           |           |     | 930,000 |        
|                                             |             |                    |           |           |           |     |           |           |          
|Present Value ($ in thousands)               |             |                    |           |           |           |     |           |           |           |     |         |        
|                                             | Developed   |                    | $         | 2,526,691 |           |     | $         | 1,744,795 |           |     | $       | 737,625 |        
|                                             | Undeveloped |                    |           | 958,947   |           |     |           | 661,023   |           |     |         | 186,718 |        
|                                             |             |                    |           |           |           |     |           |           |          
|                                             |             | Total              |           | $         | 3,485,638 | (1) |           | $         | 2,405,818 | (2) |         | $       | 924,343 | 
|                                             |             |                    |           |           |           |     |           |           |          
|Standardized Measure ($ in
    thousands)(3) |             | $                  | 2,527,619 |           |           | $   | 1,766,451 |           |           | $   | 747,029 |        
|                                             |             |                    |           |           |           |     |           |           |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The difference in the net present value from
    December 31, 2002 to December 31, 2003 resulted almost
    entirely from (i) the addition of 208 Bcfe of proved
    reserves acquired in connection with the South Texas
    Acquisition, (ii) the addition of 188 Bcfe as
    discoveries and extensions, (iii) the increase in commodity
    prices used to determine net present value (from $31.23 to
    $32.55 per bbl of oil and from $4.58 to $5.83 per
    Mmbtu of natural gas) and (iv) the inclusion of a portion
    of our producing well overhead associated with general corporate
    expenses related to operated oil and natural gas producing
    activities.
|   
|(2) | The difference in net present value from
    December 31, 2001 to December 31, 2002 resulted almost
    entirely from (i) the addition of 722.7 Bcfe of proved
    reserves acquired in connection with the Williston Basin,
    Southeast Texas and Utah acquisitions in 2002, (ii) the
    addition of 58 Bcfe as discoveries and extensions and
    (iii) the increase in commodity prices used to determine
    net present value (from $19.78 to $31.23 per bbl of oil and
    from $2.72 to $4.58 per Mmbtu of natural gas).                                                                                                                                                
|   
|(3) | The standardized measure is the value of the
    future after-tax net revenues discounted at 10%. The difference
    between the net present value and the standardized measure is
    the effect of income taxes discounted at 10%.                                                                                                                                                                                                                                                                                                                                                                                                                                              

30



---



##### Table of Contents



Estimated quantities of our oil and gas reserves
and the net present value of such reserves as of
December 31, 2003 are based upon reserve reports prepared
by Ryder Scott Company, L. P., Netherland, Sewell &
Associates, Inc. and our engineering staff. The Ryder Scott
report covered approximately 71% of the total net present value
of our proved reserves. The Netherland Sewell report covered the
South Texas properties we acquired in December 2003, comprising
approximately 16% of the total net present value of estimated
proved reserves and the internally generated report covered the
remaining 13% of the net present value of such reserves. At
December 31, 2002 the Ryder Scott reports covered 81% of
the total net present value of estimates of total proved
reserves, preparing 58% and auditing 23%. The internally
generated report covered the remaining 19% of the net present
value of estimated proved reserves. At December 31, 2001
Ryder Scott audited 87% of the total net present value of
estimates of total proved reserves and the remaining 13% of net
present value of the reserves was unaudited.

Proved developed reserves are proved reserves
that are expected to be recovered from existing wells with
existing equipment and operating methods. Proved undeveloped
reserves are proved reserves that are expected to be recovered
from new wells drilled to known reservoirs on undrilled acreage
for which the existence and recoverability of such reserves can
be estimated with reasonable certainty, or from existing wells
where a relatively major expenditure is required to establish
production.

There are numerous uncertainties inherent in
estimating quantities of proved reserves and in projecting
future rates of production and timing of exploitation
expenditures. The data in the above table represents estimates
only. Oil and natural gas reserve engineering is inherently a
subjective process of estimating underground accumulations of
oil and natural gas that cannot be measured exactly, and
estimates of other engineers might differ materially from those
shown above. The accuracy of any reserve estimate is a function
of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and
production after the date of the estimate may justify revisions.
Accordingly, reserve estimates may be revised from time to time
and may vary from the quantities of oil and natural gas that are
ultimately recovered.

Future prices received for production and costs
may vary, perhaps significantly, from the prices and costs
assumed for purposes of these estimates. The present value shown
should not be construed as the current market value of the
reserves. The 10% discount factor used to calculate present
value, which is mandated by generally accepted accounting
principles in the United States, is not necessarily the most
appropriate discount rate. The present value, no matter what
discount rate is used, is materially affected by assumptions as
to timing of future production, which may prove to be
inaccurate. For properties that we operate, expenses include a
portion of our producing well overhead associated with general
corporate expenses related to operated oil and natural gas
activities. In addition, the calculation of estimated future net
revenues does not take into account the effect of various cash
outlays, including, among other things, general and
administrative costs and interest expense.

31



---



##### Table of Contents



Production and Price History

The following table sets forth information
regarding net production of oil, natural gas and natural gas
liquids, and certain price and cost information for each of the
periods indicated:

|                                         |  |                         |         |  |      |   |         |      |  |   |        | 
|---------------------------------------- |  | ----------------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------ | 
|                                         |  |                        
|                                         |  | Year Ended December 31, |        
|                                         |  |                         |        
|                                         |  | 2003                    |         |  | 2002 |   |         | 2001 | 
|                                         |  |                         |         |  |      |   |         |      | 
|Production Data:                         |  |                         |         |  |      |   |         |      |  |   |        | 
|Oil (Mbbls)                              |  |                         | 8,175   |  |      |   | 7,927   |      |  |   | 4,929  | 
|Natural Gas (Mmcf)                       |  |                         | 116,989 |  |      |   | 82,346  |      |  |   | 58,562 | 
|Total Mmcfe                              |  |                         | 166,039 |  |      |   | 129,908 |      |  |   | 88,136 | 
|Average Prices Before Hedging:           |  |                         |         |  |      |   |         |      |  |   |        | 
|Oil (per Bbl)                            |  | $                       | 28.96   |  |      | $ | 23.66   |      |  | $ | 21.69  | 
|Natural Gas (per Mcf)                    |  |                         | 4.93    |  |      |   | 2.94    |      |  |   | 3.59   | 
|Total (per Mcfe)                         |  |                         | 4.90    |  |      |   | 3.30    |      |  |   | 3.60   | 
|Average Prices After Hedging:            |  |                         |         |  |      |   |         |      |  |   |        | 
|Oil (per Bbl)                            |  |                         | 25.92   |  |      |   | 23.60   |      |  |   | 21.79  | 
|Natural Gas (per Mcf)                    |  |                         | 4.27    |  |      |   | 2.92    |      |  |   | 3.62   | 
|Total (per Mcfe)                         |  |                         | 4.28    |  |      |   | 3.29    |      |  |   | 3.62   | 
|Average Costs (per Mcfe):                |  |                         |         |  |      |   |         |      |  |   |        | 
|Lease operating expense                  |  | $                       | .61     |  |      | $ | .69     |      |  | $ | .63    | 
|Production taxes                         |  |                         | .27     |  |      |   | .18     |      |  |   | .15    | 
|Transportation costs                     |  |                         | .08     |  |      |   | .06     |      |  |   | .06    | 
|General and administrative               |  |                         | .18     |  |      |   | .18     |      |  |   | .20    | 
|Depletion, depreciation and amortization |  |                         | 1.57    |  |      |   | 1.56    |      |  |   | 1.41   | 

Producing Wells

The following table sets forth information at
December 31, 2003, relating to the producing wells in which
we owned a working interest as of that date. We also held
royalty interests in 1,904 producing wells as of that date.
Wells are classified as oil or natural gas wells according to
their predominant production stream.

|                      |       |           |       |       |           |  |       |          |  |  |       |  | 
|--------------------- | ----- | --------- | ----- | ----- | --------- |  | ----- | -------- |  |  | ----- |  | 
|                      |       | Gross     |       |       | Net       |  |       | Average  | 
|                      |       | Producing |       |       | Producing |  |       | Working  | 
|                      |       | Wells     |       |       | Wells     |  |       | Interest | 
|                      |       |           |       |       |           |  |       |          | 
|Crude oil and liquids |       |           | 2,556 |       |           |  | 1,386 |          |  |  | 54.3% | 
|Natural gas           |       |           | 4,187 |       |           |  | 1,887 |          |  |  | 45.1% | 
|                      |       |           |       |       |           |  |       |          | 
|                      | Total |           |       | 6,743 |           |  |       | 3,273    |  |  |       |  | 
|                      |       |           |       |       |           |  |       |          | 

32



---



##### Table of Contents



Acreage

The following table sets forth information at
December 31, 2003, relating to acreage held by us.
Developed acreage is assigned to producing wells. Undeveloped
acreage is acreage held under lease, permit, contract or option
that is not in a spacing unit for a producing well, including
leasehold interests identified for exploitation or exploratory
drilling. The term gross acres refers to the total
number of acres in which we own a working interest. The term
net acres refers to gross acres multiplied by our
fractional working interest therein.

|             |                   |               |  |           |             |  |  |         |           | 
|------------ | ----------------- | ------------- |  | --------- | ----------- |  |  | ------- | --------- | 
|             |                   | Gross Acreage |  |           | Net Acreage | 
|             |                   |               |  |           |             | 
|Developed:   |                   |               |  |           |             |  |  |        
|             | Northern          |               |  | 506,868   |             |  |  | 216,150 |          
|             | Western           |               |  | 191,612   |             |  |  | 156,150 |          
|             | Southern          |               |  | 582,160   |             |  |  | 274,615 |          
|             | Gulf of Mexico    |               |  | 329,229   |             |  |  | 87,699  |          
|             |                   |               |  |           |             | 
|             | Total Developed   |               |  | 1,609,869 |             |  |  | 734,614 |          
|             |                   |               |  |           |             | 
|Undeveloped: |                   |               |  |           |             |  |  |        
|             | Northern          |               |  | 1,027,359 |             |  |  | 444,948 |          
|             | Western           |               |  | 79,068    |             |  |  | 73,027  |          
|             | Southern          |               |  | 182,689   |             |  |  | 71,264  |          
|             | Gulf of Mexico    |               |  | 286,793   |             |  |  | 181,113 |          
|             |                   |               |  |           |             | 
|             | Total Undeveloped |               |  | 1,575,909 |             |  |  | 770,352 |          
|             |                   |               |  |           |             | 
|             |                   | Total         |  |           | 3,185,778   |  |  |         | 1,504,966 | 
|             |                   |               |  |           |             | 

The total net undeveloped acres expiring in 2004,
2005 and 2006 are 123,409, 168,764 and 82,722, respectively.

Drilling Results

The following table sets forth information with
respect to wells drilled during the periods indicated. The
information should not be considered indicative of future
performance, nor should it be assumed that there is necessarily
any correlation between the number of productive wells drilled,
quantities of reserves found or economic value. Productive wells
are those that produce commercial quantities of hydrocarbons,
whether or not they generate a reasonable rate of return.

|                   |            |                         |  |  |       |  |  |      |       |  |  |  |       | 
|------------------ | ---------- | ----------------------- |  |  | ----- |  |  | ---- | ----- |  |  |  | ----- | 
|                   |            |                        
|                   |            | Year Ended December 31, | 
|                   |            |                         | 
|                   |            | 2003                    |  |  | 2002  |  |  | 2001 |      
|                   |            |                         |  |  |       |  |  |      |      
|Development Wells: |            |                         |  |  |       |  |  |      |       |  |  | 
|                   | Productive |                         |  |  |       |  |  |      |       |  |  |  |      
|                   |            | Gross                   |  |  | 270.0 |  |  |      | 194.0 |  |  |  | 242.0 | 
|                   |            | Net                     |  |  | 158.3 |  |  |      | 96.0  |  |  |  | 86.0  | 
|                   | Dry        |                         |  |  |       |  |  |      |       |  |  |  |      
|                   |            | Gross                   |  |  | 5.0   |  |  |      | 6.0   |  |  |  | 9.0   | 
|                   |            | Net                     |  |  | 1.9   |  |  |      | 3.7   |  |  |  | 3.4   | 
|Exploratory Wells: |            |                         |  |  |       |  |  |      |       |  |  | 
|                   | Productive |                         |  |  |       |  |  |      |       |  |  |  |      
|                   |            | Gross                   |  |  | 13.0  |  |  |      | 6.0   |  |  |  | 18.0  | 
|                   |            | Net                     |  |  | 6.5   |  |  |      | 2.4   |  |  |  | 5.9   | 
|                   | Dry        |                         |  |  |       |  |  |      |       |  |  |  |      
|                   |            | Gross                   |  |  | 19.0  |  |  |      | 13.0  |  |  |  | 6.0   | 
|                   |            | Net                     |  |  | 9.6   |  |  |      | 5.5   |  |  |  | 3.3   | 

As of December 31, 2003, nine additional
exploration and 31 development wells were in progress.

33



---



##### Table of Contents








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

Westport Oil and Gas Company, L.P., our
wholly-owned subsidiary, is a defendant in a case brought in
July 2001 against its predecessor, Belco Energy Corp., in the
district court of Sweetwater County, Wyoming. The complaint
seeks damages on behalf of a purported class of royalty owners
for alleged improper deduction, valuation and reporting under
the Wyoming Royalty Payment Act in connection with royalty
payments made by Belco on production from wells it operates in
the Moxa Arch area of the Green River Basin. During initial
stages of the case plaintiffs have advised us that they
calculate the amount of damages allegedly owed by Belco to be
approximately $1,165,000, which includes attorneys fees and
litigation costs. We have denied liability for any of these
damages and believe that we have valid defenses to
plaintiffs claims. Class certification and discovery have
been stayed pending the decision by the Wyoming Supreme Court in
a case involving unrelated parties that may have a bearing on
this case and other similar cases filed by plaintiffs against
other oil and natural gas industry operators in the Green River
Basin. Settlement discussions have occurred with plaintiffs and
are ongoing. We believe that our potential liability with
respect to this proceeding is not material in the aggregate to
our financial position, results of operations or cash flows.
Accordingly, we have not established a reserve for loss in
connection with this proceeding.

From time to time, we may be a party to various
other legal proceedings. Except as discussed herein, we are not
currently party to any material pending legal proceedings.






|        |                                                        
|------- | -------------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS

No matters were submitted during the fourth
quarter of the fiscal year covered by this Form 10-K to a
vote of our security holders, through the solicitation of
proxies or otherwise.

34



---



##### Table of Contents






PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND
    RELATED STOCKHOLDER MATTERS

Price Range of Common Stock

Our common stock is listed and traded on the
New York Stock Exchange, or NYSE, under the symbol
WRC. Prior to our merger with and into Belco, Belco
common stock was listed and traded on the NYSE under the symbol
BOG. The following table sets forth the high and low
sales prices per share of Belco and Westport common stock on the
NYSE, for the periods indicated:

|                                        |  |              |       |  |                 |   |      |      |  |   |       |  |  |   |       | 
|--------------------------------------- |  | ------------ | ----- |  | --------------- | - | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|                                        |  |              |       | 
|                                        |  | Belco Common |       |  | Westport Common |  
|                                        |  | Stock(1)     |       |  | Stock(2)        |  
|                                        |  |              |       |  |                 |  
|                                        |  | High         |       |  | Low             |   |      | High |  |   | Low   | 
|                                        |  |              |       |  |                 |   |      |      |  |   |       | 
|2001                                    |  |              |       |  |                 |   |      |      |  |   |       |  |  |   |       | 
|First Quarter                           |  | $            | 12.75 |  |                 | $ | 8.40 |      |  | $ |      |  |  | $ |      | 
|Second Quarter                          |  |              | 10.60 |  |                 |   | 7.90 |      |  |   |      |  |  |   |      | 
|Third Quarter (through August 20, 2001) |  |              | 9.15  |  |                 |   | 8.20 |      |  |   |      |  |  |   |      | 
|Third Quarter (from August 21, 2001)    |  |              |      |  |                 |   |     |      |  |   | 20.39 |  |  |   | 12.60 | 
|Fourth Quarter                          |  |              |      |  |                 |   |     |      |  |   | 17.94 |  |  |   | 13.90 | 
|2002                                    |  |              |       |  |                 |   |      |      |  |   |       |  |  |   |       | 
|First Quarter                           |  | $            |      |  |                 | $ |     |      |  | $ | 19.77 |  |  | $ | 15.44 | 
|Second Quarter                          |  |              |      |  |                 |   |     |      |  |   | 21.18 |  |  |   | 15.40 | 
|Third Quarter                           |  |              |      |  |                 |   |     |      |  |   | 18.69 |  |  |   | 13.20 | 
|Fourth Quarter                          |  |              |      |  |                 |   |     |      |  |   | 21.40 |  |  |   | 16.20 | 
|2003                                    |  |              |       |  |                 |   |      |      |  |   |       |  |  |   |       | 
|First Quarter                           |  | $            |      |  |                 | $ |     |      |  | $ | 21.23 |  |  | $ | 19.10 | 
|Second Quarter                          |  |              |      |  |                 |   |     |      |  |   | 24.07 |  |  |   | 19.27 | 
|Third Quarter                           |  |              |      |  |                 |   |     |      |  |   | 24.31 |  |  |   | 20.30 | 
|Fourth Quarter                          |  |              |      |  |                 |   |     |      |  |   | 30.86 |  |  |   | 23.45 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Stock price information for periods prior to
    August 21, 2001, the effective date of the merger with
    Belco, are for shares of Belco common stock listed and traded on
    the NYSE under the symbol BOG. August 20, 2001
    was the last full trading day on which shares of Belco common
    stock were traded prior to our merger with Belco.
|   
|(2) | The merger with Belco became effective on
    August 21, 2001. In accordance with the agreement governing
    the merger with Belco, each outstanding share of Belco common
    stock was exchanged for 0.4125 of a share of Westport common
    stock.                                                                                                  

Dividend Policy

We have never declared or paid any cash dividends
on our common stock. We anticipate that we will retain all
future earnings and other cash resources for investment in our
business. Accordingly, we do not intend to declare or pay cash
dividends on our common stock in the foreseeable future. Payment
of any future dividends on our common stock will be at the
discretion of our board of directors after taking into account
many factors, including our financial condition, operating
results, current and anticipated cash needs and plans for
expansion. The declaration and payment of any future dividends
on our common stock is currently prohibited by our revolving
credit facility and may be similarly restricted in the future.

35



---



##### Table of Contents



Recent Sales of Unregistered
Securities

None.






|        |                        
|------- | -----------------------
|ITEM 6. | SELECTED FINANCIAL DATA

The following table sets forth selected
consolidated financial data for Westport as of the dates and for
the periods indicated. The financial data for the five years
ended December 31, 2003 were derived from our Consolidated
Financial Statements. Future results may differ substantially
from historical results because of changes in oil and natural
gas prices, increases or decreases in production or other
factors, many of which are beyond our control. The following
data should be read in conjunction with Managements
Discussion and Analysis of Financial Condition and Results of
Operations, which includes a discussion of factors
materially affecting the comparability of the information
presented, and our financial statements and the notes thereto
included elsewhere in this report.

|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |        |        |        | 
|------------------------------ | --------------------------------------------- | ------------------------------------- | ------------ | -------- | ------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------ | ------ | ------ | 
|                               |                                               |                                      
|                               |                                               | Year Ended December 31,               |             
|                               |                                               |                                       |             
|                               |                                               | 2003                                  |              |          | 2002    |         |   | 2001    |         |         | 2000 |         |         | 1999    |  
|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |  
|                               |                                               |                                      
|                               |                                               | (In thousands, except per share data) |             
|Statements of Operations Data: |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |       
|Operating revenues:            |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |       
|                               | Oil and natural gas sales                     |                                       | $            | 813,882  |         |         | $ | 428,430 |         |         | $    | 317,278 |         |         | $ | 244,669 |         |         | $ | 83,393 |       
|                               | Hedge settlements                             |                                       |              | (102,368 | )       |         |   | (1,276  | )       |         |      | 2,091   |         |         |   | (24,627 | )       |         |   | (7,905 | )     
|                               | Gathering income                              |                                       |              | 3,456    |         |         |   |        |         |         |      |        |         |         |   |        |         |         |   |       |       
|                               | Non-hedge derivative settlements              |                                       |              | 2,653    |         |         |   | 822     |         |         |      | 15,300  |         |         |   |        |         |         |   |       |       
|                               | Non-hedge change in fair value of derivatives |                                       |              | 9,501    |         |         |   | (26,723 | )       |         |      | 14,323  |         |         |   | (739    | )       |         |   |       |       
|                               | Gain (loss) on sale of operating assets, net  |                                       |              | 6,565    |         |         |   | (1,685  | )       |         |      | (132    | )       |         |   | 3,130   |         |         |   | 3,637  |       
|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |  
|                               |                                               |                                       | Net revenues |          |         | 733,689 |   |         |         | 399,568 |      |         |         | 348,860 |   |         |         | 222,433 |   |        |        | 79,125 | 
|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |  
|Operating costs and expenses:  |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |       
|                               | Lease operating expenses                      |                                       |              | 101,032  |         |         |   | 89,328  |         |         |      | 55,315  |         |         |   | 34,397  |         |         |   | 22,916 |       
|                               | Production taxes                              |                                       |              | 45,659   |         |         |   | 23,954  |         |         |      | 13,407  |         |         |   | 10,631  |         |         |   | 5,742  |       
|                               | Transportation costs                          |                                       |              | 13,355   |         |         |   | 7,961   |         |         |      | 5,157   |         |         |   | 3,034   |         |         |   | 1,725  |       
|                               | Gathering expense                             |                                       |              | 2,977    |         |         |   |        |         |         |      |        |         |         |   |        |         |         |   |       |       
|                               | Exploration                                   |                                       |              | 58,731   |         |         |   | 32,390  |         |         |      | 31,313  |         |         |   | 12,790  |         |         |   | 7,314  |       
|                               | Depletion, depreciation and amortization      |                                       |              | 260,604  |         |         |   | 203,093 |         |         |      | 124,059 |         |         |   | 64,856  |         |         |   | 25,210 |       
|                               | Impairment of proved properties               |                                       |              | 18,166   |         |         |   | 19,700  |         |         |      | 9,423   |         |         |   | 2,911   |         |         |   | 3,072  |       
|                               | Impairment of unproved properties             |                                       |              | 27,556   |         |         |   | 9,961   |         |         |      | 6,974   |         |         |   | 5,124   |         |         |   | 2,273  |       
|                               | Stock compensation expense, net               |                                       |              | 7,744    |         |         |   | 4,608   |         |         |      | 719     |         |         |   | 5,539   | (1)     |         |   |       |       
|                               | General and administrative                    |                                       |              | 30,079   |         |         |   | 23,629  |         |         |      | 17,678  |         |         |   | 7,542   |         |         |   | 5,297  |       
|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |  
|                               |                                               | Total operating expenses              |              |          | 565,903 |         |   |         | 414,624 |         |      |         | 264,045 |         |   |         | 146,824 |         |   |        | 73,549 |       
|                               |                                               |                                       |              |          |         |         |   |         |         |         |      |         |         |         |  
|                               |                                               | Operating income (loss)               |              |          | 167,786 |         |   |         | (15,056 | )       |      |         | 84,815  |         |   |         | 75,609  |         |   |        | 5,576  |       

36



---



##### Table of Contents



|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |        |  
|------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------- | --------- | ------- | ---- | - | --------- | ------- | - | - | --------- | ------- | - | ---- | -------- | ------ | - | - | ------- | ------ | -
|                                                                                      |                                         |                                      
|                                                                                      |                                         | Year Ended December 31,               |          
|                                                                                      |                                         |                                       |          
|                                                                                      |                                         | 2003                                  |           |         | 2002 |   |           | 2001    |   |   | 2000      |         |   | 1999 |         
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|                                                                                      |                                         |                                      
|                                                                                      |                                         | (In thousands, except per share data) |          
|Other income (expense):                                                               |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |       
|                                                                                      | Interest expense                        |                                       |           | (56,225 | )    |   |           | (34,836 | ) |   |           | (13,196 | ) |      |          | (9,731 | ) |   |         | (9,207 | )
|                                                                                      | Interest income                         |                                       |           | 743     |      |   |           | 546     |   |   |           | 1,668   |   |      |          | 1,230  |   |   |         | 489    |  
|                                                                                      | Change in interest rate swap fair value |                                       |           |        |      |   |           | 226     |   |   |           | 4,960   |   |      |          |       |   |   |         |       |  
|                                                                                      | Loss on debt retirement                 |                                       |           | (920    | )    |   |           |        |   |   |           |        |   |      |          |       |   |   |         |       |  
|                                                                                      | Other                                   |                                       |           | 722     |      |   |           | 1,002   |   |   |           | 211     |   |      |          | 152    |   |   |         | 16     |  
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Income (loss) before income taxes                                                     |                                         |                                       | 112,106   |         |      |   | (48,118   | )       |   |   | 78,458    |         |   |      | 67,260   |        |   |   | (3,126  | )     
|Benefit (provision) for income taxes                                                  |                                         |                                       | (39,585   | )       |      |   | 19,552    |         |   |   | (28,637   | )       |   |      | (23,724  | )      |   |   |        |       
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Net income (loss) before cumulative effect of
    change in accounting principle      |                                         |                                       | 72,521    |         |      |   | (28,566   | )       |   |   | 49,821    |         |   |      | 43,536   |        |   |   | (3,126  | )     
|Cumulative effect of change in accounting
    principle (net of tax effect of $1,962) |                                         |                                       | (3,414    | )       |      |   |          |         |   |   |          |         |   |      |         |        |   |   |        |       
|Preferred stock dividends                                                             |                                         |                                       | (4,763    | )       |      |   | (4,762    | )       |   |   | (1,587    | )       |   |      |         |        |   |   |        |       
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Net income (loss) available to common stockholders                                    |                                         | $                                     | 64,344    |         |      | $ | (33,328   | )       |   | $ | 48,234    |         |   | $    | 43,536   |        |   | $ | (3,126  | )     
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Weighted average number of common shares
    outstanding                              |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |       
|                                                                                      | Basic                                   |                                       |           | 67,116  |      |   |           | 53,007  |   |   |           | 43,408  |   |      |          | 28,296 |   |   |         | 14,727 |  
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|                                                                                      | Diluted                                 |                                       |           | 68,103  |      |   |           | 53,007  |   |   |           | 44,168  |   |      |          | 28,645 |   |   |         | 14,727 |  
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Net income (loss) per common share:                                                   |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |       
|                                                                                      | Basic                                   |                                       | $         | 0.96    |      |   | $         | (0.63   | ) |   | $         | 1.11    |   |      | $        | 1.54   |   |   | $       | (0.21  | )
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|                                                                                      | Diluted                                 |                                       | $         | 0.94    |      |   | $         | (0.63   | ) |   | $         | 1.09    |   |      | $        | 1.52   |   |   | $       | (0.21  | )
|                                                                                      |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |         
|Other Financial Data:                                                                 |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |       
|Net cash provided by operating activities                                             |                                         | $                                     | 436,717   |         |      | $ | 223,197   |         |   | $ | 195,273   |         |   | $    | 143,429  |        |   | $ | 21,279  |       
|Net cash provided by (used in) investing
    activities                               |                                         |                                       | (596,381  | )       |      |   | (814,163  | )       |   |   | (188,686  | )       |   |      | (140,169 | )      |   |   | 17,981  |       
|Net cash provided by (used in) financing
    activities                               |                                         |                                       | 189,995   |         |      |   | 606,396   |         |   |   | 843       |         |   |      | (2,581   | )      |   |   | (29,933 | )     
|Capital expenditures                                                                  |                                         |                                       | 609,759   |         |      |   | 827,502   |         |   |   | 194,244   |         |   |      | 146,086  |        |   |   | 14,005  |       
|Balance Sheet Data (as of period
    end):                                            |                                         |                                       |           |         |      |   |           |         |   |   |           |         |   |      |          |        |   |   |         |       
|Cash and cash equivalents                                                             |                                         | $                                     | 73,658    |         |      | $ | 42,761    |         |   | $ | 27,584    |         |   | $    | 20,154   |        |   | $ | 19,475  |       
|Working capital (deficit)                                                             |                                         |                                       | (75,203   | )       |      |   | (11,068   | )       |   |   | 13,365    |         |   |      | 20,487   |        |   |   | 12,837  |       
|Total assets                                                                          |                                         |                                       | 2,617,263 |         |      |   | 2,233,541 |         |   |   | 1,604,216 |         |   |      | 551,831  |        |   |   | 271,477 |       
|Total long-term debt                                                                  |                                         |                                       | 980,885   |         |      |   | 799,358   |         |   |   | 429,224   |         |   |      | 162      |        |   |   | 105,462 |       
|Total debt                                                                            |                                         |                                       | 980,885   |         |      |   | 799,358   |         |   |   | 429,224   |         |   |      | 162      |        |   |   | 106,795 |       
|Total stockholders equity                                                            |                                         |                                       | 1,160,898 |         |      |   | 1,132,006 |         |   |   | 920,296   |         |   |      | 458,056  |        |   |   | 140,011 |       



---



|    |                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes compensation expenses of
    $3.4 million recorded as a result of a one-time repurchase
    of employee stock options in March 2000 in connection with the
    merger between Westport Oil and Gas and EPGC.

37



---



##### Table of Contents





|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following information should be read in
conjunction with our historical consolidated financial
statements and related notes and other financial information
included elsewhere in this report.

Executive Summary



| |         
| | --------
| | Overview

We are an independent energy company engaged in
oil and natural gas production, exploitation, acquisition, and
exploration activities primarily in the United States. We focus
on maintaining a balanced portfolio of lower-risk, long-lived
onshore reserves and higher-margin shorter-lived Gulf Coast and
Gulf of Mexico reserves to provide a diversified cash flow
foundation for our exploitation, acquisition and exploration
activities. We are gas-weighted, with natural gas and natural
gas liquids comprising approximately 76% of our total reserves,
and we operate about 77% of our reserve value, giving us the
ability to control the development of the majority of our
properties. On a reserve volume basis, approximately 56% of our
reserves are located in Rocky Mountain properties managed by our
Northern and Western Divisions, approximately 36% are in Permian
Basin/ Mid-Continent and Gulf Coast properties managed by our
Southern Division and the remaining 8% are in offshore
properties in the Gulf of Mexico managed by our Gulf of Mexico
Division.

Historically, acquisitions of producing
properties and the subsequent exploitation of those properties
have accounted for most of our growth. From December 31,
1997 to December 31, 2003 primarily as a result of these
investments, we increased our estimated proved reserves from
197 Bcfe to 1,781 Bcfe, and our average daily
production increased from 66 Mmcfe/d to 455 Mmcfe/d,
yielding compounded annual growth rates of approximately 44% and
38%, respectively.

Notwithstanding our rapid growth, and as an
integral part of our growth strategy, we have maintained a
disciplined approach to the control of costs. Over the six-year
period ending on December 31, 2003 we have reduced our per
unit cost structure from $1.32 per Mcfe to $1.14 per
Mcfe of our net production for the aggregate of lease operating
expenses, transportation costs, production taxes and general and
administrative costs. We have accomplished this while
maintaining a strong balance sheet and significant financial
flexibility.

We expect that our future growth will continue to
depend on our ability to continue to add reserves primarily
through acquisitions and subsequent exploitation and to a lesser
extent exploration successes.



| |                
| | ---------------
| | 2003 Highlights



| |   |                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Record levels of production Our average daily natural gas
    equivalent production was approximately 455 Mmcfe/d for
    2003, a 28% increase from 356 Mmcfe/d in 2002.                                                                                                 
|
| |  | Record levels of net cash provided by
    operating activities Net
    cash provided by operating activities was $436.7 million
    for 2003, a 96% increase from $223.2 million in 2002.                                                                                
|
| |  | Record levels of net income available to
    common stockholders Net
    income available to common stockholders was $64.3 million
    for 2003, or $0.94 per fully diluted share, compared to a
    loss of $33.3 million, or $0.63 per fully diluted
    share in 2002.
|
| |  | Reduction of lease operating costs per
    Mcfe Lease operating costs
    per Mcfe were $0.61 in 2003, a 12% reduction compared to $0.69
    in 2002.                                                                                                                    
|
| |  | 307 wells drilled with a 92% success
    rate We drilled
    307 wells and had a 92% success rate in 2003, compared to
    219 wells and a 91% success rate in 2002.                                                                                                     
|
| |  | Successful integration of Uinta Basin
    properties acquired in December 2002 We drilled or participated in
    83 wells in the Uinta Basin during 2003, increased net
    production by approximately                                                                  

38



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 25% from 67 Mmcfe/d in the first quarter of
    2003 to 84 Mmcfe/d in the fourth quarter of 2003 and
    increased our proved reserves from 596 Bcfe in 2002 to
    658 Bcfe in 2003.                                                                                                                                                                                                                                         
|
| |  | Completion of the South Texas
    Acquisition In December
    2003, we acquired oil and natural gas properties in South Texas
    for a cash purchase price of $342 million. The South Texas
    Acquisition increased our proved reserves by approximately
    208 Bcfe, 97% of which are natural gas. The purchase was
    funded with cash on hand and $262 million in borrowings
    under our revolving credit facility.
|
| |  | Replacement of production We replaced 114% and 126% of our 2003
    production through drilling and acquisitions, respectively, at
    an average finding cost of $1.65 from all sources.                                                                                                                                                                                                                                    



| |             
| | ------------
| | 2004 Outlook



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 20% to 30% production growth We expect that our average daily
    production for 2004 will increase to between 550 Mmcfe/d
    and 590 Mmcfe/d. We expect this increase as a result of:
    i) anticipated production from our newly acquired South
    Texas properties; ii) anticipated commencement of production
    from offshore wells previously drilled; and iii) projected
    production from successful drilling as part of our 2004 capital
    expenditure program.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | 20% to 30% capital budget increase In 2004, we expect to expand our
    capital budget to $370 million, of which 73% is budgeted
    for development drilling and 27% for exploration. We currently
    plan to budget approximately 38% of the total amount for the
    Southern Division, 26% for the Gulf of Mexico, 23% for the
    Western Division and 13% for the Northern Division. These
    allocations could change depending on factors such as drilling
    results and acquisition opportunities. We expect to drill
    approximately 400 to 450 wells in 2004. Based on our
    assumed prices and service sector costs, we expect to generate
    approximately $150 million to $190 million more in
    cash provided by operating activities than we have budgeted for
    capital expenditures and anticipate using this surplus cash to
    reduce debt, expand our capital budget or fund acquisitions.
|
| |  | Costs and expenses per Mcfe We expect our costs and expenses per
    Mcfe to remain relatively flat in 2004 as compared to 2003,
    except that depletion, depreciation and amortization expense, or
    DD&A, is expected to increase from $1.57 per Mcfe in
    2003 to between $1.60 and $1.80 per Mcfe in 2004. The
    increase is expected because we anticipate a higher proportion
    of our production to come from relatively short lived properties
    in the Gulf of Mexico and South Texas.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Commodity price hedging We have hedged between 45% and 50% of
    our expected 2004 natural gas production at average prices
    ranging from $4.15 per Mmbtu to $4.35 per Mmbtu and
    between 50% and 55% of our expected 2004 oil production at
    average prices ranging from $25.40 per barrel to
    $26.45 per barrel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

Critical Accounting Policies and
Estimates

Our discussion and analysis of our financial
condition and results of operations are based upon consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States of America, or GAAP. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses. Our significant accounting policies are described in
Note 1 to our consolidated financial statements included in
this report. We have identified certain of these policies as
being of particular importance to the portrayal of our financial
position and results of operations and which require the
application of significant judgment by our management. We
analyze our estimates, including those related to oil and gas
revenues, oil and gas properties, fair value of derivative
instruments, income taxes and contingencies and litigation, and
base our estimates on historical experience and various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates
under different assumptions or conditions. We believe the
following critical accounting

39



---



##### Table of Contents



policies affect our more significant judgments
and estimates used in the preparation of our consolidated
financial statements:




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition.We follow the sales method of accounting for oil and natural gas
    revenues. Under this method, revenues are recognized based on
    actual volumes of oil and natural gas sold to purchasers. No
    receivables, payables, or unearned revenue are recorded unless a
    working interest owners aggregate sales from the property
    exceed its share of the total reserves-in-place. If such a
    situation arises, the parties would likely cash balance.                                                                                                                              
|
| |  | Successful Efforts
    Accounting.We account for our oil and
    natural gas operations using the successful efforts method of
    accounting. Under this method, all costs associated with
    property acquisition, successful exploratory wells and all
    development wells are capitalized. Items charged to expense
    generally include geological and geophysical costs, costs of
    unsuccessful exploratory wells and oil and natural gas
    production costs. Substantially all of our oil and natural gas
    properties are located within the continental United States and
    the Gulf of Mexico.
|
| |  | Proved Reserve
    Estimates.Estimates of our proved
    reserves included in this report are prepared in accordance with
    SEC guidelines. The accuracy of a reserve estimate is a function
    of:                                                                                                                                                                                                                                                                                                                                                                                                               



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | the quality and quantity of available data;                   
|
| |  | the interpretation of that data;                              
|
| |  | the accuracy of various mandated economic
    assumptions; and
|
| |  | the judgment of the persons preparing the
    estimate.       

Our proved reserve information included in this
report is based on estimates prepared by Ryder Scott Company,
Netherland, Sewell & Associates, Inc. and our
engineering staff. Estimates prepared by different third parties
may be higher or lower than the estimates represented in our
reserve report.

Because these estimates depend on many
assumptions, all of which may substantially differ from actual
results, reserve estimates may be different from the quantities
of oil and natural gas that are ultimately recovered. In
addition, results of drilling, testing and production after the
date of an estimate may justify material revisions to the
estimate.

Our stockholders should not assume that the
present value of future net cash flows is the current market
value of our estimated proved reserves. In accordance with SEC
requirements, we based the estimated discounted future net cash
flows from proved reserves on prices and costs as of the date of
the estimate. Actual future prices and costs may be materially
higher or lower than the prices and costs as of the date of the
estimate.

Our estimates of proved reserves directly impact
depletion expense. If the estimates of proved reserves decline,
the rate at which we record depletion expense increases,
reducing net income. Such a decline may result from lower market
prices or increases in costs, which may make it uneconomic to
drill for and produce higher cost fields, or property
performance. In addition, the decline in proved reserve
estimates may impact the outcome of our assessment of our oil
and gas producing properties for impairment.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Impairment of Proved Oil and Gas
    Properties.Because we use the
    successful efforts method of accounting to account for our oil
    and gas operations, we assess our proved properties for
    impairment on a field-by-field basis, in accordance with the
    provisions of Statement of Financial Accounting Standards
    No. 144, Accounting for the Impairment of Long Lived
    Assets and for Long Lived Assets to be Disposed of,
    whenever events or circumstances indicate that the capitalized
    costs of oil and natural gas properties may not be recoverable.
    We estimate the expected future cash flows of our oil and gas
    properties, on a field-by-field basis, and compare such future
    cash flows to the carrying amount of the oil and gas properties
    to determine if the carrying amount is recoverable. Management
    assesses whether or not an impairment provision is necessary
    based upon managements outlook of future commodity prices
    and net cash flows that may be generated by the properties.
    Proved oil and gas properties are reviewed for impairment on a
    field-by-field basis, which

40



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | is the lowest level at which depletion of proved
    properties is calculated. If the carrying amount exceeds the
    estimated undiscounted future cash flows, we will adjust the
    carrying amount of the oil and gas properties to fair value. The
    factors used to determine fair value include estimates of
    reserves, future production, future commodity prices,
    anticipated capital expenditures, and a discount rate
    commensurate with the risk associated with realizing the
    expected future cash flows. Management has chosen to use the
    traditional present value approach to determine the fair value
    as opposed to the expected present value method. In the
    traditional present value approach, a single set of estimated
    cash flows and a single interest rate (commensurate with the
    risk) are used to estimate fair value. In the expected present
    value approach, multiple cash flow scenarios reflecting the
    range of possible outcomes and a risk-free rate are used to
    estimate fair value. Using the expected present value method
    could result in different (and possibly higher) amounts for
    property impairments than those calculated using the traditional
    present value method. Impairments for the years ended
    December 31, 2003, 2002 and 2001 were calculated based on
    the following assumed oil and natural gas prices that we believe
    were representative of market pricing assumptions at the time:



| |   |                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | At December 31, 2003, we assumed that oil
    prices in 2004, 2005 and 2006 would be $26.50, $25.00 and
    $24.00 per barrel, respectively, and would remain constant
    thereafter. We also assumed that natural gas prices in 2004,
    2005 and 2006 would be $4.80, $4.35 and $4.00 per Mcf,
    respectively, and would remain constant thereafter.                                    
|
| |  | At December 31, 2002, we assumed that oil
    prices in 2003, 2004 and 2005 would be $27.84, $24.09 and
    $23.48 per barrel, respectively, and would remain constant
    thereafter. We also assumed that natural gas prices in 2003,
    2004 and 2005 would be $4.26, $4.14 and $3.88 per Mcf,
    respectively, and would remain constant thereafter.                                    
|
| |  | At December 31, 2001, we assumed that oil
    prices in 2002 would be $20.84 per barrel and would
    escalate at an annual rate of 2.5% thereafter to a cap of
    $35.00 per barrel. We also assumed that natural gas prices
    in 2002 and 2003 would be $2.75 and $3.05 per Mcf,
    respectively, and would escalate at an annual rate of 2.5%
    thereafter to a cap of $4.50 per Mcf.

In 2003, estimates of future production were
based on estimates of which 87% of the net present value was
prepared by independent reserve engineers, the remaining 13% by
internal engineers and estimated operating costs and severance
taxes were based on past experience. We also assumed at
December 31, 2003 and 2002 that operating and future
development costs would remain constant thereafter. At
December 31, 2001, we assumed that operating and future
development costs would escalate at an annual rate of 2.5% in
2002. Reserve categories used in the impairment analysis for all
periods considered are categories of proved reserves and risk
adjusted probable and possible reserves, which were risk
adjusted based on our drilling plans and history of successfully
developing those types of reserves.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Impairment of
    Goodwill.Goodwill of a reporting unit
    is tested for impairment on an annual basis at year-end and
    between annual tests if an event occurs or circumstances change
    that would more likely than not reduce the fair value of a
    reporting unit below its carrying value. Management assesses
    whether or not an impairment provision is necessary based upon
    comparing the fair value of a reporting unit with its carrying
    value including goodwill. The factors used to determine fair
    value include estimates of reserves, future production, future
    commodity prices, anticipated capital expenditures, and a
    discount rate commensurate with the risk associated with
    realizing the expected future cash flows. Management has chosen
    to use the traditional present value approach to determine the
    fair value as opposed to the expected present value method. In
    the traditional present value approach, a single set of
    estimated cash flows and a single interest rate (commensurate
    with the risk) are used to estimate fair value. In the expected
    present value approach, multiple cash flow scenarios reflecting
    the range of possible outcomes and a risk-free rate are used to
    estimate fair value. Using the expected present value method
    could result in different (and possibly higher) impairment
    charges than those calculated using the traditional present
    value method.

41



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Impairment of Unproved Oil and Gas
    Properties.We periodically assess our
    unproved properties to determine if any such properties have
    been impaired. Such assessment is based on, among other things,
    the fair value of properties located in the same area as the
    unproved property and our intent to pursue additional
    exploration opportunities on such property. Future changes in
    any of the above-referenced factors could result in us recording
    unproved property impairment charges in future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Commodity Derivative Instruments and Hedging
    Activities.We periodically enter into
    commodity derivative contracts and fixed-price physical
    contracts to manage our exposure to oil and natural gas price
    volatility. We primarily utilize future contracts, swaps or
    options, which are generally placed with major financial
    institutions or with counterparties of high credit quality that
    we believe are minimal credit risks. The oil and natural gas
    reference prices of these commodity derivatives contracts are
    based upon crude oil and natural gas futures, which have a high
    degree of historical correlation with actual prices we receive.
    Under the provisions of SFAS No. 133, Accounting
    for Derivative Instruments and Hedging Activities, all
    derivative instruments are recorded on the balance sheet at fair
    value. Changes in the derivatives fair value are
    recognized currently in earnings unless specific hedge
    accounting criteria are met. For qualifying cash flow hedges,
    the gain or loss on the derivative is deferred in accumulated
    other comprehensive income (loss) to the extent the hedge is
    effective. For qualifying fair value hedges, the gain or loss on
    the derivative is offset by related results of the hedged item
    in the income statement. Gains and losses on hedging instruments
    included in accumulated other comprehensive income (loss) are
    reclassified to oil and natural gas sales revenue in the period
    that the related production is delivered. Derivative contracts
    that do not qualify for hedge accounting treatment are recorded
    as derivative assets and liabilities at market value in the
    consolidated balance sheet, and the associated unrealized gains
    and losses are recorded as current expense or income in the
    consolidated statement of operations. While such derivative
    contracts do not qualify for hedge accounting, management
    believes these contracts can be utilized as an effective
    component of commodity price risk management, or CPRM,
    activities.
|
| |  | Valuation of Deferred Tax
    Assets.The Company computes income
    taxes in accordance with SFAS No. 109,
    Accounting for Income Taxes. SFAS No. 109
    requires an asset and liability approach which results in the
    recognition of deferred tax liabilities and assets for the
    expected future tax consequences of temporary differences
    between the carrying amounts and the tax basis of those assets
    and liabilities. SFAS No. 109 also requires the
    recording of a valuation allowance if it is more likely than not
    that some portion or all of a deferred tax asset will not be
    realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

Results of Operations

Our results of operations are significantly
impacted by the prices of oil and natural gas, which are
volatile. NYMEX oil and natural gas prices increased from
$4.58 per Mmbtu and $31.23 per bbl at
December 31, 2002 to $5.83 per Mmbtu and
$32.55 per bbl at December 31, 2003. Approximately 70%
of our volumes sold in 2003 were natural gas compared to
approximately 63% in 2002. We attempt to manage commodity price
volatility through our CPRM activities described above in
Critical Accounting Policies and Estimates and in
Item 7A below.

Oil and natural gas production costs are composed
of lease operating expense, production taxes and transportation
costs. Lease operating expense consists of pumper salaries,
utilities, maintenance, workovers and other costs necessary to
operate our producing properties. In general, lease operating
expense per unit of production is lower on our offshore
properties and does not fluctuate proportionately with our
production. Production taxes are assessed by applicable taxing
authorities as a percentage of revenues. However, properties
located in Federal waters offshore are not subject to production
taxes. Transportation costs are comprised of costs paid to a
carrier to deliver oil or natural gas to a specified delivery
point. In some cases we receive a payment from the purchasers of
our oil and natural gas, which is net of gas transportation
costs and in other instances we pay the costs of transportation.
We focus our efforts on reducing controllable operating costs
per unit of production.

42



---



##### Table of Contents



Depletion of capitalized costs of producing oil
and natural gas properties is computed using the
units-of-production method based upon proved reserves. For
purposes of computing depletion, proved reserves are
re-determined twice each year. Because the economic life of each
producing well depends upon the assumed price for production,
fluctuations in oil and natural gas prices impact the level of
proved reserves. Higher prices generally have the effect of
increasing reserves, which reduces depletion, while lower prices
generally have the effect of decreasing reserves, which
increases depletion. The level of proved reserves is also
impacted by assumptions regarding the performance of the oil and
gas properties. See Critical Accounting Policies and
Estimates above for more information on proved reserve
estimates and how they impact depletion expense.

General and administrative expenses consist
primarily of salaries and related benefits, office rent, legal
fees, consultants, systems costs and other administrative costs
incurred in our Denver, Dallas, Houston and other offices. While
we expect such costs to increase with our growth, we expect such
increases to be proportionately smaller than our production
growth.

Stock compensation expense consists of non-cash
charges resulting from the application of the provisions of FASB
Interpretation No. 44 to certain stock options granted to
employees and issuance of restricted stock to certain employees.
Under Interpretation No. 44 we are required to measure
compensation cost on stock options that are considered to be
variable awards until the date of exercise, forfeiture or
expiration of such options. Compensation cost is measured for
the amount of any increases in our stock price and recognized
over the remaining vesting period of the options. Any decrease
in our stock price will be recognized as a decrease in
compensation cost limited to the amount of compensation cost
previously recognized as a result of an increase in our stock
price.

Historically, we have been able to overcome
natural declines in oil and natural gas production by adding,
through acquisitions and drilling, more reserves than we
produce. Our future growth, if any, will depend on our ability
to continue to add oil and natural gas reserves in excess of
production.

Following is a summary of the major acquisitions
we have completed during the last three years:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Belco
    Merger On August 21,
    2001, Westport was merged with Belco. Belco survived the merger
    and changed its name to Westport Resources Corporation. For
    accounting purposes, the merger was a purchase transaction in
    which Westport acquired Belco. We began consolidating the
    results of Belco with our results as of the August 21, 2001
    closing date.                                                                                                                              
|
| |  | Southeast Texas
    Acquisition On
    September 30, 2002, we acquired oil and natural gas
    properties located in Southeast Texas for a total cash purchase
    price of approximately $122 million. Operations from the
    properties were included in our results beginning
    October 1, 2002.                                                                                                                                                                                                            
|
| |  | Uinta Basin
    Acquisition On
    December 17, 2002, we acquired producing properties,
    undeveloped leaseholds, gathering and compression facilities and
    other related assets in the Greater Natural Buttes area of Utah
    from certain affiliates of El Paso Corporation for
    approximately $507 million. Our Western Division, formed in
    2002, is comprised substantially of these properties. Operations
    from the properties were included in our results beginning
    December 17, 2002.
|
| |  | South Texas
    Acquisition On
    December 18, 2003, we acquired oil and natural gas
    properties located in south Texas for a total cash purchase
    price of approximately $342 million. Operations from the
    properties were included in our results beginning
    December 19, 2003.                                                                                                                                                                                                                   

43



---



##### Table of Contents



The following table sets forth certain data for
the years ended December 31, 2003, 2002 and 2001.

Summary Data

|                                          |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |         | 
|----------------------------------------- | --------------------- | ---- | -------- | ------- | ------------- |  | -------- | ------------- | - |  | ---- | ------ | -- | ------------- | -------- | ------- | ------------- |  | ------ | ------- | - |  | -- | --- | -- |  | ------- | ------- | 
|                                          |                       |      |          | Change  |               |  | % Change |               |   |  |      | Change |    |               | % Change |         |               | 
|                                          |                       | 2003 |          |         | 2003 vs. 2002 |  |          | 2003 vs. 2002 |   |  | 2002 |        |    | 2002 vs. 2001 |          |         | 2002 vs. 2001 |  |        | 2001    |  
|                                          |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |  
|Average Daily Production                  |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |        
|                                          | Oil (Mbbls/d)         |      |          | 22.4    |               |  |          | 0.7           |   |  |      | 3      | %  |               |          | 21.7    |               |  |        | 8.2     |   |  |    | 61  | %  |  |         | 13.5    | 
|                                          | Natural gas (Mmcf/d)  |      |          | 320.5   |               |  |          | 94.9          |   |  |      | 42     | %  |               |          | 225.6   |               |  |        | 65.2    |   |  |    | 41  | %  |  |         | 160.4   | 
|                                          | Mmcfe/d               |      |          | 454.9   |               |  |          | 99.0          |   |  |      | 28     | %  |               |          | 355.9   |               |  |        | 114.4   |   |  |    | 47  | %  |  |         | 241.5   | 
|Production                                |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |        
|                                          | Oil (Mbbls)           |      |          | 8,175   |               |  |          | 248           |   |  |      | 3      | %  |               |          | 7,927   |               |  |        | 2,998   |   |  |    | 61  | %  |  |         | 4,929   | 
|                                          | Natural gas (Mmcf)    |      |          | 116,989 |               |  |          | 34,643        |   |  |      | 42     | %  |               |          | 82,346  |               |  |        | 23,784  |   |  |    | 41  | %  |  |         | 58,562  | 
|                                          | Mmcfe                 |      |          | 166,039 |               |  |          | 36,131        |   |  |      | 28     | %  |               |          | 129,908 |               |  |        | 41,772  |   |  |    | 47  | %  |  |         | 88,136  | 
|Average prices before hedging             |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |        
|                                          | Oil (per bbl)         |      | $        | 28.96   |               |  | $        | 5.30          |   |  |      | 22     | %  |               | $        | 23.66   |               |  | $      | 1.97    |   |  |    | 9   | %  |  | $       | 21.69   | 
|                                          | Natural gas (per Mcf) |      |          | 4.93    |               |  |          | 1.99          |   |  |      | 68     | %  |               |          | 2.94    |               |  |        | (0.65   | ) |  |    | (18 | )% |  |         | 3.59    | 
|                                          | Price (per Mcfe)      |      |          | 4.90    |               |  |          | 1.60          |   |  |      | 48     | %  |               |          | 3.30    |               |  |        | (0.30   | ) |  |    | (8  | )% |  |         | 3.60    | 
|Average prices after hedging              |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |        
|                                          | Oil (per bbl)         |      |          | 25.92   |               |  |          | 2.32          |   |  |      | 10     | %  |               |          | 23.60   |               |  |        | 1.81    |   |  |    | 8   | %  |  |         | 21.79   | 
|                                          | Natural gas (per Mcf) |      |          | 4.27    |               |  |          | 1.35          |   |  |      | 46     | %  |               |          | 2.92    |               |  |        | (0.70   | ) |  |    | (19 | )% |  |         | 3.62    | 
|                                          | Price (per Mcfe)      |      |          | 4.28    |               |  |          | 0.99          |   |  |      | 30     | %  |               |          | 3.29    |               |  |        | (0.33   | ) |  |    | (9  | )% |  |         | 3.62    | 
|                                         
|Oil and natural gas sales:                |                       |      |          |         |               |  |          |               |   |  |      |        |    |               |          |         |               |  |        |         |   |  |    |     |    |  |         |        
|                                          | Volume variance       |      |          |         |               |  |          | 179,570       |   |  |      |        |    |               |          |         |               |  |        | 140,080 |   |  |    |     |    |  |         |         | 
|                                          | Price variance(1)     |      |          |         |               |  |          | 205,882       |   |  |      |        |    |               |          |         |               |  |        | (28,928 | ) |  |    |     |    |  |         |         | 
|                                          | Total                 |      |          | 813,882 |               |  |          | 385,452       |   |  |      | 90     | %  |               |          | 428,430 |               |  |        | 111,152 |   |  |    | 35  | %  |  |         | 317,278 | 
|                                         
|Hedge settlements                         |                       |      | (102,368 | )       |               |  | (101,092 | )             |   |  |      |        |    |               | (1,276   | )       |               |  | (3,367 | )       |   |  |    |     |    |  | 2,091   |        
|                                         
|Lease operating expense                   |                       |      | 101,032  |         |               |  | 11,704   |               |   |  | 13   | %      |    |               | 89,328   |         |               |  | 34,013 |         |   |  | 61 | %   |    |  | 55,315  |        
|                                          | Per Mcfe              |      |          | 0.61    |               |  |          | (0.08         | ) |  |      | (12    | )% |               |          | 0.69    |               |  |        | 0.06    |   |  |    | 10  | %  |  |         | 0.63    | 
|Production taxes                          |                       |      | 45,659   |         |               |  | 21,705   |               |   |  | 91   | %      |    |               | 23,954   |         |               |  | 10,547 |         |   |  | 79 | %   |    |  | 13,407  |        
|                                          | Per Mcfe              |      |          | 0.27    |               |  |          | 0.09          |   |  |      | 50     | %  |               |          | 0.18    |               |  |        | 0.03    |   |  |    | 20  | %  |  |         | 0.15    | 
|Production taxes as a percent of sales(1) |                       |      | 6        | %       |               |  |         |               |   |  |     |        |    |               | 6        | %       |               |  | 2      | %       |   |  | 50 | %   |    |  | 4       | %      
|Transportation costs                      |                       |      | 13,355   |         |               |  | 5,394    |               |   |  | 68   | %      |    |               | 7,961    |         |               |  | 2,804  |         |   |  | 54 | %   |    |  | 5,157   |        
|                                          | Per Mcfe              |      |          | 0.08    |               |  |          | .02           |   |  |      | 33     | %  |               |          | 0.06    |               |  |        |        |   |  |    |    |    |  |         | 0.06    | 
|Depletion, depreciation and amortization  |                       |      | 260,604  |         |               |  | 57,511   |               |   |  | 28   | %      |    |               | 203,093  |         |               |  | 79,034 |         |   |  | 64 | %   |    |  | 124,059 |        
|                                          | Per Mcfe              |      |          | 1.57    |               |  |          | 0.01          |   |  |      | 1      | %  |               |          | 1.56    |               |  |        | 0.15    |   |  |    | 11  | %  |  |         | 1.41    | 
|General and administrative costs          |                       |      | 30,079   |         |               |  | 6,450    |               |   |  | 27   | %      |    |               | 23,629   |         |               |  | 5,951  |         |   |  | 34 | %   |    |  | 17,678  |        
|                                          | Per Mcfe              |      |          | 0.18    |               |  |          |              |   |  |      |       |    |               |          | 0.18    |               |  |        | (.02    | ) |  |    | (10 | )% |  |         | 0.20    | 



---



|    |                      
|--- | ---------------------
|(1) | Sales before hedging.

44



---



##### Table of Contents



The following table sets forth the changes in our
results between years for certain items along with an estimate
of how much those results were impacted by the recent major and
other acquisitions for the years ended December 31, 2003,
2002 and 2001.

|                                         |                      |                      |        |         |                      |  |        |         |   |  |                 |         |  |           |        |         |       |  |        |         |   |  |        |         |  
|---------------------------------------- | -------------------- | -------------------- | ------ | ------- | -------------------- |  | ------ | ------- | - |  | --------------- | ------- |  | --------- | ------ | ------- | ----- |  | ------ | ------- | - |  | ------ | ------- | -
|                                         |                      |                      |        |        
|                                         |                      | Change 2003 vs. 2002 |        |         | Change 2002 vs. 2001 | 
|                                         |                      |                      |        |         |                      | 
|                                         |                      | Acquisitions(1)      |        |         | All Other            |  |        | Total   |   |  | Acquisitions(1) |         |  | All Other |        |         | Total | 
|                                         |                      |                      |        |         |                      |  |        |         |   |  |                 |         |  |           |        |         |       | 
|Average Daily Production                 |                      |                      |        |         |                      |  |        |         |   |  |                 |         |  |           |        |         |       |  |        |         |   |  |        |        
|                                         | Oil (Mbbls/d)        |                      |        | 1.3     |                      |  |        | (0.6    | ) |  |                 | 0.7     |  |           |        | 6.8     |       |  |        | 1.4     |   |  |        | 8.2     |  
|                                         | Natural gas (Mmcf/d) |                      |        | 97.0    |                      |  |        | (2.1    | ) |  |                 | 94.9    |  |           |        | 63.2    |       |  |        | 2.0     |   |  |        | 65.2    |  
|                                         | Mmcfe/d              |                      |        | 105.0   |                      |  |        | (6.00   | ) |  |                 | 99.0    |  |           |        | 104.3   |       |  |        | 10.1    |   |  |        | 114.4   |  
|Production                               |                      |                      |        |         |                      |  |        |         |   |  |                 |         |  |           |        |         |       |  |        |         |   |  |        |        
|                                         | Oil (Mbbls)          |                      |        | 492     |                      |  |        | (244    | ) |  |                 | 248     |  |           |        | 2,501   |       |  |        | 497     |   |  |        | 2,998   |  
|                                         | Natural gas (Mmcf)   |                      |        | 35,402  |                      |  |        | (759    | ) |  |                 | 34,643  |  |           |        | 23,061  |       |  |        | 723     |   |  |        | 23,784  |  
|                                         | Mmcfe                |                      |        | 38,354  |                      |  |        | (2,223  | ) |  |                 | 36,131  |  |           |        | 38,067  |       |  |        | 3,705   |   |  |        | 41,772  |  
|Oil and natural gas sales:               |                      |                      |        |         |                      |  |        |         |   |  |                 |         |  |           |        |         |       |  |        |         |   |  |        |        
|                                         | Volume variance      |                      | $      | 185,122 |                      |  | $      | (5,552  | ) |  | $               | 179,570 |  |           | $      | 125,108 |       |  | $      | 14,972  |   |  | $      | 140,080 |  
|                                         | Price variance(2)    |                      |        | 7,120   |                      |  |        | 198,762 |   |  |                 | 205,882 |  |           |        | 13,052  |       |  |        | (41,980 | ) |  |        | (28,928 | )
|                                         | Total                |                      |        | 192,242 |                      |  |        | 193,210 |   |  |                 | 385,452 |  |           |        | 138,160 |       |  |        | (27,008 | ) |  |        | 111,152 |  
|Lease operating expense                  |                      |                      | 17,743 |         |                      |  | (6,039 | )       |   |  | 11,704          |         |  |           | 29,950 |         |       |  | 4,063  |         |   |  | 34,013 |        
|Production taxes                         |                      |                      | 14,109 |         |                      |  | 7,596  |         |   |  | 21,705          |         |  |           | 11,373 |         |       |  | (826   | )       |   |  | 10,547 |        
|Transportation costs                     |                      |                      | 4,501  |         |                      |  | 893    |         |   |  | 5,394           |         |  |           | 2,852  |         |       |  | (48    | )       |   |  | 2,804  |        
|Depletion, depreciation and amortization |                      |                      | 49,893 |         |                      |  | 7,618  |         |   |  | 57,511          |         |  |           | 60,872 |         |       |  | 18,162 |         |   |  | 79,034 |        



---



|    |                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Acquisitions include all acquisitions of
    producing properties and related assets during the years
    indicated, net of property divestitures for those years, plus
    additions from successful post-closing developmental drilling on
    the acquired properties.
|   
|(2) | Sales before hedging.                                                                                                                                                                                                                                                    



| |                                                                            
| | ---------------------------------------------------------------------------
| | Comparison of Results of
    Operations  2003 to 2002 and 2002 to
    2001

Revenues.Oil and
natural gas revenues for 2003 increased by $385.5 million,
or 90%, from $428.4 million in 2002 to $813.9 million
in 2003. Increases in oil and natural gas prices accounted for
$205.9 of the increase. Production from acquisitions accounted
for $185.1 million of the increase and discoveries in the
Gulf of Mexico accounted for $11.5 million of the increase.
The increases were partially offset by natural declines in
production in other existing properties. Production volumes
increased 36.1 Bcfe from 129.9 Bcfe in 2002 to
166.0 Bcfe in 2003. Production from acquisitions accounted
for 38.4 Bcfe of the increase and discoveries in the Gulf
of Mexico accounted for 2.4 Bcfe of the increase. Oil
prices before hedging increased 22% in 2003 compared to 2002 and
natural gas prices before hedging increased 68% in 2003 compared
to 2002 causing the average prices per Mcfe before hedging to
increase 48%. Hedging transactions had the effect of reducing
oil and natural gas revenues by $102.4 million in 2003, or
$0.62 per Mcfe, and decreasing oil and natural gas revenues
by $1.3 million in 2002, or $0.01 per Mcfe.

Oil and natural gas revenues for 2002 increased
by $111.2 million, or 35%, from $317.3 million in 2001
to $428.4 million in 2002. Production from acquisitions
accounted for $125.1 million of the increase and
discoveries in the Gulf of Mexico accounted for
$24.6 million of the increase. The increases were partially
offset by a decrease of 18% in natural gas prices before hedging
and natural declines in other existing properties. Production
volumes increased 41.8 Bcfe from 88.1 Bcfe in 2001 to
129.9 Bcfe in 2002. Production from acquisitions accounted
for 38.1 Bcfe of the increase. Production volumes also
increased 7.0 Bcfe from discoveries in the Gulf of Mexico
and 1.6 Bcfe from the horizontal drilling program in the

45



---



##### Table of Contents



Wiley Field. The increases in production volumes
were partially offset by oil and natural gas production declines
in the Gulf of Mexico developed properties. Hedging transactions
had the effect of decreasing oil and natural gas revenues by
$1.3 million in 2002, or $0.01 per Mcfe, and
increasing oil and natural gas revenues by $2.1 million in
2001, or $0.02 per Mcfe in 2001.


Lease Operating
Expense.Lease operating expense for
2003 increased by $11.7 million, or 13%, from
$89.3 million in 2002 to $101.0 million in 2003. Lease
operating expenses from acquisitions accounted for
$17.7 million of the increase. The increase was offset by
decreases in workovers of $3.8 million, primarily in the
Gulf of Mexico and the Southern divisions. On a per Mcfe basis,
lease operating expense decreased from $0.69 in 2002 to $0.61 in
2003. The decrease on a per Mcfe basis was partially due to a
$0.03 per Mcfe decrease in workovers. In addition, the
Western division properties, which were acquired in December
2002, have lower lease operating costs per Mcfe than the
properties in our Northern and Southern divisions.

Lease operating expense for 2002 increased by
$34.0 million, or 61%, from $55.3 million in 2001 to
$89.3 million in 2002. Lease operating expenses from
acquisitions accounted for $30.0 million of the increase.
The remaining increase was primarily a result of increased
production from offshore discoveries and workover expense in the
Gulf of Mexico. On a per Mcfe basis, lease operating expense
increased from $0.63 in 2001 to $0.69 in 2002. The increase on a
per Mcfe basis was primarily due to nonrecurring workovers
performed in 2002 at a rate of $0.06 per Mcfe.

Production Taxes.Production taxes for 2003 increased by $21.7 million, or
91%, from $24.0 million in 2002 to $45.7 million in
2003. Acquisitions accounted for $14.1 million of the
increase. The remainder of the increase is due to increases in
oil and natural gas prices before hedges. As a percent of oil
and natural gas revenues (excluding the effects of hedges),
production taxes remained flat at 6% in 2002 and 2003.

Production taxes for 2002 increased by
$10.5 million, or 79%, from $13.4 million in 2001 to
$24.0 million in 2002. Acquisitions accounted for
$11.4 million of the increase. The increase from
acquisitions was partially offset by a decrease in revenue from
onshore properties as a result of a decrease in realized average
oil and natural gas prices. As a percent of oil and natural gas
revenues (excluding the effects of hedges), production taxes
increased from 4% in 2001 to 6% in 2002. The increase in
production taxes as a percent of revenue was primarily the
result of acquisitions, which increased the number of onshore
properties that are subject to production taxes.

Transportation
Costs.Transportation costs for 2003
increased by $5.4 million, or 68%, from $8.0 million
in 2002 to $13.4 million in 2003. Acquisitions accounted
for $4.5 million of the increase. On a per Mcfe basis,
transportation costs increased from $0.06 in 2002 to $0.08 in
2003 as a result of the acquisition of the Western Division
properties in December 2002, which have a higher transportation
rate per unit than the properties in the other divisions.

Transportation costs for 2002 increased by
$2.8 million, or 54%, from $5.2 million in 2001 to
$8.0 million in 2002. Acquisitions accounted for
$2.9 million of the increase. On a per Mcfe basis,
transportation costs remained flat at $0.06 in 2001 and 2002.

Depletion, Depreciation and Amortization, or
DD&A, Expense.DD&A expense
increased $57.5 million in 2003, from $203.1 million
in 2002 to $260.6 million in 2003. DD&A expense related
to acquisitions caused $49.9 million of this increase.
Discoveries in the Gulf of Mexico caused DD&A expense to
increase $2.8 million. The remaining increase was primarily
due to the additions from drilling of oil and natural gas
properties during 2003. On a per Mcfe basis, DD&A expense
remained relatively flat at $1.56 in 2002 and $1.57 in 2003.

DD&A expense increased $79.0 million in
2002, from $124.1 million in 2001 to $203.1 million in
2002. DD&A expense related to acquisitions caused
$60.9 million of this increase. Discoveries in the Gulf of
Mexico caused DD&A expense to increase $17.6 million.
The remaining increase was primarily due to the additions from
drilling of oil and natural gas properties during 2002. On a per
Mcfe basis, DD&A

46



---



##### Table of Contents



expense increased from $1.41 to $1.56 primarily
due to discoveries in the Gulf of Mexico and acquisitions, which
had a higher DD&A expense per Mcfe than our other properties.


General and Administrative, or G&A,
Expense.G&A expense increased
$6.5 million in 2003, or 27%, from $23.6 million in
2002 to $30.1 million in 2003. The majority of the increase
was due to additional staff required as a result of the
acquisition of the Uinta Basin properties in December 2002,
which caused an increase in salary and related benefit costs. On
a per Mcfe basis, G&A expense remained flat at $0.18 in 2002
and 2003.

G&A expense increased $5.9 million in
2002, or 34%, from $17.7 million in 2001 to
$23.6 million in 2002. The merger with Belco accounted for
$3.8 million of the increase. A majority of the remaining
increase was due to payroll costs resulting from an increase in
staff in 2002 reflecting expanded size and scope of our
operations. On a per Mcfe basis, G&A expense in 2002 was
$0.18 compared to $0.20 in 2001.

Hedge Settlements, Non-hedge Derivative
Settlements and Non-hedge Change in Fair Value of
Derivatives.We recorded a realized
loss related to hedging settlements of $102.4 million in
2003, compared to a realized loss of $1.3 million in 2002.
The hedging losses had the effect of reducing oil and natural
gas sales by $0.62 per Mcfe in 2003 and $0.01 per Mcfe
in 2002. We recorded an unrealized net gain of $9.5 million
in the non-hedge change in fair value of derivatives in 2003
compared to an unrealized net loss of $26.7 million for
2002. These gains and losses were the result of changes in fair
value of derivative instruments that either did not qualify for
hedge accounting or were not originally designated as hedges. Of
the 2002 amount, $18.2 million of the loss was related to
derivative contracts entered into in anticipation of the
expected production from the acquisition of the Uinta Basin
properties. Upon closing of the acquisition, the derivative
contracts qualified for hedge accounting treatment. Net gains of
$2.7 million and $0.8 million were recorded in 2003
and 2002, respectively, for non-hedge settlements of
derivatives. The gains and losses relate to settlements of
derivatives that under SFAS No. 133 do not qualify for
hedge accounting.

We recorded a realized loss of $1.3 million
relating to hedging settlements in 2002, compared to a realized
gain of $2.1 million in 2001. The hedging losses had the
effect of reducing oil and natural gas sales by $0.01 per
Mcfe in 2002 and increasing oil and natural gas sales by
$0.02 per Mcfe in 2001. We recorded an unrealized net loss
of $26.7 million in the non-hedge change in fair value of
derivatives in 2002 compared to an unrealized net gain of
$14.3 million for 2001. These gains and losses were the
result of changes in fair value of derivative instruments that
either did not qualify for hedge accounting or were not
originally designated as hedges. Of the 2002 amount,
$18.2 million of the loss was related to derivative
contracts entered into in anticipation of the expected
production from the acquisition of the Uinta Basin properties.
Upon closing of the acquisition, the derivative contracts
qualified for hedge accounting treatment. Net gains of
$0.8 million and $15.3 million were recorded in 2002
and 2001, respectively, for non-hedge settlements of
derivatives. The gains relate to settlements of derivatives that
under SFAS No. 133 do not qualify for hedge accounting.

Gain (Loss) on Sale of Operating
Assets.For 2003, 2002, and 2001 we
recorded a net gain of $6.6 million, and net losses of
$1.7 million and $0.1 million, respectively, in
connection with the sale of non-strategic properties. The gains
and losses were calculated as the difference between the sales
proceeds and the carrying value of the properties as of the date
of the sale.

Exploration Costs.Exploration costs for 2003 increased by $26.3 million, or
81%, from $32.4 million in 2002 to $58.7 million in
2003. Exploration costs for 2002 increased by $1.1 million,
or 3%, from

47



---



##### Table of Contents



$31.3 million in 2001 to $32.4 million
in 2002. The following table sets forth the components of our
2003, 2002 and 2001 exploration costs:


|                                   |  |                                 |        |  |      |   |        |      |  |   |        | 
|---------------------------------- |  | ------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                                   |  |                                
|                                   |  | For the Year Ended December 31, |       
|                                   |  |                                 |       
|                                   |  | 2003                            |        |  | 2002 |   |        | 2001 | 
|                                   |  |                                 |        |  |      |   |        |      | 
|                                   |  |                                
|                                   |  | (In thousands)                  |       
|Geological and geophysical costs   |  | $                               | 16,996 |  |      | $ | 10,078 |      |  | $ | 9,877  | 
|Unsuccessful property acquisitions |  |                                 | 41     |  |      |   | 364    |      |  |   | 482    | 
|Delay rentals                      |  |                                 | 2,405  |  |      |   | 2,401  |      |  |   | 1,681  | 
|Exploratory dry holes              |  |                                 | 39,289 |  |      |   | 19,547 |      |  |   | 19,273 | 
|                                   |  |                                 |        |  |      |   |        |      | 
|                                   |  | $                               | 58,731 |  |      | $ | 32,390 |      |  | $ | 31,313 | 
|                                   |  |                                 |        |  |      |   |        |      | 

Impairment of Proved
Properties.During 2003, 2002 and
2001, we recognized proved property impairments of
$18.2 million, $19.7 million and $9.4 million,
respectively. In 2003, $9.8 million resulted from declines
in reserve value due to reserve volume reductions in
under-performing fields in the Southern division,
$0.8 million from unsuccessful drilling in the Southern
division, $7.5 million from declines in reserves values due
to reserve volume reductions in under-performing fields in the
Gulf of Mexico and $0.1 million from declines in reserve
values due to reserve volume reductions in under-performing
fields in the Northern division. In 2002, $9.7 million of
these impairments were attributable to unsuccessful development
drilling in the Rocky Mountains and the remaining
$10.0 million was primarily the result of a decline in oil
and natural gas reserve values due to reserve volume reductions
in under-performing fields located onshore and offshore.
Impairments recorded in 2001 were as follows: $4.9 million
resulting from unsuccessful development drilling in the Rocky
Mountains, $1.4 million resulting from depressed oil and
natural gas prices in the Rocky Mountains and Mid-Continent,
$1.0 million resulting from unsuccessful development
drilling in the Gulf of Mexico and $2.1 million resulting
from depressed natural gas prices in the Gulf of Mexico.

Impairment of Unproved
Properties.In 2003, we recognized
unproved property impairments of $12.7 million in the Gulf
of Mexico, $7.7 million in the Northern division,
$7.0 million in the Southern division and $0.2 million
in the Western division due to expired leases and from an
assessment of the exploration opportunities existing on such
properties. In 2002, we recognized unproved property impairments
of $10.0 million due to expired leases and from an
assessment of the exploration opportunities existing on such
properties. The impairments were for $4.0 million of leases
held offshore, $3.4 million for leases held in Wyoming,
$1.6 million for leases held in Texas and the remaining
impairments were for various leases held in North Dakota and
Louisiana. In 2001, we recognized unproved property impairments
of $7.0 million on offshore leases, as a result of an
assessment of the exploration opportunities existing on such
properties.

Stock Compensation
Expense.In 2003, 2002 and 2001 we
recorded $7.6 million, $4.3 million and
$0.4 million, respectively, of stock compensation expense
related to certain stock options as a result of applying the
provisions of FASB Interpretation No. 44 and recorded
$0.1 million, $0.3 million and $0.3 million,
respectively, in expense related to the issuance of restricted
stock.

Other Income
(Expense).Other expense for 2003 was
($55.7 million) compared to ($33.1 million) for 2002.
Interest expense increased $21.4 million in 2003, as a
result of the increase in the debt balance relating to
acquisitions. In addition, we recorded a loss on debt retirement
of $0.9 million related to the redemption of the
8 7/8% Senior Subordinated Notes due 2007 on
May 5, 2003.

Other expense for 2002 was ($33.1 million)
compared to ($6.4 million) for 2001. Interest expense
increased $21.6 million in 2002, as a result of the
increase in the debt balance relating to acquisitions. Other
income decreased $5.1 million as compared to 2001 primarily
due to a decrease of $4.7 million in changes in fair values
of interest rate swap contracts that were not designated as
hedges for accounting purposes.

48



---



##### Table of Contents



Income Taxes.We
recorded income tax expense of $39.6 million for 2003
($25.4 million deferred and $14.2 million current) and
an income tax benefit of $19.6 million ($17.5 million
deferred and $2.1 million current) for 2002.

We recorded an income tax benefit of
$19.6 million for 2002 ($17.5 million deferred and
$2.1 million current) and $28.6 million income tax
expense ($26.6 million deferred and $2.0 million
current) for 2001.

Cumulative Effect of Change in Accounting
Principle.We adopted SFAS No.
143 on January 1, 2003 and recorded a cumulative effect of
a change in accounting principle on prior years of
$3.4 million, net of tax effects, related to the
depreciation and accretion expense that would have been reported
had the fair value of the asset retirement obligations, and
corresponding increase in the carrying amount of the related
long-lived assets, been recorded when incurred.

Recent Accounting Developments

In June 2001, the FASB issued
SFAS No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 addresses accounting and
reporting for business combinations and is effective for all
business combinations initiated after June 30, 2001.
SFAS No. 142 addresses the accounting and reporting
for acquired goodwill and other intangible assets.

A reporting issue has arisen regarding the
application of certain provisions of SFAS No. 141 and
SFAS No. 142 to companies in the extractive
industries, including oil and natural gas companies. The issue
is whether SFAS No. 142 requires registrants to
classify the costs of mineral rights associated with extracting
oil and natural gas as intangible assets in the balance sheet,
apart from other capitalized oil and natural gas property costs,
and to provide specific footnote disclosures. Historically, we
have included the costs of mineral/ drilling rights associated
with extracting oil and natural gas as tangible assets and as a
component of oil and natural gas properties. If it is ultimately
determined that SFAS No. 142 requires oil and natural
as companies to classify costs of mineral rights associated with
extracting oil and natural gas as a separate intangible assets
line item on the balance sheet, we would be required to
reclassify the amounts as follows:

|                   |                                      |                                   |   |               |               |  |   |               |               | 
|------------------ | ------------------------------------ | --------------------------------- | - | ------------- | ------------- |  | - | ------------- | ------------- | 
|                   |                                      |                                  
|                   |                                      | December 31,                      |  
|                   |                                      |                                   |  
|                   |                                      | 2003                              |   |               | 2002          | 
|                   |                                      |                                   |   |               |               | 
|Intangible Assets: |                                      |                                   |   |               |               |  |   |              
|                   | Proved leasehold acquisition costs   |                                   | $ | 1,434,134,563 |               |  | $ | 1,089,490,036 |              
|                   | Unproved leasehold acquisition costs |                                   |   | 119,330,993   |               |  |   | 104,430,055   |              
|                   |                                      |                                   |   |               |               | 
|                   |                                      | Total leasehold acquisition costs |   |               | 1,553,465,556 |  |   |               | 1,193,920,091 | 
|                   | Less accumulated depletion           |                                   |   | (227,819,127  | )             |  |   | (168,081,488  | )            
|                   |                                      |                                   |   |               |               | 
|                   |                                      | Net leasehold acquisition costs   |   | $             | 1,325,646,429 |  |   | $             | 1,025,838,603 | 
|                   |                                      |                                   |   |               |               | 

Our cash flows and results of operations would
not be affected since such intangible assets would continue to
be depleted and assessed for impairment in accordance with
SFAS No. 144. Further, we do not believe the
classification of the costs of mineral rights associated with
extracting oil and natural gas as intangible assets would have
any impact on our compliance with covenants under our debt
agreements.

Liquidity and Capital Resources

Historically, our primary sources of funds have
been cash flow from our producing oil and gas properties, the
issuance of debt and equity securities, borrowings under our
bank credit facilities, and to a minor extent proceeds from
sales of non-strategic properties. Our ability to access any of
these sources of funds can be significantly impacted by
unexpected decreases in oil and natural gas prices. To mitigate
the effects of dramatic commodity price fluctuations we
typically hedge between 20% and 40% of our expected production
over the next two years. In addition we may hedge a larger
proportion of our expected

49



---



##### Table of Contents



production from acquired properties in order to
reduce the risk of receiving significantly lower revenues than
anticipated at the time of acquisition.


Our principal uses of funds have been for the
exploitation, acquisition and exploration of oil and natural gas
properties, operation of our business, interest payments, debt
repayments and preferred stockholder dividends. Our expenditures
for acquisitions are discretionary. In the event of an
unexpected decrease in oil and natural gas prices, other planned
capital expenditures can also be reduced, if necessary. If
prices increase unexpectedly, we have more flexibility to pursue
growth opportunities and to reduce our debt.

Net cash provided by operating activities was
$436.7 million for 2003 compared to $223.2 million for
2002. Net cash provided by operating activities in 2003
increased compared to 2002 due to a 90% increase in oil and
natural gas sales as a result of the Southeast Texas and Uinta
Basin acquisitions in 2002 and increases in oil and natural gas
prices in 2003. Net cash provided by operating activities
increased $27.9 million from $195.3 million for 2001
to $223.2 million for 2002 due to a 35% increase in
production as a result of the Belco merger in 2001.

Net cash used in investing activities was
$596.4 million for 2003 compared to $814.2 million for
2002. Investing activities for 2003 included $332.8 million
used for acquisitions and $277.0 million for exploitation
and exploration activities, offset by proceeds from sales of
properties of $13.4 million. Investing activities for 2002
included $147.6 million for exploitation and exploration
activities and $679.9 million for acquisitions, offset by
proceeds from sales of properties of $13.3 million. Net
cash used in investing activities was $814.2 million for
2002 compared to $188.7 million for 2001. Investing
activities for 2001 included $187.9 million for
exploitation and exploration activities and $6.3 million
for acquisitions, offset by proceeds from sales of properties of
$5.5 million.

Net cash provided by financing activities was
$190.0 million for 2003 compared to $606.4 million in
2002. Financing activities for 2003 consisted of
$413.9 million from the issuance of senior subordinated
notes and borrowings under our revolving credit facility, offset
by $226.3 million in repayment of long-term debt. See
Financing Activities below for a more complete description of
these activities. Financing activities for 2002 consisted of
$639.0 million from the issuance of senior subordinated
notes and borrowings under our revolving credit facility and
$267.8 million from the issuance of common stock, offset by
$285.0 million in repayment of long-term debt and new
financing fees of $14.3 million. Net cash provided by
financing activities was $0.8 million for 2001. Financing
activities for 2001 reflected $577.6 million in repayment
of long-term debt and new financing fees of $10.2 million,
offset by $590.0 million in borrowings.



| |                     
| | --------------------
| | Capital Expenditures

We anticipate that our capital expenditures,
excluding acquisitions, for 2004 will be approximately
$370 million. Our capital expenditures for 2003 were
$281.0 million, excluding acquisitions and geological and
geophysical costs of $17.0 million. We anticipate that our
primary cash requirements for 2004 will include the funding of
acquisitions, development projects and general working capital
needs. We will continue to seek opportunities for acquisitions
of proved reserves with substantial exploitation and exploration
potential. The size and timing of capital requirements for
acquisitions is inherently unpredictable and we therefore do not
budget for them. We expect to fund our capital expenditures in
2004 through cash flow from operations and available capacity
under our revolving credit facility.

We believe that borrowings under our revolving
credit facility, projected operating cash flows and cash on hand
will be sufficient to meet the requirements of our business.
However, future cash flows are subject to a number of variables
including the level of production and oil and natural gas
prices. We cannot assure you that operations and other capital
resources will provide cash in sufficient amounts to maintain
planned levels of capital expenditures or that increased capital
expenditures will not be made. Actual levels of capital
expenditures may vary significantly due to a variety of factors,
including but not limited to:



| |   |                                    
| | - | -----------------------------------
| |  | drilling results;                  
|
| |  | product prices and hedging results;

50



---



##### Table of Contents





| |   |                                                         
| | - | --------------------------------------------------------
| |  | industry conditions and outlook;                        
|
| |  | equipment availability and service sector
    costs; and
|
| |  | property acquisitions.                                  

Financing Activity

The following summarizes our contractual
obligations at December 31, 2003 and the effect we expect
such obligations to have on our liquidity and cash flow in
future periods.

|                                   |  |                        |           |           |        |   |       |           |       |   |           |  |  |         |        |  |  |   |         | 
|---------------------------------- |  | ---------------------- | --------- | --------- | ------ | - | ----- | --------- | ----- | - | --------- |  |  | ------- | ------ |  |  | - | ------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period |          
|                                   |  |                        |          
|                                   |  |                        |           | Less Than |        |   |       |           | After |  
|Contractual Obligations            |  | Total                  |           |           | 1 Year |   |       | 1-3 Years |       |   | 3-5 Years |  |  | 5 Years |       
|                                   |  |                        |           |           |        |   |       |           |       |   |           |  |  |         |       
|                                   |  |                       
|                                   |  | (In thousands)         |          
|Long term debt(1)                  |  | $                      | 980,885   |           |        | $ |      |           |       | $ | 262,000   |  |  | $       |       |  |  | $ | 718,885 | 
|Firm transportation agreements(2)  |  |                        | 114,118   |           |        |   | 5,700 |           |       |   | 33,107    |  |  |         | 25,578 |  |  |   | 49,733  | 
|Non-cancelable operating leases    |  |                        | 8,438     |           |        |   | 1,791 |           |       |   | 3,771     |  |  |         | 2,872  |  |  |   | 4       | 
|                                   |  |                        |           |           |        |   |       |           |       |   |           |  |  |         |       
|Total contractual cash obligations |  | $                      | 1,103,441 |           |        | $ | 7,491 |           |       | $ | 298,878   |  |  | $       | 28,450 |  |  | $ | 768,622 | 
|                                   |  |                        |           |           |        |   |       |           |       |   |           |  |  |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As of December 31, 2003, our long term debt
    was $980.9 million, consisting of $262.0 million in
    borrowings under the revolving credit facility (with an average
    interest rate of 2.9%) and $718.9 million representing the
    fair value of our outstanding 8 1/4% Senior
    Subordinated Notes Due 2011. The face amount of this debt is
    $700 million. On December 18, 2003, we borrowed
    $262.0 million under our revolving credit facility to fund
    the South Texas Acquisition.
|   
|(2) | Firm transportation agreements represent
    ship or pay arrangements whereby we have committed
    to ship certain volumes of gas for a fixed transportation fee.
    We have entered into these arrangements to aid us in moving our
    gas production to market.                                                                                                                                                                                                                                     



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

On December 17, 2002, we entered into a
revolving credit facility, as may be amended from time to time,
with JPMorgan Chase Bank and Credit Suisse First Boston
Corporation to replace our previous revolving credit facility. A
maximum committed amount under our revolving credit facility is
$600 million. Our revolving credit facility initially
provided for a borrowing base of approximately
$470 million. We made borrowings under our revolving credit
facility to refinance our outstanding indebtedness under our
previous revolving credit facility and to pay general corporate
expenses.

On October 15, 2003, our revolving credit
facility was amended to increase the borrowing base from
$470 million to $500 million. The amendment also
eliminated limits on outstanding letters of credit, provided
that the amount of letters of credit outstanding on any date
does not exceed the lesser of the aggregate commitments under
our revolving credit facility and the borrowing base then in
effect, or if the borrowing base is not in effect on such date,
the aggregate commitments under our revolving credit facility.
The amendment also increased the basket allowed for purposes of
providing cash collateral from $10 million to
$20 million and deleted the requirement to mortgage our
properties if the Company was not rated BB+ and Ba1 at
December 31, 2003.

The facility matures on December 16, 2006
and contains covenants and default provisions customary for
similar credit facilities. Advances under our revolving credit
facility are in the form of either an ABR loan or a Eurodollar
loan. The interest on an ABR loan is a fluctuating rate based
upon the highest of:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | the rate of interest announced by JP Morgan Chase
    Bank, formerly known as The Chase Manhattan Bank, as its prime
    rate;
|
| |  | the secondary market rate for three month
    certificates of deposits plus 1%; or                                            
|
| |  | the Federal funds effective rate plus 0.5%.                                                                                   

51



---



##### Table of Contents



in each case plus a margin of 0% to 0.625% based
upon the ratio of total debt to EBITDAX , as defined below, and
the ratings of our senior unsecured debt as issued by Standard
and Poors Rating Group and Moodys Investor Services,
Inc. EBITDAX is a non-GAAP financial measure, which for purposes
of the Revolving Credit Facility, is defined to mean net income
of the Company and its restricted subsidiaries determined on a
consolidated basis in accordance with GAAP, plus
(a) to the extent deducted from revenues in determining
consolidated net income, (i) the aggregate amount of
consolidated interest expense, (ii) the aggregate amount of
letter of credit fees paid, (iii) the aggregate amount of
income tax expense and (iv) all amounts attributable to
depreciation, depletion, exploration, amortization and other
non-cash charges and expenses, minus (b) to the
extent included in revenues in determining consolidated net
income, all non-cash extraordinary income, in each case
determined on a consolidated basis in accordance with GAAP and
without duplication of amounts.

The interest on a Eurodollar loan is a
fluctuating rate based upon the rate at which Eurodollar
deposits in the London interbank market are quoted plus a margin
of 1.000% to 1.875% based upon the ratio of total debt to
EBITDAX and the ratings of our senior unsecured debt as issued
by Standard and Poors Rating Group and Moodys
Investor Service, Inc.

Our revolving credit facility contains various
covenants and default provisions applicable to us and our
restricted subsidiaries, including two financial covenants that
require us to maintain a current ratio of not less than 1.0 to
1.0 and a ratio of EBITDAX to consolidated interest expense for
the preceding four consecutive fiscal quarters of not less than
3.0 to 1.0. Commitment fees under our revolving credit facility
range from 0.25% to 0.5% on the average daily amount of the
available unused borrowing capacity based on the rating of our
senior unsecured debt as issued by Standard and Poors
Rating Group and Moodys Investor Service, Inc.

Under the terms of our revolving credit facility
we must meet certain tests before we are able to declare or pay
any dividend on (other than dividends payable solely in equity
interest of the Company other than disqualified stock), or make
any payment of, or set apart assets for a sinking or other
analogous fund for the purchase, redemption, defeasance,
retirement or other acquisition of, any share of any class of
equity interest of us or any of our restricted subsidiary,
whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Company or
any restricted subsidiary. Other covenants include restrictions
on incurring additional indebtedness, liens, and guarantee
obligations; limitations on fundamental changes and sales of
assets; restrictions on making certain investments, loans or
advances; limitations on optional redemption of subordinated
indebtedness; restrictions on transacting with affiliates,
changing lines of business and entering into certain hedging
agreements; and limitations on sale and leasebacks and use of
proceeds.

As of December 31, 2003, we had borrowings
of $262.0 million (with an average interest rate of 2.9%)
and letters of credit issued of approximately $73.6 million
outstanding under our revolving credit facility, and available
unused borrowing capacity of approximately $164.4 million.
The letters of credit were issued primarily in connection with
the margin requirements of our oil and gas derivative contracts.
As of February 19, 2004, we had borrowings of
$262.0 million, letters of credit issued of approximately
$50.9 million, and available unused borrowing capacity of
approximately $187.1 million.



| |                                              
| | ---------------------------------------------
| | 8 1/4% Senior Subordinated
    Notes Due 2011

On April 3, 2003, we issued
$125 million in additional principal amount of our
8 1/4% Senior Subordinated Notes Due 2011
pursuant to Rule 144A and Regulation S under the Securities
Act of 1933 (the Securities Act) at a price of 106%
of the principal amount, with accrued interest from
November 1, 2002. The 2003 notes were issued as additional
debt securities under the indenture pursuant to which, on
November 5, 2001, we issued $275 million of
8 1/4% Senior Subordinated Notes Due 2011 and on
December 17, 2002, we issued $300 million of
8 1/4% Senior Subordinated Notes Due 2011. All of
the 2001 and 2002 notes were subsequently exchanged on
March 14, 2002 and March 12, 2003, respectively, for
equal principal amounts of notes having substantially identical
terms and registered under the Securities Act. The proceeds from
the 2003 notes were used to fund the redemption of our
8 7/8% Senior

52



---



##### Table of Contents



Subordinated Notes due 2007 (described below) on
May 5, 2003 and to reduce the indebtedness under our
revolving credit facility. We have agreed to file an exchange
offer registration statement, or under certain circumstances, a
shelf registration statement, pursuant to a registration rights
agreement relating to the 2003 notes. On June 4, 2003, we
filed the exchange offer registration statement, as amended on
September 12, 2003 and February 5, 2004, relating to
the 2003 notes, which was declared effective by the SEC on
February 9, 2004. We are currently offering to exchange up
to $125 million aggregate principal amount of our
8 1/4% Senior Subordinated Notes Due 2011 that
have been registered under the Securities Act for an equal
principal amount of the 2003 notes. We expect to consummate the
exchange offer in March of 2004.


The notes are senior subordinated unsecured
obligations of Westport and are fully and unconditionally
guaranteed on a senior subordinated basis by some of our
existing and future restricted subsidiaries. The notes mature on
November 1, 2011. We pay interest on the notes semiannually
on May 1 and November 1. On November 1, 2003, we
paid additional interest of 0.5% per annum on the 2003
notes, which accrued from October 1, 2003, and will
continue to pay such additional interest, accruing from
November 1, 2003 until we consummate the exchange offer
contemplated in the exchange offer registration statement. We
are entitled to redeem the notes in whole or in part on or after
November 1, 2006 for the redemption price set forth in the
notes. Prior to November 1, 2006, we are entitled to redeem
the notes, in whole but not in part, at a redemption price equal
to the principal amount of the notes plus a premium. There is no
sinking fund for the notes.



| |                                              
| | ---------------------------------------------
| | 8 7/8% Senior Subordinated Notes
    due 2007

In connection with the merger with Belco, we
assumed $147 million face amount, $149 million fair
value, of Belcos 8 7/8% Senior Subordinated
Notes due 2007. On November 1, 2001, approximately
$24.3 million face amount of these notes was tendered to us
pursuant to the change of control provisions of the related
indenture. The tender price was equal to 101% of the principal
amount of each note plus accrued and unpaid interest as of
October 29, 2001. Including the premium and accrued
interest, the total amount paid was $24.8 million. We used
borrowings under our revolving credit facility to fund the
repayment. No gain or loss was recorded in connection with the
redemption as the fair value of the 8 7/8% Senior
Subordinated Notes recorded in connection with the merger with
Belco equaled the redemption cost. On May 5, 2003, we
redeemed the remaining outstanding 8 7/8% Senior
Subordinated Notes due 2007 in the aggregate principal amount of
approximately $123 million. Including the premium and
accrued interest, the total amount paid to redeem these notes
was $129.7 million. The redemption was funded with the
proceeds from the offering of $125 million aggregate
principal amount of the 8 1/4% Senior Subordinated
Notes Due 2011, issued on April 3, 2003. The remaining
proceeds were used to reduce indebtedness under the Revolving
Credit Facility. We recorded a $0.9 million loss in
connection with the redemption of the 8 7/8% Senior
Subordinated Notes due 2007.



| |                        
| | -----------------------
| | Private Equity Offering

On November 19, 2002, we completed the
private equity offering of 3.125 million shares of our
common stock to Spindrift Partners, L.P., Spindrift Investors
(Bermuda) L.P., Global Natural Resources III and Global
Natural Resources III L.P. at a net price to us of
$16.00 per share for aggregate proceeds of
$50 million. The purchasers may be prohibited from selling
this common stock at our option for up to 187 days in the
event we pursue a public equity offering during the next two
years. The terms of the sale were negotiated on
November 11, 2002 and the net price represents a 9%
discount from the closing price of our common stock on the
New York Stock Exchange as of that date.

In connection with the private equity offering,
we agreed to file a shelf registration statement registering the
resale by the selling stockholders from time to time of the
common stock we issued in the private equity offering. We also
agreed to use our reasonable best efforts to cause the
registration statement to become effective within 90 days
of the closing of the private equity offering. In addition, we
agreed, subject to certain rights of suspension, to keep such
registration statement effective until the earlier of
(1) the date on which all of the shares have been
(a) sold under the registration statement or

53



---



##### Table of Contents



(b) distributed pursuant to Rule 144(k)
under the Securities Act or (2) two years after the date of
the stock purchase agreement. On December 31, 2002, we
filed the shelf registration statement registering the resale by
the selling stockholders from time to time of our common stock
issued in the private equity offering, which registration
statement was declared effective by the SEC on January 7,
2003.







|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

We periodically enter into commodity price risk
management, or CPRM, transactions to manage our exposure to oil
and gas price volatility. CPRM transactions may take the form of
futures contracts, swaps or options. All CPRM data is presented
in accordance with requirements of SFAS No. 133, which
the Company adopted on January 1, 2001. Accordingly,
unrealized gains and losses related to the change in fair market
value of derivative contracts that qualify and are designated as
cash flow hedges are recorded as other comprehensive income or
loss and such amounts are reclassified to oil and gas sales
revenues as the associated production occurs. Derivative
contracts that do not qualify for hedge accounting treatment are
recorded as derivative assets and liabilities at market value in
the consolidated balance sheet, and the associated unrealized
gains and losses are recorded as current expense or income in
the consolidated statement of operations. While such derivative
contracts do not qualify for hedge accounting, management
believes these contracts can be utilized as an effective
component of CPRM activities.

For 2003 we recorded increases in operating
revenues from non-hedge CPRM settlements in the amount of
$2.7 million, which includes ($1.0) million of cash
settlements and non-hedge change in fair value of derivatives of
$9.5 million, including $2.9 million of
ineffectiveness loss.

For 2003, we recorded hedging settlement losses
in the amount of $102.4 million, which includes cash losses
of $105.4 million.

For 2002, we recorded increases in operating
revenues from non-hedge CPRM settlements in the amount of
$0.8 million, which includes ($2.9) million of cash
settlements and non-hedge change in fair value of derivatives of
($26.7) million, including ($0.1) million in
ineffectiveness. The majority or $18.2 million of the
non-hedge loss in fair value of derivatives was related to
derivative contracts entered into in anticipation of the
expected production from the Uinta Basin properties we acquired
in December of 2002. Upon closing of such acquisition, the
derivative contracts qualified for hedge accounting treatment.

For 2002, we recorded hedging settlement losses
in the amount of $1.3 million, which includes cash losses
of $8.2 million.

For 2001, we recorded an increase in operating
revenues from non-hedge CPRM settlements in the amount of
$15.3 million, which includes $3.6 million of cash
settlements and non-hedge change in fair value of derivative of
$14.3 million.

For 2001, we recorded hedging settlement gains in
the amount of $2.1 million, which include cash losses of
$4.5 million.

As of February 13, 2004, the Company had the
following CPRM transactions in place covering hedge and
non-hedge positions:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4.8 Mmbbls of oil and 71.3 Bcf of
    natural gas subject to CPRM contracts for 2004. Of these
    contracts, all of the oil and 60.3 Bcf of the natural gas
    contracts are subject to weighted average floor prices of
    $25.41 per barrel and $4.20 per Mmbtu and weighted
    average NYMEX ceiling prices of $26.44 per barrel and
    $4.34 per Mmbtu, respectively, excluding the effect, if
    any, of the three-way floor price. The remaining 2004 natural
    gas CPRM contract settlements are calculated based on the
    Northwest Pipeline Rocky Mountain Index, or NWPRM, at a weighted
    average swap price of $3.33 per Mmbtu. In addition,
    included in the 71.3 Bcf of natural gas contracts are basis
    swaps covering 3.7 Bcf of natural gas for 2004 that lock in
    the pricing differential between NYMEX and NWPRM at a weighted
    average price differential of $0.66 per Mmbtu and
    9.2 Bcf of

54



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | natural gas for 2004 that lock in the pricing
    differential between NYMEX and Colorado Interstate Gas Index, or
    CIG, at a weighted average price differential of $0.76 per
    Mmbtu.                                                                                                                                                                                                                                                                                                                                               
|
| |  | 2.6 Mmbbls of oil and 42.0 Bcf of
    natural gas subject to CPRM contracts for 2005 with a weighted
    average NYMEX floor price of $25.92 per barrel and
    $4.25 per Mmbtu and a weighted average NYMEX ceiling price
    of $28.23 per barrel and $5.02 per Mmbtu. In addition,
    included in the 42.0 Bcf of natural gas contracts are basis
    swaps covering 3.7 Bcf of natural gas for 2005 that lock in
    the pricing differential between NYMEX and NWPRM at a weighted
    average price differential of $0.78 per Mmbtu.
|
| |  | 0.7 Mmbbls of oil and 7.3 Bcf of
    natural gas subject to CPRM contracts for 2006 with a weighted
    average NYMEX floor price of $25.00 per barrel and
    $4.00 per Mmbtu and a weighted average NYMEX ceiling price
    of $28.65 per barrel and $6.00 per Mmbtu.                                                                                                                                                                                                                                                                    

The table below provides details about the
volumes and prices of all open CPRM hedge commitments as of
February 13, 2004:

|                                                                     |                                         |                                      |        |       |      |  |        |       |      |  |       |       |   | 
|-------------------------------------------------------------------- | --------------------------------------- | ------------------------------------ | ------ | ----- | ---- |  | ------ | ----- | ---- |  | ----- | ----- | - | 
|                                                                     |                                         | 2004                                 |        |       | 2005 |  |        | 2006  |     
|                                                                     |                                         |                                      |        |       |      |  |        |       |     
|Hedges                                                               |                                         |                                      |        |       |      |  |        |       |      |  |       |      
|Gas                                                                  |                                         |                                      |        |       |      |  |        |       |      |  |       |      
|NYMEX Price Swaps Sold  receive fixed
    price (thousand Mmbtu)(1) |                                         |                                      | 40,260 |       |      |  | 20,075 |       |      |  |      |      
|                                                                     | Average price per Mmbtu                 |                                      | $      | 4.42  |      |  | $      | 4.42  |      |  | $     |       |  
|NWPRM Price Swaps Sold  receive fixed
    price (thousand Mmbtu)(2) |                                         |                                      | 10,980 |       |      |  |       |       |      |  |      |      
|                                                                     | Average price per Mmbtu                 |                                      | $      | 3.33  |      |  | $      |      |      |  | $     |      |  
|NYMEX Collars Sold (thousand Mmbtu)(3)                               |                                         |                                      | 16,380 |       |      |  | 21,900 |       |      |  |      |      
|                                                                     | Average floor price per Mmbtu           |                                      | $      | 3.70  |      |  | $      | 4.09  |      |  | $     |      |  
|                                                                     | Average ceiling price per Mmbtu         |                                      | $      | 4.00  |      |  | $      | 5.57  |      |  | $     |      |  
|NYMEX Three-way Collars (thousand Mmbtu)(3)(4)                       |                                         |                                      | 3,660  |       |      |  |       |       |      |  | 7,300 |      
|                                                                     | Average floor price per Mmbtu           |                                      | $      | 4.00  |      |  |        |      |      |  | $     | 4.00  |  
|                                                                     | Average ceiling price per Mmbtu         |                                      | $      | 5.00  |      |  |        |      |      |  | $     | 6.00  |  
|                                                                     | Three-way average floor price per Mmbtu |                                      | $      | 3.15  |      |  | $      |      |      |  | $     | 3.04  |  
|Basic Swaps versus NYMEX(5)                                          |                                         |                                      |        |       |      |  |        |       |      |  |       |      
|                                                                     | NWPRM (thousand Mmbtu)                  |                                      |        | 3,660 |      |  |        | 3,650 |      |  |       |      |  
|                                                                     |                                         | Average differential price per Mmbtu |        | $     | 0.66 |  |        | $     | 0.78 |  |       | $     |  | 
|                                                                     | CIG (thousand Mmbtu)                    |                                      |        | 9,150 |      |  |        |      |      |  |       |      |  
|                                                                     |                                         | Average differential price per Mmbtu |        | $     | 0.76 |  |        | $     |     |  |       | $     |  | 
|Oil                                                                  |                                         |                                      |        |       |      |  |        |       |      |  |       |      
|NYMEX Price Swaps Sold  receive fixed
    price (Mbbls)(1)          |                                         |                                      | 3,294  |       |      |  | 730    |       |      |  |      |      
|                                                                     | Average price per bbl                   |                                      | $      | 25.87 |      |  | $      | 28.23 |      |  | $     |      |  
|NYMEX Three-way Collars (Mbbls)(3)(4)                                |                                         |                                      | 1,464  |       |      |  | 1,825  |       |      |  | 730   |      
|                                                                     | Average floor price per bbl             |                                      | $      | 24.38 |      |  | $      | 25.00 |      |  | $     | 25.00 |  
|                                                                     | Average ceiling price per bbl           |                                      | $      | 27.71 |      |  | $      | 28.23 |      |  | $     | 28.65 |  
|                                                                     | Three-way average floor price per bbl   |                                      | $      | 19.25 |      |  | $      | 20.93 |      |  | $     | 20.88 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For any particular NYMEX swap sold transaction,
    the Counterparty is required to make a payment to Westport in
    the event that the NYMEX Reference Price for any settlement
    period is less than the swap price for such hedge, and Westport
    is required to make a payment to the Counterparty in the event
    that the NYMEX Reference Price for any settlement period is
    greater than the swap price for such hedge.

55



---



##### Table of Contents





|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | For any particular NWPRM swap sold transaction,
    the Counterparty is required to make a payment to Westport in
    the event that the NWPRM Index Price for any settlement period
    is less than the swap price for such hedge, and Westport is
    required to make a payment to the Counterparty in the event that
    the NWPRM Index Price for any settlement period is greater than
    the swap price for such hedge.                                                                                                                                                                                            
|   
|(3) | For any particular NYMEX collar transaction, the
    counterparty is required to make a payment to Westport if the
    average NYMEX Reference Price for the reference period is below
    the floor price for such transaction, and Westport is required
    to make payment to the counterparty if the average NYMEX
    Reference Price is above the ceiling price of such transaction.                                                                                                                                                                                                                                  
|   
|(4) | Three way collars are settled as described in
    footnote (3) above, with the following exception: if the
    NYMEX Reference Price falls below the three-way floor price, the
    average floor price is reduced by the amount the NYMEX Reference
    Price is below the three-way floor price. For example, if the
    NYMEX Reference Price is $18.00 per bbl during the term of
    the 2004 three-way collars, then the average floor price would
    be $23.13 per bbl.                                                                                                                                             
|   
|(5) | For any particular basis swap versus NYMEX, the
    counterparty is required to make a payment to Westport in the
    event that the difference between the NYMEX Reference Price and
    the applicable published index (NWPRM or CIG) for any settlement
    period is greater than the swap differential price for such
    hedge, and Westport is required to make a payment to the
    counterparty in the event that the difference between the NYMEX
    Reference Price and the applicable published index (NWPRM or
    CIG) for any settlement period is less than the swap
    differential price for such hedge.

Interest Rate Swap Agreements

The following table summarizes the interest rate
swap contracts we currently have in place:

|                |  |                  |               |  |                 |                   |                  |      |  |  |               | 
|--------------- |  | ---------------- | ------------- |  | --------------- | ----------------- | ---------------- | ---- |  |  | ------------- | 
|                |  |                  |               |  |                 | Current estimated |                 
|Notional Amount |  | Transaction Date |               |  | Expiration Date |                   |                  | rate | 
|                |  |                  |               |  |                 |                   |                  |      | 
|$100 million    |  |                  | November 2001 |  |                 |                   | November 1, 2011 |      |  |  | LIBOR + 2.42% | 
|$ 50 million    |  |                  | January 2003  |  |                 |                   | November 1, 2011 |      |  |  | LIBOR + 3.37% | 
|$ 40 million    |  |                  | January 2003  |  |                 |                   | November 1, 2011 |      |  |  | LIBOR + 3.55% | 
|$ 50 million    |  |                  | January 2003  |  |                 |                   | November 1, 2011 |      |  |  | LIBOR + 3.42% | 

We entered into the interest rate swap contracts
above to hedge the fair value of a portion of the
8 1/4% Senior Subordinated Notes Due 2011.
Because these swaps meet the conditions to qualify for the
short cut method of assessing effectiveness under
the provisions of SFAS 133, the change in the fair value of
the debt is assumed to equal the change in the fair value of the
interest rate swap. As such, there is no ineffectiveness assumed
to exist between the interest rate swap and the notes.

The interest rate swaps are fixed for floating
swaps in that we receive the fixed rate of 8.25% and pay the
floating rate. The floating rate is redetermined every six
months based on the London Interbank Offered Rate, or LIBOR,
rate in effect at the contractual reset date. When LIBOR plus
the applicable margin shown above is less than 8.25%, we receive
a payment from the counterparty equal to the difference in rate
times the notional amount. When LIBOR plus the applicable margin
shown above is greater than 8.25%, we pay the counterparty the
difference in rate times the notional amount. As of
December 31, 2003, we recorded a derivative asset of
$4.7 million related to the interest rate swaps, which have
been designated as fair value hedges, with a corresponding debt
increase. Based on the fair value of the interest rate swaps at
December 31, 2003, we could expect to receive cash flows of
approximately $0.6 million per year through 2011.

In September 2002, the Company terminated an
interest rate swap on the 8 7/8% Senior Subordinated
Notes due 2007 resulting in the receipt of a $3.7 million
fair value gain, which was added to the outstanding balance of
the notes and was amortized until May 5, 2003, the date of
redemption of all of our outstanding 8?% Senior
Subordinated Notes due 2007.

56



---



##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY
    DATA

Our financial statements begin on page F-1 of
this Form 10-K.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
    ON ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with our
independent accountants on our accounting or financial reporting
that would require our independent accountants to qualify or
disclaim their report on our financial statements, or otherwise
require disclosure in this Form 10-K.

On April 9, 2002, we dismissed Arthur
Andersen LLP, also referred to as Andersen, as our independent
accountants effective as of that date. The decision to dismiss
Andersen was recommended by the Audit Committee of the Board of
Directors and was approved by the Board of Directors on
April 9, 2002.

Andersens report on the Companys
financial statements for the fiscal year ended December 31,
2001 did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty or audit
scope. In addition, there were no modifications as to accounting
principles except that the audit report of Andersen for the
fiscal year ended December 31, 2001 contained an
explanatory paragraph with respect to the change in the method
of accounting for derivative instruments effective
January 1, 2001 as required by the Financial Accounting
Standards Board. During fiscal year ended December 31, 2001
and the period from January 1, 2002 through the date of
Andersens termination, there were no disagreements between
us and Andersen on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the
satisfaction of Andersen, pursuant to Item 304(a)(1) of
Regulation S-K, would have caused it to make reference to
the subject matter of the disagreements in its report.

In April of 2002 as required under the
regulations of the Securities and Exchange Commission, or the
SEC, we provided Andersen with a copy of our disclosure in
connection with this matter and requested Andersen to furnish us
with a letter addressed to the SEC stating whether it agreed
with our statements and, if not, stating the respects in which
it did not agree. Andersens letter was filed as
Exhibit 16.1 to our Current Report on Form 8-K filed
with the SEC on April 15, 2002.

Effective April 9, 2002, we engaged KPMG
LLP, or KPMG, as our new independent accountants for the fiscal
year ending December 31, 2002. The decision to appoint KPMG
was recommended by the Audit Committee of the Board of Directors
and was approved by the Board of Directors on April 9, 2002.

During the two most recent fiscal years and
through the date of Andersens termination, we did not
consult with KPMG regarding any of the matters or events set
forth in Item 304(a)(2) of Regulation S-K.






|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Our Chairman of the Board and Chief Executive
Officer and our Chief Financial Officer (our principal executive
officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within
90 days prior to the date of the filing of this annual
report on Form 10-K, that our disclosure controls and
procedures are effective to ensure that information we are
required to disclose in the reports filed or submitted by us
under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and include
controls and procedures designed to ensure that information
required to be disclosed by us in such reports is accumulated
and communicated to our management, including our Chairman of
the Board and Chief Executive Officer and our Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure.

There were no significant changes in our internal
controls or in other factors that could significantly affect
these controls subsequent to the date of such evaluation.

57



---



##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

The information called for by Item 10 of
this report is incorporated by reference from the section
entitled Management of our definitive Proxy
Statement to be filed with the SEC pursuant to
Regulation 14A under the Exchange Act.






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information called for by Item 11 of
this report is incorporated by reference from the section
entitled Executive Compensation of our definitive
Proxy Statement to be filed with the SEC pursuant to
Regulation 14A under the Exchange Act.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
    OWNERS AND MANAGEMENT

The information called for by Item 12 of
this report is incorporated by reference from the section
entitled Security Ownership of Certain Beneficial Owners
and Management of our definitive Proxy Statement to be
filed with the SEC pursuant to Regulation 14A under the
Exchange Act.






|         |                                                   
|-------- | --------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
    TRANSACTIONS

The information called for by Item 13 of
this report is incorporated by reference from the section
entitled Transactions with Related Parties of our
definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A under the Exchange Act.






|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTING FEES AND
    SERVICES

The information called by Item 14 of this
report is incorporated by reference from the section entitled
Principal Accounting Fees and Services of our
definitive Proxy Statement to be filed with the SEC pursuant to
Regulation 14A under the Exchange Act.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
    REPORTS ON FORM 8-K

(a) The following documents are filed as
part of this report:



| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements: See Index to
    Consolidated Financial Statements and Schedules immediately
    following the signature page of this report.         
|
| | 2. Financial Statement Schedules: See Index
    to Consolidated Financial Statements and Schedules immediately
    following the signature page of this report.
|
| | 3. Exhibits: The following documents are
    filed as exhibits to this report:                                                                                 

|            |   |    |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                               
|----------- | - | -- |  | - | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |    |  |   | Exhibit Description
|            |   |    |  |   |                    
|            | 1 | .1 |  |  |                     | Purchase Agreement, dated as of March 27,
    2003, by and among Westport, subsidiary guarantors party thereto
    and Lehman Brothers Inc. (incorporated by reference to
    Exhibit 1 to Westports Registration Statement on
    Form S-4 (Registration No. 333-105834), filed with the
    SEC on June 4, 2003).                                                                                          
|            | 1 | .2 |  |  |                     | Stock Purchase Agreement, dated as of
    November 15, 2002, by and among Westport, Spindrift
    Partners, L.P., Spindrift Investors (Bermuda) L.P., Global
    Natural Resources III and Global Natural Resources III
    L.P. (incorporated by reference to Exhibit 1 to
    Westports Registration Statement on Form S-3
    (Registration No. 333-102281), filed with the SEC on
    December 31, 2002).

58



---



##### Table of Contents



|            |   |    |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | - | -- |  | - | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |    |  |   | Exhibit Description
|            |   |    |  |   |                    
|            | 2 | .1 |  |  |                     | Agreement and Plan of Merger, dated as of
    March 9, 2000, by and among Westport Oil and Gas Company,
    Inc., Westport Energy Corporation, Equitable Production Company,
    Equitable Production (Gulf) Company and EPGC Merger Sub
    Corporation (incorporated by reference to Exhibit 2.1 to
    the Registration Statement on Form S-1 of Westport
    Resources Corporation, a Delaware corporation (Registration
    No. 333-40422), filed with the SEC on June 29, 2000).
|            | 2 | .2 |  |  |                     | Agreement and Plan of Merger, dated as of
    June 8, 2001, among Belco and Westport Resources
    Corporation, a Delaware corporation (incorporated by reference
    to Exhibit 2.1 to Belcos Registration Statement on
    Form S-4/A (Registration No. 333-64320), filed with
    the SEC on July 24, 2001).                                                                                                                                                                      
|            | 2 | .3 |  |  |                     | Purchase and Sale Agreement, dated
    November 6, 2002, among Westport and certain affiliates of
    El Paso Corporation parties thereto (incorporated by
    reference to Exhibit 2 to Westports Current Report on
    Form 8-K/A, filed with the SEC on December 27, 2002).                                                                                                                                                                                                       
|            | 3 | .1 |  |  |                     | Amended Articles of Incorporation of Westport
    (incorporated by reference to Exhibit 3.1 to
    Westports Registration Statement on Form 8-A/A, filed with
    the SEC on August 31, 2001).                                                                                                                                                                                                                                                                                       
|            | 3 | .2 |  |  |                     | Certificate of Amendment to Amended Articles of
    Incorporation of Westport, dated March 5, 2003
    (incorporated by reference to Exhibit 3.2 to
    Westports Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2003, filed with the SEC on May 8,
    2003).                                                                                                                                                                                                    
|            | 3 | .3 |  |  |                     | Third Amended and Restated Bylaws of Westport,
    effective as of October 1, 2003 (incorporated by reference
    to Exhibit 3.3 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                                                                              
|            | 4 | .1 |  |  |                     | Specimen Certificate for shares of Common Stock
    of Westport (incorporated by reference to Exhibit 4.1 to
    Westports Registration Statement on Form 8-A/A, filed with
    the SEC on August 31, 2001).                                                                                                                                                                                                                                                                         
|            | 4 | .2 |  |  |                     | Specimen Certificate for shares of
    6 1/2% Convertible Preferred Stock of Westport
    (incorporated by reference to Exhibit 4 to Westports
    Registration Statement on Form 8-A/A, filed with the SEC on
    August 31, 2001).                                                                                                                                                                                                                                                 
|            | 4 | .3 |  |  |                     | Third Amended and Restated Shareholders
    Agreement, dated as of February 14, 2003, among Westport,
    ERI, Medicor Foundation, WELLC and certain stockholders named
    therein (incorporated by reference to Exhibit 4.3 to
    Westports Annual Report on Form 10-K for the year ended
    December 31, 2002, filed with the SEC on March 10,
    2003).                                                                                                                       
|            | 4 | .4 |  |  |                     | Termination and Voting Agreement, dated as of
    October 1, 2003, among Westport, ERI, WELLC, Medicor and
    certain stockholders named therein (incorporated by reference to
    Exhibit 4.5 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                               
|            | 4 | .5 |  |  |                     | Registration Rights Agreement, dated as of
    October 1, 2003, among Westport, ERI, WELLC, Medicor and
    certain stockholders named therein (incorporated by reference to
    Exhibit 4.6 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                  
|            | 4 | .6 |  |  |                     | Registration Rights Agreement, dated as of
    April 3, 2003, among Westport, subsidiary guarantors party
    thereto and Lehman Brothers Inc. (incorporated by reference to
    Exhibit 4.7 to Westports Registration Statement on
    Form S-4 (Registration No. 333-105834), filed with the
    SEC on June 4, 2003).                                                                                                                                                             
|            | 4 | .7 |  |  |                     | Indenture, dated as of November 5, 2001,
    among Westport, subsidiary guarantors from time to time party
    thereto and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                                                                             
|            | 4 | .8 |  |  |                     | First Supplemental Indenture, dated as of
    December 31, 2001, among Westport, existing subsidiary
    guarantors party thereto, new subsidiary guarantors named
    therein and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.5 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                     

59



---



##### Table of Contents



|            |    |     |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | -- | --- |  | - | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  |   | Exhibit Description
|            |    |     |  |   |                    
|            | 4  | .9  |  |  |                     | Second Supplemental Indenture, dated as of
    December 17, 2002, among Westport, existing subsidiary
    guarantors party thereto, new subsidiary guarantors named
    therein and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.9 to Westports Registration
    Statement on Form S-4 (Registration No. 333-102705),
    filed with the SEC on January 24, 2003).                                                                                                                                                                                        
|            | 4  | .10 |  |  |                     | Third Supplemental Indenture, dated as of
    April 3, 2003, among Westport, subsidiary guarantors party
    thereto and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.11 to Westports
    Registration Statement on Form S-4 (Registration
    No. 333-105834), filed on June 4, 2003).                                                                                                                                                                                                                                                                   
|            | 4  | .11 |  |  |                     | Certificate of Designations of
    6 1/2% Convertible Preferred Stock dated March 5,
    1998 (incorporated by reference to Exhibit 4.1 of
    Belcos Current Report on Form 8-K, filed on March 11,
    1998).                                                                                                                                                                                                                                                                                                                                                                           
|            | 4  | .12 |  |  |                     | Form of 8 1/4% Note (contained in the
    Indenture listed as Exhibit 4.4 above) (incorporated by
    reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                                                                                                                                                                                                                                                             
|            | 4  | .13 |  |  |                     | Form of Indenture for Senior Debt Securities
    (incorporated by reference to Exhibit 4.1 to Belcos
    Amendment No. 1 to the Registration Statement on
    Form S-3 (Registration No. 333-42107), filed with the
    SEC on December 23, 1997).                                                                                                                                                                                                                                                                                                                                        
|            | 4  | .14 |  |  |                     | Form of Indenture for Subordinated Debt
    Securities (incorporated by reference to Exhibit 4.2 to
    Belcos Amendment No. 1 to the Registration Statement
    on Form S-3 (Registration No. 333-42107), filed with
    the SEC on December 23, 1997).                                                                                                                                                                                                                                                                                                                                  
|            | 10 | .1  |  |  |                     | Credit Agreement, dated as of December 17,
    2002, among Westport, certain lenders from time to time party
    thereto, Credit Suisse First Boston Corporation, as syndication
    agent, JPMorgan Chase Bank, as administrative agent and issuing
    bank, certain documentation agents party thereto, Wachovia Bank,
    N.A., as senior managing agent, and certain managing agents
    named therein (incorporated by reference to Exhibit 10.1 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-102705), filed with the SEC on
    January 24, 2003).
|            | 10 | .2  |  |  |                     | First Amendment to Credit Agreement, dated as of
    October 15, 2003, among Westport, subsidiary guarantors
    party thereto, JPMorgan Chase Bank, as administrative agent, and
    certain other lenders named therein (incorporated by reference
    to Exhibit 10.1 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                                           
|            | 10 | .3  |  |  |                     | Subsidiary Guarantee, dated as of
    December 17, 2002, by each subsidiary guarantor party
    thereto in favor of JPMorgan Chase Bank, as administrative agent
    for certain lenders and creditors (incorporated by reference to
    Exhibit 10.2 to Westports Registration Statement on
    Form S-4 (Registration No. 333-102705), filed with the
    SEC on January 24, 2003).                                                                                                                                                                                                     
|            | 10 | .4  |  |  |                     | Westport Resources Corporation 2000 Stock
    Incentive Plan, as amended on August 21, 2001 (incorporated
    by reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-8, filed with the SEC on
    August 31, 2001).                                                                                                                                                                                                                                                                                                                                                
|            | 10 | .5  |  |  |                     | Westport Resources Corporation Annual Incentive
    Plan 2000 (incorporated by reference to Exhibit 10.6 to Old
    Westports Registration Statement on Form S-1
    (Registration No. 333-40422), filed with the SEC on
    June 29, 2000).                                                                                                                                                                                                                                                                                                                                              
|            | 10 | .6  |  |  |                     | Employment Agreement, effective as of
    April 1, 2002, between Westport and Donald D. Wolf
    (incorporated by reference to Exhibit 10.1 to
    Westports Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2002, filed with the SEC on May 13,
    2002).                                                                                                                                                                                                                                                                                                             
|            | 10 | .7  |  |  |                     | Employment Agreement, effective as of
    April 1, 2002, between Westport and Barth E. Whitham
    (incorporated by reference to Exhibit 10.2 to
    Westports Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002, filed with the SEC on
    May 13, 2002).                                                                                                                                                                                                                                                                                                           
|            | 10 | .8  |  |  |                     | Form of Indemnification Agreement between
    Westport and its officers and directors (incorporated by
    reference to Exhibit 10.1 to Westports Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002, filed with the SEC on August 14, 2002).                                                                                                                                                                                                                                                                                                                      

60



---



##### Table of Contents



|            |    |     |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | -- | --- |  | - | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  |   | Exhibit Description
|            |    |     |  |   |                    
|            | 10 | .9  |  |  |                     | Belco Oil & Gas Corp. 1996 Nonemployee
    Directors Stock Option Plan (incorporated by reference to
    Exhibit 10.1 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                                                                                                    
|            | 10 | .10 |  |  |                     | First Amendment to Belco Oil & Gas Corp.
    1996 Nonemployee Directors Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of Belcos Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    1999, filed with the SEC on August 13, 1999).                                                                                                                                                                                                               
|            | 10 | .11 |  |  |                     | Belco Oil & Gas Corp. 1996 Stock
    Incentive Plan (incorporated by reference to Exhibit 10.2
    of Belcos Registration Statement on Form S-1
    (Registration No. 333-1034), filed with the SEC on
    February 6, 1996).                                                                                                                                                                                                                                                        
|            | 10 | .12 |  |  |                     | First Amendment to Belco Oil & Gas Corp.
    1996 Stock Incentive Plan (incorporated by reference to
    Exhibit 10.2 of Belcos Quarterly Report on Form 10-Q
    for the quarter ended June 30, 2000, filed with the SEC on
    August 14, 2000).                                                                                                                                                                                                                                   
|            | 10 | .13 |  |  |                     | Form of Indemnification Agreement between Belco
    and its officers and directors (incorporated by reference to
    Exhibit 10.6 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                                                                                         
|            | 10 | .14 |  |  |                     | Belco Oil & Gas Corp. Retention and
    Severance Benefit Plan dated June 8, 2001 (incorporated by
    reference to Exhibit 10.18 to Belcos Registration
    Statement on Form S-4/A (Registration No. 333-64320),
    filed with the SEC on July 24, 2001).                                                                                                                                                                                                                         
|            | 10 | .15 |  |  |                     | Amended and Restated Well Participation Letter
    Agreement dated as of December 31, 1992 between Chesapeake
    Operating, Inc. and Belco, as amended by (i) Letter
    Agreement dated April 14, 1983, (ii) Amendment dated
    December 31, 1993, and (iii) Third Amendment dated
    December 30, 1994 (incorporated by reference to
    Exhibit 10.7 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).
|            | 10 | .16 |  |  |                     | Sale Agreement (Independence) dated as of
    June 10, 1994 between Chesapeake Operating, Inc. and Belco
    (incorporated by reference to Exhibit 10.10 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                                                                                                                                                                                  
|            | 10 | .17 |  |  |                     | Sale and Area of Mutual Interest Agreement
    (Greater Giddings) dated as of December 30, 1994 between
    Chesapeake Operating, Inc. and Belco (incorporated by reference
    to Exhibit 10.12 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                          
|            | 10 | .18 |  |  |                     | Golden Trend Area of Mutual Interest Agreement
    dated as of December 17, 1992 between Chesapeake Operating,
    Inc. and Belco (incorporated by reference to Exhibit 10.13
    of Belcos Registration Statement on Form S-1
    (Registration No. 333-1034), filed with the SEC on
    February 6, 1996).                                                                                                                                                                         
|            | 10 | .19 |  |  |                     | Form of Participation Agreement for Belco
    Oil & Gas Corp. 1992 Moxa Arch Drilling Program
    (incorporated by reference to Exhibit 10.15 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                                                                                                                                                                                             
|            | 10 | .20 |  |  |                     | Form of Offset Participation Agreement to the
    Moxa Arch 1992 Offset Drilling Program (incorporated by
    reference to Exhibit 10.16 of Belcos Registration
    Statement on Form S-1 (Registration No. 333-1034),
    filed with the SEC on February 6, 1996).                                                                                                                                                                                                                  
|            | 10 | .21 |  |  |                     | Form of Participation Agreement for Belco
    Oil & Gas Corp. 1993 Moxa Arch Drilling Program
    (incorporated by reference to Exhibit 10.17 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                                                                                                                                                                                             
|            | 10 | .22 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and
    Grant W. Henderson (incorporated by reference to
    Exhibit 10.24 to Westports Registration Statement on
    Form S-4 (Registration No. 333-77060), filed with the
    SEC on January 18, 2002).                                                                                                                                                                       
|            | 10 | .23 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Lon
    McCain (incorporated by reference to Exhibit 10.25 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).                                                                                                                                                                               

61



---



##### Table of Contents



|            |     |     |  |   |                     |                                                                                                                                                                                                                                                                                                                 
|----------- | --- | --- |  | - | ------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |     |  |   | Exhibit Description
|            |     |     |  |   |                    
|            | 10  | .24 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and
    Kenneth D. Anderson (incorporated by reference to
    Exhibit 10.26 to Westports Registration Statement on
    Form S-4 (Registration No. 333-77060), filed with the
    SEC on January 18, 2002).
|            | 10  | .25 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and
    Lynn S. Belcher (incorporated by reference to
    Exhibit 10.27 to Westports Registration Statement on
    Form S-4 (Registration No. 333-77060), filed with the
    SEC on January 18, 2002).    
|            | 10  | .26 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and
    Brian K. Bess (incorporated by reference to
    Exhibit 10.28 to Westports Registration Statement on
    Form S-4 (Registration No. 333-77060), filed with the
    SEC on January 18, 2002).      
|            | 10  | .27 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and
    Howard L. Boigon (incorporated by reference to
    Exhibit 10.29 to Westports Registration Statement on
    Form S-4 (Registration No. 333-77060), filed with the
    SEC on January 18, 2002).   
|            | 10  | .28 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of February 1, 2003, between Westport and Carter
    Mathies (incorporated by reference to Exhibit 10.28 to
    Westports Annual Report on Form 10-K for the year ended
    December 31, 2002, filed with the SEC on March 10,
    2003).       
|            | 10  | .29 |  |  |                     | Change in Control Severance Protection Agreement,
    effective as of June 9, 2003, between Westport and
    Peter M. Mueller (incorporated by reference to
    Exhibit 10.1 to Westports Quarterly Report on Form
    10-Q for the quarter ended June 30, 2003, filed with the
    SEC on August 14, 2003).   
|            | *10 | .30 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of January 2, 2004, between Westport and
    Allan D. Keel.                                                                                                                                                                                      
|            | 21  |     |  |  |                     | List of Subsidiaries of Westport (incorporated by
    reference to Exhibit 21 to Westports Registration
    Statement on Form S-4/A (Registration No. 333-105834),
    filed with the SEC on February 5, 2004).                                                                                                
|            | *23 | .1  |  |  |                     | Consent of Independent Public Accountants, KPMG
    LLP.                                                                                                                                                                                                                                                        
|            | *23 | .2  |  |  |                     | Consent of Ryder Scott Company, L.P.                                                                                                                                                                                                                                                                            
|            | *23 | .3  |  |  |                     | Consent of Netherland, Sewell &
    Associates, Inc.                                                                                                                                                                                                                                                            
|            | *24 | .1  |  |  |                     | Power of Attorney (included on the signature page
    of this Annual Report on Form 10-K).                                                                                                                                                                                                                      
|            | *31 | .1  |  |  |                     | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer of
    Westport.                                                                                                                                                                                         
|            | *31 | .2  |  |  |                     | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer of
    Westport.                                                                                                                                                                                         
|            | *32 | .1  |  |  |                     | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer of
    Westport.                                                                                                                                                                                         
|            | *32 | .2  |  |  |                     | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer of
    Westport.                                                                                                                                                                                         



---



|  |                
|- | ---------------
|* | Filed herewith.

Certain of the exhibits to this filing contain
schedules which have been omitted in accordance with applicable
regulations. Westport undertakes to furnish supplementally a
copy of any omitted schedule to the Securities and Exchange
Commission upon request.

62



---



##### Table of Contents



(b) Reports on Form 8-K.



| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Current Report on Form 8-K (Item 5)
    filed on October 6, 2003 by Westport;     
|
| |  | Current Report on Form 8-K (Item 12)
    filed on November 4, 2003 by Westport;   
|
| |  | Current Report on Form 8-K (Item 5)
    filed on November 6, 2003 by Westport;    
|
| |  | Current Report on Form 8-K (Item 5)
    filed on December 5, 2003 by Westport; and
|
| |  | Current Report on Form 8-K (Item 5)
    filed on December 30, 2003 by Westport.   

63



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

Dated: March 4, 2004



| |                               
| | ------------------------------
| | WESTPORT RESOURCES CORPORATION



| |     |                   
| | --- | ------------------
| | By: | /s/ DONALD D. WOLF

| |                                 
| | --------------------------------
| |                                 
| | Name: Donald D. Wolf            
| | Title: Chairman of the Board and
| | Chief Executive Officer         

POWER OF ATTORNEY

The undersigned directors and officers of
Westport Resources Corporation hereby constitute and appoint
Donald D. Wolf, Barth E. Whitham and Lon McCain, and
each of them, with the power to act without the other and with
full power of substitution and resubstitution, our true and
lawful attorneys-in-fact and agents with full power to execute
in our name and behalf in the capacities indicated below any and
all amendments to this report and to file the same, with all
exhibits and other documents relating thereto and hereby ratify
and confirm all that such attorneys-in-fact, or either of them,
or their substitutes, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed by the
following persons in the capacities indicated on March 4,
2004:

|                                           |  |                                                                                               |  | 
|------------------------------------------ |  | --------------------------------------------------------------------------------------------- |  | 
|                                           |  |                                                                                              
|Signature                                  |  | Title                                                                                        
|                                           |  |                                                                                              
|                                          
|/s/ DONALD D. WOLFDonald D. Wolf           |  | Chairman of the Board, Chief Executive Officer
    (Principal Executive Officer) and Director
|                                          
|/s/ LON MCCAINLon McCain                   |  | Vice President, Chief Financial Officer and
    Treasurer
    (Principal Financial Officer)  
|                                          
|/s/ KENNETH D. ANDERSONKenneth D. Anderson |  | Vice President  Accounting
    (Principal Accounting Officer)                               
|                                          
|/s/ MICHAEL L. BEATTYMichael L. Beatty     |  | Director                                                                                     
|                                          
|/s/ LAURENCE D. BELFERLaurence D. Belfer   |  | Director                                                                                     
|                                          
|/s/ RICHARD D. DOLERichard D. Dole         |  | Director                                                                                     

64



---



##### Table of Contents



|                                         |  |          |  | 
|---------------------------------------- |  | -------- |  | 
|                                         |  |         
|Signature                                |  | Title   
|                                         |  |         
|                                        
|/s/ JAMES M. FUNKJames M. Funk           |  | Director
|                                        
|/s/ DAVID L. PORGESDavid L. Porges       |  | Director
|                                        
|/s/ MICHAEL RUSSELLMichael Russell       |  | Director
|                                        
|/s/ ROBERT F. SEMMENSRobert F. Semmens   |  | Director
|                                        
|/s/ RANDY STEINRandy Stein               |  | Director
|                                        
|/s/ WILLIAM F. WALLACEWilliam F. Wallace |  | Director

65



---



##### Table of Contents






INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                             |  |  |     | 
|------------------------------------------------------------------------------------------------------------ |  |  | --- | 
|Reports of Independent
    Public Accountants                                                                |  |  | F-2 | 
|Consolidated Balance Sheets
    as of December 31, 2003 and 2002                                             |  |  | F-4 | 
|Consolidated Statements of
    Operations for the years ended December 31, 2003, 2002 and
    2001           |  |  | F-5 | 
|Consolidated Statements of
    Stockholders Equity for the years ended December 31,
    2003, 2002 and 2001 |  |  | F-6 | 
|Consolidated Statements of
    Cash Flows for the years ended December 31, 2003, 2002 and
    2001           |  |  | F-7 | 
|Notes to Consolidated
    Financial Statements                                                               |  |  | F-8 | 

F-1



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors Westport Resources
Corporation:

We have audited the 2003 and 2002 consolidated
financial statements of Westport Resources Corporation (a Nevada
corporation) and subsidiaries as listed in the accompanying
index. These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit. The 2001 consolidated
financial statements of Westport Resources Corporation and
subsidiaries as listed in the accompanying index were audited by
other auditors who have ceased operations. Those auditors
report, dated March 1, 2002, on those consolidated
financial statements was unqualified and included an explanatory
paragraph that described the change in the Companys method
of accounting for derivative instruments and hedging activities
discussed in Notes 1 and 3 to the consolidated financial
statements.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the 2003 and 2002 consolidated
financial statements referred to above present fairly, in all
material respects, the financial position of Westport Resources
Corporation and subsidiaries as of December 31, 2003 and
2002, and the results of its operations and its cash flows for
the years then ended in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Notes 1 and 3 to the
consolidated financial statements, the Company changed its
method of accounting for derivative instruments and hedging
activities in 2001. As discussed in Note 1 to the
consolidated financial statements, the Company adopted Statement
of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligation, as of January 1,
2003.



| |         
| | --------
| | KPMG LLP

Denver, Colorado

February 13, 2004


F-2



---



##### Table of Contents






REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

THE FOLLOWING REPORT IS A COPY OF THE PREVIOUSLY
ISSUED REPORT FROM ARTHUR ANDERSEN LLP (ANDERSEN). ANDERSEN DID
NOT PERFORM ANY PROCEDURES IN CONNECTION WITH THIS ANNUAL REPORT
ON FORM 10-K. ACCORDINGLY, THIS REPORT HAS NOT BEEN REISSUED BY
ANDERSEN.

To Westport Resources Corporation:

We have audited the accompanying consolidated
balance sheets of Westport Resources Corporation (a Nevada
corporation) and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Westport Resources Corporation and subsidiaries as
of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.

As explained in Notes 1 and 4 to the
consolidated financial statements, on January 1, 2001, the
Company changed its method of accounting for derivative
instruments and hedging activities.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Denver, Colorado

March 1, 2002


F-3



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION



CONSOLIDATED BALANCE SHEETS


|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |           |           |         |           |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------------- | --------------------------------------------------------- | ------- | --------- | --------- | --------- | ------- | --------- | --------- | 
|                                                                                                                                                                            |                                                                |                                                              
|                                                                                                                                                                            |                                                                | December 31,                                                  |                                                          
|                                                                                                                                                                            |                                                                |                                                               |                                                          
|                                                                                                                                                                            |                                                                | 2003                                                          |                                                           |         | 2002      |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                              
|                                                                                                                                                                            |                                                                | (In thousands,                                                |                                                          
|                                                                                                                                                                            |                                                                | except share data)                                            |                                                          
|ASSETS                                                                                                                                                                     
|Current assets:                                                                                                                                                             |                                                                |                                                               |                                                           |         |           |           |           |        
|                                                                                                                                                                            | Cash and cash equivalents                                      |                                                               | $                                                         | 73,658  |           |           | $         | 42,761  |          
|                                                                                                                                                                            | Accounts receivable, net                                       |                                                               |                                                           | 86,934  |           |           |           | 73,549  |          
|                                                                                                                                                                            | Derivative assets                                              |                                                               |                                                           | 3,728   |           |           |           | 14,861  |          
|                                                                                                                                                                            | Prepaid expenses and other assets                              |                                                               |                                                           | 17,202  |           |           |           | 13,358  |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total current assets                                      |         |           | 181,522   |           |         |           | 144,529   | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|Property and equipment, at cost:                                                                                                                                            |                                                                |                                                               |                                                           |         |           |           |           |        
|                                                                                                                                                                            | Oil and natural gas properties, successful
    efforts method: |                                                               |                                                           |         |           |           |           |         |          
|                                                                                                                                                                            |                                                                | Proved properties                                             |                                                           |         | 2,707,228 |           |           |         | 2,138,471 |          
|                                                                                                                                                                            |                                                                | Unproved properties                                           |                                                           |         | 119,331   |           |           |         | 104,430   |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | 2,826,559                                                 |         |           |           | 2,242,901 |        
|                                                                                                                                                                            |                                                                | Less accumulated depletion, depreciation and
    amortization |                                                           |         | (721,631  | )         |           |         | (481,396  | )        
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Net oil and gas properties                                |         |           | 2,104,928 |           |         |           | 1,761,505 | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            | Field services assets                                          |                                                               |                                                           | 40,226  |           |           |           | 39,185  |          
|                                                                                                                                                                            | Less accumulated depreciation                                  |                                                               |                                                           | (1,135  | )         |           |           |        |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Net field services assets                                 |         |           | 39,091    |           |         |           | 39,185    | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            | Building and other office furniture and equipment              |                                                               |                                                           | 10,926  |           |           |           | 9,686   |          
|                                                                                                                                                                            | Less accumulated depreciation                                  |                                                               |                                                           | (5,380  | )         |           |           | (3,933  | )        
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Net building and other office furniture and
    equipment |         |           | 5,546     |           |         |           | 5,753     | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|Other assets:                                                                                                                                                               |                                                                |                                                               |                                                           |         |           |           |           |        
|                                                                                                                                                                            | Long-term derivative assets                                    |                                                               |                                                           | 23,105  |           |           |           | 14,824  |          
|                                                                                                                                                                            | Goodwill                                                       |                                                               |                                                           | 244,640 |           |           |           | 246,712 |          
|                                                                                                                                                                            | Other assets                                                   |                                                               |                                                           | 18,431  |           |           |           | 21,033  |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total other assets                                        |         |           | 286,176   |           |         |           | 282,569   | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total assets                                              |         | $         | 2,617,263 |           |         | $         | 2,233,541 | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                           
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                                                   
|Current liabilities:                                                                                                                                                        |                                                                |                                                               |                                                           |         |           |           |           |        
|                                                                                                                                                                            | Accounts payable                                               |                                                               | $                                                         | 79,697  |           |           | $         | 51,158  |          
|                                                                                                                                                                            | Accrued expenses                                               |                                                               |                                                           | 45,136  |           |           |           | 39,209  |          
|                                                                                                                                                                            | Ad valorem taxes payable                                       |                                                               |                                                           | 13,847  |           |           |           | 8,988   |          
|                                                                                                                                                                            | Derivative liabilities                                         |                                                               |                                                           | 107,529 |           |           |           | 56,156  |          
|                                                                                                                                                                            | Income taxes payable                                           |                                                               |                                                           | 2,499   |           |           |           | 86      |          
|                                                                                                                                                                            | Current asset retirement obligation                            |                                                               |                                                           | 8,017   |           |           |           |        |          
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total current liabilities                                 |         |           | 256,725   |           |         |           | 155,597   | 
|Long-term debt                                                                                                                                                              |                                                                |                                                               | 980,885                                                   |         |           |           | 799,358   |        
|Deferred income taxes                                                                                                                                                       |                                                                |                                                               | 118,024                                                   |         |           |           | 124,530   |        
|Long-term derivative liabilities                                                                                                                                            |                                                                |                                                               | 38,022                                                    |         |           |           | 21,305    |        
|Long-term asset retirement obligation                                                                                                                                       |                                                                |                                                               | 62,709                                                    |         |           |           | 745       |        
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total liabilities                                         |         |           | 1,456,365 |           |         |           | 1,101,535 | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|Commitments and contingencies
    (Note 12)                                                                                                                                 |                                                                |                                                               |                                                           |         |           |           |           |        
|Stockholders equity:                                                                                                                                                       |                                                                |                                                               |                                                           |         |           |           |           |        
|6 1/2% Convertible preferred stock,
    $.01 par value; 10,000,000 shares authorized;
    2,930,000 issued and outstanding at December 31, 2003 and
    2002, respectively  |                                                                |                                                               | 29                                                        |         |           |           | 29        |        
|Common stock, $.01 par value;
    70,000,000 shares authorized; 67,571,525 and
    66,823,830 shares issued and outstanding at
    December 31, 2003 and 2002, respectively |                                                                |                                                               | 675                                                       |         |           |           | 668       |        
|Additional paid-in capital                                                                                                                                                  |                                                                |                                                               | 1,167,008                                                 |         |           |           | 1,150,345 |        
|Treasury stock  at cost; 38,610 and
    33,617 shares at December 31, 2003 and 2002,
    respectively                                                                      |                                                                |                                                               | (583                                                      | )       |           |           | (469      | )      
|                                                                                                                                                                            | Retained earnings                                              |                                                               |                                                           | 64,346  |           |           |           | 2       |          
|                                                                                                                                                                            | Accumulated other comprehensive income (loss):                 |                                                               |                                                           |         |           |           |           |         |          
|                                                                                                                                                                            |                                                                | Deferred hedge loss, net                                      |                                                           |         | (70,776   | )         |           |         | (18,408   | )        
|                                                                                                                                                                            |                                                                | Cumulative translation adjustment                             |                                                           |         | 199       |           |           |         | (161      | )        
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total stockholders equity                                |         |           | 1,160,898 |           |         |           | 1,132,006 | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          
|                                                                                                                                                                            |                                                                |                                                               | Total liabilities and stockholders equity                |         | $         | 2,617,263 |           |         | $         | 2,233,541 | 
|                                                                                                                                                                            |                                                                |                                                               |                                                           |         |           |          

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |         |         |        |         |  
|------------------------------------------------------------------------------------- | -------- | --------------------------------------------- | -------------------------------------------------------------------------------- | -------------------------------------------------- | -------- | ------ | ------- | ------ | ------- | ------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                                      |          |                                              
|                                                                                      |          | For the Year Ended December 31,               |                                                                                 
|                                                                                      |          |                                               |                                                                                 
|                                                                                      |          | 2003                                          |                                                                                  |                                                    | 2002     |        |         | 2001   |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                              
|                                                                                      |          | (In thousands,                                |                                                                                 
|                                                                                      |          | except per share amounts)                     |                                                                                 
|Operating revenues:                                                                   |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      |          | Oil and natural gas sales                     |                                                                                  | $                                                  | 813,882  |        |         | $      | 428,430 |         |         | $       | 317,278 |       
|                                                                                      |          | Hedge settlements                             |                                                                                  |                                                    | (102,368 | )      |         |        | (1,276  | )       |         |         | 2,091   |       
|                                                                                      |          | Gathering income                              |                                                                                  |                                                    | 3,456    |        |         |        |        |         |         |         |        |       
|                                                                                      |          | Non-hedge derivative settlements              |                                                                                  |                                                    | 2,653    |        |         |        | 822     |         |         |         | 15,300  |       
|                                                                                      |          | Non-hedge change in fair value of derivatives |                                                                                  |                                                    | 9,501    |        |         |        | (26,723 | )       |         |         | 14,323  |       
|                                                                                      |          | Gain (loss) on sale of operating assets, net  |                                                                                  |                                                    | 6,565    |        |         |        | (1,685  | )       |         |         | (132    | )     
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Net revenues                                       |          |        | 733,689 |        |         |         | 399,568 |         |         |        | 348,860 |  
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Operating costs and expenses:                                                         |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      |          | Lease operating expenses                      |                                                                                  |                                                    | 101,032  |        |         |        | 89,328  |         |         |         | 55,315  |       
|                                                                                      |          | Production taxes                              |                                                                                  |                                                    | 45,659   |        |         |        | 23,954  |         |         |         | 13,407  |       
|                                                                                      |          | Transportation costs                          |                                                                                  |                                                    | 13,355   |        |         |        | 7,961   |         |         |         | 5,157   |       
|                                                                                      |          | Gathering expense                             |                                                                                  |                                                    | 2,977    |        |         |        |        |         |         |         |        |       
|                                                                                      |          | Exploration                                   |                                                                                  |                                                    | 58,731   |        |         |        | 32,390  |         |         |         | 31,313  |       
|                                                                                      |          | Depletion, depreciation and amortization      |                                                                                  |                                                    | 260,604  |        |         |        | 203,093 |         |         |         | 124,059 |       
|                                                                                      |          | Impairment of proved properties               |                                                                                  |                                                    | 18,166   |        |         |        | 19,700  |         |         |         | 9,423   |       
|                                                                                      |          | Impairment of unproved properties             |                                                                                  |                                                    | 27,556   |        |         |        | 9,961   |         |         |         | 6,974   |       
|                                                                                      |          | Stock compensation expense, net               |                                                                                  |                                                    | 7,744    |        |         |        | 4,608   |         |         |         | 719     |       
|                                                                                      |          | General and administrative                    |                                                                                  |                                                    | 30,079   |        |         |        | 23,629  |         |         |         | 17,678  |       
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Total operating expenses                           |          |        | 565,903 |        |         |         | 414,624 |         |         |        | 264,045 |  
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Operating income (loss)                            |          |        | 167,786 |        |         |         | (15,056 | )       |         |        | 84,815  |  
|Other income (expense):                                                               |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      |          | Interest expense                              |                                                                                  |                                                    | (56,225  | )      |         |        | (34,836 | )       |         |         | (13,196 | )     
|                                                                                      |          | Interest income                               |                                                                                  |                                                    | 743      |        |         |        | 546     |         |         |         | 1,668   |       
|                                                                                      |          | Change in interest rate swap fair value       |                                                                                  |                                                    |         |        |         |        | 226     |         |         |         | 4,960   |       
|                                                                                      |          | Loss on debt retirement                       |                                                                                  |                                                    | (920     | )      |         |        |        |         |         |         |        |       
|                                                                                      |          | Other                                         |                                                                                  |                                                    | 722      |        |         |        | 1,002   |         |         |         | 211     |       
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Income (loss) before income taxes                                                     |          |                                               | 112,106                                                                          |                                                    |          |        | (48,118 | )      |         |         | 78,458  |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Benefit (provision) for income taxes:                                                 |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      | Current  |                                               |                                                                                  | (14,233                                            | )        |        |         | 2,094  |         |         |         | (2,006  | )      
|                                                                                      | Deferred |                                               |                                                                                  | (25,352                                            | )        |        |         | 17,458 |         |         |         | (26,631 | )      
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Total benefit (provision) for income taxes         |          |        | (39,585 | )      |         |         | 19,552  |         |         |        | (28,637 | )
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               | Net income (loss) before cumulative effect of
    change in accounting principle |                                                    |          | 72,521 |         |        |         | (28,566 | )       |         |         | 49,821 |        
|Cumulative effect of change in accounting
    principle (net of tax effect of $1,962) |          |                                               | (3,414                                                                           | )                                                  |          |        |        |        |         |         |        |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Net income (loss)                                                                     |          |                                               | 69,107                                                                           |                                                    |          |        | (28,566 | )      |         |         | 49,821  |        
|Preferred stock dividends                                                             |          |                                               | (4,763                                                                           | )                                                  |          |        | (4,762  | )      |         |         | (1,587  | )      
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Net income (loss) available to common stockholders                                    |          | $                                             | 64,344                                                                           |                                                    |          | $      | (33,328 | )      |         | $       | 48,234  |        
|Weighted average number of common shares
    outstanding:                             |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      | Basic    |                                               |                                                                                  | 67,116                                             |          |        |         | 53,007 |         |         |         | 43,408  |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      | Diluted  |                                               |                                                                                  | 68,103                                             |          |        |         | 53,007 |         |         |         | 44,168  |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|Net income (loss) per common share:                                                   |          |                                               |                                                                                  |                                                    |          |        |         |        |         |         |         |        
|                                                                                      |          | Basic:                                        |                                                                                  |                                                    |          |        |         |        |         |         |         |         |         |       
|                                                                                      |          |                                               | Net income (loss) before cumulative effect of
    change in accounting principle |                                                    | $        | 1.01   |         |        | $       | (0.63   | )       |         | $       | 1.11   |        
|                                                                                      |          |                                               | Cumulative effect of change in accounting
    principle                          |                                                    |          | (0.05  | )       |        |         |        |         |         |         |       |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Net income (loss) available to common stockholders |          | $      | 0.96    |        |         | $       | (0.63   | )       |         | $      | 1.11    |  
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          | Diluted:                                      |                                                                                  |                                                    |          |        |         |        |         |         |         |         |         |       
|                                                                                      |          |                                               | Net income (loss) before cumulative effect of
    change in accounting principle |                                                    | $        | 0.99   |         |        | $       | (0.63   | )       |         | $       | 1.09   |        
|                                                                                      |          |                                               | Cumulative effect of change in accounting
    principle                          |                                                    |          | (0.05  | )       |        |         |        |         |         |         |       |        
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        
|                                                                                      |          |                                               |                                                                                  | Net income (loss) available to common stockholders |          | $      | 0.94    |        |         | $       | (0.63   | )       |         | $      | 1.09    |  
|                                                                                      |          |                                               |                                                                                  |                                                    |          |        |         |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |         |          |         |  
|---------------------------- | -------------------------------------- | ---------------------------------------------------------- | -------------------------------- | ----- | ------------ | - | -- | ---------- | - |  | ------------ | ------ | - | ------------ | --- | --- | ------------- | - | --------- | ------------- | - |  | -------- | --- | - | ------------- | ---- | ---- | ------------ | - | ------- | ------ | ------- | - | ------- | - | -------- | - | --------- | ------- | -------- | ------- | -
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |  
|                             |                                        |                                                            |                                  |       |              |   |    | Treasury   |   |  | Retained     |        |   | Accumulated  |     |     |              
|                             |                                        | Preferred Stock                                            |                                  |       | Common Stock |   |    | Additional |   |  | Common Stock |        |   | Earnings     |     |     | Other         |   |           |              
|                             |                                        |                                                            |                                  |       |              |   |    | Paid-in    |   |  |              |        |   | (Accumulated |     |     | Comprehensive |   |           | Stockholders |  
|                             |                                        | Shares                                                     |                                  |       | Amount       |   |    | Shares     |   |  | Amount       |        |   | Capital      |     |     | Shares        |   |           | Amount        |   |  | Deficit) |     |   | Income (Loss) |      |      | Equity Total |  
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|                             |                                        |                                                           
|                             |                                        | (In thousands)                                             |                                 
|Balance at December 31, 2000 |                                        |                                                            |                                 |       |              | $ |   |            |   |  | 38,419       |        |   | $            | 384 |     |               | $ | 472,576   |               |   |  |         |     |   | $             |     |      |              | $ | (14,904 | )      |         | $ |        |   |          | $ | 458,056   |        
|                             | Stock issuance for Belco merger        |                                                            |                                  | 2,930 |              |   |    | 29         |   |  |              | 13,587 |   |              |     | 136 |               |   |           | 403,959       |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 404,124 |         
|                             | Repurchase of common stock             |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          | (30 | ) |               |      | (408 | )            |   |         |       |         |   |         |  |          |   |           | (408    | )       
|                             | Option plan compensation               |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 367           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 367     |         
|                             | Stock options exercised                |                                                            |                                  |      |              |   |    |           |   |  |              | 51     |   |              |     | 1   |               |   |           | 706           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 707     |         
|                             | Preferred stock dividends paid         |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          |    |   |               |      |     |              |   |         | (1,587 | )       |   |         |  |          |   |           | (1,587  | )       
|                             | Restricted stock issued                |                                                            |                                  |      |              |   |    |           |   |  |              | 36     |   |              |     |    |               |   |           | 352           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 352     |         
|Comprehensive income:        |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |        
|                             |                                        | Net income                                                 |                                  |       |             |   |    |            |  |  |              |        |  |              |     |     |              |   |           |               |  |  |          |     |  |               |      |      |             |   |         |        | 49,821  |   |         |   |         |   |           |         | 49,821   |        
|                             |                                        | Cumulative effect of change in accounting
    principle    |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | (3,100   | ) |           |         | (3,100   | )      
|                             |                                        | Change in fair value of derivative hedging
    instruments |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | 13,292   |   |           |         | 13,292   |        
|                             |                                        | Hedge settlements reclassified to income                   |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | (1,328   | ) |           |         | (1,328   | )      
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|                             |                                        |                                                            | Total other comprehensive income |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |         |          | 58,685  |  
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|Balance at December 31, 2001 |                                        |                                                            | 2,930                            |       |              |   | 29 |            |   |  | 52,093       |        |   |              | 521 |     |               |   | 877,960   |               |   |  | (30      | )   |   |               | (408 | )    |              |   | 33,330  |        |         |   | 8,864   |   |          |   | 920,296   |        
|                             | Proceeds from issuance of common stock |                                                            |                                  |      |              |   |    |           |   |  |              | 14,625 |   |              |     | 146 |               |   |           | 266,290       |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 266,436 |         
|                             | Repurchase of common stock             |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          | (4  | ) |               |      | (61  | )            |   |         |       |         |   |         |  |          |   |           | (61     | )       
|                             | Option plan compensation               |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 4,333         |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 4,333   |         
|                             | Stock options exercised                |                                                            |                                  |      |              |   |    |           |   |  |              | 105    |   |              |     | 1   |               |   |           | 1,467         |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 1,468   |         
|                             | Stock issuance to directors            |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 20            |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 20      |         
|                             | Preferred stock dividends paid         |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          |    |   |               |      |     |              |   |         | (4,762 | )       |   |         |  |          |   |           | (4,762  | )       
|                             | Restricted stock issued                |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 275           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 275     |         
|Comprehensive income:        |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |        
|                             |                                        | Net loss                                                   |                                  |       |             |   |    |            |  |  |              |        |  |              |     |     |              |   |           |               |  |  |          |     |  |               |      |      |             |   |         |        | (28,566 | ) |         |   |         |   |           |         | (28,566  | )      
|                             |                                        | Change in fair value of derivative hedging
    instruments |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | (27,981  | ) |           |         | (27,981  | )      
|                             |                                        | Hedge settlements reclassified to income                   |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | 709      |   |           |         | 709      |        
|                             |                                        | Currency translation adjustment                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | (161     | ) |           |         | (161     | )      
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|                             |                                        |                                                            | Total other comprehensive income |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |         |          | (55,999 | )
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|Balance at December 31, 2002 |                                        |                                                            | 2,930                            |       |              |   | 29 |            |   |  | 66,823       |        |   |              | 668 |     |               |   | 1,150,345 |               |   |  | (34      | )   |   |               | (469 | )    |              |   | 2       |        |         |   | (18,569 | ) |          |   | 1,132,006 |        
|                             | Proceeds from issuance of common stock |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 154           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 154     |         
|                             | Repurchase of common stock             |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          | (5  | ) |               |      | (114 | )            |   |         |       |         |   |         |  |          |   |           | (114    | )       
|                             | Option plan compensation               |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           | 7,624         |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 7,624   |         
|                             | Stock options exercised                |                                                            |                                  |      |              |   |    |           |   |  |              | 598    |   |              |     | 6   |               |   |           | 8,707         |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 8,713   |         
|                             | Stock issuance to directors            |                                                            |                                  |      |              |   |    |           |   |  |              | 5      |   |              |     |    |               |   |           | 59            |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 59      |         
|                             | Preferred stock dividends paid         |                                                            |                                  |      |              |   |    |           |   |  |              |       |   |              |     |    |               |   |           |              |   |  |          |    |   |               |      |     |              |   |         | (4,763 | )       |   |         |  |          |   |           | (4,763  | )       
|                             | Restricted stock issued                |                                                            |                                  |      |              |   |    |           |   |  |              | 146    |   |              |     | 1   |               |   |           | 119           |   |  |          |    |   |               |      |     |              |   |         |       |         |   |         |  |          |   |           | 120     |         
|Comprehensive income:        |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |        
|                             |                                        | Net income                                                 |                                  |       |             |   |    |            |  |  |              |        |  |              |     |     |              |   |           |               |  |  |          |     |  |               |      |      |             |   |         |        | 72,521  |   |         |   |         |   |           |         | 72,521   |        
|                             |                                        | Cumulative effect of change in accounting
    principle    |                                  |       |             |   |    |            |  |  |              |        |  |              |     |     |              |   |           |               |  |  |          |     |  |               |      |      |             |   |         |        | (3,414  | ) |         |   |         |   |           |         | (3,414   | )      
|                             |                                        | Change in fair value of derivative hedging
    instruments |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | (117,372 | ) |           |         | (117,372 | )      
|                             |                                        | Hedge settlements reclassified to income                   |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | 65,004   |   |           |         | 65,004   |        
|                             |                                        | Currency translation adjustment                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   | 360      |   |           |         | 360      |        
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|                             |                                        |                                                            | Total other comprehensive income |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |   |         |        |         |   |         |   |          |   |           |         |          | 17,099  |  
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  
|Balance at December 31, 2003 |                                        |                                                            | 2,930                            |       |              | $ | 29 |            |   |  | 67,572       |        |   | $            | 675 |     |               | $ | 1,167,008 |               |   |  | (39      | )   |   | $             | (583 | )    |              | $ | 64,346  |        |         | $ | (70,577 | ) |          | $ | 1,160,898 |        
|                             |                                        |                                                            |                                  |       |              |   |    |            |   |  |              |        |   |              |     |     |               |   |           |               |   |  |          |     |   |               |      |      |              |  

The accompanying notes are an integral part of
these consolidated financial statements.

F-6



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |          |         |         |  
|------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------ | -------- | ------- | ------- | -------- | -------- | ------- | ------ | -------- | -------- | ------- | ------- | -
|                                                                                                        |                                                                                              |                                                                       
|                                                                                                        |                                                                                              | For the Year Ended December 31,                                        |                                                             
|                                                                                                        |                                                                                              |                                                                        |                                                             
|                                                                                                        |                                                                                              | 2003                                                                   |                                                              |          | 2002    |         |          | 2001     |        
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|                                                                                                        |                                                                                              |                                                                       
|                                                                                                        |                                                                                              | (In thousands)                                                         |                                                             
|Cash flows from operating activities:                                                                   |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |         
|                                                                                                        | Net income (loss)                                                                            |                                                                        | $                                                            | 69,107   |         |         | $        | (28,566  | )       |        | $        | 49,821   |        
|                                                                                                        | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                        |                                                              |          |         |         |          |          |         |        |          |          |        
|                                                                                                        |                                                                                              | Depletion, depreciation and amortization                               |                                                              |          | 260,604 |         |          |          | 203,093 |        |          |          | 124,059 |        
|                                                                                                        |                                                                                              | Exploratory dry hole costs                                             |                                                              |          | 39,289  |         |          |          | 19,546  |        |          |          | 19,273  |        
|                                                                                                        |                                                                                              | Impairment of proved properties                                        |                                                              |          | 18,166  |         |          |          | 19,700  |        |          |          | 9,423   |        
|                                                                                                        |                                                                                              | Impairment of unproved properties                                      |                                                              |          | 27,556  |         |          |          | 9,961   |        |          |          | 6,974   |        
|                                                                                                        |                                                                                              | Deferred income taxes                                                  |                                                              |          | 25,352  |         |          |          | (17,458 | )      |          |          | 26,631  |        
|                                                                                                        |                                                                                              | Stock compensation expense                                             |                                                              |          | 7,744   |         |          |          | 4,608   |        |          |          | 719     |        
|                                                                                                        |                                                                                              | Change in derivative fair value                                        |                                                              |          | (9,501  | )       |          |          | 26,723  |        |          |          | (14,323 | )      
|                                                                                                        |                                                                                              | Amortization of financing fees                                         |                                                              |          | 1,275   |         |          |          | 2,438   |        |          |          | 435     |        
|                                                                                                        |                                                                                              | Loss (gain) on sale of assets                                          |                                                              |          | (6,565  | )       |          |          | 1,685   |        |          |          | 132     |        
|                                                                                                        |                                                                                              | Cumulative change in accounting principle, net of
    tax              |                                                              |          | 3,414   |         |          |          |        |        |          |          |        |        
|                                                                                                        |                                                                                              | Other                                                                  |                                                              |          | (112    | )       |          |          | (274    | )      |          |          |        |        
|                                                                                                        |                                                                                              | Changes in assets and liabilities, net of effects
    of acquisitions: |                                                              |          |         |         |          |          |         |        |          |          |         |        
|                                                                                                        |                                                                                              |                                                                        | Decrease (increase) in accounts receivable                   |          |         | (25,429 | )        |          |         | (2,909 | )        |          |         | 10,126  |  
|                                                                                                        |                                                                                              |                                                                        | Decrease in net derivative liabilities                       |          |         | (5,178  | )        |          |         | (9,636 | )        |          |         | (23,245 | )
|                                                                                                        |                                                                                              |                                                                        | Decrease (increase) in prepaid expenses and other
    assets |          |         | (4,883  | )        |          |         | (5,031 | )        |          |         | 1,051   |  
|                                                                                                        |                                                                                              |                                                                        | Increase (decrease) in accounts payable                      |          |         | 28,616  |          |          |         | (6,573 | )        |          |         | (6,240  | )
|                                                                                                        |                                                                                              |                                                                        | Increase (decrease) in accrued expenses                      |          |         | 630     |          |          |         | 8,105  |          |          |         | (8,474  | )
|                                                                                                        |                                                                                              |                                                                        | Increase (decrease) in ad valorem taxes payable              |          |         | 4,858   |          |          |         | (851   | )        |          |         | (1,130  | )
|                                                                                                        |                                                                                              |                                                                        | Increase (decrease) in income taxes payable                  |          |         | 3,826   |          |          |         | (477   | )        |          |         | 301     |  
|                                                                                                        |                                                                                              |                                                                        | Decrease in other liabilities                                |          |         | (2,052  | )        |          |         | (887   | )        |          |         | (260    | )
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Net cash provided by operating activities                                                               |                                                                                              |                                                                        | 436,717                                                      |          |         |         | 223,197  |          |         |        | 195,273  |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Cash flows from investing activities:                                                                   |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |         
|                                                                                                        | Additions to property and equipment                                                          |                                                                        |                                                              | (277,008 | )       |         |          | (147,612 | )       |        |          | (187,925 | )      
|                                                                                                        | Proceeds from sales of assets                                                                |                                                                        |                                                              | 13,378   |         |         |          | 13,311   |         |        |          | 5,536    |        
|                                                                                                        | Other acquisitions                                                                           |                                                                        |                                                              | (332,751 | )       |         |          | (679,890 | )       |        |          | (6,319   | )      
|                                                                                                        | Other                                                                                        |                                                                        |                                                              |         |         |         |          | 28       |         |        |          | 22       |        
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Net cash used in investing activities                                                                   |                                                                                              |                                                                        | (596,381                                                     | )        |         |         | (814,163 | )        |         |        | (188,686 | )       
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Cash flows from financing activities:                                                                   |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |         
|                                                                                                        | Proceeds from issuance of common stock, net                                                  |                                                                        |                                                              | 8,867    |         |         |          | 267,787  |         |        |          | 576      |        
|                                                                                                        | Repurchase of common stock                                                                   |                                                                        |                                                              | (114     | )       |         |          | (61      | )       |        |          | (408     | )      
|                                                                                                        | Proceeds from issuance of long-term debt                                                     |                                                                        |                                                              | 413,875  |         |         |          | 639,000  |         |        |          | 590,000  |        
|                                                                                                        | Repayments of long-term debt                                                                 |                                                                        |                                                              | (226,311 | )       |         |          | (285,000 | )       |        |          | (577,585 | )      
|                                                                                                        | Preferred stock dividends                                                                    |                                                                        |                                                              | (4,763   | )       |         |          | (4,762   | )       |        |          | (1,587   | )      
|                                                                                                        | Loss an retirement of debt                                                                   |                                                                        |                                                              | (920     | )       |         |          |         |         |        |          |         |        
|                                                                                                        | Gain on interest rate swap cancellation                                                      |                                                                        |                                                              |         |         |         |          | 3,705    |         |        |          |         |        
|                                                                                                        | Financing fees                                                                               |                                                                        |                                                              | (639     | )       |         |          | (14,273  | )       |        |          | (10,153  | )      
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Net cash provided by financing activities                                                               |                                                                                              |                                                                        | 189,995                                                      |          |         |         | 606,396  |          |         |        | 843      |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Net increase in cash and cash equivalents                                                               |                                                                                              |                                                                        | 30,331                                                       |          |         |         | 15,430   |          |         |        | 7,430    |         
|Effect of exchange rate changes on cash and cash
    equivalents                                        |                                                                                              |                                                                        | 566                                                          |          |         |         | (253     | )        |         |        |         |         
|Cash and cash equivalents, beginning of year                                                            |                                                                                              |                                                                        | 42,761                                                       |          |         |         | 27,584   |          |         |        | 20,154   |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Cash and cash equivalents, end of year                                                                  |                                                                                              | $                                                                      | 73,658                                                       |          |         | $       | 42,761   |          |         | $      | 27,584   |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Supplemental cash flow information:                                                                     |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |         
|                                                                                                        | Cash paid for interest                                                                       |                                                                        | $                                                            | 55,509   |         |         | $        | 37,426   |         |        | $        | 14,065   |        
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|                                                                                                        | Cash paid for income taxes                                                                   |                                                                        | $                                                            | 10,418   |         |         | $        | 44       |         |        | $        | 1,700    |        
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Supplemental schedule of non-cash investing and
    financing activities:                               |                                                                                              |                                                                        |                                                              |          |         |         |          |          |         |        |          |         
|Common stock and stock options issued in
    connection with the Belco and EPGC mergers, respectively   |                                                                                              | $                                                                      |                                                             |          |         | $       |         |          |         | $      | 349,919  |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        
|Liabilities and preferred stock assumed in
    connection with the Belco and EPGC mergers, respectively |                                                                                              | $                                                                      |                                                             |          |         | $       |         |          |         | $      | 662,089  |         
|                                                                                                        |                                                                                              |                                                                        |                                                              |          |         |         |          |          |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-7



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | Description of Business and Summary of
    Significant Accounting Policies

On August 21, 2001, the stockholders of each
of Westport Resources Corporation, a Delaware corporation
(Old Westport), and Belco Oil & Gas Corp.,
a Nevada corporation (Belco), approved the Agreement
and Plan of Merger dated as of June 8, 2001 (the
Merger Agreement) between Belco and Old Westport.
Pursuant to the Merger Agreement, Old Westport was merged with
and into Belco (the Merger), with Belco surviving as
the legal entity and changing its name to Westport Resources
Corporation (the Company or Westport).
The merger of Old Westport into Belco was accounted for as a
purchase transaction for financial accounting purposes. Because
former Old Westport stockholders owned a majority of the
outstanding Westport common stock as a result of the Merger, the
Merger was accounted for as a reverse acquisition in which Old
Westport is the purchaser of Belco. Business activities of the
Company include the exploration for and production of oil and
natural gas primarily in the Gulf of Mexico, the Rocky
Mountains, the Gulf Coast and the West Texas/Mid Continent area.

A summary of the Companys significant
accounting policies follows:



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

For purposes of the statements of cash flows, the
Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents. The total carrying amount of cash and cash
equivalents approximates the fair value of such instruments.



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

The Company follows the sales method of
accounting for oil and natural gas revenues. Under this method,
revenues are recognized based on actual volumes of oil and
natural gas sold to purchasers.



| |                     
| | --------------------
| | Transportation Costs

In accordance with Emerging Issues Task Force
Issue No. 00-10, Accounting for Shipping and Handling
Fees and Costs, the Company excludes the effects of direct
transportation costs from oil and gas revenues and records such
transportation costs as a separate line in the statement of
operations.



| |                      
| | ---------------------
| | Natural Gas Balancing

The Company uses the sales method of accounting
for natural gas imbalances. Under this method, revenue is
recognized based on cash received rather than the Companys
proportionate share of natural gas produced. Natural gas
imbalances at December 31, 2003 and 2002 were not
significant.



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

The Company accounts for its oil and natural gas
operations using the successful efforts method of accounting.
Under this method, all costs associated with property
acquisition, successful exploratory wells and all development
wells are capitalized. Items charged to expense generally
include geological and geophysical costs, costs of unsuccessful
exploratory wells and oil and natural gas production costs. All
of the Companys oil and natural gas properties are located
within the continental United States, the Gulf of Mexico and
Canada.

The Company follows the provisions of Statement
of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes
SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. SFAS No. 144 establishes a single accounting
model for long-lived assets to be disposed of by sale and
requires that those long-lived assets be measured at the lower
of carrying amount or fair value

F-8



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

less cost to sell, whether reported in continuing
operations or in discontinued operations. In applying this
statement, the Company estimates the expected future cash flows
of its oil and gas properties, on a field-by-field basis, and
compares such future cash flows to the carrying amount of the
oil and gas properties to determine if the carrying amount is
recoverable. If the carrying amount exceeds the estimated
undiscounted future cash flows, the Company will adjust the
carrying amount of the oil and gas properties to fair value. The
factors used to determine fair value include estimates of
reserves, future commodity prices, future production estimates,
anticipated capital expenditures, and a discount rate
commensurate with the risk associated with realizing the
expected future cash flows. The Company has chosen to use the
traditional present value approach to determine the fair value
as opposed to the expected present value method. In the
traditional present value approach, a single set of estimated
cash flows and a single interest rate (commensurate with the
risk) are used to estimate fair value. In the expected present
value approach, multiple cash flow scenarios reflecting the
range of possible outcomes and a risk-free rate are used to
estimate fair value. Using the expected present value method
could result in different (and possibly higher) amounts for
property impairments than those calculated using the traditional
present value method. In 2003, 2002 and 2001, the Company
recorded proved property impairments of $18.2 million,
$19.7 million and $9.4 million, respectively. The
impairments for 2003 consisted of $0.1 million for North
Dakota in the Northern Division, $7.5 million for offshore
oil and natural gas properties in the Gulf of Mexico Division
and $10.6 million for Texas, Kansas and Oklahoma oil and
natural gas properties in the Southern Division. The impairments
for 2002 consisted of $12.2 million for Wyoming, North
Dakota and Montana oil and natural gas properties in the
Northern Division, $1.4 million for offshore oil and
natural gas properties in the Gulf of Mexico Division and
$6.1 million for Texas and Oklahoma oil and natural gas
properties in the Southern Division. The impairments for 2001
consisted of $5.8 million for Wyoming oil and natural gas
properties in the Northern Division, $3.1 million for
offshore oil and natural gas properties in the Gulf of Mexico
Division and $0.5 million for Oklahoma oil and natural gas
properties in the Southern Division. Several factors can cause a
producing oil and natural gas property to become impaired,
including a decrease in oil and natural gas prices resulting in
a decrease in oil and natural gas reserve value, unsuccessful
development drilling and a decline in oil and natural gas
reserve value due to reserve volume reductions in
underperforming fields. Future changes in any of the
above-referenced factors could result in the Company recording
proved property impairment charges in future periods. Gains and
losses resulting from the disposition of proved properties are
included in operations.

Capitalized costs of proved properties are
depleted on a field-by-field basis using the units-of-production
method based upon proved oil and natural gas reserves. The
amortizable base of the Companys properties includes
estimated dismantlement, restoration and abandonment costs, net
of estimated salvage values. The Company adopted SFAS 143
Accounting for Asset Retirement Obligations on
January 1, 2003. SFAS 143 requires that an asset
retirement cost be capitalized as part of the cost of the asset.

Unproved properties are assessed periodically on
a project-by-project basis to determine whether an impairment
has occurred. Managements assessment of the results of
exploration activities, commodity price outlooks, planned future
sales or expiration of all or a portion of such projects impact
the amount and timing of impairment provisions. In 2003, 2002
and 2001, the Company recorded unproved property impairments of
$27.6 million, $10.0 million and $7.0 million,
respectively. The impairments for 2003 consisted of
$7.7 million for Wyoming and North Dakota leases in the
Northern Division, $12.7 million for offshore leases in the
Gulf of Mexico Division, $7.0 million for Texas, Oklahoma
and Louisiana leases in the Southern Division and
$0.2 million for Utah in the Western Division. The
impairments for 2002 consisted of $3.9 million for Wyoming
and North Dakota leases in the Northern Division,
$4.0 million for offshore leases in the Gulf of Mexico
Division and $2.1 million for Texas and Louisiana leases in
the Southern Division. The impairments for 2001 consisted of
$7.0 million for offshore leases held in the Gulf of Mexico
Division. Factors leading to recording unproved property
impairments include lease expirations and an assessment of the
lack of exploration opportunities existing on a lease. Future
changes in any of the

F-9



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

above-referenced factors could result in the
Company recording unproved property impairment charges in future
periods. Sales proceeds from unproved oil and natural gas
properties are credited to related costs of the prospect sold
until all such costs are recovered and then to net gain or loss
on sales of unproved oil and natural gas properties.



| |                                   
| | ----------------------------------
| | Goodwill and Intangible
    Assets

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141,
Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets.
SFAS No. 141 addresses accounting and reporting for
business combinations and is effective for all business
combinations initiated after June 30, 2001.
SFAS No. 142 addresses the accounting and reporting
for acquired goodwill and other intangible assets.

SFAS No. 142 eliminates the requirement
to amortize acquired goodwill; instead, such goodwill is to be
reviewed at least annually for impairment. Westport recorded
goodwill in connection with the Merger for its cost or
investment in excess of the fair value of the net acquired
assets as of August 21, 2001. In accordance with the
provisions of SFAS No. 142 no goodwill amortization
has been recorded. Westport adopted SFAS No. 142
effective January 1, 2002.

In accordance with SFAS No. 142,
Westport was required to perform an initial impairment review of
its goodwill as of January 1, 2002 and will perform an
annual impairment review hereafter. Westport completed the
initial step of the transitional goodwill impairment test during
the second quarter of fiscal 2002 in accordance with the
provisions of SFAS No. 142, which requires that this
step be completed within six months from the date of adoption.
This step of the goodwill impairment test compares the fair
value of a reporting unit with its carrying amount, including
goodwill. Based on results of these comparisons, goodwill in
each of Westports reporting units had not been impaired as
of June 30, 2002. The factors used to determine fair value
include estimates of reserves, future commodity prices, future
production estimates, anticipated capital expenditures, and a
discount rate commensurate with the risk associated with
realizing the expected future cash flows. Management has chosen
to use the traditional present value approach to determine the
fair value as opposed to the expected present value method. In
the traditional present value approach, a single set of
estimated cash flows and a single interest rate (commensurate
with the risk) are used to estimate fair value. In the expected
present value approach, multiple cash flow scenarios reflecting
the range of possible outcomes and a risk-free rate are used to
estimate fair value. Using the expected present value method
could result in different (and possibly higher) impairment
charges than those calculated using the traditional present
value method. Westport performed its annual impairment review as
of December 31, 2003 and 2002 and there was no impairment
of goodwill.

At the closing of the Merger the Company prepared
a preliminary allocation of the purchase price among the assets
and liabilities as of the closing date based on the information
provided by Belco. The purchase price exceeded the fair value of
the assets acquired and, as a result, the Company recorded
goodwill.

In its pre-closing engineering review of
Belcos properties, the Company focused on the proved
reserves, which accounted for the majority of the value of the
transaction. For those reserves, the Company reviewed the data
provided by Belco and engaged independent reserve engineers to
confirm the Companys reserve estimates. For Belcos
lower-valued properties the Company focused on the proved
reserves that were generating current cash flow (i.e.,
the proved developed producing assets). Because of the large
volume of data involved, limited available review time and
relatively low portion of the total transaction value
represented, the Company generally relied on reserve engineering
presented by Belco with respect to the proved non-producing and
proved undeveloped reserves on these lower-valued properties.
The Company used this information in making its preliminary
allocation of the purchase price

F-10



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and subsequently conducted a thorough
post-closing review of these properties as part of its final
purchase price allocation.

The post-closing evaluation was completed in the
second quarter of 2002, resulting in the reclassification to
goodwill of $19.7 million from unproved properties and
$10.3 million from proved properties. The Company also
increased goodwill by $1.9 million to reflect additional
Merger costs and other miscellaneous adjustments. The
information that caused the adjustment was not known by us at
closing because the volume of data relating to the acquired
enterprise and limited time available between execution of the
Merger agreement and the closing made a detailed review
impracticable.

The $19.7 million adjustment to unproved
properties resulted from a determination that the actual
inventory of net unproved acreage acquired in the Merger
consisted of 517,248 net undeveloped acres, rather than the
707,179 net undeveloped acres reported by Belco in
connection with the Merger. This 189,931 net acre reduction
was the result of three components affecting Belcos net
undeveloped acreage figures: (1) expiration of rights to
certain acreage prior to the closing date; (2) the failure
to initiate or cessation of development activities necessary to
maintain unearned option acreage; and (3) a duplication of
acreage that Westport had included in proved property. Using the
same per acre market value used in its original valuation,
Westport reduced the value assigned to the reduced acreage
included in Belcos unproved properties by
$19.7 million and transferred that amount to goodwill.

After the Merger, the Company engaged a third
party engineering firm to assess the fair value of certain
lower-valued Belco properties for possible sale or trade. These
properties included approximately 30 fields comprising a
portion of the lower 15% of the value of Belco properties
acquired in the Merger. The third party engineering firm
determined that the fair value of some those properties was
lower than had been estimated at the time of the Merger. The
reduction in fair value was based on the discovery that
anticipated modifications to waterfloods that had been assumed
in the Belco engineering report used in the Companys
preliminary valuation had not in fact occurred by the time of
the closing, and were not occurring on the offset or adjacent
leases. As a result, the Company reallocated approximately
$10.3 million from the affected proved properties to
goodwill.

The following table summarizes the goodwill
allocation to the reporting units as of December 31, 2003.

|                                                                                                                  |  |                |        |   |          |   |         |       |  |   |         |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | -------- | - | ------- | ----- |  | - | ------- | -
|                                                                                                                  |  | Northern       |        |   | Southern |   |         |      
|                                                                                                                  |  | Division       |        |   | Division |   |         |      
|                                                                                                                  |  | Segment        |        |   | Segment  |   |         | Total | 
|                                                                                                                  |  |                |        |   |          |   |         |       | 
|                                                                                                                  |  |               
|                                                                                                                  |  | (In thousands) |       
|Goodwill acquired (August 21, 2001)                                                                               |  | $              | 33,416 |   |          | $ | 181,428 |       |  | $ | 214,844 |  
|Adjustments confirmed by information received
    subsequent to the Merger that existed at the date of the Merger |  |                |       |   |          |   | 31,868  |       |  |   | 31,868  |  
|                                                                                                                  |  |                |        |   |          |   |         |       | 
|Balance as of December 31, 2002                                                                                   |  |                | 33,416 |   |          |   | 213,296 |       |  |   | 246,712 |  
|Sale of properties                                                                                                |  |                | (402   | ) |          |   | (1,670  | )     |  |   | (2,072  | )
|                                                                                                                  |  |                |        |   |          |   |         |       | 
|Balance as of December 31, 2003                                                                                   |  | $              | 33,014 |   |          | $ | 211,626 |       |  | $ | 244,640 |  
|                                                                                                                  |  |                |        |   |          |   |         |       | 

A reporting issue has arisen regarding the
application of certain provisions of SFAS No. 141 and
SFAS No. 142 to companies in the extractive
industries, including oil and natural gas companies. The issue
is whether SFAS No. 142 requires registrants to
classify the costs of mineral rights associated with extracting
oil and natural gas as intangible assets in the balance sheet,
apart from other capitalized oil and natural gas property costs,
and to provide specific footnote disclosures. Historically, we
have included the costs of mineral/drilling rights associated
with extracting oil and natural gas as tangible assets and as a
component of oil and natural gas properties. If it is ultimately
determined that SFAS No. 142 requires oil

F-11



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and natural as companies to classify costs of
mineral rights associated with extracting oil and natural gas as
a separate intangible assets line item on the balance sheet, we
would be required to reclassify the amounts as follows:

|                   |                                      |                                   |   |               |               |  |   |               |               | 
|------------------ | ------------------------------------ | --------------------------------- | - | ------------- | ------------- |  | - | ------------- | ------------- | 
|                   |                                      |                                  
|                   |                                      | December 31,                      |  
|                   |                                      |                                   |  
|                   |                                      | 2003                              |   |               | 2002          | 
|                   |                                      |                                   |   |               |               | 
|Intangible Assets: |                                      |                                   |   |               |               |  |   |              
|                   | Proved leasehold acquisition costs   |                                   | $ | 1,434,134,563 |               |  | $ | 1,089,490,036 |              
|                   | Unproved leasehold acquisition costs |                                   |   | 119,330,993   |               |  |   | 104,430,055   |              
|                   |                                      |                                   |   |               |               | 
|                   |                                      | Total leasehold acquisition costs |   |               | 1,553,465,556 |  |   |               | 1,193,920,091 | 
|                   | Less accumulated depletion           |                                   |   | (227,819,127  | )             |  |   | (168,081,488  | )            
|                   |                                      |                                   |   |               |               | 
|                   |                                      | Net leasehold acquisition costs   |   | $             | 1,325,646,429 |  |   | $             | 1,025,838,603 | 
|                   |                                      |                                   |   |               |               | 

Westports cash flows and results of
operations would not be affected since such intangible assets
would continue to be depleted and assessed for impairment in
accordance with SFAS No. 144. Further, the Company
does not believe the classification of the costs of mineral
rights associated with extracting oil and natural gas as
intangible assets would have any impact on its compliance with
covenants under its debt agreements.



| |                     
| | --------------------
| | Capitalized Interest

The Company capitalizes interest on expenditures
of significant exploration and development projects while
activities are in progress to bring the assets to their intended
use. The Company began capitalizing interest in 2002 during
which $45,000 was capitalized. In 2003, $144,000 was capitalized.



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

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in the consolidation.



| |                                     
| | ------------------------------------
| | Earnings (Loss) per Common
    Share

The Company follows the provisions of
SFAS No. 128, Earnings Per Share. Basic
earnings per share is computed based on the weighted average
number of common shares outstanding. Diluted earnings per share
is computed based on the weighted average number of common
shares outstanding adjusted for the incremental shares
attributed to outstanding options and warrants to purchase
common stock. All options to purchase common shares were
excluded from the computation of diluted earnings per share in
2002 because they were antidilutive as a result of the
Companys net loss in that year. Dilutive securities of the
Company consist entirely of outstanding options to purchase the
Companys common stock. The Companys
6 1/2% convertible preferred stock was antidilutive
for the period it has been outstanding.



| |                                          
| | -----------------------------------------
| | Consolidated Statements of Cash
    Flows

For purposes of the Statements of Cash Flows, the
costs of exploratory dry holes are included in cash flows from
investing activities.



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

The Company computes income taxes in accordance
with SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires an asset and
liability approach which results in the recognition of deferred

F-12



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

tax liabilities and assets for the expected
future tax consequences of temporary differences between the
carrying amounts and the tax basis of those assets and
liabilities. SFAS No. 109 also requires the recording
of a valuation allowance if it is more likely than not that some
portion or all of a deferred tax asset will not be realized.



| |                                                                        
| | -----------------------------------------------------------------------
| | Building, Office Furniture and Equipment
    and Leasehold Improvements

Building, office furniture and equipment are
stated at cost and are depreciated using the straight-line
method over their estimated useful lives of three to
20 years. Leasehold improvements are amortized over the
life of the related lease. Maintenance and repairs are charged
to expense as incurred. Gains or losses on dispositions of
office furniture and equipment are included in operations.



| |                    
| | -------------------
| | Derivative Activity

The Company periodically enters into commodity
derivative contracts and fixed-price physical contracts to
manage its exposure to oil and natural gas price volatility. The
Company primarily utilizes future contracts, swaps or options
which are generally placed with major financial institutions or
with counterparties of high credit quality that the Company
believes are minimal credit risks. The oil and natural gas
reference prices of these commodity derivatives contracts are
based upon crude oil and natural gas futures which have a high
degree of historical correlation with actual prices received by
the Company.

On January 1, 2001, the Company adopted
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. Under
SFAS No. 133 all derivative instruments are recorded
on the balance sheet at fair value. Changes in the
derivatives fair value are recognized currently in
earnings unless specific hedge accounting criteria are met. For
qualifying cash flow hedges, the gain or loss on the derivative
is deferred in accumulated other comprehensive income (loss) to
the extent the hedge is effective. For qualifying fair value
hedges, the gain or loss on the derivative is offset by related
results of the hedged item in the income statement. Gains and
losses on hedging instruments included in accumulated other
comprehensive income (loss) are reclassified to oil and natural
gas sales revenue in the period that the related production is
delivered. Derivative contracts that do not qualify for hedge
accounting treatment are recorded as derivative assets and
liabilities at fair value in the consolidated balance sheet, and
the associated unrealized gains and losses are recorded as
current expense or income in the consolidated statement of
operations. While such derivative contracts do not qualify for
hedge accounting, management believes these contracts can be
utilized as an effective component of CPRM activities to help
reduce volatility of expected revenues. See Notes 3
and 7.



| |                           
| | --------------------------
| | Stock Compensation Expense

Stock compensation expense consists of noncash
charges resulting from the application of the provisions of FASB
Interpretation No. 44 to certain stock options granted to
employees and issuance of restricted stock to certain employees.
Under Interpretation No. 44 the Company is required to
measure compensation cost on stock options that are considered
to be variable awards until the date of exercise, forfeiture or
expiration of such options. Compensation cost is measured for
the amount of any increases in the Company stock price and
recognized over the remaining vesting period of the options. Any
decrease in the Company stock price will be recognized as a
decrease in compensation cost limited to the amount of
compensation cost previously recognized as a result of an
increase in the Company stock price.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying amounts of the Companys cash,
accounts receivable, accounts payable and accrued expenses
approximate fair value due to the short-term maturities of these
assets and liabilities. The carrying amount of the
Companys long-term debt approximates fair value based on
the variable borrowing

F-13



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

rate of the credit facility and the interest rate
swaps in place that hedge the fair value of a portion of the
senior subordinated notes.



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

The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles in the United States of America requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.

The Companys consolidated financial
statements are based on a number of significant estimates
including oil and natural gas reserve quantities which are the
basis for the calculation of depletion, impairment of oil and
natural gas properties and impairment of goodwill.



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

The Company follows the provisions of
SFAS No. 130, Reporting Comprehensive
Income, which establishes standards for reporting and
display of comprehensive income and its components in a full set
of general-purpose financial statements. In addition to net
income, comprehensive income includes all changes in equity
during a period, except those resulting from investments and
distributions to owners.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 requires entities to
record the fair value of liabilities for retirement obligations
of acquired assets. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002. The Company
adopted SFAS No. 143 on January 1, 2003 and
recorded a cumulative effect of a change in accounting principle
on prior years of $3.4 million, net of tax effects, related
to the depreciation and accretion expense that would have been
reported had the fair value of the asset retirement obligations,
and corresponding increase in the carrying amount of the related
long-lived assets, been recorded when incurred. The
Companys asset retirement obligations arise from the
plugging and abandonment liabilities for its oil and gas wells
and offshore platform facilities. On January 1, 2003, the
Company also recorded $58.7 million of asset retirement
obligations (using a 7.6% discount rate), an increase in the
carrying amount of its oil and gas properties of
$49.6 million and a decrease to accumulated depreciation of
$3.8 million. Changes to the Companys asset
retirement obligations from January 1 to December 31
of 2003 are presented below:

|                                              |  |                |        |  
|--------------------------------------------- |  | -------------- | ------ | -
|                                              |  | 2003           |       
|                                              |  |                |       
|                                              |  | (In thousands) |       
|Asset retirement obligation  January 1       |  | $              | 58,735 |  
|Accretion                                     |  |                | 4,201  |  
|Additions                                     |  |                | 10,303 |  
|Revisions                                     |  |                | 2,260  |  
|Settlements                                   |  |                | (4,773 | )
|                                              |  |                |       
|Asset retirement obligation 
    December 31 |  |                | 70,726 |  
|Less: Current asset retirement obligation     |  |                | (8,017 | )
|                                              |  |                |       
|Long-term asset retirement obligation         |  | $              | 62,709 |  
|                                              |  |                |       

F-14



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Companys current and long-term asset
retirement obligations are included in current asset retirement
obligation and long-term asset retirement obligation,
respectively, on the accompanying December 31, 2003
consolidated balance sheet.

The pro forma effects of the application of
SFAS No. 143, as if the Statement had been adopted net
of tax on January 1, 2002 (rather than January 1,
2003), are presented below:

|                                                   |             |                    |   |        |      |  |   |         |  
|-------------------------------------------------- | ----------- | ------------------ | - | ------ | ---- |  | - | ------- | -
|                                                   |             |                   
|                                                   |             | Pro Forma          |  
|                                                   |             | For the Year       |  
|                                                   |             | Ended December 31, |  
|                                                   |             |                    |  
|                                                   |             | 2003               |   |        | 2002 | 
|                                                   |             |                    |   |        |      | 
|                                                   |             |                   
|                                                   |             | (In thousands)     |  
|Net income (loss) available to common stockholders |             |                    |   |        |      |  |   |        
|                                                   | As reported |                    | $ | 64,344 |      |  | $ | (33,328 | )
|                                                   | Pro forma   |                    |   | 67,758 |      |  |   | (36,742 | )
|Basic net income (loss) per common share           |             |                    |   |        |      |  |   |        
|                                                   | As reported |                    | $ | 0.96   |      |  | $ | (0.63   | )
|                                                   | Pro forma   |                    |   | 1.01   |      |  |   | (0.69   | )
|Diluted net income (loss) per common share         |             |                    |   |        |      |  |   |        
|                                                   | As reported |                    | $ | 0.94   |      |  | $ | (0.63   | )
|                                                   | Pro forma   |                    |   | 0.99   |      |  |   | (0.69   | )

In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13
and Technical Corrections. Prior to the adoption of the
provisions of SFAS No. 145, GAAP required that gains
or losses on the early extinguishment of debt be classified in a
companys periodic consolidated statements of operations as
extraordinary gains or losses, net of associated income taxes,
below the determination of income or loss from continuing
operations. SFAS No. 145 changed GAAP to require,
except in the case of events or transactions of a highly unusual
and infrequent nature, gains or losses from the early
extinguishment of debt be classified as components of a
companys income or loss from continuing operations. The
Company adopted the provisions of SFAS No. 145 on
January 1, 2003. In May 2003, the Company recorded a
$0.9 million loss in connection with the early
extinguishment of debt in 2003.

In June 2002, the FASB issued
SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair
value only when the liability is incurred.
SFAS No. 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The
Company adopted SFAS No. 146 on January 1, 2003.
The adoption of SFAS No. 146 has not had an effect on
the Companys financial position or results of operations.

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-based
Compensation-Transition and Disclosure. SFAS 148
amended FASB Statement No. 123, Accounting for
Stock-Based Compensation to provide alternative methods of
transition for a voluntary change to the fair-value based method
of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on the reported results. The provisions of
SFAS 148 has no material impact on us, as we do not plan to
adopt the fair-value method of accounting for stock options at
the current time. We have included the required disclosures in
Note 9 to the Consolidated Financial Statements.

In November 2002, the FASB issued Financial
Interpretation No. 45, Guarantors Accounting
and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others  an

F-15



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

interpretation of FASB Statements No. 5, 57,
and 107 and rescission of FASB Interpretation No. 34
(FIN 45). FIN 45 elaborates on the disclosures to be
made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002,
irrespective of the guarantors fiscal year-end. The
disclosure requirements are effective for financial statements
of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 has not had any effect on the
Companys financial position or results of operations.

In January 2003, the FASB issued Financial
Interpretation No. 46, Consolidation of Variable
Interest Entities  an interpretation of ARB
No. 51 (FIN 46). FIN 46 is an
interpretation of Accounting Research Bulletin 51,
Consolidated Financial Statements, and addresses
consolidation by business enterprises of variable interest
entities (VIEs). The primary objective of the
Interpretation is to provide guidance on the identification of,
and financial reporting for, entities over which control is
achieved through means other than voting rights; such entities
are known as VIEs. FIN 46 requires an enterprise to
consolidate a VIE if that enterprise has a variable interest
that will absorb a majority of the entitys expected losses
if they occur, receive a majority of the entitys expected
residual returns if they occur, or both. An enterprise shall
consider the rights and obligations conveyed by its variable
interests in making this determination. This guidance applies
immediately to variable interest entities created after
January 31, 2003, and to variable interest entities in
which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which
an enterprise holds a variable interest that it acquired before
February 1, 2003. At this time, the Company does not have a
VIE.

In April 2003, FASB issued
SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.
SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003.
The Company adopted SFAS No. 149 on July 1, 2003
and it has not had a material impact on its financial condition
and results of operations.

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 changes the accounting for
certain financial instruments that, under previous guidance,
issuers could account for as equity. FASB No. 150 requires
that those instruments be classified as liabilities in
statements of financial position. SFAS No. 150 is
effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after
June 15, 2003. The adoption of SFAS No. 150 has
not had any effect on the Companys financial position or
results of operations.

F-16



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|2. | Mergers & Acquisitions



| |                        
| | -----------------------
| | South Texas Acquisition

On December 18, 2003, the Company acquired
oil and gas properties located in South Texas, also referred to
as the South Texas Acquisition, for a total cash purchase price
of approximately $341.7 million, which includes certain
purchase price adjustments, allocated as follows (in thousands):

|                              |                                   |                  |   |         |         | 
|----------------------------- | --------------------------------- | ---------------- | - | ------- | ------- | 
|Allocation of purchase price: |                                   |                  |   |        
|                              | Oil and gas properties  proved   |                  | $ | 308,149 |        
|                              | Oil and gas properties  unproved |                  |   | 38,222  |        
|                              | Assumed liabilities               |                  |   | (4,690  | )      
|                              |                                   |                  |  
|                              |                                   | Total allocation |   | $       | 341,681 | 
|                              |                                   |                  |  



| |                        
| | -----------------------
| | Uinta Basin Acquisition

On December 17, 2002, effective as of
June 1, 2002, the Company acquired producing properties,
undeveloped leaseholds, gathering and compression facilities and
other related assets in the Greater Natural Buttes area of
Uintah County, Utah from affiliates of El Paso Corporation
for approximately $507.2 million (the Uinta Basin
Acquisition), which includes certain purchase price
adjustments. The Companys newly formed Western Division is
comprised substantially of these properties.

The total purchase price of $507.2 million
was allocated as follows (in thousands):

|                              |                                   |                  |   |         |         | 
|----------------------------- | --------------------------------- | ---------------- | - | ------- | ------- | 
|Allocation of purchase price: |                                   |                  |   |        
|                              | Oil and gas properties  proved   |                  | $ | 464,481 |        
|                              | Oil and gas properties  unproved |                  |   | 3,500   |        
|                              | Gathering assets                  |                  |   | 39,185  |        
|                              |                                   |                  |  
|                              |                                   | Total allocation |   | $       | 507,166 | 
|                              |                                   |                  |  



| |                                                
| | -----------------------------------------------
| | Pro Forma Results of Operations
    (Unaudited)

The following table reflects the pro forma
results of operations for the respective years ended
December 31, 2002 and 2001 as though the Uinta Basin
Acquisition and the Merger, had occurred as of January 1 of
each year presented. The pro forma amounts are not necessarily
indicative of the results that may be reported in the future.
The Company began consolidating the results of the Uinta Basin
Acquisition with the results of Westport as of December 17,
2002.

|                                    |  |                        |         |   |      |   |         | 
|----------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | 
|                                    |  |                       
|                                    |  | For the Year Ended     |        
|                                    |  | December 31,           |        
|                                    |  |                        |        
|                                    |  | 2002                   |         |   | 2001 |  
|                                    |  |                        |         |   |      |  
|                                    |  |                       
|                                    |  | (In thousands,         |        
|                                    |  | except per share data) |        
|Revenues                            |  | $                      | 461,584 |   |      | $ | 645,713 | 
|Net income (loss)                   |  |                        | (33,746 | ) |      |   | 124,090 | 
|Basic net income (loss) per share   |  |                        | (0.52   | ) |      |   | 1.82    | 
|Diluted net income (loss) per share |  |                        | (0.52   | ) |      |   | 1.80    | 

F-17



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Southeast Texas Acquisition

On September 30, 2002, the Company acquired
oil and gas properties located in Southeast Texas, (the
Southeast Texas Acquisition) for a total cash
purchase price of approximately $122.6 million, which was
allocated as follows (in thousands):

|                              |                                   |                  |   |         |         | 
|----------------------------- | --------------------------------- | ---------------- | - | ------- | ------- | 
|Allocation of purchase price: |                                   |                  |   |        
|                              | Oil and gas properties  proved   |                  | $ | 111,623 |        
|                              | Oil and gas properties  unproved |                  |   | 10,636  |        
|                              | Seismic licenses                  |                  |   | 2,936   |        
|                              | Assumed liabilities               |                  |   | (2,568  | )      
|                              |                                   |                  |  
|                              |                                   | Total allocation |   | $       | 122,627 | 
|                              |                                   |                  |  



|   |                                                            
|-- | -----------------------------------------------------------
|3. | Commodity Derivative Instruments and Hedging
    Activities

The Company periodically enters into commodity
price risk management (CPRM) transactions to manage
its exposure to oil and gas price volatility. CPRM transactions
may take the form of futures contracts, swaps or options. All
CPRM data is presented in accordance with requirements of
SFAS No. 133 which the Company adopted on
January 1, 2001. Accordingly, unrealized gains and losses
related to the change in fair market value of derivative
contracts which qualify and are designated as cash flow hedges
are recorded as other comprehensive income or loss and such
amounts are reclassified to oil and gas sales revenues as the
associated production occurs. Derivative contracts that do not
qualify for hedge accounting treatment are recorded as
derivative assets and liabilities at market value in the
consolidated balance sheet, and the associated unrealized gains
and losses are recorded as current expense or income in the
consolidated statement of operations. While such derivative
contracts do not qualify for hedge accounting, management
believes these contracts can be utilized as an effective
component of CPRM activities.

Upon adoption of SFAS No. 133 on
January 1, 2001, the Company recorded a derivative
liability of approximately $4.7 million for the fair market
value of its derivative instruments designated as cash flow
hedges and a corresponding loss of approximately
$3.1 million (net of tax effect of $1.6 million) as a
cumulative effect of a change in accounting principle in other
comprehensive income. For the years ended December 31,
2003, 2002 and 2001 the Company reclassified approximately
$102.4 million, $1.3 million of hedging losses and
$2.1 million of hedging gains out of accumulated other
comprehensive income into oil and gas sales revenues,
respectively. The hedging losses and gains reclassified to
revenues include cash losses of $105.4 million,
$8.2 million and $4.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. As of
December 31, 2003, the Company expects to reclassify
approximately $101.6 million of loss into earnings from
accumulated other comprehensive income during 2004.

For the years ended December 31, 2003, 2002
and 2001, the Company recorded non-hedge CPRM settlements of
$2.7 million, $0.8 million and $15.3 million,
respectively. The non-hedge CPRM settlements reflect cash
settlements of ($1.0) million, ($2.9) million and
$3.6 million for the years ended December 31, 2003,
2002 and 2001, respectively.

For the years ended December 31, 2003, 2002
and 2001, the Company recorded unrealized non-hedge change in
fair value of derivatives of $9.5 million which included
$2.9 million ineffectiveness loss, ($26.7) which included a
$0.1 million ineffectiveness loss and $14.3 million
with no ineffectiveness, respectively. The majority,
$18.2 million, of the non-hedge loss in fair value of
derivatives for 2002 was related to derivative contracts entered
into in anticipation of the expected production acquired in the
Uinta Basin Acquisition. Upon closing of the transaction the
derivative contracts qualified for hedge accounting treatment.

F-18



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

As of December 31, 2003, the Company had:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 4.8 Mmbbls of oil and 71.3 Bcf of
    natural gas subject to CPRM contracts for 2004. Of these
    contracts, all of the oil and 60.3 Bcf of the natural gas
    contracts are subject to weighted average floor prices of
    $25.41 per barrel and $4.20 per Mmbtu and weighted
    average New York Mercantile Exchange (NYMEX)
    ceiling prices of $26.44 per barrel and $4.34 per
    Mmbtu, respectively, excluding the effect, if any, of the
    three-way floor price. The remaining 2004 natural gas CPRM
    contract settlements are calculated based on the Northwest
    Pipeline Rocky Mountain Index (NWPRM) at a weighted
    average swap price of $3.33 per Mmbtu. In addition,
    included in the 71.3 Bcf of natural gas contracts are basis
    swaps covering 3.7 Bcf of natural gas for 2004 that lock in
    the pricing differential between NYMEX and NWPRM at a weighted
    average price differential of $0.66 per Mmbtu and
    9.2 Bcf of natural gas for 2004 that lock in the pricing
    differential between NYMEX and Colorado Interstate Gas Index
    (CIG) at a weighted average price differential of
    $0.76 per Mmbtu.
|
| |  | 1.8 Mmbbls of oil and 42.0 Bcf of
    natural gas subject to CPRM contracts for 2005, with a weighted
    average NYMEX floor price of $25.00 per barrel and
    $4.25 per Mmbtu and weighted average NYMEX ceiling price of
    $28.23 per barrel and $5.02 per Mmbtu. In addition,
    included in the 42.0 Bcf of natural gas contracts are basis
    swaps covering 3.7 Bcf of natural gas for 2005 that lock in
    the pricing differential between NYMEX and NWPRM at a weighted
    average price differential of $0.78 per Mmbtu.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 0.7 Mmbbls of oil and 7.3 Bcf of
    natural gas subject to CPRM contracts for 2006, with a weighted
    average NYMEX floor price of $25.00 per barrel and
    $4.00 per Mmbtu and weighted average NYMEX ceiling price of
    $28.65 per barrel and $6.00 per Mmbtu.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-19



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below provides details about the
volumes and prices of all open CPRM hedge commitments as of
December 31, 2003.

|                                                                                               |                         |                                               |                                      |      |       |      |         |      |       |      |        |   |       |   | 
|---------------------------------------------------------------------------------------------- | ----------------------- | --------------------------------------------- | ------------------------------------ | ---- | ----- | ---- | ------- | ---- | ----- | ---- | ------ | - | ----- | - | 
|                                                                                               |                         | 2004                                          |                                      |      | 2005  |      |         | 2006 |      
|                                                                                               |                         |                                               |                                      |      |       |      |         |      |      
|Hedges                                                                                         |                         |                                               |                                      |      |       |      |         |      |       |      |        |  
|Natural Gas                                                                                    |                         |                                               |                                      |      |       |      |         |      |       |      |        |  
|NYMEX Price Swaps Sold  receive fixed
    price (thousand Mmbtu)(1)                           |                         |                                               | 40,260                               |      |       |      | 20,075  |      |       |      |       |  
|                                                                                               | Average price per Mmbtu |                                               | $                                    | 4.42 |       |      | $       | 4.42 |       |      | $      |   |      
|NWPRM Price Swaps Sold  receive fixed
    price (thousand Mmbtu)(2)                           |                         |                                               | 10,980                               |      |       |      |        |      |       |      |       |  
|                                                                                               |                         | Average price per Mmbtu                       |                                      | $    | 3.33  |      |         |      |      |      |        |   |      |  
|NYMEX Collars Sold (thousand Mmbtu)(3)                                                         |                         |                                               | 16,380                               |      |       |      | 21,900  |      |       |      |       |  
|                                                                                               |                         | Average floor price per Mmbtu                 |                                      | $    | 3.70  |      |         | $    | 4.09  |      |        |   |      |  
|                                                                                               |                         | Average ceiling price per Mmbtu               |                                      | $    | 4.00  |      |         | $    | 5.57  |      |        |   |      |  
|NYMEX Three  way Collars (thousand
    Mmbtu)(3)(4)                                           |                         |                                               | 3,660                                |      |       |      |        |      |       |      | 7,300  |  
|                                                                                               |                         | Average floor price per Mmbtu                 |                                      | $    | 4.00  |      |         |      |      |      |        | $ | 4.00  |  
|                                                                                               |                         | Average ceiling price per Mmbtu               |                                      | $    | 5.00  |      |         |      |      |      |        | $ | 6.00  |  
|                                                                                               |                         | Three  way average floor price per
    Mmbtu |                                      | $    | 3.15  |      |         |      |      |      |        |   | 3.04  |  
|Basic Swaps versus NYMEX(5)                                                                    |                         |                                               |                                      |      |       |      |         |      |       |      |        |  
|                                                                                               |                         | NWPRM (thousand Mmbtu)                        |                                      |      | 3,660 |      |         |      | 3,650 |      |        |   |      |  
|                                                                                               |                         |                                               | Average differential price per Mmbtu |      | $     | 0.66 |         |      | $     | 0.78 |        |   |       |  | 
|                                                                                               |                         | CIG (thousand Mmbtu)                          |                                      |      | 9,150 |      |         |      |      |      |        |   |      |  
|                                                                                               |                         |                                               | Average differential price per Mmbtu |      | $     | 0.76 |         |      |       |     |        |   |       |  | 
|Oil                                                                                            |                         |                                               |                                      |      |       |      |         |      |       |      |        |  
|NYMEX Price Swaps Sold  receive fixed
    price (Mbbls)(1)                                    |                         |                                               | 3,294                                |      |       |      |        |      |       |      |       |  
|                                                                                               |                         | Average price per bbl                         |                                      | $    | 25.87 |      |         |      |      |      |        |   |      |  
|NYMEX Three-way Collars (Mbbls)(3)(4)                                                          |                         |                                               | 1,464                                |      |       |      | 1,825   |      |       |      | 730    |  
|                                                                                               |                         | Average floor price per bbl                   |                                      | $    | 24.38 |      |         | $    | 25.00 |      |        | $ | 25.00 |  
|                                                                                               |                         | Average ceiling price per bbl                 |                                      | $    | 27.71 |      |         | $    | 28.23 |      |        | $ | 28.65 |  
|                                                                                               |                         | Three-way average floor price per bbl         |                                      | $    | 19.25 |      |         | $    | 20.93 |      |        | $ | 20.88 |  
|Estimated fair value of oil and gas
    derivatives as of December 31, 2003 (in
    thousands) |                         | $                                             | (101,600                             | )    |       | $    | (17,373 | )    |       | $    | (1,648 | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For any particular NYMEX swap sold transaction,
    the Counterparty is required to make a payment to Westport in
    the event that the NYMEX Reference Price for any settlement
    period is less than the swap price for such hedge, and Westport
    is required to make a payment to the Counterparty in the event
    that the NYMEX Reference Price for any settlement period is
    greater than the swap price for such hedge.
|   
|(2) | For any particular NWPRM swap sold transaction,
    the Counterparty is required to make a payment to Westport in
    the event that the NWPRM Index Price for any settlement period
    is less than the swap price for such hedge, and Westport is
    required to make a payment to the Counterparty in the event that
    the NWPRM Index Price for any settlement period is greater than
    the swap price for such hedge.        
|   
|(3) | For any particular NYMEX collar transaction, the
    counterparty is required to make a payment to Westport if the
    average NYMEX Reference Price for the reference period is below
    the floor price for                                                                                                                                                                                                                          

F-20



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | such transaction, and Westport is required to
    make payment to the counterparty if the average NYMEX Reference
    Price is above the ceiling price of such transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(4) | Three way collars are settled as described in
    footnote (3) above, with the following exception: if the
    NYMEX Reference Price falls below the three-way floor price, the
    average floor price is reduced by the amount the NYMEX Reference
    Price is below the three-way floor price. For example, if the
    NYMEX Reference Price is $18.00 per bbl during the term of
    the 2004 three-way collars, then the average floor price would
    be $23.13 per bbl.                                                                                                                                             
|   
|(5) | For any particular basis swap versus NYMEX, the
    counterparty is required to make a payment to Westport in the
    event that the difference between the NYMEX Reference Price and
    the applicable published index (NWPRM or CIG) for any settlement
    period is greater than the swap differential price for such
    hedge, and Westport is required to make a payment to the
    counterparty in the event that the difference between the NYMEX
    Reference Price and the applicable published index (NWPRM or
    CIG) for any settlement period is less than the swap
    differential price for such hedge.

Also see Note 7 of the Consolidated
Financial Statements for interest rate hedge disclosures.



|   |                                                             
|-- | ------------------------------------------------------------
|4. | Earnings Per Share and Other Comprehensive
    Income (Loss)



| |                   
| | ------------------
| | Earnings per Share

Basic earnings per share are computed by dividing
net earnings attributable to common stock by the weighted
average number of common shares outstanding during each period,
excluding treasury shares. Diluted earnings per share are
computed by adjusting the average number of common shares
outstanding for the dilutive effect, if any, of convertible
preferred stock and stock options.

The following sets forth the calculation of basic
and diluted earnings per share:

|                             |                                                                                                         |                                                |   |        |      |  |   |         |   | 
|---------------------------- | ------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | - | ------ | ---- |  | - | ------- | - | 
|                             |                                                                                                         |                                               
|                             |                                                                                                         | For the Year Ended                             |  
|                             |                                                                                                         |                                                |  
|                             |                                                                                                         | 2003                                           |   |        | 2002 | 
|                             |                                                                                                         |                                                |   |        |      | 
|                             |                                                                                                         |                                               
|                             |                                                                                                         | (In thousands, except                          |  
|                             |                                                                                                         | per share data)                                |  
|Net income (loss) per share: |                                                                                                         |                                                |   |        |      |  |   |        
|                             | Net income (loss) before cumulative effect of
    change in accounting principle                        |                                                | $ | 72,521 |      |  | $ | (28,566 | )
|                             | Cumulative change in accounting principle                                                               |                                                |   | (3,414 | )    |  |   |        |  
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Net income (loss)                                                                                       |                                                |   | 69,107 |      |  |   | (28,566 | )
|                             | Preferred stock dividends                                                                               |                                                |   | (4,763 | )    |  |   | (4,762  | )
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Net income (loss) available to common stockholders                                                      |                                                | $ | 64,344 |      |  | $ | (33,328 | )
|                             | Weighted average common shares outstanding                                                              |                                                |   | 67,116 |      |  |   | 53,007  |  
|                             |                                                                                                         | Add dilutive effects of employee stock options |   |        | 987  |  |   |         |  | 
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Weighted average common shares outstanding
    including the effects of dilutive securities             |                                                |   | 68,103 |      |  |   | 53,007  |  
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Basic earnings (loss) per share common before
    cumulative effect of change in accounting principle   |                                                | $ | 1.01   |      |  | $ | (0.63   | )
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Basic earnings (loss) per common share                                                                  |                                                | $ | 0.96   |      |  | $ | (0.63   | )
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Diluted earnings (loss) per common share before
    cumulative effect of change in accounting principle |                                                | $ | 0.99   |      |  | $ | (0.63   | )
|                             |                                                                                                         |                                                |   |        |      | 
|                             | Diluted earnings (loss) per common share                                                                |                                                | $ | 0.94   |      |  | $ | (0.63   | )
|                             |                                                                                                         |                                                |   |        |      | 

F-21



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Comprehensive Income (Loss)

The Company follows SFAS No. 130,
Reporting Comprehensive Income, which establishes
standards for reporting comprehensive income. In addition to net
income, comprehensive income includes all changes in equity
during a period, except those resulting from investments and
distributions to the owners of the Company. The components of
other comprehensive income (loss) and related tax effects for
the twelve months ended December 31, 2003 and 2002 are as
follows:

|                                                                                  |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |   |        |        |   |   |         |         |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------ | ------- | -------- | ----------------- | - | ------- | ------- | - | - | ------ | -------- | - | ---------- | ------- | ------- | --- | - | ------ | ------ | - | - | ------- | ------- | -
|                                                                                  |                                                            |                   
|                                                                                  |                                                            | For the Year Ended |        
|                                                                                  |                                                            |                    |        
|                                                                                  |                                                            |                    |         |         
|                                                                                  |                                                            | December 31, 2003  |         |          | December 31, 2002 |  
|                                                                                  |                                                            |                    |         |          |                   |  
|                                                                                  |                                                            | Gross              |         |          | Tax Effect        |   |         | Net     |   |   | Gross  |          |   | Tax Effect |         |         | Net |  
|                                                                                  |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |  
|                                                                                  |                                                            |                   
|                                                                                  |                                                            | (In thousands)     |        
|Net income (loss) available to common stockholders                                |                                                            | $                  | 103,929 |          |                   | $ | (39,585 | )       |   | $ | 64,344 |          |   | $          | (52,880 | )       |     | $ | 19,552 |        |   | $ | (33,328 | )      
|Add preferred stock dividends                                                     |                                                            |                    | 4,763   |          |                   |   |        |         |   |   | 4,763  |          |   |            | 4,762   |         |     |   |       |        |   |   | 4,762   |        
|                                                                                  |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |  
|Net income (loss) available to common
    stockholders before preferred dividends |                                                            |                    | 108,692 |          |                   |   | (39,585 | )       |   |   | 69,107 |          |   |            | (48,118 | )       |     |   | 19,552 |        |   |   | (28,566 | )      
|Other comprehensive income                                                        |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |   |        |        |   |   |         |        
|                                                                                  | Change in fair value of derivative hedging
    instruments |                    |         | (184,838 | )                 |   |         | 67,466  |   |   |        | (117,372 | ) |            |         | (44,065 | )   |   |        | 16,084 |   |   |         | (27,981 | )
|                                                                                  | Enron non-cash settlements reclassified to income          |                    |         | (1,915   | )                 |   |         | 699     |   |   |        | (1,216   | ) |            |         | (1,443  | )   |   |        | 527    |   |   |         | (916    | )
|                                                                                  | Hedge settlements reclassified to income                   |                    |         | 104,283  |                   |   |         | (38,063 | ) |   |        | 66,220   |   |            |         | 2,559   |     |   |        | (934   | ) |   |         | 1,625   |  
|                                                                                  | Currency translation adjustment                            |                    |         | 566      |                   |   |         | (206    | ) |   |        | 360      |   |            |         | (254    | )   |   |        | 93     |   |   |         | (161    | )
|                                                                                  |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |  
|Comprehensive income (loss)                                                       |                                                            | $                  | 26,788  |          |                   | $ | (9,689  | )       |   | $ | 17,099 |          |   | $          | (91,321 | )       |     | $ | 35,322 |        |   | $ | (55,999 | )      
|                                                                                  |                                                            |                    |         |          |                   |   |         |         |   |   |        |          |   |            |         |         |     |  



|   |                             
|-- | ----------------------------
|5. | Concentration of Credit Risk

The Company has accounts with separate banks in
Denver, Colorado, Dallas, Texas and Calgary, Canada. The Company
invests substantially all available cash in overnight investment
accounts consisting of U.S. Treasury obligations and
commercial paper. At December 31, 2003, the balance in the
overnight investment accounts was $68.3 million.

The Company sells its oil and natural gas
production to companies it believes to be creditworthy. Actual
losses relating to product sales have been immaterial and
currently the Company does require collateral from certain
companies.

F-22



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |             
|-- | ------------
|6. | Income Taxes

The components of the provision for income taxes
are as follows:

|                           |         |                                 |        |        |      |   |         |         |   |   |        |        | 
|-------------------------- | ------- | ------------------------------- | ------ | ------ | ---- | - | ------- | ------- | - | - | ------ | ------ | 
|                           |         |                                
|                           |         | For the Year Ended December 31, |       
|                           |         |                                 |       
|                           |         | 2003                            |        |        | 2002 |   |         | 2001    |  
|                           |         |                                 |        |        |      |   |         |         |  
|                           |         |                                
|                           |         | (In thousands)                  |       
|Current:                   |         |                                 |        |        |      |   |         |         |   |   |        |       
|                           | Federal |                                 | $      | 13,331 |      |   | $       | (1,894  | ) |   | $      | 1,806  | 
|                           | State   |                                 |        | 902    |      |   |         | (200    | ) |   |        | 200    | 
|                           |         |                                 |        |        |      |   |         |         |  
|                           |         |                                 | 14,233 |        |      |   | (2,094  | )       |   |   | 2,006  |       
|                           |         |                                 |        |        |      |   |         |         |  
|Deferred:                  |         |                                 |        |        |      |   |         |         |   |   |        |       
|                           | Federal |                                 |        | 24,367 |      |   |         | (16,736 | ) |   |        | 25,654 | 
|                           | State   |                                 |        | 985    |      |   |         | (722    | ) |   |        | 977    | 
|                           |         |                                 |        |        |      |   |         |         |  
|                           |         |                                 | 25,352 |        |      |   | (17,458 | )       |   |   | 26,631 |       
|                           |         |                                 |        |        |      |   |         |         |  
|Provision for income taxes |         | $                               | 39,585 |        |      | $ | (19,552 | )       |   | $ | 28,637 |       
|                           |         |                                 |        |        |      |   |         |         |  

The difference between the provision for income
taxes and the amounts computed by applying the U.S. Federal
statutory rate are as follows:

|                                                       |  |                                 |        |   |      |   |         |      |  |   |        | 
|------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | 
|                                                       |  |                                
|                                                       |  | For the Year Ended December 31, |       
|                                                       |  |                                 |       
|                                                       |  | 2003                            |        |   | 2002 |   |         | 2001 | 
|                                                       |  |                                 |        |   |      |   |         |      | 
|                                                       |  |                                
|                                                       |  | (In thousands)                  |       
|Federal statutory rate of 35%                          |  | $                               | 39,237 |   |      | $ | (16,841 | )    |  | $ | 27,460 | 
|State income taxes, net of Federal effect              |  |                                 | 1,682  |   |      |   | (722    | )    |  |   | 1,177  | 
|Other permanent differences                            |  |                                 | (815   | ) |      |   | 21      |      |  |   |       | 
|Other                                                  |  |                                 |       |   |      |   | 84      |      |  |   |       | 
|Adjustment to prior years estimated tax
    liability |  |                                 | (519   | ) |      |   | (2,094  | )    |  |   |       | 
|                                                       |  |                                 |        |   |      |   |         |      | 
|                                                       |  | $                               | 39,585 |   |      | $ | (19,552 | )    |  | $ | 28,637 | 
|                                                       |  |                                 |        |   |      |   |         |      | 

F-23



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Components of the net long-term deferred tax
liabilities are comprised of the following:

|                          |                                                               |                                      |   |          |          |   |   |          |          |  
|------------------------- | ------------------------------------------------------------- | ------------------------------------ | - | -------- | -------- | - | - | -------- | -------- | -
|                          |                                                               |                                     
|                          |                                                               | December 31,                         |  
|                          |                                                               |                                      |  
|                          |                                                               | 2003                                 |   |          | 2002     |  
|                          |                                                               |                                      |   |          |          |  
|                          |                                                               |                                     
|                          |                                                               | (In thousands)                       |  
|Deferred tax assets:      |                                                               |                                      |   |          |          |   |   |         
|                          | Taxes related to SFAS 133 (OCI)                               |                                      | $ | 45,777   |          |   | $ | 15,676   |         
|                          | Net operating loss carryforward                               |                                      |   | 26,075   |          |   |   | 42,773   |         
|                          | Capital loss carryforward                                     |                                      |   | 4,782    |          |   |   | 3,642    |         
|                          | Taxes related to SFAS 143 (Retirement Costs)                  |                                      |   | 1,963    |          |   |   |         |         
|                          | Taxes related to compensation                                 |                                      |   | 3,148    |          |   |   | 3,302    |         
|                          | Taxes related to net hedging liabilities                      |                                      |   | 309      |          |   |   | 5,243    |         
|                          | Alternative minimum tax credit                                |                                      |   |         |          |   |   | 1,400    |         
|                          |                                                               |                                      |   |          |          |  
|                          |                                                               | Total gross deferred tax assets      |   |          | 82,054   |   |   |          | 72,036   |  
|                          |                                                               |                                      |   |          |          |  
|Deferred tax liabilities: |                                                               |                                      |   |          |          |   |   |         
|                          | Oil and natural gas properties                                |                                      |   | (198,330 | )        |   |   | (196,181 | )       
|                          | Taxes related to other                                        |                                      |   | (1,541   | )        |   |   | (293     | )       
|                          | Taxes related to foreign currency translation
    liabilities |                                      |   | (207     | )        |   |   | (92      | )       
|                          |                                                               |                                      |   |          |          |  
|                          |                                                               | Total gross deferred tax liabilities |   |          | (200,078 | ) |   |          | (196,566 | )
|                          |                                                               |                                      |   |          |          |  
|                          | Net deferred tax liabilities                                  |                                      | $ | (118,024 | )        |   | $ | (124,530 | )       
|                          |                                                               |                                      |   |          |          |  

As of December 31, 2003, the Company had net
operating loss carryforwards for income tax purposes of
approximately $71.4 million, which expire between 2018 and
2022 and may be utilized to reduce future tax liability of the
Company. The utilization of substantially all of these loss
carryforwards, acquired in the Merger, will be limited to
approximately $16.3 million per year.



|   |               
|-- | --------------
|7. | Long-Term Debt

Long-term debt consisted of:

|                                                       |  |                |         |     |      |   |         |    
|------------------------------------------------------ |  | -------------- | ------- | --- | ---- | - | ------- | ---
|                                                       |  |               
|                                                       |  | December 31,   |        
|                                                       |  |                |        
|                                                       |  | 2003           |         |     | 2002 |  
|                                                       |  |                |         |     |      |  
|                                                       |  |               
|                                                       |  | (In thousands) |        
|8 1/4% Senior Subordinated
    Notes due 2011          |  | $              | 718,885 | (1) |      | $ | 591,771 | (2)
|8 7/8% Senior Subordinated Notes due
    2007          |  |                |        |     |      |   | 127,587 | (3)
|Revolving credit facility due on
    December 16, 2006 |  |                | 262,000 |     |      |   | 80,000  |    
|                                                       |  |                |         |     |      |  
|Less current portion                                   |  |                |        |     |      |   |        |    
|                                                       |  |                |         |     |      |  
|                                                       |  | $              | 980,885 |     |      | $ | 799,358 |    
|                                                       |  |                |         |     |      |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The balance of the 8 1/4% Senior
    Subordinated Notes Due 2011 as of December 31, 2003
    reflects the aggregate face amount of $700 million plus
    $14.2 million related to the premium recorded in connection
    with the issuance of 8 1/4% Senior Subordinated
    Notes Due 2011 on December 17, 2002 and April 3,
    2003 (see 8 1/4% Senior Subordinated Notes Due
    2011 below) and an increase of $4.7 million related to
    fair market value adjustments recorded as a result of the
    Companys interest rate swaps accounted for as fair value
    hedges. See Interest Rate Swaps  Hedges below.

F-24



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The balance of the 8 1/4% Senior
    Subordinated Notes Due 2011 as of December 31, 2002
    reflects an increase of $8.9 million related to the premium
    recorded in connection with the issuance of
    8 1/4% Senior Subordinated Notes Due 2011 on
    December 17, 2002 (see 8 1/4% Senior Subordinated
    Notes Due 2011 below) and an increase of $7.9 million
    related to fair market value adjustments recorded as a result of
    the Companys interest rate swaps accounted for as fair
    value hedges. The face amount of the notes at December 31,
    2002 was $575.0 million. See Interest Rate
    Swaps  Hedges below.       
|   
|(3) | There was no balance outstanding with respect to
    the 8 7/8% Senior Subordinated Notes due 2007 as of
    December 31, 2003, since all of these notes were redeemed
    on May 5, 2003. The balance of the 8 7/8% Senior
    Subordinated Notes due 2007 as of December 31, 2002
    reflects an increase of $3.5 million related to the gain on
    the cancellation of the fair market value hedge, which was
    amortized until the notes were redeemed on May 5, 2003. The
    face amount of the 8 7/8% Senior Subordinated Notes
    due 2007 at December 31, 2002 was $122.7 million. See
    8 7/8% Senior Subordinated Notes due 2007 below.



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

The Company entered into a new credit facility
(as amended from time to time, the Revolving Credit
Facility) on December 17, 2002 with JPMorgan Chase
Bank and Credit Suisse First Boston Corporation, for a maximum
committed amount of $600 million and an initial borrowing
base of approximately $470 million. The facility matures on
December 16, 2006 and contains covenants and default
provisions customary for similar credit facilities. We made
borrowings under the Revolving Credit Facility to refinance all
outstanding indebtedness under our previous revolving credit
facility and to pay general corporate expenses.

On October 15, 2003, the Revolving Credit
Facility was amended, to increase the borrowing base from
$470 million to $500 million. The amendment also
eliminated the limit on the outstanding letters of credit,
provided that the amount of letters of credit outstanding on any
date does not exceed the lesser of the aggregate commitments
under the Revolving Credit Facility and the borrowing base then
in effect, or if the borrowing base is not in effect on such
date, the aggregate commitments under the Revolving Credit
Facility. The amendment also increased the basket allowed for
purposes of providing cash collateral from $10 million to
$20 million and deleted the requirement to file liens on
properties if not rated BB+ and Ba1 at December 31, 2003.

Advances under the Revolving Credit Facility are
in the form of either an ABR loan or a Eurodollar loan. The
interest on an ABR loan is a fluctuating rate based upon the
highest of: (1) the rate of interest announced by JPMorgan
Chase Bank as its prime rate; (2) the secondary market rate
for three-month certificates of deposits plus 1%; or
(3) the Federal funds effective rate plus 0.5%, plus in
each case a margin of 0% to 0.625% based upon the ratio of total
debt to EBITDAX and the ratings of our senior unsecured debt as
issued by Standard and Poors Rating Group and Moodys
Investors Service, Inc. EBITDAX is defined as net income plus
interest expense, income tax expense, and amounts attributable
to depreciation, depletion, exploration, amortization and other
non-cash charges and expenses, but excluding changes in value of
certain hedging instruments and extraordinary or nonrecurring
gains or losses, subject to certain other specified adjustments.
The interest on a Eurodollar loan is a fluctuating rate based
upon the rate at which Eurodollar deposits in the London
interbank market are quoted plus a margin of 1.000% to 1.875%
based upon the ratio of total debt to EBITDAX and the ratings of
our senior unsecured debt as issued by Standard and Poors
Rating Group and Moodys Investors Service, Inc.

The Revolving Credit Facility contains various
covenants and restrictive provisions including two financial
covenants that require the Company to maintain a current ratio
of not less than 1.0 to 1.0 and a ratio of EBITDAX to
consolidated interest expense for the preceding four consecutive
fiscal quarters of

F-25



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

not less than 3.0 to 1.0. Commitment fees under
the Revolving Credit Facility range from 0.25% to 0.5% on the
average daily amount of the available unused borrowing capacity
based on the rating of our senior unsecured debt as issued by
Standard and Poors Rating Group and Moodys Investor
Service, Inc.

As of December 31, 2003, we had borrowings
and letters of credit issued of approximately
$335.6 million outstanding under the Credit Facility, with
a weighted average interest rate of 2.9% and available unused
borrowing capacity of approximately $164.4 million. The
letters of credit were issued primarily in connection with the
margin requirements of the Companys oil and natural gas
derivative contracts.

Under the terms of the Revolving Credit Facility
the Company must meet certain tests before it is able to declare
or pay any dividend on (other than dividends payable solely in
equity interests of the Company other than disqualified stock),
or make any payment of, or set apart assets for a sinking or
other analogous fund for the purchase, redemption, defeasance,
retirement or other acquisition of, any shares of any class of
equity interests of the Company or any restricted subsidiary,
whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly,
whether in cash or property or in obligations of the Company or
any restricted subsidiary.



| |                                              
| | ---------------------------------------------
| | 8 1/4% Senior Subordinated
    Notes Due 2011

On April 3, 2003, the Company issued
$125 million in additional principal amount of the
8 1/4% Senior Subordinated Notes Due 2011
pursuant to Rule 144A and Regulation S under the
Securities Act of 1933 (the Securities Act) at a
price of 106% of the principal amount, with accrued interest
from November 1, 2002. The 2003 notes were issued as
additional debt securities under the indenture pursuant to
which, on November 5, 2001, the Company issued
$275 million of 8 1/4% Senior Subordinated
Notes Due 2011 and on December 17, 2002, the Company
issued $300 million of 8 1/4% Senior Subordinated
Notes Due 2011. All of the 2001 and 2002 notes were
subsequently exchanged on March 14, 2002 and March 12,
2003, respectively, for equal principal amounts of notes having
substantially identical terms and registered under the
Securities Act. The proceeds from the 2003 notes were used to
fund the redemption of the Companys
8 7/8% Senior Subordinated Notes due 2007 (described
below) on May 5, 2003 and to reduce the indebtedness under
the Revolving Credit Facility. The Company has agreed to file an
exchange offer registration statement, or under certain
circumstances, a shelf registration statement, pursuant to a
registration rights agreement relating to the 2003 notes. On
June 4, 2003, the Company filed the exchange offer
registration statement, as amended on September 12, 2003
and February 5, 2004, relating to the 2003 notes, which was
declared effective by the SEC on February 9, 2004. The
Company is currently offering to exchange up to
$125 million aggregate principal amount of new
8 1/4% Senior Subordinated Notes Due 2011 that
have been registered under the Securities Act for an equal
principal amount of the 2003 notes. The Company expects to
consummate the exchange offer in March of 2004.

The notes are senior subordinated unsecured
obligations of the Company and are guaranteed on a senior
subordinated basis by some of its existing and future restricted
subsidiaries. The notes mature on November 1, 2011. The
Company pays interest on the notes semi-annually on May 1
and November 1. On November 1, 2003, the Company paid
additional interest of 0.5% per annum on the 2003 notes,
which accrued from October 1, 2003, and will continue to
pay additional interest, accruing from November 1, 2003
until we consummate the exchange offer contemplated in the
exchange offer registration statement. The Company is entitled
to redeem the notes in whole or in part on or after
November 1, 2006 for the redemption price set forth in the
notes. Prior to November 1, 2006, the Company is entitled
to redeem the notes, in whole but not in part, at a redemption
price equal to the principal amount of the notes plus a premium.
There is no sinking fund for the notes.

The indenture governing the
8 1/4% Senior Subordinated Notes Due 2011 limits the
activity of the Company and its restricted subsidiaries. The
provisions of such indenture limit the ability of the Company

F-26



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

and its restricted subsidiaries to incur
additional indebtedness; pay dividends on capital stock or
redeem, repurchase or retire such capital stock or subordinated
indebtedness; make investments; incur liens; create any
consensual limitation on the ability of the Companys
restricted subsidiaries to pay dividends, make loans or transfer
property to the Company; engage in transactions with the
Companys affiliates; sell assets, including capital stock
of the Companys subsidiaries; and consolidate, merge or
transfer assets. During any period that these notes have
investment grade ratings from both Moodys Investors
Service, Inc. and Standard and Poors Ratings Group and no
default has occurred and is continuing, the foregoing covenants
will cease to be in effect with the exception of covenants that
contain limitations on liens and on, among other things, certain
consolidations, mergers and transfers of assets. The
8 1/4% Senior Subordinated Notes Due 2011 do not
currently qualify as investment grade.



| |                                              
| | ---------------------------------------------
| | 8 7/8% Senior Subordinated Notes
    due 2007

In connection with the Merger, the Company
assumed $147 million face amount, $149 million fair
value, of Belcos 8 7/8% Senior Subordinated
Notes due 2007. On November 1, 2001, approximately
$24.3 million face amount of these notes was tendered to
the Company pursuant to the change of control provisions of the
related indenture. The tender price was equal to 101% of the
principal amount of each note plus accrued and unpaid interest
as of October 29, 2001. Including the premium and accrued
interest, the total amount paid to repay the tendered notes was
$24.8 million. The Company used borrowings under its
previous revolving credit facility to fund the repayment. No
gain or loss was recorded in connection with the redemption as
the fair value of the 8 7/8% Senior Subordinated Notes
recorded in connection with the Merger equaled the redemption
cost. On May 5, 2003, the Company redeemed the remaining
outstanding 8 7/8% Senior Subordinated Notes due 2007
in the aggregate principal amount of approximately
$123 million. Including the premium and accrued interest,
the total amount paid to redeem these notes was
$129.7 million. The redemption was funded with the proceeds
from the offering of $125 million aggregate principal
amount of the Companys 8 1/4% Senior
Subordinated Notes Due 2011, issued on April 3, 2003.
The remaining proceeds were used to reduce indebtedness under
the Revolving Credit Facility. The Company recorded a
$0.9 million loss in connection with the redemption of the
8 7/8% Senior Subordinated Notes due 2007.



| |                                 
| | --------------------------------
| | Interest Rate Swaps 
    Hedges

The following table summarizes the interest rate
swap contracts the Company currently has in place:

|                |  |                  |               |  |                 |  |                  |                        |  |  |               | 
|--------------- |  | ---------------- | ------------- |  | --------------- |  | ---------------- | ---------------------- |  |  | ------------- | 
|Notional Amount |  | Transaction Date |               |  | Expiration Date |  |                  | Current Estimated Rate | 
|                |  |                  |               |  |                 |  |                  |                        | 
|$100 million    |  |                  | November 2001 |  |                 |  | November 1, 2011 |                        |  |  | LIBOR + 2.42% | 
|$ 50 million    |  |                  | January 2003  |  |                 |  | November 1, 2011 |                        |  |  | LIBOR + 3.37% | 
|$ 40 million    |  |                  | January 2003  |  |                 |  | November 1, 2011 |                        |  |  | LIBOR + 3.55% | 
|$ 50 million    |  |                  | January 2003  |  |                 |  | November 1, 2011 |                        |  |  | LIBOR + 3.42% | 

The Company entered into the interest rate swap
contracts above to hedge the fair value of a portion of the
8 1/4% Senior Subordinated Notes Due 2011.
Because these swaps meet the conditions to qualify for the
short cut method of assessing effectiveness under
the provisions SFAS No. 133, the change in the fair
value of the notes is assumed to equal the change in the fair
value of the interest rate swap. As such, there is no
ineffectiveness assumed to exist between the interest rate swap
and the notes.

The interest rate swaps are fixed for floating
swaps in that the Company receives the fixed rate of 8.25% and
pays the floating rate. The floating rate is redetermined every
six months based on the London Interbank Offered Rate
(LIBOR) in effect at the contractual reset date.
When LIBOR plus the applicable margin shown above is less than
8.25%, the Company receives a payment from the counterparty
equal to the difference in rate times the notional amount. When
LIBOR plus the applicable margin shown

F-27



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

above is greater than 8.25%, the Company pays the
counterparty the difference in rate times the notional amount.
As of December 31, 2003, the Company recorded a derivative
asset of $4.7 million related to the interest rate swaps,
which have been designated as fair value hedges, with a
corresponding debt increase. Based on the fair value of the
interest rate swaps at December 31, 2003, the Company could
expect to receive approximately $0.6 million per year
through 2011.

In September 2002, the Company terminated an
interest rate swap on the 8 7/8% Senior Subordinated
Notes due 2007 resulting in the receipt of a $3.7 million
fair value gain, which was added to the outstanding balance of
the notes and was amortized until May 5, 2003, the date of
redemption of all of the Companys outstanding
8 7/8% Senior Subordinated Notes due 2007. See
8 7/8% Senior Subordinated Notes due 2007discussed above.

Maturities of long-term debt for each of the five
years following December 31, 2003 are as follows (in
thousands):

|                         |  |   |         | 
|------------------------ |  | - | ------- | 
|Year Ending December 31, |  |  
|                         |  |  
|2004                     |  | $ |        | 
|2005                     |  |   |        | 
|2006                     |  |   | 262,000 | 
|2007                     |  |   |        | 
|2008                     |  |   |        | 
|Thereafter               |  |   | 718,885 | 
|                         |  |   |        
|                         |  | $ | 980,885 | 
|                         |  |   |        



|   |                     
|-- | --------------------
|8. | Stockholders Equity

On December 16, 2002, the Company closed the
shelf offering of 11.5 million shares of common stock at a
price of $19.90 per share, which includes 1.5 million
shares covered by an over-allotment option granted to, and which
was exercised by, the underwriters. The Company received net
proceeds of approximately $216 million from the sale of our
common stock, which the Company used to finance, in part, the
Uinta Basin Acquisition.

On November 19, 2002, the Company completed
the private equity offering of 3.125 million shares of its
common stock to Spindrift Partners, L.P., Spindrift Investors
(Bermuda) L.P., Global Natural Resources III and Global
Natural Resources III L.P. at a net price to us of
$16.00 per share for aggregate proceeds of
$50 million. On December 31, 2002, the Company filed
the shelf registration statement registering the resale by the
selling stockholders from time to time of its common stock
issued in the private equity offering. The registration
statement was declared effective on January 7, 2003 by the
SEC.

On September 21, 2001, the Board of
Directors authorized management to repurchase up to
$30 million of the Companys common stock. Through
December 31, 2003, the Company has repurchased
30,000 shares of its common stock at an average price of
$13.61 per share including broker commissions.

The Companys 6 1/2% convertible
preferred stock has a liquidation preference of $25 per
share and is convertible at the option of the holder into shares
of the Companys common stock at an initial conversion rate
of 0.465795 shares of common stock for each share of
preferred stock, equivalent to a conversion price of
$11.64 per share of common stock. During 2003, 2002 and
2001, the Company declared and paid dividends of $1.63, $1.63
and $0.54 per share of preferred stock, respectively.

F-28



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |              
|-- | -------------
|9. | Stock Options

On October 17, 2000, the Westport Resources
Directors Stock Option Plan and the Westport Resources
Corporation Stock Option Plan (the Predecessor
Plans) were merged into the Westport Resources Corporation
2000 Stock Incentive Plan (the Stock Option Plan).
The Stock Option Plan provides for issuance of options to
employees, officers and directors to purchase shares of common
stock. The aggregate number of shares of common stock that may
be issued under the Stock Option Plan is 6,232,484 shares.
The exercise price, vesting and duration of the options may vary
and will be determined at the time of issuance.

During 2003, options to purchase
723,350 shares of the Companys common stock were
granted under the Stock Option Plan at exercise prices between
$20.07 and $26.70 per share, which reflected the estimated
fair market value of the shares at the date of grant. These
options vest ratably over two or three years from the date
of grant and have a term of 10 years.

During 2002, options to purchase
648,099 shares of the Companys common stock were
granted under the Stock Option Plan at exercise prices between
$17.18 and $20.47 per share, which reflected the estimated
fair market value of the shares at the date of grant. These
options vest ratably over two or three years from the date of
grant and have a term of 10 years.

In connection with the August 21, 2001
merger of Old Westport and Belco, options previously issued by
Belco were converted into options to purchase
788,194 shares of Westport common stock at exercise prices
between $11.82 and $70.30 per share. These exercise prices
reflect the estimated fair market value of the shares on
August 21, 2001, after converting the Belco options into
the existing Westport plan using a .4125 rate to account for the
reverse stock split which was consummated under the merger
agreement. Since Belco options converted into options to
purchase Westport common stock were fully vested, the fair value
of Westport options issued upon conversion was included in the
purchase price of the Merger, in accordance with FASB
Interpretation No. 44 (see Note 2  Belco
Merger). The fair value of Westport options issued upon
conversion of Belco options was determined using the
Black-Scholes option pricing model. Also during 2001, options to
purchase 690,562 shares of the Companys common stock
were granted under the Stock Option Plan at exercise prices
between $15.90 and $31.07 per share, which reflected the
estimated fair market value of the shares at the date of grant.
The options vest ratably over two or three years from the
date of grant and have a term of 10 years.

In March 2000, the FASB issued Interpretation
No. 44, Accounting for Certain Transactions Involving
Stock Compensation. The Interpretation clarified
(a) the definition of employee for purposes of applying APB
Opinion No. 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of
previously fixed stock options or awards, and (d) the
accounting for an exchange of stock options and/or awards in a
business combination. Under provisions of the Interpretation,
the Company is required to account for 1,080,473 of replacement
options, for options repurchased by the Company on
March 24, 2000, as variable awards from July 1, 2000
until the date the options are exercised, forfeited or expire
unexercised. Compensation cost will be measured for the amount
of any increases in our stock price after July 1, 2000 and
recognized over the remaining vesting period of the options. Any
decreases in the Company stock price subsequent to July 1,
2000 will be recognized as a decrease in compensation cost,
limited to the amount of compensation cost previously recognized
as a result of increases in our stock price. Any adjustment to
compensation cost for further changes in the stock price after
the award vests will be recognized immediately. As of
December 31, 2003, 856,065 of the replacement options were
still outstanding, which resulted in $7.6 million,
$4.3 million and $0.4 million of compensation costs
recorded in 2003, 2002 and 2001, respectively.

F-29



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of the status of the Companys
Stock Option Plans as of December 31, 2003, 2002 and 2001
and changes during the years ended December 31, 2003, 2002,
and 2001 are included below:

|                                         |                              |              |           |          |          |   |       |       | 
|---------------------------------------- | ---------------------------- | ------------ | --------- | -------- | -------- | - | ----- | ----- | 
|                                         |                              |              |           | Weighted |         
|                                         |                              | Shares       |           |          | Average  |  
|                                         |                              | Under        |           |          | Exercise |  
|                                         |                              | Option Plans |           |          | Price    |  
|                                         |                              |              |           |          |          |  
|Balance at December 31, 2000             |                              |              | 2,053,441 |          |          | $ | 12.61 |      
|                                         | Options converted from Belco |              |           | 788,194  |          |   |       | 28.61 | 
|                                         | Options granted              |              |           | 690,562  |          |   |       | 21.32 | 
|                                         | Options forfeited            |              |           | (276,683 | )        |   |       | 27.75 | 
|                                         | Options exercised            |              |           | (49,675  | )        |   |       | 11.59 | 
|                                         |                              |              |           |          |          |  
|Balance at December 31, 2001             |                              |              | 3,205,839 |          |          |   | 17.13 |      
|                                         | Options granted              |              |           | 648,099  |          |   |       | 18.22 | 
|                                         | Options forfeited            |              |           | (261,571 | )        |   |       | 30.99 | 
|                                         | Options exercised            |              |           | (105,064 | )        |   |       | 12.85 | 
|                                         |                              |              |           |          |          |  
|Balance at December 31, 2002             |                              |              | 3,487,303 |          |          |   | 16.42 |      
|                                         | Options granted              |              |           | 723,350  |          |   |       | 20.74 | 
|                                         | Options forfeited            |              |           | (155,666 | )        |   |       | 20.98 | 
|                                         | Options exercised            |              |           | (598,399 | )        |   |       | 14.56 | 
|                                         |                              |              |           |          |          |  
|Balance at December 31, 2003             |                              |              | 3,456,588 |          |          | $ | 17.44 |      
|                                         |                              |              |           |          |          |  
|Options exercisable at December 31, 2001 |                              |              | 1,272,065 |          |          | $ | 19.36 |      
|                                         |                              |              |           |          |          |  
|Options exercisable at December 31, 2002 |                              |              | 1,812,835 |          |          | $ | 15.97 |      
|                                         |                              |              |           |          |          |  
|Options exercisable at December 31, 2003 |                              |              | 2,220,078 |          |          | $ | 16.01 |      
|                                         |                              |              |           |          |          |  

The following table summarizes information about
stock options outstanding at December 31, 2003.

|                        |  |                     |           |                  |                     |  |          |          |  |   |           |          |  |          |           |  |  |   |       | 
|----------------------- |  | ------------------- | --------- | ---------------- | ------------------- |  | -------- | -------- |  | - | --------- | -------- |  | -------- | --------- |  |  | - | ----- | 
|                        |  |                     |           |                 
|                        |  | Options Outstanding |           |                  | Options Exercisable | 
|                        |  |                     |           |                  |                     | 
|                        |  |                     |           | Weighted Average |                     |  | Weighted |          |  |   |           | Weighted | 
|                        |  |                     |           | Remaining        |                     |  | Average  |          |  |   |           | Average  | 
|                        |  | Number of           |           |                  | Contractual Life    |  |          | Exercise |  |   | Number of |          |  | Exercise |          
|Range of Exercise Price |  | Options             |           |                  | (Yrs)               |  |          | Price    |  |   | Options   |          |  | Price    |          
|                        |  |                     |           |                  |                     |  |          |          |  |   |           |          |  |          |          
|$ 7.03-$14.06           |  |                     | 1,129,187 |                  |                     |  | 6.3      |          |  | $ | 10.91     |          |  |          | 1,129,187 |  |  | $ | 10.91 | 
|$14.07-$21.09           |  |                     | 1,974,926 |                  |                     |  | 8.0      |          |  | $ | 19.13     |          |  |          | 858,582   |  |  | $ | 18.55 | 
|$21.10-$28.12           |  |                     | 243,037   |                  |                     |  | 7.4      |          |  | $ | 23.40     |          |  |          | 134,537   |  |  | $ | 23.40 | 
|$28.13-$42.17           |  |                     | 50,667    |                  |                     |  | 6.4      |          |  | $ | 30.62     |          |  |          | 39,001    |  |  | $ | 30.68 | 
|$42.18-$49.21           |  |                     | 10,927    |                  |                     |  | 3.0      |          |  | $ | 46.54     |          |  |          | 10,927    |  |  | $ | 46.54 | 
|$49.22-$63.26           |  |                     | 44,545    |                  |                     |  | 3.9      |          |  | $ | 49.77     |          |  |          | 44,545    |  |  | $ | 49.77 | 
|$63.27-$70.30           |  |                     | 3,299     |                  |                     |  | 2.4      |          |  | $ | 70.02     |          |  |          | 3,299     |  |  | $ | 70.02 | 
|                        |  |                     |           |                  |                     |  |          |          |  |   |           |          |  |          |          
|                        |  |                     | 3,456,588 |                  |                     |  | 7.3      |          |  | $ | 17.44     |          |  |          | 2,220,078 |  |  | $ | 16.01 | 
|                        |  |                     |           |                  |                     |  |          |          |  |   |           |          |  |          |          

The Company has elected to continue following
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and has
elected to adopt the disclosure provisions of
SFAS No. 148, Accounting for Stock-Based
Compensation  Transitions and Disclosure. Had
compensation costs for the Companys options been
determined based on the fair value at the grant dates

F-30



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

consistent with SFAS No. 123, the
Companys net income would have been decreased and the net
loss would have been increased to the pro forma amounts
indicated below:

|                                                                   |             |                                       |        |        |      |   |         |         |   |   |        |        | 
|------------------------------------------------------------------ | ----------- | ------------------------------------- | ------ | ------ | ---- | - | ------- | ------- | - | - | ------ | ------ | 
|                                                                   |             |                                      
|                                                                   |             | Year Ended December 31,               |       
|                                                                   |             |                                       |       
|                                                                   |             | 2003                                  |        |        | 2002 |   |         | 2001    |  
|                                                                   |             |                                       |        |        |      |   |         |         |  
|                                                                   |             |                                      
|                                                                   |             | (In thousands, except per share data) |       
|Net income (loss) available to common
    stockholders as reported |             | $                                     | 64,344 |        |      | $ | (33,328 | )       |   | $ | 48,234 |       
|                                                                   | Pro forma   |                                       |        | 61,493 |      |   |         | (38,632 | ) |   |        | 45,267 | 
|Basic net income (loss) per common share                           |             |                                       |        |        |      |   |         |         |   |   |        |       
|                                                                   | As reported |                                       | $      | 0.96   |      |   | $       | (0.63   | ) |   | $      | 1.11   | 
|                                                                   | Pro forma   |                                       |        | 0.92   |      |   |         | (0.73   | ) |   |        | 1.04   | 
|Diluted net income (loss) per common share                         |             |                                       |        |        |      |   |         |         |   |   |        |       
|                                                                   | As reported |                                       | $      | 0.94   |      |   | $       | (0.63   | ) |   | $      | 1.09   | 
|                                                                   | Pro forma   |                                       |        | 0.90   |      |   |         | (0.73   | ) |   |        | 1.02   | 

The weighted average fair value of options
granted during the years ended December 31, 2003, 2002 and
2001, calculated using the Black-Scholes option pricing model,
was $8.29, $8.45 and $8.88, respectively. The fair value of each
option granted is estimated with the following weighted average
assumptions for grants in 2003, 2002 and 2001: risk-free
interest rate of 1.13%, 1.67% and 3.89%, respectively; no
dividend yields; expected volatility of 44.62%, 52.22% and
40.74%, respectively; and expected lives of five years.



|    |                        
|--- | -----------------------
|10. | Restricted Stock Awards

Common stock shares issued to certain employees
as restricted stock awards pursuant to the Companys 2000
Stock Incentive Plan were 158,100 and 36,550 for the years ended
December 31, 2003 and 2001, respectively. There were no
restricted stock awards issued for the year ended
December 31, 2002. The shares are restricted for various
periods ranging from one to three years after the date of grant.
As of December 31, 2003, 32,550 shares had vested. As
of December 31, 2003, 11,400 shares were cancelled for
certain terminated employees. During the years ended
December 31, 2003, 2002 and 2001 compensation expense of
$0.1 million, $0.3 million and $0.3 million,
respectively, was recorded as a result of the issuances.



|    |                 
|--- | ----------------
|11. | Major Purchasers

The following purchasers accounted for 10% or
more of the Companys oil and gas sales for the years ended
December 31, 2003, 2002 and 2001:

|            |  |      |    |   |      |  |    |      |  |  |    |  
|----------- |  | ---- | -- | - | ---- |  | -- | ---- |  |  | -- | -
|            |  | 2003 |    |   | 2002 |  |    | 2001 | 
|            |  |      |    |   |      |  |    |      | 
|Dynegy Inc. |  |      |   |   |      |  |   |      |  |  | 23 | %
|Conoco Inc. |  |      |   |   |      |  | 10 | %    |  |  |   |  
|Duke Energy |  |      | 14 | % |      |  |   |      |  |  |   |  

F-31



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|12. | Commitments and Contingencies

At December 31, 2003, the Company had leases
covering office space and copiers under noncancelable agreements
which begin to expire in June 2004. The minimum annual lease
payments under noncancelable operating leases are as follows (in
thousands):

|                        |  |   |       | 
|----------------------- |  | - | ----- | 
|Year Ending December 31 |  |  
|                        |  |  
|2004                    |  | $ | 1,791 | 
|2005                    |  |   | 1,846 | 
|2006                    |  |   | 1,925 | 
|2007                    |  |   | 1,838 | 
|2008                    |  |   | 1,034 | 
|Thereafter              |  |   | 4     | 
|                        |  |   |      
|                        |  | $ | 8,438 | 
|                        |  |   |      

Rent expense for the years ended
December 31, 2003, 2002 and 2001 was approximately
$1,641,000, $1,439,000 and $954,000, respectively.

The Company entered into employment agreements on
April 1, 2002 with its chief executive officer and
president, which provide for annual base salaries of $382,000
and $264,000, respectively, subject to annual adjustments
through May 31, 2005. The agreements provide for severance
payments equal to three times the individuals then
applicable base salary and three times the average of the
bonus the individual received in the last three years if
the Company terminates such persons employment other than
for cause or if such persons employment is terminated upon
a change of control of Westport.

Following the Merger, the Company entered into
retention agreements with its executive officers. The retention
agreements set forth the terms and conditions of the
officers compensation in the event of termination of their
employment following a change in control, as defined in the
agreements, within five years of the date of such retention
agreements. Each agreement automatically expires if a change in
control has not occurred within the five-year period, and may be
renewed for successive one-year periods by written agreement of
the parties. If a termination following a change in control
occurs within the specified period, other than a termination for
cause or with good reason, as defined in the agreement, the
terminated person will be entitled to all earned and accrued
compensation and benefits plus severance compensation equal to a
stated percentage of the sum of their respective base salary and
average bonus for three prior years, plus the amount of any
excise tax imposed on such severance payment. In addition, all
equity incentive awards become immediately vested.

Westport Oil and Gas Company, L.P., the
Companys wholly-owned subsidiary, is a defendant in a case
brought in July 2001 against its predecessor, Belco Energy
Corp., in the district court of Sweetwater County, Wyoming. The
complaint seeks damages on behalf of a purported class of
royalty owners for alleged improper deduction, valuation and
reporting under the Wyoming Royalty Payment Act in connection
with royalty payments made by Belco on production from wells it
operates in the Moxa Arch area of the Green River Basin. During
initial stages of the case, plaintiffs have advised Westport
that they calculate the amount of damages allegedly owed by
Belco as approximately $1,165,000, which includes attorneys fees
and litigation costs. Westport has denied liability for any of
these damages and believes that it has valid defenses to
plaintiffs claims. Class certification and discovery have
been stayed pending the decision by the Wyoming Supreme Court in
a case involving unrelated parties that may have a bearing on
this case and other similar cases filed by plaintiffs against
other oil and gas industry operators in the Green River Basin.
Settlement discussions have occurred with plaintiffs and are
ongoing. The Company believes that the potential liability with
respect to such proceedings is not material in the aggregate to
the

F-32



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Companys financial position, results of
operations or cash flows. Accordingly, the Company has not
established a reserve for loss in connection with this
proceeding.

The Company is subject to governmental and
regulatory controls arising in the ordinary course of business.
It is the opinion of the Companys management that there
are no claims or litigation involving the Company that are
likely to have a material adverse effect on its financial
position, results of operations or cash flows.



|    |                        
|--- | -----------------------
|13. | Retirement Savings Plan

Effective December 1, 1995, the Company
adopted a retirement savings plan. The Westport Savings and
Profit Sharing Plan (the Plan) is a defined
contribution plan and covers all employees of the Company. The
Plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974, as amended, and Section 401(k)
of the Internal Revenue Code.

The assets of the Plan are held and the related
investments are executed by the Plans trustee.
Participants in the Plan have investment alternatives in which
to place their funds and may place their funds in one or more of
these investment alternatives. Administrative fees are paid by
the Company on behalf of the Plan. The Plan provides for
discretionary matching by the Company of 75% of each
participants contributions up to 6% of the
participants compensation. The Company contributed
$894,000, $657,000 and $400,000 for the years ended
December 31, 2003, 2002 and 2001, respectively.



|    |                    
|--- | -------------------
|14. | Segment Information

The Company operates in four geographic
divisions: Northern (Rocky Mountains); Southern (Permian Basin,
Mid-Continent and Gulf Coast); Western (Uinta Basin) and Gulf of
Mexico (offshore). Amounts presented below for Western only
represent fifteen days of operations in 2002. All four areas are
engaged in the production, development, acquisition and
exploration of oil and natural gas properties. The Company
evaluates segment performance based on the profit or loss from
operations before income taxes.

F-33



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Corporate general and administrative expenses are
unallocated in 2001. Consolidated and segment financial
information is as follows:

|                                  |  |          |         |  |          |                |           |         |  |   |             |  |  |             |         |   |              |   |          |   |  |   |           |  
|--------------------------------- |  | -------- | ------- |  | -------- | -------------- | --------- | ------- |  | - | ----------- |  |  | ----------- | ------- | - | ------------ | - | -------- | - |  | - | --------- | -
|                                  |  |          |         |  |          |                |           | Gulf of |  |   | Corporate & |  |  |            
|                                  |  | Northern |         |  | Southern |                |           | Western |  |   | Mexico      |  |  | Unallocated |         |   | Consolidated |  
|                                  |  |          |         |  |          |                |           |         |  |   |             |  |  |             |         |   |              |  
|                                  |  |          |         |  |          |                |           |         |  |  
|                                  |  |          |         |  |          | (In thousands) |           |         |  |   |            
|2003                              |  |          |         |  |          |                |           |         |  |   |             |  |  |             |         |   |              |   |          |   |  |   |           |  
|Revenues(1)                       |  | $        | 177,926 |  |          | $              | 293,377   |         |  | $ | 128,503     |  |  | $           | 226,458 |   |              | $ | (92,575  | ) |  | $ | 733,689   |  
|DD&A                              |  |          | 41,437  |  |          |                | 93,639    |         |  |   | 26,998      |  |  |             | 97,082  |   |              |   | 1,448    |   |  |   | 260,604   |  
|Impairment of proved properties   |  |          | 112     |  |          |                | 10,585    |         |  |   |            |  |  |             | 7,469   |   |              |   |         |   |  |   | 18,166    |  
|Impairment of unproved properties |  |          | 7,655   |  |          |                | 6,975     |         |  |   | 194         |  |  |             | 12,732  |   |              |   |         |   |  |   | 27,556    |  
|Operating income (loss)           |  |          | 68,356  |  |          |                | 89,688    |         |  |   | 66,652      |  |  |             | 44,865  |   |              |   | (101,775 | ) |  |   | 167,786   |  
|Assets(2)                         |  |          | 391,153 |  |          |                | 1,211,552 |         |  |   | 586,948     |  |  |             | 263,490 |   |              |   | 164,120  |   |  |   | 2,617,263 |  
|Expenditures for assets, net      |  |          | 48,818  |  |          |                | 399,855   |         |  |   | 74,126      |  |  |             | 85,720  |   |              |   | 1,240    |   |  |   | 609,759   |  
|                                 
|2002                              |  |          |         |  |          |                |           |         |  |   |             |  |  |             |         |   |              |   |          |   |  |   |           |  
|Revenues(1)                       |  |          | 125,863 |  |          |                | 163,842   |         |  |   | 1,857       |  |  |             | 135,184 |   |              |   | (27,178  | ) |  |   | 399,568   |  
|DD&A                              |  |          | 45,210  |  |          |                | 77,844    |         |  |   | 791         |  |  |             | 78,813  |   |              |   | 435      |   |  |   | 203,093   |  
|Impairment of proved properties   |  |          | 12,231  |  |          |                | 6,118     |         |  |   |            |  |  |             | 1,351   |   |              |   |         |   |  |   | 19,700    |  
|Impairment of unproved properties |  |          | 3,847   |  |          |                | 2,109     |         |  |   |            |  |  |             | 4,005   |   |              |   |         |   |  |   | 9,961     |  
|Operating income (loss)           |  |          | 12,571  |  |          |                | 8,160     |         |  |   | 292         |  |  |             | (3,740  | ) |              |   | (32,339  | ) |  |   | (15,056   | )
|Assets(2)                         |  |          | 395,375 |  |          |                | 894,420   |         |  |   | 506,618     |  |  |             | 296,330 |   |              |   | 140,798  |   |  |   | 2,233,541 |  
|Expenditures for assets, net      |  |          | 72,074  |  |          |                | 162,706   |         |  |   | 510,916     |  |  |             | 80,220  |   |              |   | 1,586    |   |  |   | 827,502   |  
|                                 
|2001                              |  |          |         |  |          |                |           |         |  |   |             |  |  |             |         |   |              |   |          |   |  |   |           |  
|Revenues(1)                       |  |          | 92,583  |  |          |                | 73,526    |         |  |   |            |  |  |             | 151,037 |   |              |   | 31,714   |   |  |   | 348,860   |  
|DD&A                              |  |          | 26,116  |  |          |                | 34,108    |         |  |   |            |  |  |             | 62,947  |   |              |   | 888      |   |  |   | 124,059   |  
|Impairment of proved properties   |  |          | 5,861   |  |          |                | 484       |         |  |   |            |  |  |             | 3,078   |   |              |   |         |   |  |   | 9,423     |  
|Impairment of unproved properties |  |          | 24      |  |          |                | 10        |         |  |   |            |  |  |             | 6,940   |   |              |   |         |   |  |   | 6,974     |  
|Operating income                  |  |          | 25,014  |  |          |                | 11,821    |         |  |   |            |  |  |             | 28,640  |   |              |   | 19,340   |   |  |   | 84,815    |  
|Assets(2)                         |  |          | 418,817 |  |          |                | 789,429   |         |  |   |            |  |  |             | 305,372 |   |              |   | 90,598   |   |  |   | 1,604,216 |  
|Expenditures for assets, net      |  |          | 40,217  |  |          |                | 38,195    |         |  |   |            |  |  |             | 115,088 |   |              |   | 744      |   |  |   | 194,244   |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Corporate and unallocated revenues consist of
    hedge settlements, non-hedge settlements and non-hedge change in
    fair value of derivatives, most of which is not allocated to the
    divisions.                                                                                                                                                                                  
|   
|(2) | Corporate and unallocated assets include
    $19.6 million, $16.5 million and $25.5 million of
    joint interest billing receivables at December 31, 2003,
    2002 and 2001. Because the Company tracks its joint interest
    receivables by joint interest partner and not by property, the
    Company is unable to allocate joint interest receivables to its
    three divisions.

F-34



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                          
|--- | -------------------------------------------------------------------------
|15. | Condensed Consolidated Financial Statements of
    Subsidiary Guarantors:

On April 3, 2003 the Company issued
$125 million of its 8 1/4% Senior Subordinated
Notes Due 2011. These notes were issued as additional debt
securities under an indenture, pursuant to which, on
November 5, 2001 the Company issued $275 million of
8 1/4% Senior Subordinated Notes Due 2011 and on
December 17, 2002, the Company issued $300 million of
8 1/4% Senior Subordinated Notes Due 2011. All of
the 8 1/4% Senior Subordinated Notes Due 2011 are
jointly and severally guaranteed, on a senior subordinated
unsecured basis, by the following wholly-owned subsidiaries of
Westport: Westport Finance Co., Jerry Chambers Exploration
Company, Westport Argentina LLC, Westport Canada LLC, Westport
Oil and Gas Company, L.P., Horse Creek Trading &
Compression Company LLC, Westport Field Services, LLC, Westport
Overriding Royalty LLC, WHG, Inc. and WHL, Inc. (collectively,
the Subsidiary Guarantors). The guarantees of the
Subsidiary Guarantors are subordinated to senior debt of the
Subsidiary Guarantors.

F-35



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Presented below are condensed consolidating
financial statements for Westport and the Subsidiary Guarantors.

CONDENSED CONSOLIDATING BALANCE
SHEET

December 31, 2003


|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |           |           |           | 
|---------------------------------------- | ------------------------------------------------------------- | ------------------- | ------------------------------------------ | --------- | ---------- | --------- | --------- | ------------ | --------- | --------- | ------------ | ---------- | - | ---------- | --------- | --------- | --------- | --------- | 
|                                         |                                                               | Parent              |                                            |           | Subsidiary |           |           |              |           |          
|                                         |                                                               | Company             |                                            |           | Guarantors |           |           | Eliminations |           |           | Consolidated |           
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                    
|                                         |                                                               | (In thousands)      |                                           
|ASSETS                                  
|Current Assets:                          |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Cash and cash equivalents                                     |                     | $                                          | 45,509    |            |           | $         | 28,149       |           |           | $            |           |   |            | $         | 73,658    |          
|                                         | Accounts receivable, net                                      |                     |                                            | 24,269    |            |           |           | 62,665       |           |           |              |           |   |            |           | 86,934    |          
|                                         | Intercompany receivable                                       |                     |                                            | 1,533,325 |            |           |           |             |           |           |              | (1,533,325 | ) |            |           |          |          
|                                         | Derivative assets                                             |                     |                                            | 3,728     |            |           |           |             |           |           |              |           |   |            |           | 3,728     |          
|                                         | Prepaid expenses                                              |                     |                                            | 5,988     |            |           |           | 11,214       |           |           |              |           |   |            |           | 17,202    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total current assets                       |           |            | 1,612,819 |           |              |           | 102,028   |              |            |   | (1,533,325 | )         |           |           | 181,522   | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Property and equipment, at cost:         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Oil and gas properties, successful efforts method:            |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |           |          
|                                         |                                                               | Proved properties   |                                            |           | 403,927    |           |           |              | 2,303,301 |           |              |            |  |            |           |           | 2,707,228 |          
|                                         |                                                               | Unproved properties |                                            |           | 18,421     |           |           |              | 100,910   |           |              |            |  |            |           |           | 119,331   |          
|                                         | Field services assets                                         |                     |                                            |          |            |           |           | 40,226       |           |           |              |           |   |            |           | 40,226    |          
|                                         | Building and other office furniture and equipment             |                     |                                            | 711       |            |           |           | 10,215       |           |           |              |           |   |            |           | 10,926    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | 423,059                                    |           |            |           | 2,454,652 |              |           |           |             |            |   |            | 2,877,711 |          
|                                         | Less accumulated depletion, depreciation and
    amortization |                     |                                            | (203,563  | )          |           |           | (524,583     | )         |           |              |           |   |            |           | (728,146  | )        
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Net property and equipment                 |           |            | 219,496   |           |              |           | 1,930,069 |              |            |   |           |           |           |           | 2,149,565 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Other Assets:                            |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Long-term derivative assets                                   |                     |                                            | 23,105    |            |           |           |             |           |           |              |           |   |            |           | 23,105    |          
|                                         | Goodwill                                                      |                     |                                            |          |            |           |           | 244,640      |           |           |              |           |   |            |           | 244,640   |          
|                                         | Other assets                                                  |                     |                                            | 18,431    |            |           |           |             |           |           |              |           |   |            |           | 18,431    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total other assets                         |           |            | 41,536    |           |              |           | 244,640   |              |            |   |           |           |           |           | 286,176   | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total assets                               |           | $          | 1,873,851 |           |              | $         | 2,276,737 |              |            | $ | (1,533,325 | )         |           | $         | 2,617,263 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Accounts payable                                              |                     | $                                          | 15,511    |            |           | $         | 64,186       |           |           | $            |           |   |            | $         | 79,697    |          
|                                         | Accrued expenses                                              |                     |                                            | 19,101    |            |           |           | 26,035       |           |           |              |           |   |            |           | 45,136    |          
|                                         | Ad valorem taxes payable                                      |                     |                                            | 20        |            |           |           | 13,827       |           |           |              |           |   |            |           | 13,847    |          
|                                         | Intercompany payable                                          |                     |                                            |          |            |           |           | 1,533,325    |           |           |              | (1,533,325 | ) |            |           |          |          
|                                         | Derivative liabilities                                        |                     |                                            | 107,529   |            |           |           |             |           |           |              |           |   |            |           | 107,529   |          
|                                         | Income taxes payable                                          |                     |                                            |          |            |           |           | 2,499        |           |           |              |           |   |            |           | 2,499     |          
|                                         | Current asset retirement obligation                           |                     |                                            | 4,479     |            |           |           | 3,538        |           |           |              |            |   |            |           | 8,017     |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total current liabilities                  |           |            | 146,640   |           |              |           | 1,643,410 |              |            |   | (1,533,325 | )         |           |           | 256,725   | 
|Long-term debt                           |                                                               |                     | 980,885                                    |           |            |           |          |              |           |           |             |            |   |            | 980,885   |          
|Deferred income taxes                    |                                                               |                     | (88,677                                    | )         |            |           | 206,701   |              |           |           |             |            |   |            | 118,024   |          
|Long-term derivative liabilities         |                                                               |                     | 38,022                                     |           |            |           |          |              |           |           |             |            |   |            | 38,022    |          
|Long-term retirement obligation          |                                                               |                     | 15,962                                     |           |            |           | 46,747    |              |           |           |             |            |   |            | 62,709    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total liabilities                          |           |            | 1,092,832 |           |              |           | 1,896,858 |              |            |   | (1,533,325 | )         |           |           | 1,456,365 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Stockholders equity                     |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Preferred stock                                               |                     |                                            | 29        |            |           |           |             |           |           |              |           |   |            |           | 29        |          
|                                         | Common stock                                                  |                     |                                            | 675       |            |           |           | 3            |           |           |              | (3         | ) |            |           | 675       |          
|                                         | Additional paid-in capital                                    |                     |                                            | 967,851   |            |           |           | 199,154      |           |           |              | 3          |   |            |           | 1,167,008 |          
|                                         | Treasury stock                                                |                     |                                            | (583      | )          |           |           |             |           |           |              |           |   |            |           | (583      | )        
|                                         | Retained earnings                                             |                     |                                            | (116,177  | )          |           |           | 180,523      |           |           |              |           |   |            |           | 64,346    |          
|                                         | Accumulated other comprehensive income                        |                     |                                            | (70,776   | )          |           |           | 199          |           |           |              |           |   |            |           | (70,577   | )        
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total stockholders equity                 |           |            | 781,019   |           |              |           | 379,879   |              |            |   |           |           |           |           | 1,160,898 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total liabilities and stockholders equity |           | $          | 1,873,851 |           |              | $         | 2,276,737 |              |            | $ | (1,533,325 | )         |           | $         | 2,617,263 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           

F-36



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

For the Year Ended December 31,
2003


|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |   |   |   |         |          |         |  
|---------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------ | -------- | -------- | ---------- | - | ------- | ------------ | ------- | ------------ | - | - | - | - | ------- | -------- | ------- | -
|                                                                       |                                               | Parent                                     |          |          | Subsidiary |   |         |              |         |             
|                                                                       |                                               | Company                                    |          |          | Guarantors |   |         | Eliminations |         | Consolidated |  
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |  
|                                                                       |                                               |                                           
|                                                                       |                                               | (In thousands)                             |         
|Operating revenues:                                                    |                                               |                                            |          |          |            |   |         |              |         |              |   |   |   |   |         |         
|                                                                       | Oil and natural gas sales                     |                                            | $        | 172,270  |            |   | $       | 641,612      |         |              | $ |  |   |   | $       | 813,882  |        
|                                                                       | Hedge settlements                             |                                            |          | (102,368 | )          |   |         |             |         |              |   |  |   |   |         | (102,368 | )      
|                                                                       | Gathering income                              |                                            |          |         |            |   |         | 3,456        |         |              |   |   |   |   |         | 3,456    |        
|                                                                       | Non-hedge settlements                         |                                            |          | 2,653    |            |   |         |             |         |              |   |  |   |   |         | 2,653    |        
|                                                                       | Non-hedge change in fair value of derivatives |                                            |          | 9,501    |            |   |         |             |         |              |   |  |   |   |         | 9,501    |        
|Gain on sale of operating assets, net                                  |                                               |                                            | 3        |          |            |   | 6,562   |              |         |              |  |   |   |   | 6,565   |         
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|                                                                       |                                               | Net revenues                               |          |          | 82,059     |   |         |              | 651,630 |              |   |   |  |   |         |          | 733,689 |  
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|Operating expenses:                                                    |                                               |                                            |          |          |            |   |         |              |         |              |   |   |   |   |         |         
|                                                                       | Lease operating expense                       |                                            |          | 12,081   |            |   |         | 88,951       |         |              |   |  |   |   |         | 101,032  |        
|                                                                       | Production taxes                              |                                            |          | 3        |            |   |         | 45,656       |         |              |   |  |   |   |         | 45,659   |        
|                                                                       | Transportation costs                          |                                            |          | 853      |            |   |         | 12,502       |         |              |   |  |   |   |         | 13,355   |        
|                                                                       | Gathering expense                             |                                            |          |         |            |   |         | 2,977        |         |              |   |  |   |   |         | 2,977    |        
|                                                                       | Exploration                                   |                                            |          | 29,920   |            |   |         | 28,811       |         |              |   |  |   |   |         | 58,731   |        
|                                                                       | Depletion, depreciation and amortization      |                                            |          | 78,087   |            |   |         | 182,517      |         |              |   |  |   |   |         | 260,604  |        
|                                                                       | Impairment of proved properties               |                                            |          | 5,907    |            |   |         | 12,259       |         |              |   |  |   |   |         | 18,166   |        
|                                                                       | Impairment of unproved properties             |                                            |          | 10,309   |            |   |         | 17,247       |         |              |   |  |   |   |         | 27,556   |        
|                                                                       | Stock compensation expense                    |                                            |          | 7,744    |            |   |         |             |         |              |   |  |   |   |         | 7,744    |        
|                                                                       | General and administrative                    |                                            |          | 7,361    |            |   |         | 22,718       |         |              |   |  |   |   |         | 30,079   |        
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|                                                                       |                                               | Total operating expenses                   |          |          | 152,265    |   |         |              | 413,638 |              |   |   |  |   |         |          | 565,903 |  
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|                                                                       |                                               | Operating income (loss)                    |          |          | (70,206    | ) |         |              | 237,992 |              |   |   |  |   |         |          | 167,786 |  
|Other income (expense):                                                |                                               |                                            |          |          |            |   |         |              |         |              |   |   |   |   |         |         
|                                                                       | Interest expense                              |                                            |          | (56,208  | )          |   |         | (17          | )       |              |   |  |   |   |         | (56,225  | )      
|                                                                       | Interest income                               |                                            |          | 317      |            |   |         | 426          |         |              |   |  |   |   |         | 743      |        
|                                                                       | Loss on debt retirement                       |                                            |          | (920     | )          |   |         |             |         |              |   |  |   |   |         | (920     | )      
|                                                                       | Other                                         |                                            |          | 362      |            |   |         | 360          |         |              |   |  |   |   |         | 722      |        
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|Income (loss) before income taxes                                      |                                               |                                            | (126,655 | )        |            |   | 238,761 |              |         |              |  |   |   |   | 112,106 |         
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|Benefit (provision) for income taxes:                                  |                                               |                                            |          |          |            |   |         |              |         |              |   |   |   |   |         |         
|                                                                       | Current                                       |                                            |          |         |            |   |         | (14,233      | )       |              |   |  |   |   |         | (14,233  | )      
|                                                                       | Deferred                                      |                                            |          | 46,229   |            |   |         | (71,581      | )       |              |   |  |   |   |         | (25,352  | )      
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|                                                                       |                                               | Total benefit (provision) for income taxes |          |          | 46,229     |   |         |              | (85,814 | )            |   |   |  |   |         |          | (39,585 | )
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|Net income (loss) before cumulative change in
    accounting principle |                                               |                                            | (80,426  | )        |            |   | 152,947 |              |         |              |  |   |   |   | 72,521  |         
|Preferred stock dividends                                              |                                               |                                            | (4,763   | )        |            |   |        |              |         |              |  |   |   |   | (4,763  | )       
|Cumulative effect of change in accounting
    principle                |                                               |                                            | 1,765    |          |            |   | (5,179  | )            |         |              |  |   |   |   | (3,414  | )       
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  
|Net income (loss) available to common stockholders                     |                                               | $                                          | (83,424  | )        |            | $ | 147,768 |              |         | $            |  |   |   | $ | 64,344  |         
|                                                                       |                                               |                                            |          |          |            |   |         |              |         |              |   |  

F-37



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

For the Year Ended December 31,
2003


|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |          |         |         |          |  
|-------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------------------------------------------------------ | ----------------------------------------- | ---------- | ------ | ------- | ------------ | ------- | ------- | ------------ | ------- | - | - | ------- | -------- | ------- | ------- | -------- | -
|                                             |                                                                                              | Parent                                                                         |                                                              |                                           | Subsidiary |        |         |              |         |        
|                                             |                                                                                              | Company                                                                        |                                                              |                                           | Guarantors |        |         | Eliminations |         |         | Consolidated |        
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|                                             |                                                                                              |                                                                               
|                                             |                                                                                              | (In thousands)                                                                 |                                                             
|Cash flows from operating activities:        |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Net income (loss)                                                                            |                                                                                | $                                                            | (78,661                                   | )          |        | $       | 147,768      |         |         | $            |        |   |   | $       | 69,107   |        
|                                             | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |          |        
|                                             |                                                                                              | Depletion, depreciation and amortization                                       |                                                              |                                           | 78,087     |        |         |              | 182,517 |         |              |         |  |   |         |          | 260,604 |        
|                                             |                                                                                              | Exploration dry hole costs                                                     |                                                              |                                           | 22,177     |        |         |              | 17,112  |         |              |         |  |   |         |          | 39,289  |        
|                                             |                                                                                              | Impairment of proved properties                                                |                                                              |                                           | 5,907      |        |         |              | 12,259  |         |              |         |  |   |         |          | 18,166  |        
|                                             |                                                                                              | Impairment of unproved properties                                              |                                                              |                                           | 10,309     |        |         |              | 17,247  |         |              |         |  |   |         |          | 27,556  |        
|                                             |                                                                                              | Deferred income taxes                                                          |                                                              |                                           | (46,229    | )      |         |              | 71,581  |         |              |         |  |   |         |          | 25,352  |        
|                                             |                                                                                              | Stock compensation expense                                                     |                                                              |                                           | 7,744      |        |         |              |        |         |              |         |  |   |         |          | 7,744   |        
|                                             |                                                                                              | Change in derivative fair value                                                |                                                              |                                           | (9,501     | )      |         |              |        |         |              |         |  |   |         |          | (9,501  | )      
|                                             |                                                                                              | Amortization of financing fees                                                 |                                                              |                                           | 1,275      |        |         |              |        |         |              |         |  |   |         |          | 1,275   |        
|                                             |                                                                                              | Changes in asset and liabilities, net of effects
    of gain on sale of assets |                                                              |                                           | (3         | )      |         |              | (6,562  | )       |              |         |  |   |         |          | (6,565  | )      
|                                             |                                                                                              | Cumulative change in accounting principle, net of
    tax                      |                                                              |                                           | (1,765     | )      |         |              | 5,179   |         |              |         |  |   |         |          | 3,414   |        
|                                             |                                                                                              | Other                                                                          |                                                              |                                           | (83        | )      |         |              | (29     | )       |              |         |  |   |         |          | (112    | )      
|                                             |                                                                                              | Changes in asset and liabilities, net of effects
    of acquisitions:          |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |          |         |        
|                                             |                                                                                              |                                                                                | Decrease (increase) in accounts receivable                   |                                           |            | 3,612  |         |              |         | (29,041 | )            |         |   |  |         |          |         | (25,429 | )       
|                                             |                                                                                              |                                                                                | Decrease (increase) in prepaid expenses and other
    assets |                                           |            | 1,933  |         |              |         | (6,816  | )            |         |   |  |         |          |         | (4,883  | )       
|                                             |                                                                                              |                                                                                | Decrease in net derivative liabilities                       |                                           |            | (5,178 | )       |              |         |        |              |         |   |  |         |          |         | (5,178  | )       
|                                             |                                                                                              |                                                                                | Increase in accounts payable                                 |                                           |            | 210    |         |              |         | 28,406  |              |         |   |  |         |          |         | 28,616  |         
|                                             |                                                                                              |                                                                                | Decrease in ad valorem taxes payable                         |                                           |            | 21     |         |              |         | 4,837   |              |         |   |  |         |          |         | 4,858   |         
|                                             |                                                                                              |                                                                                | Increase in income taxes payable                             |                                           |            |       |         |              |         | 3,826   |              |         |   |  |         |          |         | 3,826   |         
|                                             |                                                                                              |                                                                                | Increase (decrease) in accrued expenses                      |                                           |            | (1,834 | )       |              |         | 2,464   |              |         |   |  |         |          |         | 630     |         
|                                             |                                                                                              |                                                                                | Decrease in other liabilities                                |                                           |            | (350   | )       |              |         | (1,702  | )            |         |   |  |         |          |         | (2,052  | )       
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|                                             |                                                                                              |                                                                                |                                                              | Net cash provided by operating activities |            |        | (12,329 | )            |         |         | 449,046      |         |   |   |        |          |         |         | 436,717  |  
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|Cash flows from investing activities:        |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Additions to property and equipment                                                          |                                                                                |                                                              | (76,809                                   | )          |        |         | (200,199     | )       |         |              |        |   |   |         | (277,008 | )      
|                                             | Proceeds from sales of assets                                                                |                                                                                |                                                              | 3                                         |            |        |         | 13,375       |         |         |              |        |   |   |         | 13,378   |        
|                                             | Increase (decrease) in intercompany receivable                                               |                                                                                |                                                              |                                          |            |        |         | 57,932       |         |         |              | (57,932 | ) |   |         |         |        
|                                             | Other asset acquisitions                                                                     |                                                                                |                                                              |                                          |            |        |         | (332,751     | )       |         |              |        |   |   |         | (332,751 | )      
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|                                             |                                                                                              |                                                                                |                                                              | Net cash used in investing activities     |            |        | (76,806 | )            |         |         | (461,643     | )       |   |   | (57,932 | )        |         |         | (596,381 | )
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|Cash flows from financing activities:        |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Proceeds from issuance of common stock                                                       |                                                                                |                                                              | 8,867                                     |            |        |         |             |         |         |              |        |   |   |         | 8,867    |        
|                                             | Repurchase of common stock                                                                   |                                                                                |                                                              | (114                                      | )          |        |         |             |         |         |              |        |   |   |         | (114     | )      
|                                             | Proceeds from issuance of long-term debt                                                     |                                                                                |                                                              | 413,875                                   |            |        |         |             |         |         |              |        |   |   |         | 413,875  |        
|                                             | Repayment of long-term debt                                                                  |                                                                                |                                                              | (226,311                                  | )          |        |         |             |         |         |              |        |   |   |         | (226,311 | )      
|                                             | Preferred stock dividend                                                                     |                                                                                |                                                              | (4,763                                    | )          |        |         |             |         |         |              |        |   |   |         | (4,763   | )      
|                                             | Loss on retirement of debt                                                                   |                                                                                |                                                              | (920                                      | )          |        |         |             |         |         |              |        |   |   |         | (920     | )      
|                                             | Financing fees                                                                               |                                                                                |                                                              | (639                                      | )          |        |         |             |         |         |              |        |   |   |         | (639     | )      
|                                             | Increase in intercompany payable                                                             |                                                                                |                                                              | (57,932                                   | )          |        |         |             |         |         |              | 57,932  |   |   |         |         |        
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|                                             |                                                                                              |                                                                                |                                                              | Net cash provided by financing activities |            |        | 132,063 |              |         |         |             |         |   |   | 57,932  |          |         |         | 189,995  |  
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|Net increase in cash and cash equivalents    |                                                                                              |                                                                                | 42,928                                                       |                                           |            |        | (12,597 | )            |         |         |             |         |   |   | 30,331  |         
|Effect of exchange rate changes on cash      |                                                                                              |                                                                                |                                                             |                                           |            |        | 566     |              |         |         |             |         |   |   | 566     |         
|Cash and cash equivalents, beginning of year |                                                                                              |                                                                                | 2,581                                                        |                                           |            |        | 40,180  |              |         |         |             |         |   |   | 42,761  |         
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        
|Cash and cash equivalents, end of year       |                                                                                              | $                                                                              | 45,509                                                       |                                           |            | $      | 28,149  |              |         | $       |             |         |   | $ | 73,658  |         
|                                             |                                                                                              |                                                                                |                                                              |                                           |            |        |         |              |         |         |              |        

F-38



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING BALANCE
SHEET

December 31, 2002


|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |           |           |           | 
|---------------------------------------- | ------------------------------------------------------------- | ------------------- | ------------------------------------------ | --------- | ---------- | --------- | --------- | ------------ | --------- | --------- | ------------ | ---------- | - | ---------- | --------- | --------- | --------- | --------- | 
|                                         |                                                               | Parent              |                                            |           | Subsidiary |           |           |              |           |          
|                                         |                                                               | Company             |                                            |           | Guarantors |           |           | Eliminations |           |           | Consolidated |           
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                    
|                                         |                                                               | (In thousands)      |                                           
|ASSETS                                  
|Current Assets:                          |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Cash and cash equivalents                                     |                     | $                                          | 2,581     |            |           | $         | 40,180       |           |           | $            |           |   |            | $         | 42,761    |          
|                                         | Accounts receivable, net                                      |                     |                                            | 27,880    |            |           |           | 45,669       |           |           |              |           |   |            |           | 73,549    |          
|                                         | Intercompany receivable                                       |                     |                                            | 1,475,393 |            |           |           |             |           |           |              | (1,475,393 | ) |            |           |          |          
|                                         | Derivative assets                                             |                     |                                            | 14,861    |            |           |           |             |           |           |              |           |   |            |           | 14,861    |          
|                                         | Prepaid expenses                                              |                     |                                            | 7,922     |            |           |           | 5,436        |           |           |              |           |   |            |           | 13,358    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total current assets                       |           |            | 1,528,637 |           |              |           | 91,285    |              |            |   | (1,475,393 | )         |           |           | 144,529   | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Property and equipment, at cost:         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Oil and gas properties, successful efforts method:            |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |           |          
|                                         |                                                               | Proved properties   |                                            |           | 339,947    |           |           |              | 1,798,524 |           |              |            |  |            |           |           | 2,138,471 |          
|                                         |                                                               | Unproved properties |                                            |           | 29,252     |           |           |              | 75,178    |           |              |            |  |            |           |           | 104,430   |          
|                                         | Field services assets                                         |                     |                                            |          |            |           |           | 39,185       |           |           |              |           |   |            |           | 39,185    |          
|                                         | Building and other office furniture and equipment             |                     |                                            | 620       |            |           |           | 9,066        |           |           |              |           |   |            |           | 9,686     |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | 369,819                                    |           |            |           | 1,921,953 |              |           |           |             |            |   |            | 2,291,772 |          
|                                         | Less accumulated depletion, depreciation and
    amortization |                     |                                            | (131,946  | )          |           |           | (353,383     | )         |           |              |           |   |            |           | (485,329  | )        
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Net property and equipment                 |           |            | 237,873   |           |              |           | 1,568,570 |              |            |   |           |           |           |           | 1,806,443 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Other Assets:                            |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Long-term derivative assets                                   |                     |                                            | 14,824    |            |           |           |             |           |           |              |           |   |            |           | 14,824    |          
|                                         | Goodwill                                                      |                     |                                            |          |            |           |           | 246,712      |           |           |              |           |   |            |           | 246,712   |          
|                                         | Other assets                                                  |                     |                                            | 21,033    |            |           |           |             |           |           |              |           |   |            |           | 21,033    |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total other assets                         |           |            | 35,857    |           |              |           | 246,712   |              |            |   |           |           |           |           | 282,569   | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total assets                               |           | $          | 1,802,367 |           |              | $         | 1,906,567 |              |            | $ | (1,475,393 | )         |           | $         | 2,233,541 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current Liabilities:                     |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Accounts payable                                              |                     | $                                          | 15,301    |            |           | $         | 35,857       |           |           | $            |           |   |            | $         | 51,158    |          
|                                         | Accrued expenses                                              |                     |                                            | 23,354    |            |           |           | 15,855       |           |           |              |           |   |            |           | 39,209    |          
|                                         | Ad valorem taxes payable                                      |                     |                                            | (2        | )          |           |           | 8,990        |           |           |              |           |   |            |           | 8,988     |          
|                                         | Intercompany payable                                          |                     |                                            |          |            |           |           | 1,475,393    |           |           |              | (1,475,393 | ) |            |           |          |          
|                                         | Derivative liabilities                                        |                     |                                            | 56,156    |            |           |           |             |           |           |              |           |   |            |           | 56,156    |          
|                                         | Income taxes payable                                          |                     |                                            |          |            |           |           | 86           |           |           |              |           |   |            |           | 86        |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total current liabilities                  |           |            | 94,809    |           |              |           | 1,536,181 |              |            |   | (1,475,393 | )         |           |           | 155,597   | 
|Long-term debt                           |                                                               |                     | 799,358                                    |           |            |           |          |              |           |           |             |            |   |            | 799,358   |          
|Deferred income taxes                    |                                                               |                     | (13,361                                    | )         |            |           | 137,891   |              |           |           |             |            |   |            | 124,530   |          
|Long-term derivative liabilities         |                                                               |                     | 21,305                                     |           |            |           |          |              |           |           |             |            |   |            | 21,305    |          
|Other liabilities                        |                                                               |                     |                                           |           |            |           | 745       |              |           |           |             |            |   |            | 745       |          
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total liabilities                          |           |            | 902,111   |           |              |           | 1,674,817 |              |            |   | (1,475,393 | )         |           |           | 1,101,535 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|Stockholders equity                     |                                                               |                     |                                            |           |            |           |           |              |           |           |              |            |   |            |           |          
|                                         | Preferred stock                                               |                     |                                            | 29        |            |           |           |             |           |           |              |           |   |            |           | 29        |          
|                                         | Common stock                                                  |                     |                                            | 668       |            |           |           | 3            |           |           |              | (3         | ) |            |           | 668       |          
|                                         | Additional paid-in capital                                    |                     |                                            | 951,189   |            |           |           | 199,153      |           |           |              | 3          |   |            |           | 1,150,345 |          
|                                         | Treasury stock                                                |                     |                                            | (469      | )          |           |           |             |           |           |              |           |   |            |           | (469      | )        
|                                         | Retained earnings                                             |                     |                                            | (32,753   | )          |           |           | 32,755       |           |           |              |           |   |            |           | 2         |          
|                                         | Accumulated other comprehensive income                        |                     |                                            | (18,408   | )          |           |           | (161         | )         |           |              |           |   |            |           | (18,569   | )        
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total stockholders equity                 |           |            | 900,256   |           |              |           | 231,750   |              |            |   |           |           |           |           | 1,132,006 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           
|                                         |                                                               |                     | Total liabilities and stockholders equity |           | $          | 1,802,367 |           |              | $         | 1,906,567 |              |            | $ | (1,475,393 | )         |           | $         | 2,233,541 | 
|                                         |                                                               |                     |                                            |           |            |           |           |              |           |           |              |           

F-39



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

For the Year Ended December 31,
2002


|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |   |   |   |         |         |         |  
|-------------------------------------------------- | --------------------------------------------- | -------------------------------- | ------- | ------- | ---------- | - | ------ | ------------ | ------- | ------------ | - | - | - | - | ------- | ------- | ------- | -
|                                                   |                                               | Parent                           |         |         | Subsidiary |   |        |              |         |             
|                                                   |                                               | Company                          |         |         | Guarantors |   |        | Eliminations |         | Consolidated |  
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |  
|                                                   |                                               |                                 
|                                                   |                                               | (In thousands)                   |        
|Operating revenues:                                |                                               |                                  |         |         |            |   |        |              |         |              |   |   |   |   |         |        
|                                                   | Oil and natural gas sales                     |                                  | $       | 82,136  |            |   | $      | 346,294      |         |              | $ |  |   |   | $       | 428,430 |        
|                                                   | Hedge settlements                             |                                  |         | (1,276  | )          |   |        |             |         |              |   |  |   |   |         | (1,276  | )      
|                                                   | Non-hedge settlements                         |                                  |         | 822     |            |   |        |             |         |              |   |  |   |   |         | 822     |        
|                                                   | Non-hedge change in fair value of derivatives |                                  |         | (26,723 | )          |   |        |             |         |              |   |  |   |   |         | (26,723 | )      
|                                                   | Gain (loss) on sale of operating assets, net  |                                  |         | 276     |            |   |        | (1,961       | )       |              |   |  |   |   |         | (1,685  | )      
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|                                                   |                                               | Net revenues                     |         |         | 55,235     |   |        |              | 344,333 |              |   |   |  |   |         |         | 399,568 |  
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|Operating expenses:                                |                                               |                                  |         |         |            |   |        |              |         |              |   |   |   |   |         |        
|                                                   | Lease operating expense                       |                                  |         | 12,748  |            |   |        | 76,580       |         |              |   |  |   |   |         | 89,328  |        
|                                                   | Production taxes                              |                                  |         | 5       |            |   |        | 23,949       |         |              |   |  |   |   |         | 23,954  |        
|                                                   | Transportation costs                          |                                  |         | 317     |            |   |        | 7,644        |         |              |   |  |   |   |         | 7,961   |        
|                                                   | Exploration                                   |                                  |         | 21,689  |            |   |        | 10,701       |         |              |   |  |   |   |         | 32,390  |        
|                                                   | Depletion, depreciation and amortization      |                                  |         | 48,847  |            |   |        | 154,246      |         |              |   |  |   |   |         | 203,093 |        
|                                                   | Impairment of proved properties               |                                  |         |        |            |   |        | 19,700       |         |              |   |  |   |   |         | 19,700  |        
|                                                   | Impairment of unproved properties             |                                  |         | 3,046   |            |   |        | 6,915        |         |              |   |  |   |   |         | 9,961   |        
|                                                   | Stock compensation expense                    |                                  |         | 4,608   |            |   |        |             |         |              |   |  |   |   |         | 4,608   |        
|                                                   | General and administrative                    |                                  |         | 6,046   |            |   |        | 17,583       |         |              |   |  |   |   |         | 23,629  |        
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|                                                   |                                               | Total operating expenses         |         |         | 97,306     |   |        |              | 317,318 |              |   |   |  |   |         |         | 414,624 |  
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|                                                   |                                               | Operating income                 |         |         | (42,071    | ) |        |              | 27,015  |              |   |   |  |   |         |         | (15,056 | )
|Other income (expense):                            |                                               |                                  |         |         |            |   |        |              |         |              |   |   |   |   |         |        
|                                                   | Interest expense                              |                                  |         | (34,607 | )          |   |        | (229         | )       |              |   |  |   |   |         | (34,836 | )      
|                                                   | Interest income                               |                                  |         | 172     |            |   |        | 374          |         |              |   |  |   |   |         | 546     |        
|                                                   | Change in interest rate swap fair value       |                                  |         |        |            |   |        | 226          |         |              |   |  |   |   |         | 226     |        
|                                                   | Other                                         |                                  |         | 579     |            |   |        | 423          |         |              |   |  |   |   |         | 1,002   |        
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|Income (loss) before income taxes                  |                                               |                                  | (75,927 | )       |            |   | 27,809 |              |         |              |  |   |   |   | (48,118 | )      
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|Benefit (provision) for income taxes:              |                                               |                                  |         |         |            |   |        |              |         |              |   |   |   |   |         |        
|                                                   | Current                                       |                                  |         |        |            |   |        | 2,094        |         |              |   |  |   |   |         | 2,094   |        
|                                                   | Deferred                                      |                                  |         | 27,609  |            |   |        | (10,151      | )       |              |   |  |   |   |         | 17,458  |        
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|                                                   |                                               | Total provision for income taxes |         |         | 27,609     |   |        |              | (8,057  | )            |   |   |  |   |         |         | 19,552  |  
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|Net income (loss)                                  |                                               |                                  | (48,318 | )       |            |   | 19,752 |              |         |              |  |   |   |   | (28,566 | )      
|Preferred stock dividends                          |                                               |                                  | (4,762  | )       |            |   |       |              |         |              |  |   |   |   | (4,762  | )      
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  
|Net income (loss) available to common stockholders |                                               | $                                | (53,080 | )       |            | $ | 19,752 |              |         | $            |  |   |   | $ | (33,328 | )      
|                                                   |                                               |                                  |         |         |            |   |        |              |         |              |   |  

F-40



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

For the Year Ended December 31,
2002


|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |          |         |        |          |  
|-------------------------------------------- | -------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------- | ---------- | ------ | -------- | ------------ | ------- | ------ | ------------ | -------- | - | - | -------- | -------- | ------- | ------ | -------- | -
|                                             |                                                                                              | Parent                                                                                |                                                             |                                                         | Subsidiary |        |          |              |         |       
|                                             |                                                                                              | Company                                                                               |                                                             |                                                         | Guarantors |        |          | Eliminations |         |        | Consolidated |         
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|                                             |                                                                                              |                                                                                      
|                                             |                                                                                              | (In thousands)                                                                        |                                                            
|Cash flows from operating activities:        |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |         
|                                             | Net income (loss)                                                                            |                                                                                       | $                                                           | (48,318                                                 | )          |        | $        | 19,752       |         |        | $            |         |   |   | $        | (28,566  | )      
|                                             | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |          |        
|                                             |                                                                                              | Depletion, depreciation and amortization                                              |                                                             |                                                         | 48,847     |        |          |              | 154,246 |        |              |          |  |   |          |          | 203,093 |       
|                                             |                                                                                              | Exploration dry hole costs                                                            |                                                             |                                                         | 13,955     |        |          |              | 5,591   |        |              |          |  |   |          |          | 19,546  |       
|                                             |                                                                                              | Impairment of proved properties                                                       |                                                             |                                                         |           |        |          |              | 19,700  |        |              |          |  |   |          |          | 19,700  |       
|                                             |                                                                                              | Impairment of unproved properties                                                     |                                                             |                                                         | 3,046      |        |          |              | 6,915   |        |              |          |  |   |          |          | 9,961   |       
|                                             |                                                                                              | Deferred income taxes                                                                 |                                                             |                                                         | (27,609    | )      |          |              | 10,151  |        |              |          |  |   |          |          | (17,458 | )     
|                                             |                                                                                              | Stock compensation expense                                                            |                                                             |                                                         | 4,608      |        |          |              |        |        |              |          |  |   |          |          | 4,608   |       
|                                             |                                                                                              | Change in derivative fair value                                                       |                                                             |                                                         | 26,723     |        |          |              |        |        |              |          |  |   |          |          | 26,723  |       
|                                             |                                                                                              | Amortization of financing fees                                                        |                                                             |                                                         | 2,438      |        |          |              |        |        |              |          |  |   |          |          | 2,438   |       
|                                             |                                                                                              | Changes in asset and liabilities, net of effects
    of loss (gain) on sale of assets |                                                             |                                                         | (276       | )      |          |              | 1,961   |        |              |          |  |   |          |          | 1,685   |       
|                                             |                                                                                              | Other                                                                                 |                                                             |                                                         | (274       | )      |          |              |        |        |              |          |  |   |          |          | (274    | )     
|                                             |                                                                                              | Changes in asset and liabilities, net of effects
    of acquisitions:                 |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |          |         |       
|                                             |                                                                                              |                                                                                       | Decrease (increase) in accounts receivable                  |                                                         |            | (9,194 | )        |              |         | 6,285  |              |          |   |  |          |          |         | (2,909 | )       
|                                             |                                                                                              |                                                                                       | Decrease (increase)in prepaid expenses and other
    assets |                                                         |            | (5,575 | )        |              |         | 544    |              |          |   |  |          |          |         | (5,031 | )       
|                                             |                                                                                              |                                                                                       | Decrease in net derivative liabilities                      |                                                         |            | (9,636 | )        |              |         |       |              |          |   |  |          |          |         | (9,636 | )       
|                                             |                                                                                              |                                                                                       | Decrease in accounts payable                                |                                                         |            | (3,405 | )        |              |         | (3,168 | )            |          |   |  |          |          |         | (6,573 | )       
|                                             |                                                                                              |                                                                                       | Decrease in ad valorem taxes payable                        |                                                         |            | (2     | )        |              |         | (849   | )            |          |   |  |          |          |         | (851   | )       
|                                             |                                                                                              |                                                                                       | Increase (decrease) in income taxes payable                 |                                                         |            | 248    |          |              |         | (725   | )            |          |   |  |          |          |         | (477   | )       
|                                             |                                                                                              |                                                                                       | Increase in accrued expenses                                |                                                         |            | 2,782  |          |              |         | 5,323  |              |          |   |  |          |          |         | 8,105  |         
|                                             |                                                                                              |                                                                                       | Decrease in other liabilities                               |                                                         |            |       |          |              |         | (887   | )            |          |   |  |          |          |         | (887   | )       
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|                                             |                                                                                              |                                                                                       |                                                             | Net cash provided by (used in) operating
    activities |            |        | (1,642   | )            |         |        | 224,839      |          |   |   |         |          |         |        | 223,197  |  
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|Cash flows from investing activities:        |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |         
|                                             | Additions to property and equipment                                                          |                                                                                       |                                                             | (68,928                                                 | )          |        |          | (78,684      | )       |        |              |         |   |   |          | (147,612 | )      
|                                             | Proceeds from sales of assets                                                                |                                                                                       |                                                             | 750                                                     |            |        |          | 12,561       |         |        |              |         |   |   |          | 13,311   |        
|                                             | Increase (decrease) in intercompany receivable                                               |                                                                                       |                                                             | (547,479                                                | )          |        |          |             |         |        |              | 547,479  |   |   |          |         |        
|                                             | Other acquisitions                                                                           |                                                                                       |                                                             | (328                                                    | )          |        |          | (679,562     | )       |        |              |         |   |   |          | (679,890 | )      
|                                             | Other                                                                                        |                                                                                       |                                                             |                                                        |            |        |          | 28           |         |        |              |         |   |   |          | 28       |        
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|                                             |                                                                                              |                                                                                       |                                                             | Net cash used in (provided by) investing
    activities |            |        | (615,985 | )            |         |        | (745,657     | )        |   |   | 547,479  |          |         |        | (814,163 | )
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|Cash flows from financing activities:        |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |          |   |   |          |         
|                                             | Proceeds from issuance of common stock                                                       |                                                                                       |                                                             | 267,787                                                 |            |        |          |             |         |        |              |         |   |   |          | 267,787  |        
|                                             | Repurchase of common stock                                                                   |                                                                                       |                                                             | (61                                                     | )          |        |          |             |         |        |              |         |   |   |          | (61      | )      
|                                             | Proceeds from issuance of long-term debt                                                     |                                                                                       |                                                             | 639,000                                                 |            |        |          |             |         |        |              |         |   |   |          | 639,000  |        
|                                             | Repayment of long-term debt                                                                  |                                                                                       |                                                             | (285,000                                                | )          |        |          |             |         |        |              |         |   |   |          | (285,000 | )      
|                                             | Preferred stock dividend                                                                     |                                                                                       |                                                             | (4,762                                                  | )          |        |          |             |         |        |              |         |   |   |          | (4,762   | )      
|                                             | Gain in interest rate swap cancellation                                                      |                                                                                       |                                                             | 3,705                                                   |            |        |          |             |         |        |              |         |   |   |          | 3,705    |        
|                                             | Financing fees                                                                               |                                                                                       |                                                             | (14,273                                                 | )          |        |          |             |         |        |              |         |   |   |          | (14,273  | )      
|                                             | Increase in intercompany payable                                                             |                                                                                       |                                                             |                                                        |            |        |          | 547,479      |         |        |              | (547,479 | ) |   |          |         |        
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|                                             |                                                                                              |                                                                                       |                                                             | Net cash provided by (used in) financing
    activities |            |        | 606,396  |              |         |        | 547,479      |          |   |   | (547,479 | )        |         |        | 606,396  |  
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|Net increase in cash and cash equivalents    |                                                                                              |                                                                                       | (11,231                                                     | )                                                       |            |        | 26,661   |              |         |        |             |          |   |   | 15,430   |         
|Effect of exchange rate changes on cash      |                                                                                              |                                                                                       |                                                            |                                                         |            |        | (253     | )            |         |        |             |          |   |   | (253     | )       
|Cash and cash equivalents, beginning of year |                                                                                              |                                                                                       | 13,812                                                      |                                                         |            |        | 13,772   |              |         |        |             |          |   |   | 27,584   |         
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         
|Cash and cash equivalents, end of year       |                                                                                              | $                                                                                     | 2,581                                                       |                                                         |            | $      | 40,180   |              |         | $      |             |          |   | $ | 42,761   |         
|                                             |                                                                                              |                                                                                       |                                                             |                                                         |            |        |          |              |         |        |              |         

F-41



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF
OPERATIONS

For the Year Ended December 31,
2001


|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |   |   |   |        |         |         |  
|-------------------------------------------------- | --------------------------------------------- | ------------------------------------------ | ------ | ------ | ---------- | - | ------ | ------------ | ------- | ------------ | - | - | - | - | ------ | ------- | ------- | -
|                                                   |                                               | Parent                                     |        |        | Subsidiary |   |        |              |         |             
|                                                   |                                               | Company                                    |        |        | Guarantors |   |        | Eliminations |         | Consolidated |  
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |  
|                                                   |                                               |                                           
|                                                   |                                               | (In thousands)                             |       
|Operating revenues:                                |                                               |                                            |        |        |            |   |        |              |         |              |   |   |   |   |        |        
|                                                   | Oil and natural gas sales                     |                                            | $      | 90,954 |            |   | $      | 226,324      |         |              | $ |  |   |   | $      | 317,278 |        
|                                                   | Hedge settlements                             |                                            |        |       |            |   |        | 2,091        |         |              |   |  |   |   |        | 2,091   |        
|                                                   | Non-hedge settlements                         |                                            |        |       |            |   |        | 15,300       |         |              |   |  |   |   |        | 15,300  |        
|                                                   | Non-hedge change in fair value of derivatives |                                            |        |       |            |   |        | 14,323       |         |              |   |  |   |   |        | 14,323  |        
|                                                   | Gain (loss) on sale of operating assets, net  |                                            |        | (304   | )          |   |        | 172          |         |              |   |  |   |   |        | (132    | )      
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|                                                   |                                               | Net revenues                               |        |        | 90,650     |   |        |              | 258,210 |              |   |   |  |   |        |         | 348,860 |  
|Operating expenses:                                |                                               |                                            |        |        |            |   |        |              |         |              |   |   |   |   |        |        
|                                                   | Lease operating expense                       |                                            |        | 7,879  |            |   |        | 47,436       |         |              |   |  |   |   |        | 55,315  |        
|                                                   | Production taxes                              |                                            |        | 8      |            |   |        | 13,399       |         |              |   |  |   |   |        | 13,407  |        
|                                                   | Transportation costs                          |                                            |        | 421    |            |   |        | 4,736        |         |              |   |  |   |   |        | 5,157   |        
|                                                   | Exploration                                   |                                            |        | 24,393 |            |   |        | 6,920        |         |              |   |  |   |   |        | 31,313  |        
|                                                   | Depletion, depreciation and amortization      |                                            |        | 43,044 |            |   |        | 81,015       |         |              |   |  |   |   |        | 124,059 |        
|                                                   | Impairment of proved properties               |                                            |        | 612    |            |   |        | 8,811        |         |              |   |  |   |   |        | 9,423   |        
|                                                   | Impairment of unproved properties             |                                            |        | 5,562  |            |   |        | 1,412        |         |              |   |  |   |   |        | 6,974   |        
|                                                   | Stock compensation expense                    |                                            |        | 719    |            |   |        |             |         |              |   |  |   |   |        | 719     |        
|                                                   | General and administrative                    |                                            |        | 6,410  |            |   |        | 11,268       |         |              |   |  |   |   |        | 17,678  |        
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|                                                   |                                               | Total operating expenses                   |        |        | 89,048     |   |        |              | 174,997 |              |   |   |  |   |        |         | 264,045 |  
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|                                                   |                                               | Operating income                           |        |        | 1,602      |   |        |              | 83,213  |              |   |   |  |   |        |         | 84,815  |  
|Other income (expense):                            |                                               |                                            |        |        |            |   |        |              |         |              |   |   |   |   |        |        
|                                                   | Interest expense                              |                                            |        | (6,990 | )          |   |        | (6,206       | )       |              |   |  |   |   |        | (13,196 | )      
|                                                   | Interest income                               |                                            |        | 1,159  |            |   |        | 509          |         |              |   |  |   |   |        | 1,668   |        
|                                                   | Change in interest rate swap fair value       |                                            |        |       |            |   |        | 4,960        |         |              |   |   |   |   |        | 4,960   |        
|                                                   | Other                                         |                                            |        | 163    |            |   |        | 48           |         |              |   |  |   |   |        | 211     |        
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|Income (loss) before income taxes                  |                                               |                                            | (4,066 | )      |            |   | 82,524 |              |         |              |  |   |   |   | 78,458 |        
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|Benefit (provision) for income taxes:              |                                               |                                            |        |        |            |   |        |              |         |              |   |   |   |   |        |        
|                                                   | Current                                       |                                            |        |       |            |   |        | (2,006       | )       |              |   |  |   |   |        | (2,006  | )      
|                                                   | Deferred                                      |                                            |        | 1,547  |            |   |        | (28,178      | )       |              |   |  |   |   |        | (26,631 | )      
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|                                                   |                                               | Total benefit (provision) for income taxes |        |        | 1,547      |   |        |              | (30,184 | )            |   |   |  |   |        |         | (28,637 | )
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|Net income (loss)                                  |                                               |                                            | (2,519 | )      |            |   | 52,340 |              |         |              |  |   |   |   | 49,821 |        
|Preferred stock dividends                          |                                               |                                            | (1,587 | )      |            |   |       |              |         |              |  |   |   |   | (1,587 | )      
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  
|Net income (loss) available to common stockholders |                                               | $                                          | (4,106 | )      |            | $ | 52,340 |              |         | $            |  |   |   | $ | 48,234 |        
|                                                   |                                               |                                            |        |        |            |   |        |              |         |              |   |  

F-42



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH
FLOWS

For the Year Ended December 31,
2001


|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |          |         |         |          |  
|-------------------------------------------- | ------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------- | ---------- | ------ | ------- | ------------ | ------- | ------- | ------------ | ------- | - | - | ------- | -------- | ------- | ------- | -------- | -
|                                             |                                                                                       | Parent                                                                |                                               |                                                         | Subsidiary |        |         |              |         |        
|                                             |                                                                                       | Company                                                               |                                               |                                                         | Guarantors |        |         | Eliminations |         |         | Consolidated |        
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|                                             |                                                                                       |                                                                      
|                                             |                                                                                       | (In thousands)                                                        |                                              
|Cash flows from operating activities:        |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Net income (loss)                                                                     |                                                                       | $                                             | (2,519                                                  | )          |        | $       | 52,340       |         |         | $            |        |   |   | $       | 49,821   |        
|                                             | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |          |        
|                                             |                                                                                       | Depletion, depreciation and amortization                              |                                               |                                                         | 43,044     |        |         |              | 81,015  |         |              |         |  |   |         |          | 124,059 |        
|                                             |                                                                                       | Exploration dry hole costs                                            |                                               |                                                         | 14,183     |        |         |              | 5,090   |         |              |         |  |   |         |          | 19,273  |        
|                                             |                                                                                       | Impairment of proved properties                                       |                                               |                                                         | 612        |        |         |              | 8,811   |         |              |         |  |   |         |          | 9,423   |        
|                                             |                                                                                       | Impairment of unproved properties                                     |                                               |                                                         | 5,562      |        |         |              | 1,412   |         |              |         |  |   |         |          | 6,974   |        
|                                             |                                                                                       | Stock compensation expense                                            |                                               |                                                         | 719        |        |         |              |        |         |              |         |  |   |         |          | 719     |        
|                                             |                                                                                       | Change in derivative fair value                                       |                                               |                                                         |           |        |         |              | (14,323 | )       |              |         |  |   |         |          | (14,323 | )      
|                                             |                                                                                       | Loss (gain) on sale of assets                                         |                                               |                                                         | 304        |        |         |              | (172    | )       |              |         |  |   |         |          | 132     |        
|                                             |                                                                                       | Deferred income taxes                                                 |                                               |                                                         | (1,547     | )      |         |              | 28,178  |         |              |         |  |   |         |          | 26,631  |        
|                                             |                                                                                       | Amortization of financing fees                                        |                                               |                                                         | 323        |        |         |              | 112     |         |              |         |  |   |         |          | 435     |        
|                                             |                                                                                       | Changes in asset and liabilities, net of effects
    of acquisitions: |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |          |         |        
|                                             |                                                                                       |                                                                       | Decrease (increase) in accounts receivable    |                                                         |            | (4,283 | )       |              |         | 14,409  |              |         |   |  |         |          |         | 10,126  |         
|                                             |                                                                                       |                                                                       | Decrease in prepaid expenses and other assets |                                                         |            | 797    |         |              |         | 254     |              |         |   |  |         |          |         | 1,051   |         
|                                             |                                                                                       |                                                                       | Decrease in net derivative liabilities        |                                                         |            |       |         |              |         | (23,245 | )            |         |   |  |         |          |         | (23,245 | )       
|                                             |                                                                                       |                                                                       | Increase (decrease) in accounts payable       |                                                         |            | 7,193  |         |              |         | (13,433 | )            |         |   |  |         |          |         | (6,240  | )       
|                                             |                                                                                       |                                                                       | Increase (decrease) in accrued expenses       |                                                         |            | (5,982 | )       |              |         | (2,492  | )            |         |   |  |         |          |         | (8,474  | )       
|                                             |                                                                                       |                                                                       | Increase in ad valorem taxes payable          |                                                         |            |       |         |              |         | (1,130  | )            |         |   |  |         |          |         | (1,130  | )       
|                                             |                                                                                       |                                                                       | Increase in income taxes payable              |                                                         |            |       |         |              |         | 301     |              |         |   |  |         |          |         | 301     |         
|                                             |                                                                                       |                                                                       | Decrease in other liabilities                 |                                                         |            |       |         |              |         | (260    | )            |         |   |  |         |          |         | (260    | )       
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|                                             |                                                                                       |                                                                       |                                               | Net cash provided by operating activities               |            |        | 58,406  |              |         |         | 136,867      |         |   |   |        |          |         |         | 195,273  |  
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|Cash flows from investing activities:        |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Additions to property and equipment                                                   |                                                                       |                                               | (76,083                                                 | )          |        |         | (111,842     | )       |         |              |        |   |   |         | (187,925 | )      
|                                             | Proceeds from sales of assets                                                         |                                                                       |                                               | 161                                                     |            |        |         | 5,375        |         |         |              |        |   |   |         | 5,536    |        
|                                             | Other acquisitions                                                                    |                                                                       |                                               |                                                        |            |        |         | (6,319       | )       |         |              |        |   |   |         | (6,319   | )      
|                                             | Increase (decrease) in intercompany receivable                                        |                                                                       |                                               | 18,340                                                  |            |        |         |             |         |         |              | (18,340 | ) |   |         |         |        
|                                             | Other                                                                                 |                                                                       |                                               |                                                        |            |        |         | 22           |         |         |              |        |   |   |         | 22       |        
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|                                             |                                                                                       |                                                                       |                                               | Net cash used in investing activities                   |            |        | (57,582 | )            |         |         | (112,764     | )       |   |   | (18,340 | )        |         |         | (188,686 | )
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|Cash flows from financing activities:        |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |         |   |   |         |         
|                                             | Proceeds from issuance of common stock                                                |                                                                       |                                               | 576                                                     |            |        |         |             |         |         |              |        |   |   |         | 576      |        
|                                             | Repurchase of common stock                                                            |                                                                       |                                               | (408                                                    | )          |        |         |             |         |         |              |        |   |   |         | (408     | )      
|                                             | Proceeds from issuance of long-term debt                                              |                                                                       |                                               | 590,000                                                 |            |        |         |             |         |         |              |        |   |   |         | 590,000  |        
|                                             | Repayment of long-term debt                                                           |                                                                       |                                               | (577,898                                                | )          |        |         | 313          |         |         |              |        |   |   |         | (577,585 | )      
|                                             | Preferred stock dividend                                                              |                                                                       |                                               | (1,587                                                  | )          |        |         |             |         |         |              |        |   |   |         | (1,587   | )      
|                                             | Financing fees                                                                        |                                                                       |                                               | (10,153                                                 | )          |        |         |             |         |         |              |        |   |   |         | (10,153  | )      
|                                             | Increase in intercompany payable                                                      |                                                                       |                                               |                                                        |            |        |         | (18,340      | )       |         |              | 18,340  |   |   |         |         |        
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|                                             |                                                                                       |                                                                       |                                               | Net cash provided by (used in) financing
    activities |            |        | 530     |              |         |         | (18,027      | )       |   |   | 18,340  |          |         |         | 843      |  
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|Net increase in cash and cash equivalents    |                                                                                       |                                                                       | 1,354                                         |                                                         |            |        | 6,076   |              |         |         |             |         |   |   | 7,430   |         
|Cash and cash equivalents, beginning of year |                                                                                       |                                                                       | 12,458                                        |                                                         |            |        | 7,696   |              |         |         |             |         |   |   | 20,154  |         
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        
|Cash and cash equivalents, end of year       |                                                                                       | $                                                                     | 13,812                                        |                                                         |            | $      | 13,772  |              |         | $       |             |         |   | $ | 27,584  |         
|                                             |                                                                                       |                                                                       |                                               |                                                         |            |        |         |              |         |         |              |        

F-43



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                               
|--- | --------------------------------------------------------------
|16. | Supplemental Information Related to Oil and
    Gas Activities

The following tables set forth certain historical
costs and costs incurred related to the Companys oil and
natural gas producing activities:

|                  |                                                                |                                      |   |           |           |  |   |           |           |  |   |           |           | 
|----------------- | -------------------------------------------------------------- | ------------------------------------ | - | --------- | --------- |  | - | --------- | --------- |  | - | --------- | --------- | 
|                  |                                                                |                                     
|                  |                                                                | For the Year Ended December 31,      |  
|                  |                                                                |                                      |  
|                  |                                                                | 2003                                 |   |           | 2002      |  |   | 2001      |          
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  |                                                                |                                     
|                  |                                                                | (In thousands)                       |  
|Capitalized costs |                                                                |                                      |   |           |           |  |   |           |           |  |   |          
|                  | Proved oil and natural gas properties                          |                                      | $ | 2,707,228 |           |  | $ | 2,138,471 |           |  | $ | 1,446,331 |          
|                  | Unproved oil and natural gas properties                        |                                      |   | 119,331   |           |  |   | 104,430   |           |  |   | 105,539   |          
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  |                                                                | Total oil and natural gas properties |   |           | 2,826,559 |  |   |           | 2,242,901 |  |   |           | 1,551,870 | 
|                  | Less: Accumulated depletion, depreciation and
    amortization |                                      |   | (721,631  | )         |  |   | (481,396  | )         |  |   | (280,737  | )        
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  |                                                                | Net capitalized costs                |   | $         | 2,104,928 |  |   | $         | 1,761,505 |  |   | $         | 1,271,133 | 
|                  |                                                                |                                      |   |           |           |  |   |           |          
|Costs incurred    |                                                                |                                      |   |           |           |  |   |           |           |  |   |          
|                  | Proved property acquisition costs                              |                                      | $ | 306,262   |           |  | $ | 618,597   |           |  | $ | 706,811   |          
|                  | Unproved property acquisition costs                            |                                      |   | 54,008    |           |  |   | 30,051    |           |  |   | 76,401    |          
|                  | Exploration costs                                              |                                      |   | 66,940    |           |  |   | 35,198    |           |  |   | 60,704    |          
|                  | Development costs                                              |                                      |   | 197,420   |           |  |   | 103,045   |           |  |   | 115,563   |          
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  |                                                                | Total finding and development costs  |   |           | 624,630   |  |   |           | 786,891   |  |   |           | 959,479   | 
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  | Asset retirement costs  additions                             |                                      |   | 10,303    |           |  |   |          |           |  |   |          |          
|                  | Asset retirement costs  revisions                             |                                      |   | 2,260     |           |  |   |          |           |  |   |          |          
|                  |                                                                |                                      |   |           |           |  |   |           |          
|                  |                                                                | Costs Incurred                       |   | $         | 637,193   |  |   | $         | 786,891   |  |   | $         | 959,479   | 
|                  |                                                                |                                      |   |           |           |  |   |           |          



| |                                                
| | -----------------------------------------------
| | Oil and Gas Reserve Information
    (Unaudited)

The following summarizes the policies used by the
Company in preparing the accompanying oil and natural gas
reserve disclosures, standardized measure of discounted future
net cash flows relating to proved oil and gas reserves and
reconciliation of such standardized measure between years.

Estimated quantities of the Companys oil
and gas reserves and the net present value of such reserves as
of December 31, 2003 are based upon reserve reports
prepared by Ryder Scott Company, L.P., Netherland,
Sewell & Associates, Inc. and the Companys
engineering staff. The Ryder Scott report covered 71% of the
total net present value of estimates of total proved reserves.
The Netherland Sewell report covered 16% and the internally
generated report covered the remaining 13% of the net present
value. Estimates of total proved reserves at December 31,
2002 were prepared by Ryder Scott Company, L.P. and the
Companys engineering staff. Ryder Scott reports covered
81% of the total net present value of estimates of total proved
reserves, preparing 58% and auditing 23%. The internally
generated report covered the remaining 19% of the net present
value. At December 31, 2001, Ryder Scott Company, L.P.
audited 87% of the total net present value of estimates of total
proved reserves and the remaining 13% of net present value of
the reserves was unaudited. Proved reserves are estimated
quantities of crude oil and natural gas which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing
economic and operating conditions. Proved developed reserves are
proved reserves that can be recovered through existing wells
with existing equipment and operating methods. Substantially all
of the Companys oil and natural gas reserves are located
in the United States and the Gulf of Mexico.

F-44



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The standardized measure of discounted future net
cash flows from proved reserves was developed as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Estimates are made of quantities of
    proved reserves and the future periods during which they are
    expected to be produced based on year-end economic conditions.                                                                                                                                                                                                                                                                                                 
|
| | 2. The estimated future cash flows from
    proved reserves were determined based on year-end prices held
    constant, except in those instances where fixed and determinable
    price escalations are included in existing contracts.                                                                                                                                                                                                                                   
|
| | 3. The future cash flows are reduced by
    estimated production costs and costs to develop and produce the
    proved reserves, all based on year-end economic conditions and
    by the estimated effect of future income taxes based on
    statutory income tax rates in effect at each year end, the
    Companys tax basis in its proved oil and natural gas
    properties and the effect of net operating loss, investment tax
    credit and other carryforwards.

The standardized measure of discounted future net
cash flows does not purport to present, nor should it be
interpreted to present, the fair value of the Companys oil
and natural gas reserves. An estimate of fair value would also
take into account, among other things, the recovery of reserves
not presently classified as proved, anticipated future changes
in prices and costs and a discount factor more representative of
the time value of money and the risks inherent in reserve
estimates.

The estimated net future development costs to
develop the booked proved undeveloped reserves for 2004, 2005
and 2006 are $137.8 million, $166.9 million and
$79.8 million, respectively.

F-45



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                                   
| | --------------------------------------------------
| | Quantities of Oil and Gas Reserves
    (Unaudited)

The following table presents estimates of the
Companys net proved and proved developed oil and gas
reserves:

|                                                   |                                 |            |        |        |            |  |           |          |  
|-------------------------------------------------- | ------------------------------- | ---------- | ------ | ------ | ---------- |  | --------- | -------- | -
|                                                   |                                 | Oil (Mbls) |        |        | Gas (Mmcf) | 
|                                                   |                                 |            |        |        |            | 
|Proved reserves at December 31, 2000               |                                 |            | 34,800 |        |            |  | 245,465   |         
|                                                   | Revisions of previous estimates |            |        | (4,360 | )          |  |           | (6,390   | )
|                                                   | Discoveries                     |            |        | 6,057  |            |  |           | 55,366   |  
|                                                   | Purchase of minerals in place   |            |        | 37,576 |            |  |           | 283,783  |  
|                                                   | Sales of minerals in place      |            |        | (488   | )          |  |           | (1,599   | )
|                                                   | Production                      |            |        | (4,929 | )          |  |           | (58,561  | )
|                                                   |                                 |            |        |        |            | 
|Proved reserves at December 31, 2001               |                                 |            | 68,656 |        |            |  | 518,064   |         
|                                                   | Revisions of previous estimates |            |        | 6,008  |            |  |           | (15,754  | )
|                                                   | Discoveries                     |            |        | 3,082  |            |  |           | 39,936   |  
|                                                   | Purchase of minerals in place   |            |        | 12,085 |            |  |           | 650,230  |  
|                                                   | Sales of minerals in place      |            |        | (2,735 | )          |  |           | (5,555   | )
|                                                   | Production                      |            |        | (7,927 | )          |  |           | (82,346  | )
|                                                   |                                 |            |        |        |            | 
|Proved reserves at December 31, 2002               |                                 |            | 79,169 |        |            |  | 1,104,575 |         
|                                                   | Revisions of previous estimates |            |        | (3,201 | )          |  |           | 340      |  
|                                                   | Discoveries                     |            |        | 2,768  |            |  |           | 171,967  |  
|                                                   | Purchase of minerals in place   |            |        | 1,290  |            |  |           | 201,465  |  
|                                                   | Sales of minerals in place      |            |        | (1,623 | )          |  |           | (1,933   | )
|                                                   | Production                      |            |        | (8,175 | )          |  |           | (116,989 | )
|                                                   |                                 |            |        |        |            | 
|Proved reserves at December 31, 2003               |                                 |            | 70,228 |        |            |  | 1,359,425 |         
|                                                   |                                 |            |        |        |            | 
|Proved developed reserves at December 31,
    2001 |                                 |            | 51,068 |        |            |  | 401,823   |         
|                                                   |                                 |            |        |        |            | 
|Proved developed reserves at December 31,
    2002 |                                 |            | 60,576 |        |            |  | 676,365   |         
|                                                   |                                 |            |        |        |            | 
|Proved developed reserves at December 31,
    2003 |                                 |            | 57,474 |        |            |  | 819,724   |         
|                                                   |                                 |            |        |        |            | 

F-46



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Standardized Measure of Discounted Future
    Net Cash Flows Relating to Proved Oil and Gas Reserves
    (Unaudited)

|                                                             |  |                |            |     |      |   |            |      |  |   |           |  
|------------------------------------------------------------ |  | -------------- | ---------- | --- | ---- | - | ---------- | ---- |  | - | --------- | -
|                                                             |  |               
|                                                             |  | December 31,   |           
|                                                             |  |                |           
|                                                             |  | 2003           |            |     | 2002 |   |            | 2001 | 
|                                                             |  |                |            |     |      |   |            |      | 
|                                                             |  |               
|                                                             |  | (In thousands) |           
|Future cash flows                                            |  | $              | 9,625,476  |     |      | $ | 6,627,844  |      |  | $ | 2,543,696 |  
|Future production costs                                      |  |                | (2,807,677 | )   |      |   | (1,928,788 | )    |  |   | (841,940  | )
|Future development costs                                     |  |                | (669,193   | )   |      |   | (474,447   | )    |  |   | (216,708  | )
|                                                             |  |                |            |     |      |   |            |      | 
|Future net cash flows before tax                             |  |                | 6,148,606  |     |      |   | 4,224,609  |      |  |   | 1,485,048 |  
|Future income taxes                                          |  |                | (1,676,304 | )   |      |   | (1,123,508 | )    |  |   | (306,261  | )
|                                                             |  |                |            |     |      |   |            |      | 
|Future net cash flows after tax                              |  |                | 4,472,302  |     |      |   | 3,101,101  |      |  |   | 1,178,787 |  
|Annual discount at 10%                                       |  |                | (1,944,683 | )   |      |   | (1,334,650 | )    |  |   | (431,758  | )
|                                                             |  |                |            |     |      |   |            |      | 
|Standardized measure of discounted future net
    cash flows |  | $              | 2,527,619  |     |      | $ | 1,766,451  |      |  | $ | 747,029   |  
|                                                             |  |                |            |     |      |   |            |      | 
|Discounted future net cash flows before income
    taxes     |  | $              | 3,485,638  | (1) |      | $ | 2,405,818  | (2)  |  | $ | 924,343   |  
|                                                             |  |                |            |     |      |   |            |      | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The difference in the discounted future net cash
    flows before income taxes from December 31, 2002 to
    December 31, 2003 resulted almost entirely from
    (i) the addition of 209.2 Bcfe of proved reserves due
    to acquisitions, (ii) the addition of 188.6 Bcfe as
    discoveries and extension and (iii) the change in commodity
    prices used to determine future cash flows.                                                                                      
|   
|(2) | The difference in the discounted future net cash
    flows before income taxes from December 31, 2001 to
    December 31, 2002 resulted almost entirely from
    (i) the addition of 722.7 Bcfe of proved reserves due
    to acquisitions, (ii) the addition of 58.4 Bcfe as
    discoveries and extension and (iii) the upward revision of
    20 Bcfe due to revisions of previous estimates and
    (iv) the change in commodity prices used to determine
    future cash flows.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | Changes in Standardized Measure of
    Discounted Future Net Cash Flows (Unaudited)

|                                                           |                                |                                 |          |         |      |   |          |           |  |   |            |          |  
|---------------------------------------------------------- | ------------------------------ | ------------------------------- | -------- | ------- | ---- | - | -------- | --------- |  | - | ---------- | -------- | -
|                                                           |                                |                                
|                                                           |                                | For the Year Ended December 31, |         
|                                                           |                                |                                 |         
|                                                           |                                | 2003                            |          |         | 2002 |   |          | 2001      | 
|                                                           |                                |                                 |          |         |      |   |          |           | 
|                                                           |                                |                                
|                                                           |                                | (In thousands)                  |         
|Oil and natural gas sales, net of production costs         |                                | $                               | (653,836 | )       |      | $ | (307,187 | )         |  | $ | (243,399   | )       
|Net changes in anticipated prices and production
    costs |                                |                                 | 646,461  |         |      |   | 659,541  |           |  |   | (1,179,511 | )       
|Extensions and discoveries, less related costs             |                                |                                 | 391,154  |         |      |   | 125,262  |           |  |   | 139,078    |         
|Changes in estimated future development costs              |                                |                                 | (111,226 | )       |      |   | (32,309  | )         |  |   | (10,284    | )       
|Previously estimated development costs incurred            |                                |                                 | 151,958  |         |      |   | 73,422   |           |  |   | 50,704     |         
|Net change in income taxes                                 |                                |                                 | (318,652 | )       |      |   | (462,053 | )         |  |   | 295,179    |         
|Purchase of minerals in place                              |                                |                                 | 558,245  |         |      |   | 825,382  |           |  |   | 489,733    |         
|Sales of minerals in place                                 |                                |                                 | (16,477  | )       |      |   | (12,024  | )         |  |   | (8,466     | )       
|Accretion of discount                                      |                                |                                 | 240,582  |         |      |   | 92,434   |           |  |   | 157,089    |         
|Revision of quantity estimates                             |                                |                                 | (39,508  | )       |      |   | 39,468   |           |  |   | (35,347    | )       
|Changes in production rates and other                      |                                |                                 | (87,533  | )       |      |   | 17,486   |           |  |   | (6,146     | )       
|                                                           |                                |                                 |          |         |      |   |          |           | 
|                                                           | Change in standardized measure |                                 | $        | 761,168 |      |   | $        | 1,019,422 |  |   | $          | (351,370 | )
|                                                           |                                |                                 |          |         |      |   |          |           | 

F-47



---



##### Table of Contents



WESTPORT RESOURCES CORPORATION


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                             
|--- | ------------------------------------------------------------
|17. | Supplemental Quarterly Financial Information
    (Unaudited)

|                                            |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |         |       |   |   |         |       |  
|------------------------------------------- | ------- | ---------------------------------------- | ------- | ----- | ------- | - | ------- | ------- |  | - | ------- | ---- |  | --------- | ------- | ----- | - | - | ------- | ----- | -
|                                            |         | First                                    |         |       | Second  |   |         | Third   |  |   | Fourth  |      |  |          
|                                            |         | Quarter                                  |         |       | Quarter |   |         | Quarter |  |   | Quarter |      |  | Full Year |        
|                                            |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |        
|                                            |         |                                         
|                                            |         | (In thousands, except per share amounts) |        
|2003                                        |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |         |       |   |   |         |      
|Total revenues                              |         | $                                        | 181,894 |       |         | $ | 180,627 |         |  | $ | 186,765 |      |  | $         | 184,403 |       |   | $ | 733,689 |      
|Gross profit(1)                             |         |                                          | 134,668 |       |         |   | 131,626 |         |  |   | 141,715 |      |  |           | 143,938 |       |   |   | 551,947 |      
|Net income                                  |         |                                          | 20,441  |       |         |   | 14,408  |         |  |   | 25,823  |      |  |           | 8,435   |       |   |   | 69,107  |      
|Net income available to common stock        |         |                                          | 19,250  |       |         |   | 13,217  |         |  |   | 24,632  |      |  |           | 7,245   |       |   |   | 64,344  |      
|Net income per share(2)                     |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |         |       |   |   |         |      
|                                            | Basic   |                                          |         | 0.29  |         |   |         | 0.20    |  |   |         | 0.37 |  |           |         | 0.11  |   |   |         | 0.96  |  
|                                            | Diluted |                                          |         | 0.29  |         |   |         | 0.19    |  |   |         | 0.36 |  |           |         | 0.11  |   |   |         | 0.94  |  
|                                           
|2002                                        |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |         |       |   |   |         |      
|Total revenues                              |         | $                                        | 71,948  |       |         | $ | 111,331 |         |  | $ | 103,048 |      |  | $         | 113,241 |       |   | $ | 399,568 |      
|Gross profit(1)                             |         |                                          | 52,755  |       |         |   | 80,479  |         |  |   | 72,709  |      |  |           | 99,968  |       |   |   | 305,911 |      
|Net income (loss)                           |         |                                          | (19,473 | )     |         |   | 2,410   |         |  |   | 2,165   |      |  |           | (13,668 | )     |   |   | (28,566 | )    
|Net income (loss) available to common stock |         |                                          | (20,663 | )     |         |   | 1,219   |         |  |   | 974     |      |  |           | (14,858 | )     |   |   | (33,328 | )    
|Net income (loss) per share(2)              |         |                                          |         |       |         |   |         |         |  |   |         |      |  |           |         |       |   |   |         |      
|                                            | Basic   |                                          |         | (0.40 | )       |   |         | 0.02    |  |   |         | 0.02 |  |           |         | (0.27 | ) |   |         | (0.63 | )
|                                            | Diluted |                                          |         | (0.40 | )       |   |         | 0.02    |  |   |         | 0.02 |  |           |         | (0.27 | ) |   |         | (0.63 | )



---



|    |                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross profit is computed as the excess of oil and
    natural gas revenues, including hedge settlements and gathering
    income, over operating expenses. Operating expenses include
    lease operating expense, production taxes, transportation costs
    and gathering expenses.
|   
|(2) | The sum of the individual quarterly net income
    (loss) per share may not agree with year-to-date net income per
    share as each periods computation is based on the weighted
    average number of common shares outstanding during the period.                                

F-48



---



##### Table of Contents



INDEX TO EXHIBITS

|            |   |    |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | - | -- |  | - | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |   |    |  |   | Exhibit Description
|            |   |    |  |   |                    
|            | 1 | .1 |  |  |                     | Purchase Agreement, dated as of March 27,
    2003, by and among Westport, subsidiary guarantors party thereto
    and Lehman Brothers Inc. (incorporated by reference to
    Exhibit 1 to Westports Registration Statement on
    Form S-4 (Registration No. 333-105834), filed with the
    SEC on June 4, 2003).                                                                                                                                                                  
|            | 1 | .2 |  |  |                     | Stock Purchase Agreement, dated as of
    November 15, 2002, by and among Westport, Spindrift
    Partners, L.P., Spindrift Investors (Bermuda) L.P., Global
    Natural Resources III and Global Natural Resources III
    L.P. (incorporated by reference to Exhibit 1 to
    Westports Registration Statement on Form S-3
    (Registration No. 333-102281), filed with the SEC on
    December 31, 2002).                                                                        
|            | 2 | .1 |  |  |                     | Agreement and Plan of Merger, dated as of
    March 9, 2000, by and among Westport Oil and Gas Company,
    Inc., Westport Energy Corporation, Equitable Production Company,
    Equitable Production (Gulf) Company and EPGC Merger Sub
    Corporation (incorporated by reference to Exhibit 2.1 to
    the Registration Statement on Form S-1 of Westport
    Resources Corporation, a Delaware corporation (Registration
    No. 333-40422), filed with the SEC on June 29, 2000).
|            | 2 | .2 |  |  |                     | Agreement and Plan of Merger, dated as of
    June 8, 2001, among Belco and Westport Resources
    Corporation, a Delaware corporation (incorporated by reference
    to Exhibit 2.1 to Belcos Registration Statement on
    Form S-4/A (Registration No. 333-64320), filed with
    the SEC on July 24, 2001).                                                                                                                                                                      
|            | 2 | .3 |  |  |                     | Purchase and Sale Agreement, dated
    November 6, 2002, among Westport and certain affiliates of
    El Paso Corporation parties thereto (incorporated by
    reference to Exhibit 2 to Westports Current Report on
    Form 8-K/A, filed with the SEC on December 27, 2002).                                                                                                                                                                                                       
|            | 3 | .1 |  |  |                     | Amended Articles of Incorporation of Westport
    (incorporated by reference to Exhibit 3.1 to
    Westports Registration Statement on Form 8-A/A, filed with
    the SEC on August 31, 2001).                                                                                                                                                                                                                                                                                       
|            | 3 | .2 |  |  |                     | Certificate of Amendment to Amended Articles of
    Incorporation of Westport, dated March 5, 2003
    (incorporated by reference to Exhibit 3.2 to
    Westports Quarterly Report on Form 10-Q for the quarter
    ended March 31, 2003, filed with the SEC on May 8,
    2003).                                                                                                                                                                                                    
|            | 3 | .3 |  |  |                     | Third Amended and Restated Bylaws of Westport,
    effective as of October 1, 2003 (incorporated by reference
    to Exhibit 3.3 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                                                                              
|            | 4 | .1 |  |  |                     | Specimen Certificate for shares of Common Stock
    of Westport (incorporated by reference to Exhibit 4.1 to
    Westports Registration Statement on Form 8-A/A, filed with
    the SEC on August 31, 2001).                                                                                                                                                                                                                                                                         
|            | 4 | .2 |  |  |                     | Specimen Certificate for shares of
    6 1/2% Convertible Preferred Stock of Westport
    (incorporated by reference to Exhibit 4 to Westports
    Registration Statement on Form 8-A/A, filed with the SEC on
    August 31, 2001).                                                                                                                                                                                                                                                 
|            | 4 | .3 |  |  |                     | Third Amended and Restated Shareholders
    Agreement, dated as of February 14, 2003, among Westport,
    ERI, Medicor Foundation, WELLC and certain stockholders named
    therein (incorporated by reference to Exhibit 4.3 to
    Westports Annual Report on Form 10-K for the year ended
    December 31, 2002, filed with the SEC on March 10,
    2003).                                                                                                                       
|            | 4 | .4 |  |  |                     | Termination and Voting Agreement, dated as of
    October 1, 2003, among Westport, ERI, WELLC, Medicor and
    certain stockholders named therein (incorporated by reference to
    Exhibit 4.5 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                               
|            | 4 | .5 |  |  |                     | Registration Rights Agreement, dated as of
    October 1, 2003, among Westport, ERI, WELLC, Medicor and
    certain stockholders named therein (incorporated by reference to
    Exhibit 4.6 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                  



---



##### Table of Contents



|            |    |     |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------- | -- | --- |  | - | ------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  |   | Exhibit Description
|            |    |     |  |   |                    
|            | 4  | .6  |  |  |                     | Registration Rights Agreement, dated as of
    April 3, 2003, among Westport, subsidiary guarantors party
    thereto and Lehman Brothers Inc. (incorporated by reference to
    Exhibit 4.7 to Westports Registration Statement on
    Form S-4 (Registration No. 333-105834), filed with the
    SEC on June 4, 2003).                                                                                                                                                                                                                                                                  
|            | 4  | .7  |  |  |                     | Indenture, dated as of November 5, 2001,
    among Westport, subsidiary guarantors from time to time party
    thereto and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                                                                                                                                                                                  
|            | 4  | .8  |  |  |                     | First Supplemental Indenture, dated as of
    December 31, 2001, among Westport, existing subsidiary
    guarantors party thereto, new subsidiary guarantors named
    therein and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.5 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                                                                                                                          
|            | 4  | .9  |  |  |                     | Second Supplemental Indenture, dated as of
    December 17, 2002, among Westport, existing subsidiary
    guarantors party thereto, new subsidiary guarantors named
    therein and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.9 to Westports Registration
    Statement on Form S-4 (Registration No. 333-102705),
    filed with the SEC on January 24, 2003).                                                                                                                                                                                        
|            | 4  | .10 |  |  |                     | Third Supplemental Indenture, dated as of
    April 3, 2003, among Westport, subsidiary guarantors party
    thereto and The Bank of New York, as trustee (incorporated
    by reference to Exhibit 4.11 to Westports
    Registration Statement on Form S-4 (Registration
    No. 333-105834), filed on June 4, 2003).                                                                                                                                                                                                                                                                   
|            | 4  | .11 |  |  |                     | Certificate of Designations of
    6 1/2% Convertible Preferred Stock dated March 5,
    1998 (incorporated by reference to Exhibit 4.1 of
    Belcos Current Report on Form 8-K, filed on March 11,
    1998).                                                                                                                                                                                                                                                                                                                                                                           
|            | 4  | .12 |  |  |                     | Form of 8 1/4% Note (contained in the
    Indenture listed as Exhibit 4.4 above) (incorporated by
    reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-4 (Registration No. 333-77060),
    filed with the SEC on January 18, 2002).                                                                                                                                                                                                                                                                                                                             
|            | 4  | .13 |  |  |                     | Form of Indenture for Senior Debt Securities
    (incorporated by reference to Exhibit 4.1 to Belcos
    Amendment No. 1 to the Registration Statement on
    Form S-3 (Registration No. 333-42107), filed with the
    SEC on December 23, 1997).                                                                                                                                                                                                                                                                                                                                        
|            | 4  | .14 |  |  |                     | Form of Indenture for Subordinated Debt
    Securities (incorporated by reference to Exhibit 4.2 to
    Belcos Amendment No. 1 to the Registration Statement
    on Form S-3 (Registration No. 333-42107), filed with
    the SEC on December 23, 1997).                                                                                                                                                                                                                                                                                                                                  
|            | 10 | .1  |  |  |                     | Credit Agreement, dated as of December 17,
    2002, among Westport, certain lenders from time to time party
    thereto, Credit Suisse First Boston Corporation, as syndication
    agent, JPMorgan Chase Bank, as administrative agent and issuing
    bank, certain documentation agents party thereto, Wachovia Bank,
    N.A., as senior managing agent, and certain managing agents
    named therein (incorporated by reference to Exhibit 10.1 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-102705), filed with the SEC on
    January 24, 2003).
|            | 10 | .2  |  |  |                     | First Amendment to Credit Agreement, dated as of
    October 15, 2003, among Westport, subsidiary guarantors
    party thereto, JPMorgan Chase Bank, as administrative agent, and
    certain other lenders named therein (incorporated by reference
    to Exhibit 10.1 to Westports Quarterly Report on Form
    10-Q for the quarter ended September 30, 2003, filed with
    the SEC on November 14, 2003).                                                                                                                                                                           
|            | 10 | .3  |  |  |                     | Subsidiary Guarantee, dated as of
    December 17, 2002, by each subsidiary guarantor party
    thereto in favor of JPMorgan Chase Bank, as administrative agent
    for certain lenders and creditors (incorporated by reference to
    Exhibit 10.2 to Westports Registration Statement on
    Form S-4 (Registration No. 333-102705), filed with the
    SEC on January 24, 2003).                                                                                                                                                                                                     
|            | 10 | .4  |  |  |                     | Westport Resources Corporation 2000 Stock
    Incentive Plan, as amended on August 21, 2001 (incorporated
    by reference to Exhibit 4.4 to Westports Registration
    Statement on Form S-8, filed with the SEC on
    August 31, 2001).                                                                                                                                                                                                                                                                                                                                                



---



##### Table of Contents



|            |    |     |  |   |                     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----------- | -- | --- |  | - | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    |     |  |   | Exhibit Description
|            |    |     |  |   |                    
|            | 10 | .5  |  |  |                     | Westport Resources Corporation Annual Incentive
    Plan 2000 (incorporated by reference to Exhibit 10.6 to Old
    Westports Registration Statement on Form S-1
    (Registration No. 333-40422), filed with the SEC on
    June 29, 2000).                                                                                                                                                                                                                                         
|            | 10 | .6  |  |  |                     | Employment Agreement, effective as of
    April 1, 2002, between Westport and Donald D. Wolf
    (incorporated by reference to Exhibit 10.1 to
    Westports Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002, filed with the SEC on
    May 13, 2002).                                                                                                                                                                                                        
|            | 10 | .7  |  |  |                     | Employment Agreement, effective as of
    April 1, 2002, between Westport and Barth E. Whitham
    (incorporated by reference to Exhibit 10.2 to
    Westports Quarterly Report on Form 10-Q for the
    quarter ended March 31, 2002, filed with the SEC on
    May 13, 2002).                                                                                                                                                                                                      
|            | 10 | .8  |  |  |                     | Form of Indemnification Agreement between
    Westport and its officers and directors (incorporated by
    reference to Exhibit 10.1 to Westports Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    2002, filed with the SEC on August 14, 2002).                                                                                                                                                                                                                 
|            | 10 | .9  |  |  |                     | Belco Oil & Gas Corp. 1996 Nonemployee
    Directors Stock Option Plan (incorporated by reference to
    Exhibit 10.1 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                                                                                                    
|            | 10 | .10 |  |  |                     | First Amendment to Belco Oil & Gas Corp.
    1996 Nonemployee Directors Stock Option Plan (incorporated
    by reference to Exhibit 10.1 of Belcos Quarterly
    Report on Form 10-Q for the quarter ended June 30,
    1999, filed with the SEC on August 13, 1999).                                                                                                                                                                                                               
|            | 10 | .11 |  |  |                     | Belco Oil & Gas Corp. 1996 Stock
    Incentive Plan (incorporated by reference to Exhibit 10.2
    of Belcos Registration Statement on Form S-1
    (Registration No. 333-1034), filed with the SEC on
    February 6, 1996).                                                                                                                                                                                                                                                        
|            | 10 | .12 |  |  |                     | First Amendment to Belco Oil & Gas Corp.
    1996 Stock Incentive Plan (incorporated by reference to
    Exhibit 10.2 of Belcos Quarterly Report on Form 10-Q
    for the quarter ended June 30, 2000, filed with the SEC on
    August 14, 2000).                                                                                                                                                                                                                                   
|            | 10 | .13 |  |  |                     | Form of Indemnification Agreement between Belco
    and its officers and directors (incorporated by reference to
    Exhibit 10.6 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                                                                                         
|            | 10 | .14 |  |  |                     | Belco Oil & Gas Corp. Retention and
    Severance Benefit Plan dated June 8, 2001 (incorporated by
    reference to Exhibit 10.18 to Belcos Registration
    Statement on Form S-4/A (Registration No. 333-64320),
    filed with the SEC on July 24, 2001).                                                                                                                                                                                                                         
|            | 10 | .15 |  |  |                     | Amended and Restated Well Participation Letter
    Agreement dated as of December 31, 1992 between Chesapeake
    Operating, Inc. and Belco, as amended by (i) Letter
    Agreement dated April 14, 1983, (ii) Amendment dated
    December 31, 1993, and (iii) Third Amendment dated
    December 30, 1994 (incorporated by reference to
    Exhibit 10.7 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).
|            | 10 | .16 |  |  |                     | Sale Agreement (Independence) dated as of
    June 10, 1994 between Chesapeake Operating, Inc. and Belco
    (incorporated by reference to Exhibit 10.10 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                                                                                                                                                                                  
|            | 10 | .17 |  |  |                     | Sale and Area of Mutual Interest Agreement
    (Greater Giddings) dated as of December 30, 1994 between
    Chesapeake Operating, Inc. and Belco (incorporated by reference
    to Exhibit 10.12 of Belcos Registration Statement on
    Form S-1 (Registration No. 333-1034), filed with the
    SEC on February 6, 1996).                                                                                                                                                          
|            | 10 | .18 |  |  |                     | Golden Trend Area of Mutual Interest Agreement
    dated as of December 17, 1992 between Chesapeake Operating,
    Inc. and Belco (incorporated by reference to Exhibit 10.13
    of Belcos Registration Statement on Form S-1
    (Registration No. 333-1034), filed with the SEC on
    February 6, 1996).                                                                                                                                                                         
|            | 10 | .19 |  |  |                     | Form of Participation Agreement for Belco
    Oil & Gas Corp. 1992 Moxa Arch Drilling Program
    (incorporated by reference to Exhibit 10.15 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                                                                                                                                                                                             



---



##### Table of Contents



|            |     |     |  |   |                     |                                                                                                                                                                                                                                                                                                                 
|----------- | --- | --- |  | - | ------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |     |  |   | Exhibit Description
|            |     |     |  |   |                    
|            | 10  | .20 |  |  |                     | Form of Offset Participation Agreement to the
    Moxa Arch 1992 Offset Drilling Program (incorporated by
    reference to Exhibit 10.16 of Belcos Registration
    Statement on Form S-1 (Registration No. 333-1034),
    filed with the SEC on February 6, 1996).                                            
|            | 10  | .21 |  |  |                     | Form of Participation Agreement for Belco
    Oil & Gas Corp. 1993 Moxa Arch Drilling Program
    (incorporated by reference to Exhibit 10.17 of Belcos
    Registration Statement on Form S-1 (Registration
    No. 333-1034), filed with the SEC on February 6, 1996).                                       
|            | 10  | .22 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Grant W.
    Henderson (incorporated by reference to Exhibit 10.24 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002). 
|            | 10  | .23 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Lon
    McCain (incorporated by reference to Exhibit 10.25 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).         
|            | 10  | .24 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Kenneth
    D. Anderson (incorporated by reference to Exhibit 10.26 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).
|            | 10  | .25 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Lynn S.
    Belcher (incorporated by reference to Exhibit 10.27 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).    
|            | 10  | .26 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Brian K.
    Bess (incorporated by reference to Exhibit 10.28 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).      
|            | 10  | .27 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of December 1, 2001, between Westport and Howard
    L. Boigon (incorporated by reference to Exhibit 10.29 to
    Westports Registration Statement on Form S-4
    (Registration No. 333-77060), filed with the SEC on
    January 18, 2002).   
|            | 10  | .28 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of February 1, 2003, between Westport and Carter
    Mathies (incorporated by reference to Exhibit 10.28 to
    Westports Annual Report on Form 10-K for the year ended
    December 31, 2002, filed with the SEC on March 10,
    2003).       
|            | 10  | .29 |  |  |                     | Change in Control Severance Protection Agreement,
    effective as of June 9, 2003, between Westport and Peter M.
    Mueller (incorporated by reference to Exhibit 10.1 to
    Westports Quarterly Report on Form 10-Q for the quarter
    ended June 30, 2003, filed with the SEC on August 14,
    2003).   
|            | *10 | .30 |  |  |                     | Change in Control Severance Protection Agreement,
    dated as of January 2, 2004, between Westport and Allan D.
    Keel.                                                                                                                                                                                      
|            | 21  |     |  |  |                     | List of Subsidiaries of Westport (incorporated by
    reference to Exhibit 21 to Westports Registration
    Statement on Form S-4/A (Registration No. 333-105834),
    filed with the SEC on February 5, 2004).                                                                                                
|            | *23 | .1  |  |  |                     | Consent of Independent Public Accountants, KPMG
    LLP.                                                                                                                                                                                                                                                        
|            | *23 | .2  |  |  |                     | Consent of Ryder Scott Company, L.P.                                                                                                                                                                                                                                                                            
|            | *23 | .3  |  |  |                     | Consent of Netherland, Sewell &
    Associates, Inc.                                                                                                                                                                                                                                                            
|            | *24 | .1  |  |  |                     | Power of Attorney (included on the signature page
    of this Annual Report on Form 10-K).                                                                                                                                                                                                                      
|            | *31 | .1  |  |  |                     | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer of
    Westport.                                                                                                                                                                                         
|            | *31 | .2  |  |  |                     | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer of
    Westport.                                                                                                                                                                                         



---



##### Table of Contents



|            |     |    |  |   |                     |                                                                                                                        
|----------- | --- | -- |  | - | ------------------- | -----------------------------------------------------------------------------------------------------------------------
|Exhibit No. |     |    |  |   | Exhibit Description
|            |     |    |  |   |                    
|            | *32 | .1 |  |  |                     | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Executive Officer of
    Westport.
|            | *32 | .2 |  |  |                     | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002 of Chief Financial Officer of
    Westport.



---



|  |                
|- | ---------------
|* | Filed herewith.