##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K


|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the Fiscal Year ended: December 31, 2004                                                
|  
|OR
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-17204





INFINITY, INC.


(Exact Name of Small Business Issuer as Specified in its
Charter)


|                            |  |                                        
|--------------------------- |  | ---------------------------------------
|Colorado                    |  | 84-1070066                             
|(State or of Incorporation) |  | (I.R.S. Employer Identification Number)

1401 West Main Street, Suite C, Chanute, Kansas 66720


(Address of Principal Executive Offices, Including Zip
Code)


(620) 431-6200


(Registrants telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act: None


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


þ o


o


o þ




DOCUMENTS INCORPORATED BY REFERENCE












---










TABLE OF CONTENTS


|                                                    |  |                                                                                           |    |  |    |  |  | 
|--------------------------------------------------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- |  |  | 
|PART I                                              |  |                                                                                           | 3  | 
|Item 1. and Item 2. Business
    and Properties     |  |                                                                                           | 3  | 
|Item 3.                                             |  | Legal Proceedings                                                                         |    |  | 30 | 
|Item 4.                                             |  | Submission of Matters to a Vote of Security
    Holders                                   |    |  | 30 | 
|PART II                                             |  |                                                                                           | 31 | 
|Item 5.                                             |  | Market for Registrants Common Equity
    and Related Shareholder Matters                 |    |  | 31 | 
|Item 6.                                             |  | Selected Financial Data                                                                   |    |  | 32 | 
|Item 7.                                             |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |    |  | 33 | 
|Item 7A.                                            |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |    |  | 47 | 
|Item 8.                                             |  | Financial Statements                                                                      |    |  | 48 | 
|Item 9.                                             |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure  |    |  | 48 | 
|Item 9A.                                            |  | Controls and Procedures                                                                   |    |  | 48 | 
|PART III                                            |  |                                                                                           | 49 | 
|Item 10.                                            |  | Directors and Executive Officers of the
    Registrant                                    |    |  | 49 | 
|Item 11.                                            |  | Executive Compensation                                                                    |    |  | 49 | 
|Item 12.                                            |  | Security Ownership of Certain Beneficial
    Owners and Management                        |    |  | 49 | 
|Item 13.                                            |  | Certain Relationships and Related
    Transactions                                        |    |  | 49 | 
|Item 14.                                            |  | Principal Accountant Fees and Services                                                    |    |  | 49 | 
|PART IV                                             |  |                                                                                           | 49 | 
|Item 15.                                            |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                       |    |  | 49 | 
|Subsidiaries                                       
|Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C.
|Consent of Netherland Sewell and Assiciates, Inc.  
|Certification of CEO Pursuant to Section 302       
|Certification of CFO Pursuant to Section 302       
|Certification of CEO Pursuant to Section 906       
|Certification of CFO Pursuant to Section 906       



1



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FORWARD-LOOKING STATEMENTS






| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Infinitys business strategy and anticipated trends in
    Infinitys business and its future results of operations;                                                                                                            
|
| |  | the ability of Infinity to make and integrate acquisitions and
    the completion of the Comanche and Nicaragua acquisitions;                                                                                                   
|
| |  | commencement and progress of exploration, drilling and
    completion activities in the Barnett Shale, Niobrara Shale,
    Caribbean shelf, Lower Marble Falls formation and the Forth
    Worth and Greater Green River Basins;
|
| |  | availability of drilling rigs and other support equipment;                                                                                                                                                                      
|
| |  | the connection of Infinitys wells to third party pipeline
    systems;                                                                                                                                                         
|
| |  | the costs and results of dewatering operations, including
    drilling water disposal wells;                                                                                                                                    
|
| |  | the closure of wells and the costs associated therewith;                                                                                                                                                                        
|
| |  | demand for oilfield services;                                                                                                                                                                                                   
|
| |  | the availability of financing on acceptable terms;                                                                                                                                                                              
|
| |  | the impact of governmental regulation; and                                                                                                                                                                                      
|
| |  | the timing of engineering and environmental impact studies and
    permitting,                                                                                                                                                  





| |   |                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in oil and natural gas prices and production,                                                                                                     
|
| |  | incorrect estimations of required capital expenditures,                                                                                                        
|
| |  | uncertainties inherent in estimating quantities of oil and gas
    reserves and projecting future rates of production and timing of
    development activities,
|
| |  | an increase in the cost of oil and gas drilling, completion and
    production and in materials, fuel and labor costs,                                         
|
| |  | the availability, conditions and timing of required government
    approvals and third party financing,                                                        
|
| |  | a decline in demand for Infinitys oil and gas production
    or oilfield services, and                                                                        
|
| |  | changes in general economic conditions.                                                                                                                        

2



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##### Table of Contents






PART I







|                    |                        
|------------------- | -----------------------
|ITEM 1. AND ITEM 2. | BUSINESS AND PROPERTIES

GENERAL










http://www.infinity-res.com




| |                  
| | -----------------
| | Subsequent Events



| |                              
| | -----------------------------
| | Senior Secured Notes Facility



3



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| |                                                              
| | -------------------------------------------------------------
| | Acquisition of Additional Acreage in the Fort Worth
    Basin





| |                                                
| | -----------------------------------------------
| | Redemption of All Subordinated Convertible Debt







| |               
| | --------------
| | Infinity-Texas



4



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| |                 
| | ----------------
| | Infinity-Wyoming













5



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| |          
| | ---------
| | Nicaragua





| |             
| | ------------
| | Consolidated



BUSINESS STRATEGY






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Exploration and Production. We will seek to:
    (i) consummate acquisitions of early-stage oil and gas
    properties, acreage leaseholds and prospects; (ii) explore
    such properties or prospects to discover underlying,
    commercially-viable hydrocarbon resource bases;
    (iii) develop such hydrocarbon resource bases into proved
    and producing reserves; (iv) operate and produce
    hydrocarbons from such reserve bases; and (v) sell or
    otherwise monetize such reserve bases at attractive valuations.
    We will usually seek to operate our exploration and production
    projects with a maximum working interest and net revenue
    interest, with exceptions or adjustments being made in
    situations in which the risk or capital requirements to explore,
    develop and produce from a given project are deemed high enough
    to warrant a partner, which may bring to the given project
    greater financial and technical resources than we have or are
    willing to commit.                                                      
|
| |  | Oilfield Services. We will seek to grow Consolidated
    through: (i) selected acquisitions in our existing
    operating areas and (ii) selected acquisitions in new
    geographical operating areas. We will seek to improve and
    increase our product and service offerings and increase our
    operating margins, utilizing increasing efficiencies of scale as
    they present themselves. Ultimately, as the proved and producing
    reserve base in our exploration and production operations
    reaches a point at which we believe no longer require cash flow
    contributions from our oilfield services operations, dependent
    upon industry conditions, we may explore potential opportunities
    to monetize our investment in Consolidated, which monetization
    may include: (i) a sale to an industry acquiror;
    (ii) a sale to a financial buyer or investor; or
    (iii) spin-off, split-off or other such corporate
    transaction with the intended consequence of Consolidated
    standing on its own as a separate publicly-traded entity.



6



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RISK FACTORS




| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | We have a history of operating losses and we may be unable
    to achieve long-term profitability.







| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | prices for oil and gas we produce may be lower than expected;                                                        
|
| |  | the capital, equipment, personnel or services required to
    develop the leases for production may not be available;
|
| |  | we may not find oil and gas reserves in the quantities
    anticipated;                                              
|
| |  | the reserves we find may not produce oil and gas at the rate
    anticipated;                                        
|
| |  | the costs of producing oil and gas may be higher than
    expected; and                                              
|
| |  | we may encounter one or more of many operating risks associated
    with drilling for and producing oil and gas.     



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Oil and gas prices are volatile, and declines in prices
    would hurt our ability to achieve profitable operations.









| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | worldwide and domestic supplies of oil and gas;                                                                         
|
| |  | political instability or armed conflict in oil or gas producing
    regions;                                            
|
| |  | the ability of the members of the Organization of Petroleum
    Exporting Countries to agree to and maintain oil prices;
|
| |  | production controls;                                                                                                    
|
| |  | the price and level of foreign imports;                                                                                 
|
| |  | worldwide economic conditions;                                                                                          

7



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| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | marketability of production;                                                                                           
|
| |  | the level of consumer demand;                                                                                          
|
| |  | the price, availability and acceptance of alternative fuels;                                                           
|
| |  | the price, availability and capacity of commodity processing and
    gathering facilities, and pipeline transportation;
|
| |  | weather conditions; and                                                                                                
|
| |  | actions of federal, state, local and foreign authorities.                                                              





| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | impairing our financial condition, cash flows and liquidity;              
|
| |  | limiting our ability to finance planned capital expenditures;             
|
| |  | reducing our revenue, operating income and profitability;                 
|
| |  | reducing the carrying value of our oil and natural gas
    properties; and
|
| |  | reducing demand for our oilfield service business.                        







| |                                            
| | -------------------------------------------
| | Prices may be affected by regional factors.



8



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| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Forward sales transactions may limit our potential gains
    or expose us to loss.





| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | our production is less than expected;                                                  
|
| |  | the counterparties to our futures contracts fail to perform
    under the contracts; or
|
| |  | our production costs on the hedged production significantly
    increase.              



| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | Exploration and development of our oil and gas projects
    will require large amounts of capital which we may not be able
    to obtain.







| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our oil and gas projects in the Fort Worth Basin of Texas,
    Greater Green River Basin of Wyoming, and Sand Wash and Piceance
    Basins of Colorado achieving a level of production that provides
    sufficient cash flow to support additional borrowings and to
    attract other forms of debt and equity capital;
|
| |  | our success in locating and producing new reserves;                                                                                                                                                                                                                                                                      
|
| |  | prices of crude oil and natural gas;                                                                                                                                                                                                                                                                                     
|
| |  | the level of production from existing wells; and                                                                                                                                                                                                                                                                         
|
| |  | amounts of necessary working capital and expenses.                                                                                                                                                                                                                                                                       





| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | all or a substantial portion of our operating cash flow being
    dedicated to the payment of principal and interest;  
|
| |  | an increase in interest expense as the amount of debt
    outstanding increases or as variable interest rates increase;
|
| |  | increased vulnerability to competitive pressures and economic
    downturns; and                                       
|
| |  | restrictions on our operations that may be contained in any
    contract entered into with lenders.                    



9



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| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The covenants and debt service obligations of our Senior
    Secured Note Facility may adversely affect our cash flow and our
    ability to raise additional capital.





| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | it may be more difficult for us to satisfy our debt repayment
    obligations;                                                                                                                               
|
| |  | covenant violations, if any, could result in accelerated payment
    terms on existing debt;                                                                                                                 
|
| |  | the amount of our interest expense may increase because our
    borrowings are at a variable rate of interest, which, if
    interest rates increase, would result in higher interest expense;               
|
| |  | we will need to use a portion of our revenue 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; and
|
| |  | substantially all of our properties are pledged as collateral to
    lenders and failure to pay could result in foreclosure and loss
    of assets.                                                          







| |   |                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any additional financing we obtain may be on unfavorable terms;                                                                                              
|
| |  | we may have a higher level of debt than many of our competitors,
    which may place us at a competitive disadvantage;                                       
|
| |  | we may issue equity securities at an undesired or unanticipated
    point in time to repay indebtedness, causing additional dilution
    to our shareholders;
|
| |  | 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 industries in which
    we operate.          



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Information concerning our reserves, future net cash flow
    estimates, and potential future ceiling write-downs is
    uncertain.





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| |   |                                                           
| | - | ----------------------------------------------------------
| |  | 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.       









| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | the amount and timing of actual production;                                        
|
| |  | the price for which that oil and gas production can be sold;                       
|
| |  | supply and demand for oil and natural gas;                                         
|
| |  | curtailments or increases in consumption by natural gas and oil
    purchasers; and
|
| |  | changes in government regulations or taxation.                                     









| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | The oil and gas exploration business involves a high
    degree of business and financial risk.



11



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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | defects in title;                                                            
|
| |  | the absence of producible quantities of oil and gas;                         
|
| |  | insufficient formation attributes, such as porosity, to allow
    production;
|
| |  | water production requiring disposal; and                                     
|
| |  | improperly pressured reservoirs from which to produce the
    reserves.      





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | availability and cost of equipment and transportation for the
    production;
|
| |  | demand for the oil and gas produced; and                                     
|
| |  | price for the oil and gas produced.                                          



| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to operating hazards that could
    result in substantial losses against which we may not be
    insured.





| |   |                                                                         
| | - | ------------------------------------------------------------------------
| |  | well blowouts;                                                          
|
| |  | craterings;                                                             
|
| |  | explosions;                                                             
|
| |  | uncontrollable flows of oil, natural gas or well fluids;                
|
| |  | fires;                                                                  
|
| |  | formations with abnormal pressures;                                     
|
| |  | pipeline ruptures or spills; and                                        
|
| |  | releases of toxic gas and other environmental hazards and
    pollution.



12



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| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We depend on successful exploration, development and
    acquisitions to maintain reserves and revenue in the
    future.





| |                                                                  
| | -----------------------------------------------------------------
| | Exploratory drilling is an uncertain process with many
    risks.





| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | unexpected drilling conditions;                                                                                        
|
| |  | pressure or irregularities in formations;                                                                              
|
| |  | equipment failures or accidents;                                                                                       
|
| |  | adverse weather conditions;                                                                                            
|
| |  | defects in title;                                                                                                      
|
| |  | compliance with governmental requirements, rules and
    regulations; and                                              
|
| |  | shortages or delays in the availability of drilling rigs, the
    delivery of equipment and adequate trained personnel.





| |                                                                           
| | --------------------------------------------------------------------------
| | Our business will depend on transportation facilities
    owned by others.



13



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| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | The oil and gas industry is heavily regulated and we must
    comply with complex governmental regulations.









| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | land use restrictions;                                                                              
|
| |  | drilling bonds and other financial responsibility requirements;                                     
|
| |  | spacing of wells;                                                                                   
|
| |  | emissions into the air;                                                                             
|
| |  | unitization and pooling of properties;                                                              
|
| |  | habitat and endangered species protection, reclamation and
    remediation;                         
|
| |  | the containment and disposal of hazardous substances, oil field
    waste and other waste materials;
|
| |  | the use of underground storage tanks;                                                               
|
| |  | the use of underground injection wells, which affects the
    disposal of water from our wells;     
|
| |  | safety precautions;                                                                                 
|
| |  | the prevention of oil spills;                                                                       
|
| |  | the closure of production facilities;                                                               
|
| |  | operational reporting; and                                                                          
|
| |  | taxation.                                                                                           





| |   |                                       
| | - | --------------------------------------
| |  | personal injuries;                    
|
| |  | property and natural resource damages;

14



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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | releases or discharges of hazardous materials;                                                        
|
| |  | well reclamation costs;                                                                               
|
| |  | oil spill clean-up costs;                                                                             
|
| |  | other remediation and clean-up costs;                                                                 
|
| |  | plugging and abandonment costs, which may be particularly high
    in the case of offshore facilities;
|
| |  | governmental sanctions, such as fines and penalties; and                                              
|
| |  | other environmental damages.                                                                          







| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the containment and disposal of hazardous substances, oilfield
    waste and other waste materials;
|
| |  | the use of underground storage tanks; and                                                          
|
| |  | the use of underground injection wells.                                                            





| |   |                                              
| | - | ---------------------------------------------
| |  | administrative, civil and criminal penalties;
|
| |  | revocation of permits; and                   
|
| |  | corrective action orders.                    





15



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| |                                                
| | -----------------------------------------------
| | The oil and gas industry is highly competitive.





| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acquisition of desirable producing properties or new leases for
    future exploration;                                                             
|
| |  | marketing our oil and natural gas production;                                                                                                       
|
| |  | arranging for growth capital on attractive terms; and                                                                                               
|
| |  | seeking to acquire or secure the equipment, service, labor,
    other personnel and materials necessary to operate and develop
    those properties.





| |                                                            
| | -----------------------------------------------------------
| | We may have difficulty managing growth in our
    business.





| |                            
| | ---------------------------
| | We depend on key personnel.



16



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SIGNIFICANT PROJECT AND PROSPECT AREAS






| |                 
| | ----------------
| | Fort Worth Basin





| |                                   
| | ----------------------------------
| | Erath and Hamilton Counties, Texas







| |                       
| | ----------------------
| | Comanche County, Texas







| |                          
| | -------------------------
| | Greater Green River Basin





| |               
| | --------------
| | Pipeline Field



17



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| |              
| | -------------
| | Labarge Field









| |                   
| | ------------------
| | Northwest Colorado





| |                   
| | ------------------
| | Sand Wash Prospect





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| |                        
| | -----------------------
| | Piceance Basin Prospect





| |          
| | ---------
| | Nicaragua







| |      
| | -----
| | Other



19



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##### Table of Contents



OILFIELD SERVICES










| |                             
| | ----------------------------
| | Oil and Natural Gas Reserves





|                                                        |  |           |            |  |             |   |            |       |  |   |            | 
|------------------------------------------------------- |  | --------- | ---------- |  | ----------- | - | ---------- | ----- |  | - | ---------- | 
|                                                        |  | Developed |            |  | Undeveloped |   |            | Total | 
|                                                        |  |           |            |  |             |   |            |       | 
|Natural gas (Mcf)                                       |  |           | 3,773,033  |  |             |   | 4,269,913  |       |  |   | 8,042,946  | 
|Crude oil (barrels)                                     |  |           | 117,031    |  |             |   | 76,546     |       |  |   | 193,577    | 
|Total (Mcfe)                                            |  |           | 4,475,219  |  |             |   | 4,729,189  |       |  |   | 9,204,408  | 
|Future net revenue before income taxes                  |  | $         | 18,037,000 |  |             | $ | 16,545,500 |       |  | $ | 34,582,500 | 
|Present value of future net revenue before income taxes |  | $         | 13,168,500 |  |             | $ | 10,850,900 |       |  | $ | 24,019,400 | 

20



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| |                                        
| | ---------------------------------------
| | Production, Prices and Production Costs



|                              |                         |      |      |           |      |   |      |           |  |   |      |         | 
|----------------------------- | ----------------------- | ---- | ---- | --------- | ---- | - | ---- | --------- |  | - | ---- | ------- | 
|                              |                         | 2004 |      |           | 2003 |   |      | 2002      | 
|                              |                         |      |      |           |      |   |      |           | 
|Production:                   |                         |      |      |           |      |   |      |           |  |   |      |        
|                              | Natural gas (Mcf)       |      |      | 953,428   |      |   |      | 1,080,456 |  |   |      | 676,879 | 
|                              | Crude oil (barrels)     |      |      | 33,668    |      |   |      | 57,654    |  |   |      | 53,122  | 
|                              | Total (Mcfe)            |      |      | 1,155,436 |      |   |      | 1,426,380 |  |   |      | 995,611 | 
|Average daily production:     |                         |      |      |           |      |   |      |           |  |   |      |        
|                              | Natural gas (Mcf)       |      |      | 2,612     |      |   |      | 2,960     |  |   |      | 1,854   | 
|                              | Crude oil (barrels)     |      |      | 92        |      |   |      | 158       |  |   |      | 145     | 
|                              | Total (Mcfe)            |      |      | 3,164     |      |   |      | 3,908     |  |   |      | 2,727   | 
|Average sales price per unit: |                         |      |      |           |      |   |      |           |  |   |      |        
|                              | Natural gas ($per Mcf)  |      | $    | 5.12      |      |   | $    | 4.47      |  |   | $    | 1.88    | 
|                              | Crude oil ($per barrel) |      | $    | 41.15     |      |   | $    | 30.51     |  |   | $    | 17.14   | 
|                              | Total ($per Mcfe)       |      | $    | 5.42      |      |   | $    | 4.62      |  |   | $    | 2.38    | 
|Production costs per Mcfe     |                         | $    | 2.28 |           |      | $ | 2.05 |           |  | $ | 1.83 |        



21



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| |                                                                  
| | -----------------------------------------------------------------
| | Development, Exploration and Acquisition Capital
    Expenditures



|                           |          |                                  |            |           |           |   |           |           |           |   |            |           |           | 
|-------------------------- | -------- | -------------------------------- | ---------- | --------- | --------- | - | --------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                           |          | 2004                             |            |           | 2003      |   |           | 2002      |          
|                           |          |                                  |            |           |           |   |           |           |          
|Property acquisition costs |          |                                  |            |           |           |   |           |           |           |   |            |          
|                           | Proved   |                                  | $          | 516,239   |           |   | $         | 1,099,120 |           |   | $          | 72,383    |          
|                           | Unproved |                                  |            | 3,717,280 |           |   |           | 661,224   |           |   |            | 2,279,587 |          
|                           |          |                                  |            |           |           |   |           |           |          
|                           |          | Total property acquisition costs |            |           | 4,233,519 |   |           |           | 1,760,344 |   |            |           | 2,351,970 | 
|Development costs          |          |                                  | 6,056,131  |           |           |   | 3,167,700 |           |           |   | 786,095    |          
|Exploration costs          |          |                                  | 5,294,148  |           |           |   | 3,491,953 |           |           |   | 11,955,351 |          
|                           |          |                                  |            |           |           |   |           |           |          
|Total costs                |          | $                                | 15,583,798 |           |           | $ | 8,419,997 |           |           | $ | 15,093,416 |          
|                           |          |                                  |            |           |           |   |           |           |          



| |                  
| | -----------------
| | Drilling Activity



|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     |  |  |    |    |  |  |    |    | 
|----------------- | ------------- | ----- |  | - | ---- |  |  | ----- | --- |  | --- | - | - | ----- |  | - | --- |  |  | -- | -- |  |  | -- | -- | 
|                  |               | 2004  |  |   | 2003 |  |  | 2002  |    
|                  |               |       |  |   |      |  |  |       |    
|                  |               | Gross |  |   | Net  |  |  | Gross |     |  | Net |   |   | Gross |  |   | Net | 
|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     | 
|Exploratory Wells |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     |  |  |    |    |  |  |   
|                  | Productive    |       |  | 3 |      |  |  | 2.9   |     |  |     |  |   |       |  |  |     |  |  | 13 |    |  |  | 13 |   
|                  | Nonproductive |       |  |  |      |  |  |      |     |  |     |  |   |       |  |  |     |  |  | 9  |    |  |  | 9  |   
|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     | 
|                  |               | Total |  |   | 3    |  |  |       | 2.9 |  |     |   |  |       |  |   |    |  |  |    | 22 |  |  |    | 22 | 
|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     | 
|Development Wells |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     |  |  |    |    |  |  |   
|                  | Service       |       |  |  |      |  |  |      |     |  |     | 1 |   |       |  | 1 |     |  |  | 2  |    |  |  | 2  |   
|                  | Productive    |       |  | 9 |      |  |  | 8.0   |     |  |     |  |   |       |  |  |     |  |  | 2  |    |  |  | 2  |   
|                  | Nonproductive |       |  |  |      |  |  |      |     |  |     |  |   |       |  |  |     |  |  |   |    |  |  |   |   
|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     | 
|                  |               | Total |  |   | 9    |  |  |       | 8.0 |  |     |   | 1 |       |  |   | 1   |  |  |    | 4  |  |  |    | 4  | 
|                  |               |       |  |   |      |  |  |       |     |  |     |   |   |       |  |   |     | 



22



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##### Table of Contents





| |             
| | ------------
| | Acreage Data



|                          |                |           |     |       |                     |  |     |       |       |  |         |        |         |  |        |        |         | 
|------------------------- | -------------- | --------- | --- | ----- | ------------------- |  | --- | ----- | ----- |  | ------- | ------ | ------- |  | ------ | ------ | ------- | 
|                          |                | Developed |     |       |                    
|                          |                | Acreage   |     |       | Undeveloped Acreage | 
|                          |                |           |     |       |                     | 
|                          |                | Gross     |     |       | Net                 |  |     | Gross |       |  | Net     |       
|                          |                |           |     |       |                     |  |     |       |       |  |         |       
|Fort Worth Basin          |                |           |    |       |                     |  |    |       |       |  | 32,108  |        |         |  | 26,634 |       
|Greater Green River Basin |                |           |     |       |                     |  |     |       |       |  |         |        |         |  |        |       
|                          | Wamsutter Arch |           |     | 4,000 |                     |  |     | 3,840 |       |  |         | 18,210 |         |  |        | 15,490 |        
|                          | Labarge        |           |     | 1,763 |                     |  |     | 1,763 |       |  |         | 9,967  |         |  |        | 9,436  |        
|Sand Wash Prospect        |                |           | 640 |       |                     |  | 640 |       |       |  | 103,592 |        |         |  | 66,285 |       
|Piceance Basin Prospect   |                |           |    |       |                     |  |    |       |       |  | 20,020  |        |         |  | 20,020 |       
|                          |                |           |     |       |                     |  |     |       |       |  |         |       
|                          |                | Total     |     |       | 6,403               |  |     |       | 6,243 |  |         |        | 183,897 |  |        |        | 137,865 | 
|                          |                |           |     |       |                     |  |     |       |       |  |         |       





| |                      
| | ---------------------
| | Customers and Markets



| |                           
| | --------------------------
| | Exploration and Production



|               |               |  |             |       |                |                     |  |  |                |  |  |   |            | 
|-------------- | ------------- |  | ----------- | ----- | -------------- | ------------------- |  |  | -------------- |  |  | - | ---------- | 
|               |               |  |             | Daily |                |                     | 
|Beginning Date |               |  | Ending Date |       |                | Contract Volume (1) |  |  | Contract Price | 
|               |               |  |             |       |                |                     |  |  |                | 
|               | April 1, 2004 |  |             |       | March 31, 2005 |                     |  |  | 2,000 MMBtu    |  |  | $ | 4.40/MMBtu | 
|               | April 1, 2005 |  |             |       | March 31, 2006 |                     |  |  | 2,000 MMBtu    |  |  | $ | 4.15/MMBtu | 






|    |                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | MMBtu of gas is equivalent to one million British thermal units
    (Btu), a standard measure of the heating value of
    the gas. The gas produced from the Pipeline project contains
    about 1100 Btu per cubic foot of gas.)





|       |  |             |              |  |               |  |     | 
|------ |  | ----------- | ------------ |  | ------------- |  | --- | 
|       |  | Oil and Gas |              |  | Percentage of | 
|Period |  | Revenue     |              |  | Total Revenue | 
|       |  |             |              |  |               | 
|2004   |  | $           | 6.3  million |  |               |  | 30% | 
|2003   |  | $           | 6.6  million |  |               |  | 36% | 
|2002   |  | $           | 2.4  million |  |               |  | 22% | 



23



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##### Table of Contents





| |                  
| | -----------------
| | Oilfield Services





|         |                    |                   |                                   |         |   |              |          |  |            |                  |  |  |  |     | 
|-------- | ------------------ | ----------------- | --------------------------------- | ------- | - | ------------ | -------- |  | ---------- | ---------------- |  |  |  | --- | 
|         |                    |                   |                                   |         |   | Percent      |          |  | Percent of |                 
|Customer |                    | Area of Operation |                                   | Revenue |   |              | of Total |  |            | Oilfield Service | 
|         |                    |                   |                                   |         |   |              |          |  |            |                  | 
|2004     |                    |                   |                                   |         |   |              |          |  |            |                  |  |  |  |    
|         | Qwest Cherokee LLC |                   | Eastern Kansas/Northeast Oklahoma |         | $ | 2.1  million |          |  |            | 10%              |  |  |  | 14% | 
|         |                    |                   | Northeast Wyoming                 |         | $ | 1.5  million |          |  |            | 7%               |  |  |  | 10% | 
|         |                    |                   | Northeast Oklahoma                |         | $ | 1.4  million |          |  |            | 7%               |  |  |  | 10% | 
|        
|2003     |                    |                   |                                   |         |   |              |          |  |            |                  |  |  |  |    
|         |                    |                   | Northeast Oklahoma                |         | $ | 1.1  million |          |  |            | 6%               |  |  |  | 10% | 
|         |                    |                   | Eastern Kansas                    |         | $ | 0.9  million |          |  |            | 5%               |  |  |  | 8%  | 
|        
|2002     |                    |                   |                                   |         |   |              |          |  |            |                  |  |  |  |    
|         | Devon Energy       |                   | Eastern Kansas/Northeast Oklahoma |         | $ | 1.6  million |          |  |            | 14%              |  |  |  | 18% | 





| |            
| | -----------
| | Competition





| |                           
| | --------------------------
| | Exploration and Production





| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | Acquisition of desirable producing properties or new leases for
    future exploration;
|
| |  | Marketing our oil and natural gas production; and                                      

24



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##### Table of Contents





| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | Seeking to acquire the services, equipment, labor and materials
    necessary to explore, operate and develop those properties.





| |                  
| | -----------------
| | Oilfield Services





| |                     
| | --------------------
| | Delivery Commitments





25



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##### Table of Contents





| |                                                  
| | -------------------------------------------------
| | Government Regulation of the Oil and Gas Industry



| |        
| | -------
| | General









| |                                              
| | ---------------------------------------------
| | Federal Regulation of the Sale of Oil and Gas







| |                         
| | ------------------------
| | Regulation of Operations





26



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##### Table of Contents











| |                                      
| | -------------------------------------
| | Environmental and Land Use Regulation





| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | unit production expenses primarily related to the control and
    limitation of air emissions, spill prevention and the disposal
    of produced water;                                       
|
| |  | capital costs to drill development wells resulting from expenses
    primarily related to the management and disposal of drilling
    fluids and other oil and natural gas exploration wastes;
|
| |  | capital costs to construct, maintain and upgrade equipment and
    facilities;                                                                                                                
|
| |  | operational costs associated with ongoing compliance and
    monitoring activities; and                                                                                                       
|
| |  | exit costs for operations that we are responsible for closing,
    including costs for dismantling and abandoning wells and
    remediating environmental impacts.                            





Discharges to Waters.


27



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##### Table of Contents









Oil Spill Regulations.


Air Emissions.




Superfund.


28



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##### Table of Contents





Abandonment and Remediation Requirements.




| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Potentially Material Costs Associated with Environmental
    Regulation of Our Oil and Natural Gas Operations











29



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##### Table of Contents







| |                    
| | -------------------
| | Title to Properties





| |                                
| | -------------------------------
| | Operating Hazards and Insurance





| |          
| | ---------
| | Employees








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








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



30



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##### Table of Contents






PART II







|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER
    MATTERS

Principal Market and Price
Range of Common Stock




|                   |  |      |      |  |     |   |      | 
|------------------ |  | ---- | ---- |  | --- | - | ---- | 
|Quarter Ended      |  | High |      |  | Low |  
|                   |  |      |      |  |     |  
|March 31, 2003     |  | $    | 9.74 |  |     | $ | 7.75 | 
|June 30, 2003      |  |      | 8.83 |  |     |   | 5.50 | 
|September 30, 2003 |  |      | 6.01 |  |     |   | 4.30 | 
|December 31, 2003  |  |      | 4.90 |  |     |   | 3.31 | 
|                  
|March 31, 2004     |  | $    | 5.15 |  |     | $ | 2.75 | 
|June 30, 2004      |  |      | 5.00 |  |     |   | 3.00 | 
|September 30, 2004 |  |      | 5.85 |  |     |   | 3.87 | 
|December 31, 2004  |  |      | 8.49 |  |     |   | 4.75 | 

Approximate Number of
Holders of Common Stock




Dividends




31



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##### Table of Contents








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



|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |        |       | 
|-------------------------------------- | -------------------------------------------- | ---------------------------------------- | ------ | ------ | --------- | - | ------ | ------ | ------ | - | ------ | ------- | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ----- | 
|                                       |                                              | For the Period Ended                     |       
|                                       |                                              |                                          |       
|                                       |                                              | December 31,                             |        |        |          
|                                       |                                              |                                          |        |        | March 31, |  
|                                       |                                              | 2004                                     |        |        | 2003      |   |        | 2002   |        |   | 2001   |         |        | 2001 |       
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|                                       |                                              | (In thousands, except per share amounts) |       
|Statement of Operations Data           |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|Revenue:                               |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|                                       | Oil field service operations                 |                                          | $      | 14,721 |           |   | $      | 11,634 |        |   | $      | 8,570   |        |      | $      | 9,854  |        |   | $      | 8,476  |      
|                                       | Exploration and production                   |                                          |        | 6,267  |           |   |        | 6,589  |        |   |        | 2,368   |        |      |        | 1,759  |        |   |        | 376    |      
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|                                       |                                              | Total revenue                            |        |        | 20,988    |   |        |        | 18,223 |   |        |         | 10,938 |      |        |        | 11,613 |   |        |        | 8,852 | 
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|Expenses:                              |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|                                       | Oil and gas service operations               |                                          |        | 7,890  |           |   |        | 6,223  |        |   |        | 4,621   |        |      |        | 5,154  |        |   |        | 4,666  |      
|                                       | Oil and gas production expense               |                                          |        | 1,914  |           |   |        | 2,161  |        |   |        | 1,583   |        |      |        | 1,074  |        |   |        | 207    |      
|                                       | Production taxes                             |                                          |        | 722    |           |   |        | 759    |        |   |        | 238     |        |      |        | 66     |        |   |        | 14     |      
|                                       | General and administrative expenses          |                                          |        | 5,462  |           |   |        | 5,311  |        |   |        | 4,647   |        |      |        | 2,789  |        |   |        | 2,460  |      
|                                       | Depreciation, depletion and amortization     |                                          |        | 5,198  |           |   |        | 3,074  |        |   |        | 1,783   |        |      |        | 1,063  |        |   |        | 922    |      
|                                       | Ceiling write-down of oil and gas properties |                                          |        | 4,100  |           |   |        | 2,975  |        |   |        |        |        |      |        |       |        |   |        |       |      
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|                                       |                                              | Total expenses                           |        |        | 25,286    |   |        |        | 20,503 |   |        |         | 12,872 |      |        |        | 10,146 |   |        |        | 8,269 | 
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|Other income (expense)                 |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|                                       | Interest expense/amortization of loan costs  |                                          |        | (3,329 | )         |   |        | (7,794 | )      |   |        | (837    | )      |      |        | (1,866 | )      |   |        | (1,062 | )    
|                                       | Impairment of other assets                   |                                          |        |       |           |   |        |       |        |   |        |        |        |      |        | (600   | )      |   |        |       |      
|                                       | Gain (loss) on sale of assets                |                                          |        | 2,824  |           |   |        | 20     |        |   |        | (34     | )      |      |        | 5,128  |        |   |        | 2,780  |      
|                                       | Other, net                                   |                                          |        | 170    |           |   |        | 129    |        |   |        | 104     |        |      |        | 1      |        |   |        | 176    |      
|Income (loss) before income taxes      |                                              |                                          | (4,633 | )      |           |   | (9,925 | )      |        |   | (2,701 | )       |        |      | 4,130  |        |        |   | 2,477  |       
|Income tax (expense) benefit           |                                              |                                          |       |        |           |   |       |        |        |   | 1,144  |         |        |      | (1,590 | )      |        |   | (710   | )     
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|Net income (loss)                      |                                              | $                                        | (4,633 | )      |           | $ | (9,925 | )      |        | $ | (1,557 | )       |        | $    | 2,540  |        |        | $ | 1,767  |       
|                                       |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |       
|Basic income (loss) per common share   |                                              | $                                        | (0.49  | )      |           | $ | (1.23  | )      |        | $ | (0.22  | )       |        | $    | 0.39   |        |        | $ | 0.29   |       
|Diluted income (loss) per common share |                                              |                                          | (0.49  | )      |           |   | (1.23  | )      |        |   | (0.22  | )       |        |      | 0.37   |        |        |   | 0.27   |       
|Statement of Cash Flows Data           |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|Net cash provided by (used in):        |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|                                       | Operating activities                         |                                          | $      | 5,463  |           |   | $      | 2,845  |        |   | $      | 136     |        |      | $      | 1,361  |        |   | $      | 1,157  |      
|                                       | Investing activities                         |                                          |        | (9,942 | )         |   |        | (6,902 | )      |   |        | (16,218 | )      |      |        | (3,232 | )      |   |        | (715   | )    
|                                       | Financing activities                         |                                          |        | 6,804  |           |   |        | 3,917  |        |   |        | 16,283  |        |      |        | 2,381  |        |   |        | (1,003 | )    
|Balance Sheet Data                     |                                              |                                          |        |        |           |   |        |        |        |   |        |         |        |      |        |        |        |   |        |       
|Cash and cash equivalents              |                                              | $                                        | 3,052  |        |           | $ | 727    |        |        | $ | 867    |         |        | $    | 666    |        |        | $ | 155    |       
|Accounts receivable, net of allowance  |                                              |                                          | 3,493  |        |           |   | 1,767  |        |        |   | 1,514  |         |        |      | 1,600  |        |        |   | 1,488  |       
|Investment in securities               |                                              |                                          |       |        |           |   |       |        |        |   |       |         |        |      |       |        |        |   | 8,509  |       
|Net property and equipment             |                                              |                                          | 8,764  |        |           |   | 10,044 |        |        |   | 10,315 |         |        |      | 10,343 |        |        |   | 6,107  |       
|Net oil and gas properties             |                                              |                                          | 44,387 |        |           |   | 36,162 |        |        |   | 32,284 |         |        |      | 17,191 |        |        |   | 8,127  |       
|Net intangible assets                  |                                              |                                          | 1,497  |        |           |   | 3,953  |        |        |   | 5,300  |         |        |      | 1,527  |        |        |   | 305    |       
|Total assets                           |                                              |                                          | 64,048 |        |           |   | 55,266 |        |        |   | 53,130 |         |        |      | 33,097 |        |        |   | 26,013 |       
|Current portion of long-term debt      |                                              | $                                        | 284    |        |           | $ | 1,763  |        |        | $ | 2,227  |         |        | $    | 3,342  |        |        | $ | 3,520  |       
|Accounts payable                       |                                              |                                          | 4,001  |        |           |   | 2,645  |        |        |   | 2,876  |         |        |      | 2,591  |        |        |   | 1,879  |       
|Long-term debt, net of current portion |                                              |                                          | 25,340 |        |           |   | 26,230 |        |        |   | 24,247 |         |        |      | 10,421 |        |        |   | 5,552  |       
|Stockholders equity                   |                                              |                                          | 28,822 |        |           |   | 22,911 |        |        |   | 22,810 |         |        |      | 15,207 |        |        |   | 13,596 |       

32



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##### Table of Contents








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





Overview of Oil and Gas
Exploration and Production Activity








Overview of Oilfield Service
Operations




33



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##### Table of Contents







| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | revenue of $14.7 million;                                                                                                                      
|
| |  | subsidiary level earnings before interest, taxes, depreciation
    and amortization of approximately $6.5 million;                             
|
| |  | provided services to approximately 475 customers;                                                                                              
|
| |  | subsidiary level income before taxes of approximately
    $4.7 million; and                                                                    
|
| |  | the acquisition of a Kansas oilfield service provider and the
    divestiture of relatively low-margin assets and operations to a
    customer.





| |                  
| | -----------------
| | Subsequent Events



| |                              
| | -----------------------------
| | Senior Secured Notes Facility









| |                                                              
| | -------------------------------------------------------------
| | Acquisition of Additional Acreage in the Fort Worth
    Basin



34



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##### Table of Contents







| |                                                
| | -----------------------------------------------
| | Redemption of All Subordinated Convertible Debt







| |                                          
| | -----------------------------------------
| | 2005 Operational and Financial Objectives



| |                           
| | --------------------------
| | Exploration and Production









| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The availability of the capital resources required to fund the
    activity. Infinity-Wyoming expects to generate approximately
    $4 million in cash flow from operations in 2005.
    Infinity-Texas expects to generate cash flow from operations in
    2005 subsequent to the hook up of its initial wells in the
    Fort Worth basin; however management is currently unable to
    predict with accuracy an estimate of this amount;
|
| |  | The availability of third party contractors for drilling rigs
    and completion services;                                                                                                                                                                                                                                                                                                                                                   
|
| |  | The completion of environmental studies by the Bureau of Land
    Management covering federal acreage in the Pipeline and Labarge
    fields; and                                                                                                                                                                                                                                                                                            
|
| |  | The approval by regulatory agencies of applications for permits
    to drill in a timely manner.                                                                                                                                                                                                                                                                                                                                             

35



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##### Table of Contents





| |                  
| | -----------------
| | Oilfield Services





| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | expand the services that are provided;                                             
|
| |  | expand the area that is serviced; and                                              
|
| |  | gain market share by providing complementary services to our
    existing services.





| |                     
| | --------------------
| | Corporate Activities





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Results of operations for the year ended December 31,
    2004 compared to the year ended December 31, 2003









36



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##### Table of Contents







| |                           
| | --------------------------
| | Exploration and Production



|                               |  |      |         |  |      |   |         |      |  |   |         | 
|------------------------------ |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|                               |  | 2004 |         |  | 2003 |   |         | 2002 | 
|                               |  |      |         |  |      |   |         |      | 
|Production:                    |  |      |         |  |      |   |         |      |  |   |         | 
|Natural gas (MMcf)             |  |      | 953.4   |  |      |   | 1,080.5 |      |  |   | 676.9   | 
|Oil (thousands of barrels)     |  |      | 33.7    |  |      |   | 57.7    |      |  |   | 53.1    | 
|Total (MMcfe)                  |  |      | 1,155.4 |  |      |   | 1,426.4 |      |  |   | 995.6   | 
|Financial Data (in thousands): |  |      |         |  |      |   |         |      |  |   |         | 
|Total revenue                  |  | $    | 6,267.5 |  |      | $ | 6,589.3 |      |  | $ | 2,367.7 | 
|Production expenses            |  |      | 1,913.7 |  |      |   | 2,161.7 |      |  |   | 1,582.8 | 
|Production taxes               |  |      | 722.2   |  |      |   | 758.8   |      |  |   | 237.9   | 
|Financial Data per Mcfe:       |  |      |         |  |      |   |         |      |  |   |         | 
|Total revenue                  |  |      | $5.42   |  |      | $ | 4.62    |      |  | $ | 2.38    | 
|Production expenses            |  |      | 1.66    |  |      |   | 1.52    |      |  |   | 1.59    | 
|Production taxes               |  |      | 0.63    |  |      |   | 0.53    |      |  |   | 0.24    | 









37



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| |                  
| | -----------------
| | Oilfield Services



Oilfield Service Statistics


|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         |  |       |   |  |   |      |  
|-------------------------- |  | --------------------------------- | ----- |  | ------- | - | ---- | ------ |  |  | ------- |  |  | ---- | ---- | - | ------- |  | ----- | - |  | - | ---- | -
|                           |  | 2004                              |       |  | 2003    |   |      | Change | 
|                           |  |                                   |       |  |         |   |      |        | 
|Job Type                   |  | Jobs                              |       |  | Revenue |   |      | Jobs   |  |  | Revenue |  |  | Jobs |      |   | Revenue | 
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 
|                           |  | ($ in millions, before discounts) |      
|Cementing                  |  |                                   | 3,059 |  |         | $ | 8.2  |        |  |  | 1,955   |  |  | $    | 4.8  |   |         |  | 1,104 |   |  | $ | 3.4  |  
|Acidizing                  |  |                                   | 1,260 |  |         |   | 1.4  |        |  |  | 1,201   |  |  |      | 1.4  |   |         |  | 59    |   |  |   |     |  
|Fracturing                 |  |                                   | 790   |  |         |   | 6.0  |        |  |  | 1,015   |  |  |      | 6.1  |   |         |  | (225  | ) |  |   | (0.1 | )
|Discounts and eliminations |  |                                   |       |  |         |   | (0.9 | )      |  |  |         |  |  |      | (0.7 | ) |         |  |       |   |  |   | (0.2 | )
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 
|                           |  |                                   |       |  |         | $ | 14.7 |        |  |  |         |  |  | $    | 11.6 |   |         |  |       |   |  | $ | 3.1  |  
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 







| |                     
| | --------------------
| | Corporate Activities





| |                          
| | -------------------------
| | Other Income and Expenses



38



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| |           
| | ----------
| | Income Tax





| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Results of operations for the year ended December 31,
    2003 compared to the year ended December 31, 2002











39



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##### Table of Contents





| |                           
| | --------------------------
| | Exploration and Production















40



---



##### Table of Contents









| |                  
| | -----------------
| | Oilfield Services



Oilfield Service Statistics


|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         |  |     |  |  |   |      |  
|-------------------------- |  | --------------------------------- | ----- |  | ------- | - | ---- | ------ |  |  | ------- |  |  | ---- | ---- | - | ------- |  | --- |  |  | - | ---- | -
|                           |  | 2003                              |       |  | 2002    |   |      | Change | 
|                           |  |                                   |       |  |         |   |      |        | 
|Job Type                   |  | Jobs                              |       |  | Revenue |   |      | Jobs   |  |  | Revenue |  |  | Jobs |      |   | Revenue | 
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 
|                           |  | ($ in millions, before discounts) |      
|Cementing                  |  |                                   | 1,955 |  |         | $ | 4.8  |        |  |  | 1,454   |  |  | $    | 3.4  |   |         |  | 501 |  |  | $ | 1.4  |  
|Acidizing                  |  |                                   | 1,201 |  |         | $ | 1.4  |        |  |  | 1,029   |  |  | $    | 1.1  |   |         |  | 172 |  |  | $ | 0.3  |  
|Fracturing                 |  |                                   | 1,015 |  |         | $ | 6.1  |        |  |  | 1,015   |  |  | $    | 6.5  |   |         |  | 0   |  |  | $ | (0.4 | )
|Discounts and eliminations |  |                                   |       |  |         |   | (0.7 | )      |  |  |         |  |  |      | (2.4 | ) |         |  |     |  |  |   | 1.7  |  
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 
|                           |  |                                   |       |  |         | $ | 11.6 |        |  |  |         |  |  | $    | 8.6  |   |         |  |     |  |  | $ | 3.0  |  
|                           |  |                                   |       |  |         |   |      |        |  |  |         |  |  |      |      |   |         | 





| |                     
| | --------------------
| | Corporate Activities



41



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| |                          
| | -------------------------
| | Other Income and Expenses





| |           
| | ----------
| | Income Tax





| |                                
| | -------------------------------
| | Liquidity and Capital Resources















42



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| |                 
| | ----------------
| | Outlook for 2005





43



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##### Table of Contents



















| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates





| |                  
| | -----------------
| | Reserve Estimates



44



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| |                                                                    
| | -------------------------------------------------------------------
| | Oil and Gas Properties, Depreciation and Full Cost Ceiling
    Test









45



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| |                                     
| | ------------------------------------
| | Property, Equipment and Depreciation





| |                       
| | ----------------------
| | Valuation of Tax Asset





| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements





| |                        
| | -----------------------
| | Contractual Obligations



|                                           |  |                        |        |  |         |   |       |           |  |   |           |  |  |          |     |  |  |   |       | 
|------------------------------------------ |  | ---------------------- | ------ |  | ------- | - | ----- | --------- |  | - | --------- |  |  | -------- | --- |  |  | - | ----- | 
|                                           |  | Payments Due by Period |       
|                                           |  |                        |       
|                                           |  | Total                  |        |  | <1 Year |   |       | 1-3 Years |  |   | 3-5 Years |  |  | >5 Years |    
|                                           |  |                        |        |  |         |   |       |           |  |   |           |  |  |          |    
|                                           |  | (In thousands)         |       
|8% subordinated convertible notes          |  | $                      | 2,493  |  |         | $ |      |           |  | $ | 2,493     |  |  | $        |    |  |  | $ |      | 
|7% subordinated convertible notes          |  |                        | 11,517 |  |         |   |      |           |  |   | 11,517    |  |  |          |    |  |  |   |      | 
|Revolving credit facilities and term loans |  |                        | 9,288  |  |         |   | 3,150 |           |  |   | 5,980     |  |  |          | 103 |  |  |   | 55    | 
|Note payable to seller                     |  |                        | 2,326  |  |         |   | 124   |           |  |   | 216       |  |  |          | 194 |  |  |   | 1,792 | 
|Asset retirement obligations               |  |                        | 635    |  |         |   |      |           |  |   |          |  |  |          |    |  |  |   | 635   | 
|Office lease                               |  |                        | 355    |  |         |   | 122   |           |  |   | 200       |  |  |          | 33  |  |  |   |      | 
|Non-current production and property taxes  |  |                        | 469    |  |         |   | 469   |           |  |   |          |  |  |          |    |  |  |   |      | 
|Total contractual obligations              |  | $                      | 27,083 |  |         | $ | 3,865 |           |  | $ | 20,406    |  |  | $        | 330 |  |  | $ | 2,482 | 







| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements



46



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







47



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##### Table of Contents










|        |                      
|------- | ---------------------
|ITEM 8. | FINANCIAL STATEMENTS.








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








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





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PART III







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








|         |                       
|-------- | ----------------------
|ITEM 11: | EXECUTIVE COMPENSATION








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








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








|         |                                       
|-------- | --------------------------------------
|ITEM 14: | PRINCIPAL ACCOUNTANT FEES AND SERVICES






PART IV







|         |                                        
|-------- | ---------------------------------------
|ITEM 15: | EXHIBITS, FINANCIAL STATEMENT SCHEDULES





| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Our consolidated financial statements are listed on the
    Index to Consolidated Financial Statements on Page
    F-1 to this report.                  
|
| | (2) Financial Statement Schedules (omitted because not
    applicable or not required. Information is disclosed in the
    notes to the financial statements).
|
| | (3) The following exhibits are filed with this report on
    Form 10-K or incorporated by reference.                                                          

49



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EXHIBITS


|        |      |                         |  |                                                                                                                                                                                                                                                                                                  
|------- | ---- | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |                        
|Number  |      | Description of Exhibits
|        |      |                        
|        | 3.1  |                         |  | Articles of Incorporation and Bylaws(1)                                                                                                                                                                                                                                                          
|        | 3.2  |                         |  | Articles and Amendment to Articles of Incorporation(1)                                                                                                                                                                                                                                           
|        | 3.3  |                         |  | Articles of Amendment to Articles of Incorporation(2)                                                                                                                                                                                                                                            
|        | 4.1  |                         |  | Form of 8% Convertible Subordinated Note(1)                                                                                                                                                                                                                                                      
|        | 4.2  |                         |  | Form of Trust Indenture for 8% Convertible Subordinated
    Notes with the Wilmington Trust Company(3)                                                                                                                                                                                           
|        | 4.3  |                         |  | Form of Placement Agent Warrant in connection with
    8% Convertible Subordinated Notes(1)                                                                                                                                                                                                      
|        | 4.4  |                         |  | Trust Indenture for 7% Convertible Subordinated Notes with
    Wilmington Trust Company(1)                                                                                                                                                                                                       
|        | 4.5  |                         |  | Form of Placement Agent Warrants in connection with
    7% Convertible Subordinated Notes(4)                                                                                                                                                                                                     
|        | 4.6  |                         |  | Form of Warrant Agreement for 12% Bridge Note Financing(1)                                                                                                                                                                                                                                       
|        | 4.7  |                         |  | Form of Common Stock Purchase Agreement for January 2004 private
    placement(5)                                                                                                                                                                                                                
|        | 4.8  |                         |  | Form of Registration Rights Agreement in connection with January
    2004 private placement(5)                                                                                                                                                                                                   
|        | 4.9  |                         |  | Form of Common Stock Purchase Agreement for November 2004
    private placement(6)                                                                                                                                                                                                               
|        | 4.10 |                         |  | Form of Registration Rights Agreement for November 2004 private
    placement(6)                                                                                                                                                                                                                 
|        | 4.11 |                         |  | Securities Purchase Agreement for Senior Secured Notes with
    Promethean Asset Management LLC(7)                                                                                                                                                                                               
|        | 4.12 |                         |  | Form of Initial Note for Senior Secured Notes (7)                                                                                                                                                                                                                                                
|        | 4.13 |                         |  | Form of Additional Note for Senior Secured Notes(7)                                                                                                                                                                                                                                              
|        | 4.14 |                         |  | Registration Rights Agreement in connection with Senior Secured
    Notes(7)                                                                                                                                                                                                                     
|        | 4.15 |                         |  | Form of Warrant in connection with Senior Secured Notes(7)                                                                                                                                                                                                                                       
|        | 4.16 |                         |  | Form of Security Agreement for Senior Secured Notes(7)                                                                                                                                                                                                                                           
|        | 4.17 |                         |  | Form of Guaranty for Senior Secured Notes(7)                                                                                                                                                                                                                                                     
|        | 4.18 |                         |  | Form of Mortgage for Senior Secured Notes(7)                                                                                                                                                                                                                                                     
|        | 10.1 |                         |  | Stock Option Plan (1); 1999 Stock Option Plan (2); 2000 Stock
    Option Plan (1); 2001 Stock Option Plan (8); 2002 Stock Option
    Plan (9); 2003 Stock Option Plan (10); 2004 Stock Option Plan(11)                                                                                           
|        | 10.2 |                         |  | Loan and Security Agreement between LaSalle Bank N.A. and
    Consolidated Oil Well Services, Inc. and related guaranties (1);
    Third Amendment to Loan and Security Agreement with LaSalle Bank
    N.A. (12); Fourth Amendment to Loan and Security Agreement with
    LaSalle Bank N.A.(13)
|        | 10.3 |                         |  | Credit agreement dated as of September 4, 2003 between
    Infinity Oil and Gas of Wyoming, Inc. and U.S. Bank
    National Association (14); First Amendment of Credit Agreement
    with U.S. Bank(13)                                                                                         
|        | 10.4 |                         |  | Promissory Note to Stanton E. Ross, dated June 11, 2004(13)                                                                                                                                                                                                                                      
|        | 21   |                         |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                   
|        | 23.1 |                         |  | Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C.                                                                                                                                                                                                                                              
|        | 23.2 |                         |  | Consent of Netherland Sewell and Associates, Inc.                                                                                                                                                                                                                                                
|        | 31.1 |                         |  | Certification of Chief Executive Officer of Periodic Report
    Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302
    of the Sarbanes-Oxley act of 2002).                                                                                                                               
|        | 31.2 |                         |  | Certification of Chief Financial Officer of Periodic Report
    Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302
    of the Sarbanes-Oxley act of 2002).                                                                                                                               
|        | 32.1 |                         |  | Certification of Chief Executive Officer Pursuant to
    18 U.S.C. Section 1350 (Section 906 of the
    Sarbanes-Oxley Act of 2002)                                                                                                                                                              
|        | 32.2 |                         |  | Certification of Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350 (Section 906 of the
    Sarbanes-Oxley Act of 2002)                                                                                                                                                              

50



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##### Table of Contents








|    |                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Registration Statement
    (No. 33-17416-D).                                           
|   
|(2) | Incorporated by reference to our Annual Report on
    Form 10-KSB for the fiscal year ended March 31, 2000.             
|   
|(3) | Incorporated by reference to our Registration Statement on
    Form S-3 (File No. 333-69292).                           
|   
|(4) | Incorporated by reference to our Registration Statement on
    Form S-3 (File No. 333-96671).                           
|   
|(5) | Incorporated by reference to our Current Report on
    Form 8-K, filed with the SEC on January 21, 2004.                
|   
|(6) | Incorporated by reference to our Current Report on
    Form 8-K, filed with the SEC on November 16, 2004.               
|   
|(7) | Incorporated by reference to our Current Report on
    Form 8-K, filed with the SEC on January 14, 2005.                
|   
|(8) | Incorporated by reference to our Annual Report on
    Form 10-KSB for the fiscal year ended March 31, 2001.             
|   
|(9) | Incorporated by reference to our Annual Report on
    Form 10-KSB for the transition period ended
    December 31, 2001.



|     |                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our Annual Report on
    Form 10-KSB for the fiscal year ended December 31,
    2002.
|    
|(11) | Incorporated by reference to our Registration Statement on
    Form S-8 (File No. 333-117390).                    
|    
|(12) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended March 31, 2004.          
|    
|(13) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2004.           
|    
|(14) | Incorporated by reference to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003.      

51



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SIGNATURES






| |               
| | --------------
| | INFINITY, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ Stanton E. Ross

| |                                      
| | -------------------------------------
| |                                      
| | Stanton E. Ross                      
| | President and Chief Executive Officer





|                                         |  |                                                                                      |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------ |  | -------------- |  | 
|Signature                                |  | Capacity                                                                             |  | Date          
|                                         |  |                                                                                      |  |               
|                                        
|/s/ Stanton E. RossStanton
    E. Ross   |  | President and Chief Executive Officer
    (Principal Executive Officer) and Director |  | March 30, 2005
|                                        
|/s/ James A. TuellJames
    A. Tuell     |  | Executive Vice President
    (Principal Financial and Accounting Officer)            |  | March 30, 2005
|                                        
|/s/ Elliot M. KaplanElliot
    M. Kaplan |  | Director                                                                             |  | March 30, 2005
|                                        
|/s/ Robert O. LorenzRobert
    O. Lorenz |  | Director                                                                             |  | March 29, 2005
|                                        
|/s/ Leroy C. RichieLeroy
    C. Richie   |  | Director                                                                             |  | March 30, 2005
|                                        
|O.
    Lee Tawes                         |  | Director                                                                             |  | March   , 2005

52



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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


|                                                        |                                                                                                                           |      |     |     | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ---- | --- | --- | 
|                                                        |                                                                                                                           | Page |    
|                                                        |                                                                                                                           |      |    
|Report of Independent Registered Public Accounting Firm |                                                                                                                           |      | F-2 |    
|Consolidated Financial Statements:                      |                                                                                                                           |      |     |    
|                                                        | Consolidated Balance Sheets  December 31, 2004
    and 2003                                                              |      |     | F-3 | 
|                                                        | Consolidated Statements of Operations  For the Years
    Ended December 31, 2004, 2003 and 2002                          |      |     | F-4 | 
|                                                        | Consolidated Statements of Changes in Stockholders
    Equity  For the Years Ended December 31, 2004,
    2003 and 2002 |      |     | F-5 | 
|                                                        | Consolidated Statements of Cash Flows  For the Years
    Ended December 31, 2004, 2003 and 2002                          |      |     | F-7 | 
|Notes to Consolidated Financial Statements              |                                                                                                                           |      | F-9 |    

F-1



---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED


PUBLIC ACCOUNTING FIRM


















| |                                        
| | ---------------------------------------
| | /s/ Ehrhardt Keefe Steiner & Hottman PC







F-2



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED BALANCE SHEETS


|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |            |            |            |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ----------- | ----------------- | ---------- | ---------- | ---------- | ---------- | ---------- | 
|                                                                                                                                           |                                                                                                                                             | December 31, 2004           |                            |             | December 31, 2003 |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|ASSETS                                                                                                                                    
|Current assets                                                                                                                             |                                                                                                                                             |                             |                            |             |                   |            |            |           
|                                                                                                                                           | Cash and cash equivalents                                                                                                                   |                             | $                          | 3,051,986   |                   |            | $          | 727,134    |           
|                                                                                                                                           | Accounts receivable, less allowance for doubtful accounts of
    $85,476 (2004) and $80,000 (2003)                                          |                             |                            | 3,493,448   |                   |            |            | 1,766,642  |           
|                                                                                                                                           | Current portion of note receivable                                                                                                          |                             |                            | 1,580,742   |                   |            |            | 16,311     |           
|                                                                                                                                           | Inventories                                                                                                                                 |                             |                            | 286,365     |                   |            |            | 351,197    |           
|                                                                                                                                           | Prepaid expenses and other                                                                                                                  |                             |                            | 654,107     |                   |            |            | 206,314    |           
|                                                                                                                                           | Derivative asset                                                                                                                            |                             |                            |            |                   |            |            | 97,624     |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|                                                                                                                                           |                                                                                                                                             |                             | Total current assets       |             |                   | 9,066,648  |            |            |            | 3,165,222  | 
|Property and equipment, at cost, less accumulated depreciation                                                                             |                                                                                                                                             |                             | 8,764,327                  |             |                   |            | 10,043,828 |           
|Oil and gas properties, using full cost accounting net of
    accumulated depreciation, depletion, amortization and ceiling
    write-down |                                                                                                                                             |                             |                            |             |                   |            |            |           
|                                                                                                                                           |                                                                                                                                             | Subject to amortization     |                            |             | 28,791,880        |            |            |            | 23,446,343 |           
|                                                                                                                                           |                                                                                                                                             | Not subject to amortization |                            |             | 15,595,508        |            |            |            | 12,715,834 |           
|Intangible assets, at cost, less accumulated amortization                                                                                  |                                                                                                                                             |                             | 1,497,076                  |             |                   |            | 3,952,989  |           
|Note receivable, less current portion                                                                                                      |                                                                                                                                             |                             |                           |             |                   |            | 1,580,742  |           
|Other assets, net                                                                                                                          |                                                                                                                                             |                             | 332,824                    |             |                   |            | 361,320    |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|Total assets                                                                                                                               |                                                                                                                                             | $                           | 64,048,263                 |             |                   | $          | 55,266,278 |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|                                                                                                                                          
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                      
|Current Liabilities                                                                                                                        |                                                                                                                                             |                             |                            |             |                   |            |            |           
|                                                                                                                                           | Note payable and current portion of long-term debt                                                                                          |                             | $                          | 283,978     |                   |            | $          | 1,762,777  |           
|                                                                                                                                           | Accounts payable                                                                                                                            |                             |                            | 4,001,364   |                   |            |            | 2,645,277  |           
|                                                                                                                                           | Accrued liabilities                                                                                                                         |                             |                            | 4,496,412   |                   |            |            | 966,769    |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|                                                                                                                                           |                                                                                                                                             |                             | Total current liabilities  |             |                   | 8,781,754  |            |            |            | 5,374,823  | 
|Long-term liabilities                                                                                                                      |                                                                                                                                             |                             |                            |             |                   |            |            |           
|                                                                                                                                           | Production taxes payable                                                                                                                    |                             |                            | 469,054     |                   |            |            | 229,889    |           
|                                                                                                                                           | Asset retirement obligations                                                                                                                |                             |                            | 635,023     |                   |            |            | 520,638    |           
|                                                                                                                                           | Long-term debt, less current portion                                                                                                        |                             |                            | 11,330,438  |                   |            |            | 9,252,872  |           
|                                                                                                                                           | 8% subordinated convertible notes payable                                                                                                   |                             |                            | 2,493,000   |                   |            |            | 2,793,000  |           
|                                                                                                                                           | 7% subordinated convertible notes payable                                                                                                   |                             |                            | 11,516,698  |                   |            |            | 11,184,000 |           
|                                                                                                                                           | Note payable  related party                                                                                                                |                             |                            |            |                   |            |            | 3,000,000  |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|                                                                                                                                           |                                                                                                                                             |                             | Total liabilities          |             |                   | 35,225,967 |            |            |            | 32,355,222 | 
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|Commitments and contingencies                                                                                                              |                                                                                                                                             |                             |                            |             |                   |            |            |           
|Stockholders equity                                                                                                                       |                                                                                                                                             |                             |                            |             |                   |            |            |           
|                                                                                                                                           | Common stock, par value $.0001, authorized
    300,000,000 shares, issued and outstanding 10,628,196
    (2004) and 8,204,032 (2003) shares |                             |                            | 1,063       |                   |            |            | 820        |           
|                                                                                                                                           | Additional paid-in-capital                                                                                                                  |                             |                            | 43,362,925  |                   |            |            | 32,720,904 |           
|                                                                                                                                           | Accumulated other comprehensive income                                                                                                      |                             |                            |            |                   |            |            | 97,624     |           
|                                                                                                                                           | Accumulated deficit                                                                                                                         |                             |                            | (14,541,692 | )                 |            |            | (9,908,292 | )         
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|                                                                                                                                           |                                                                                                                                             |                             | Total stockholders equity |             |                   | 28,822,296 |            |            |            | 22,911,056 | 
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           
|Total liabilities and stockholders equity                                                                                                 |                                                                                                                                             | $                           | 64,048,263                 |             |                   | $          | 55,266,278 |           
|                                                                                                                                           |                                                                                                                                             |                             |                            |             |                   |           



F-3



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                        |                                      |                                 |            |            |            |   |            |            |            |   |            |           |            |  
|------------------------------------------------------- | ------------------------------------ | ------------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | -
|                                                        |                                      | For the Year Ended December 31, |           
|                                                        |                                      |                                 |           
|                                                        |                                      | 2004                            |            |            | 2003       |   |            | 2002       |           
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Revenue                                                 |                                      |                                 |            |            |            |   |            |            |            |   |            |          
|                                                        | Oilfield service operations          |                                 | $          | 14,720,979 |            |   | $          | 11,634,457 |            |   | $          | 8,570,631 |           
|                                                        | Exploration and production           |                                 |            | 6,267,453  |            |   |            | 6,589,281  |            |   |            | 2,367,713 |           
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|                                                        |                                      | Total revenue                   |            |            | 20,988,432 |   |            |            | 18,223,738 |   |            |           | 10,938,344 |  
|Cost of revenue                                         |                                      |                                 |            |            |            |   |            |            |            |   |            |          
|                                                        | Oilfield service operations          |                                 |            | 7,890,375  |            |   |            | 6,222,919  |            |   |            | 4,620,663 |           
|                                                        | Oil and gas production expenses      |                                 |            | 1,913,735  |            |   |            | 2,161,666  |            |   |            | 1,582,816 |           
|                                                        | Oil and gas production taxes         |                                 |            | 722,157    |            |   |            | 758,827    |            |   |            | 237,876   |           
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|                                                        |                                      | Total cost of revenue           |            |            | 10,526,267 |   |            |            | 9,143,412  |   |            |           | 6,441,355  |  
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Gross profit                                            |                                      |                                 | 10,462,165 |            |            |   | 9,080,326  |            |            |   | 4,496,989  |          
|General and administrative expenses                     |                                      |                                 | 5,462,491  |            |            |   | 5,311,080  |            |            |   | 4,647,062  |          
|Depreciation, depletion, amortization and accretion     |                                      |                                 | 5,197,981  |            |            |   | 3,074,247  |            |            |   | 1,782,586  |          
|Ceiling write-down of oil and gas properties            |                                      |                                 | 4,100,000  |            |            |   | 2,975,000  |            |            |   |           |          
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|                                                        |                                      |                                 | 14,760,472 |            |            |   | 11,360,327 |            |            |   | 6,429,648  |          
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Operating loss                                          |                                      |                                 | (4,298,307 | )          |            |   | (2,280,001 | )          |            |   | (1,932,659 | )        
|Other income (expense)                                  |                                      |                                 |            |            |            |   |            |            |            |   |            |          
|                                                        | Interest and other income            |                                 |            | 169,937    |            |   |            | 129,599    |            |   |            | 102,460   |           
|                                                        | Amortization of loan costs           |                                 |            | (2,097,329 | )          |   |            | (6,200,633 | )          |   |            | (234,680  | )         
|                                                        | Interest expense and finance charges |                                 |            | (1,231,515 | )          |   |            | (1,593,765 | )          |   |            | (602,350  | )         
|                                                        | Gain (loss) on sales of other assets |                                 |            | 2,823,814  |            |   |            | 19,920     |            |   |            | (33,665   | )         
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|                                                        |                                      | Total other expense             |            |            | (335,093   | ) |            |            | (7,644,879 | ) |            |           | (768,235   | )
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Net loss before income taxes                            |                                      |                                 | (4,633,400 | )          |            |   | (9,924,880 | )          |            |   | (2,700,894 | )        
|Income tax benefit                                      |                                      |                                 |           |            |            |   |           |            |            |   | 1,144,028  |          
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Net loss                                                |                                      | $                               | (4,633,400 | )          |            | $ | (9,924,880 | )          |            | $ | (1,556,866 | )        
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Basic and diluted net loss per share                    |                                      | $                               | (0.49      | )          |            | $ | (1.23      | )          |            | $ | (0.22      | )        
|                                                        |                                      |                                 |            |            |            |   |            |            |           
|Weighted average shares outstanding (basic and diluted) |                                      |                                 | 9,495,346  |            |            |   | 8,047,688  |            |            |   | 7,202,844  |          
|                                                        |                                      |                                 |            |            |            |   |            |            |           



F-4



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


For the years ended December 31, 2004, 2003 and 2002


|                                                                                           |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               |   |            |            |   |  |         |         |   |   |            |            |  
|------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------- | ------------ | --------- | - | ---------- | ------------ | --- | -------- |  | - | ------------- | - |  | ------------- | --------- | ---------- | ------------- | - | ---------- | ---------- | - |  | ------- | ------- | - | - | ---------- | ---------- | -
|                                                                                           |                                                                                          |              |           |   |            | (Accumulated |     |          |  |   | Accumulated   |   |  |              
|                                                                                           |                                                                                          | Common Stock |           |   | Additional |              |     | Deficit) |  |   | Total         |   |  | Other         |           |            |              
|                                                                                           |                                                                                          |              |           |   | Paid-In    |              |     | Retained |  |   | Comprehensive |   |  | Comprehensive |           |            | Stockholders |  
|                                                                                           |                                                                                          | Shares       |           |   | Amount     |              |     | Capital  |  |   | Earnings      |   |  | Loss          |           |            | Income (Loss) |   |            | Equity     |  
|                                                                                           |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               |   |            |            |  
|Balance, December 31, 2001                                                                 |                                                                                          |              | 6,515,224 |   |            | $            | 652 |          |  | $ | 13,632,999    |   |  | $             | 1,573,454 |            |               |   |            |            |   |  |        |         |   | $ | 15,207,105 |           
|Issuance of common stock for cash upon the exercise of options
    and warrants            |                                                                                          |              | 588,264   |   |            |              | 58  |          |  |   | 1,947,147     |   |  |               |          |            |               |   |            |            |   |  |        |         |   |   | 1,947,205  |           
|Conversion of 8% subordinated convertible notes and accrued
    interest into common stock |                                                                                          |              | 454,974   |   |            |              | 46  |          |  |   | 2,274,813     |   |  |               |          |            |               |   |            |            |   |  |        |         |   |   | 2,274,859  |           
|Warrants granted in connection with $2,000,000 bridge loan                                 |                                                                                          |              |          |   |            |              |    |          |  |   | 1,347,728     |   |  |               |          |            |               |   |            |            |   |  |        |         |   |   | 1,347,728  |           
|Warrants granted in connection with 7% subordinated convertible
    notes                  |                                                                                          |              |          |   |            |              |    |          |  |   | 1,386,044     |   |  |               |          |            |               |   |            |            |   |  |        |         |   |   | 1,386,044  |           
|Warrants granted in connection with $3,000,000 bridge loan                                 |                                                                                          |              |          |   |            |              |    |          |  |   | 2,281,718     |   |  |               |          |            |               |   |            |            |   |  |        |         |   |   | 2,281,718  |           
|Comprehensive loss:                                                                        |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               |   |            |            |   |  |         |         |   |   |            |           
|                                                                                           | Net loss                                                                                 |              |           |  |            |              |     |         |  |   |               |  |  |               |           | (1,556,866 | )             |   | $          | (1,556,866 | ) |  |         |        |   |   |            | (1,556,866 | )
|                                                                                           | Change in fair value of fixed price delivery contract, net of
    tax benefit of $60,712 |              |           |  |            |              |     |         |  |   |               |  |  |               |           |           |               |   |            | (96,981    | ) |  | $       | (96,981 | ) |   |            | (96,981    | )
|                                                                                           | Reclassifications, net of income tax expense of $12,320                                  |              |           |  |            |              |     |         |  |   |               |  |  |               |           |           |               |   |            | 19,680     |   |  |         | 19,680  |   |   |            | 19,680     |  
|                                                                                           |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               |   |            |            |  
|                                                                                           |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               | $ | (1,634,167 | )          |   |  |         |         |   |   |            |           
|                                                                                           |                                                                                          |              |           |   |            |              |     |          |  |   |               |   |  |               |           |            |               |   |            |            |  
|Balance, December 31, 2002                                                                 |                                                                                          |              | 7,558,462 |   |            |              | 756 |          |  |   | 22,870,449    |   |  |               | 16,588    |            |               |   |            |            |   |  | (77,301 | )       |   |   | 22,810,492 |           



F-5



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY


For the year ended December 31, 2004, 2003 and 2002


|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |            |   |         |         |   |   |            |            |   | 
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------ | ---------- | - | ---------- | ------------ | ----- | -------- |  | - | ------------- | - |  | ------------- | ----------- | ---------- | ------------- |  | - | ---------- | ---------- | - | ------- | ------- | - | - | ---------- | ---------- | - | 
|                                                                                                     |                                                                                           |                    |            |   |            | (Accumulated |       |          |  |   | Accumulated   |   |  |              
|                                                                                                     |                                                                                           | Common Stock       |            |   | Additional |              |       | Deficit) |  |   | Total         |   |  | Other         |             |            |              
|                                                                                                     |                                                                                           |                    |            |   | Paid-In    |              |       | Retained |  |   | Comprehensive |   |  | Comprehensive |             |            | Stockholders | 
|                                                                                                     |                                                                                           | Shares             |            |   | Amount     |              |       | Capital  |  |   | Earnings      |   |  | Loss          |             |            | Income (Loss) |  |   | Equity     |           
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           
|Balance, December 31, 2002                                                                           |                                                                                           |                    | 7,558,462  |   |            | $            | 756   |          |  | $ | 22,870,449    |   |  | $             | 16,588      |            |               |  |   |            |            | $ | (77,301 | )       |   | $ | 22,810,492 |           
|Issuance of common stock upon the exercise of options and
    warrants                               |                                                                                           |                    | 146,169    |   |            |              | 15    |          |  |   | 824,219       |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 824,234    |           
|Conversion of 8% subordinated convertible notes and accrued
    interest into common stock           |                                                                                           |                    | 295,689    |   |            |              | 29    |          |  |   | 1,478,521     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 1,478,550  |           
|Conversion of 7% subordinated convertible notes and accrued
    interest into common stock           |                                                                                           |                    | 203,712    |   |            |              | 20    |          |  |   | 1,756,996     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 1,757,016  |           
|Options granted in connection with $1,050,000 of bridge loans                                        |                                                                                           |                    |           |   |            |              |      |          |  |   | 1,050,000     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 1,050,000  |           
|Options granted in connection with amendments and agreements
    related to a $3,000,000 bridge loan |                                                                                           |                    |           |   |            |              |      |          |  |   | 2,493,329     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 2,493,329  |           
|Warrants granted in connection with $4,850,000 of bridge loans                                       |                                                                                           |                    |           |   |            |              |      |          |  |   | 2,247,390     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 2,247,390  |           
|Comprehensive loss:                                                                                  |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |            |   |         |         |   |   |            |           
|                                                                                                     | Net loss                                                                                  |                    |            |  |            |              |       |         |  |   |               |  |  |               |             | (9,924,880 | )             |  | $ | (9,924,880 | )          |   |         |        |   |   |            | (9,924,880 | )
|                                                                                                     | Change in fair value of fixed price delivery contract, net of
    tax benefit of $151,573 |                    |            |  |            |              |       |         |  |   |               |  |  |               |             |           |               |  |   | 256,500    |            |   |         | 256,500 |   |   |            | 256,500    |  
|                                                                                                     | Reclassifications, net of income tax expense of $51,068                                   |                    |            |  |            |              |       |         |  |   |               |  |  |               |             |           |               |  |   | (81,575    | )          |   |         | (81,575 | ) |   |            | (81,575    | )
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           
|                                                                                                     |                                                                                           | Comprehensive loss |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   | $          | (9,749,955 | ) |         |         |   |   |            |            |   | 
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           
|Balance, December 31, 2003                                                                           |                                                                                           |                    | 8,204,032  |   |            |              | 820   |          |  |   | 32,720,904    |   |  |               | (9,908,292  | )          |               |  |   |            |            |   | 97,624  |         |   |   | 22,911,056 |           
|Issuance of common stock in private equity placement financings,
    net of costs of $319,644        |                                                                                           |                    | 2,027,000  |   |            |              | 203   |          |  |   | 8,917,853     |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 8,918,056  |           
|Issuance of common stock to partially repay related party debt                                       |                                                                                           |                    | 125,000    |   |            |              | 13    |          |  |   | 499,987       |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 500,000    |           
|Issuance of common stock upon the exercise of options and
    warrants                               |                                                                                           |                    | 146,300    |   |            |              | 15    |          |  |   | 428,432       |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 428,447    |           
|Conversion of 8% subordinated convertible notes and accrued
    interest into common stock           |                                                                                           |                    | 63,179     |   |            |              | 6     |          |  |   | 308,276       |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 308,282    |           
|Conversion of 7% subordinated convertible notes and accrued
    interest into common stock           |                                                                                           |                    | 62,685     |   |            |              | 6     |          |  |   | 487,473       |   |  |               |            |            |               |  |   |            |            |   |        |         |   |   | 487,479    |           
|Comprehensive loss:                                                                                  |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |            |   |         |         |   |   |            |           
|                                                                                                     | Net loss                                                                                  |                    |            |  |            |              |       |         |  |   |               |  |  |               |             | (4,633,400 | )             |  |   | (4,633,400 | )          |   |         |        |   |   |            | (4,633,400 | )
|                                                                                                     | Reclassifications, net of income tax expense of $(57,559)                                 |                    |            |  |            |              |       |         |  |   |               |  |  |               |             |           |               |  |   | (97,624    | )          |   |         | (97,624 | ) |   |            | (97,624    | )
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           
|                                                                                                     |                                                                                           | Comprehensive loss |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   | $          | (4,731,024 | ) |         |         |   |   |            |            |   | 
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           
|Balance, December 31, 2004                                                                           |                                                                                           |                    | 10,628,196 |   |            | $            | 1,063 |          |  | $ | 43,362,925    |   |  | $             | (14,541,692 | )          |               |  |   |            |            | $ |        |         |   | $ | 28,822,296 |           
|                                                                                                     |                                                                                           |                    |            |   |            |              |       |          |  |   |               |   |  |               |             |            |               |  |   |            |           



F-6



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |           |            |         |             |            |             |  
|---------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ----------------------------------------- | ----------- | ---------- | ---------- | -------- | ---------- | --------- | ---------- | ------- | ----------- | ---------- | ----------- | -
|                                                     |                                                                                     | For the Year Ended December 31,                                                         |                                          
|                                                     |                                                                                     |                                                                                         |                                          
|                                                     |                                                                                     | 2004                                                                                    |                                           |             | 2003       |            |          | 2002       |          
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|Cash flows from operating activities                 |                                                                                     |                                                                                         |                                           |             |            |            |          |            |           |            |         |            
|                                                     | Net loss                                                                            |                                                                                         | $                                         | (4,633,400  | )          |            | $        | (9,924,880 | )         |            | $       | (1,556,866  | )         
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|                                                     | Adjustments to reconcile net loss to net cash provided by
    operating activities: |                                                                                         |                                           |             |            |            |          |            |           |            |         |             |           
|                                                     |                                                                                     | Depreciation, depletion, amortization, accretion, impairment and
    ceiling write-down |                                           |             | 9,297,981  |            |          |            | 6,049,247 |            |         |             | 1,782,586  |            
|                                                     |                                                                                     | Amortization of loan costs included in interest expense                                 |                                           |             | 2,097,329  |            |          |            | 6,200,633 |            |         |             | 234,680    |            
|                                                     |                                                                                     | Deferred income taxes                                                                   |                                           |             |           |            |          |            |          |            |         |             | (1,144,028 | )          
|                                                     |                                                                                     | (Gain) loss on sales of other assets                                                    |                                           |             | (2,823,814 | )          |          |            | (19,920   | )          |         |             | 33,665     |            
|                                                     | Change in assets and liabilities                                                    |                                                                                         |                                           |             |            |            |          |            |           |            |         |             |           
|                                                     |                                                                                     | (Increase) decrease in accounts receivable                                              |                                           |             | (1,686,806 | )          |          |            | (252,483  | )          |         |             | 85,724     |            
|                                                     |                                                                                     | (Increase) decrease in inventories                                                      |                                           |             | 64,832     |            |          |            | (10,980   | )          |         |             | 9,999      |            
|                                                     |                                                                                     | (Increase) decrease in prepaid expenses and other                                       |                                           |             | (89,160    | )          |          |            | (12,234   | )          |         |             | (89,985    | )          
|                                                     |                                                                                     | Increase in accounts payable                                                            |                                           |             | 1,525,618  |            |          |            | 32,758    |            |         |             | 284,657    |            
|                                                     |                                                                                     | Increase in accrued liabilities                                                         |                                           |             | 1,709,944  |            |          |            | 782,391   |            |         |             | 495,383    |            
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|                                                     |                                                                                     |                                                                                         | Net cash provided by operating activities |             |            | 5,462,524  |          |            |           | 2,844,532  |         |             |            | 135,815     |  
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|Cash flows from investing activities                 |                                                                                     |                                                                                         |                                           |             |            |            |          |            |           |            |         |            
|                                                     | Capital expenditures  exploration and production                                   |                                                                                         |                                           | (11,714,121 | )          |            |          | (6,273,692 | )         |            |         | (15,560,549 | )         
|                                                     | Capital expenditures  oilfield services                                            |                                                                                         |                                           | (1,149,093  | )          |            |          | (459,820   | )         |            |         | (1,561,357  | )         
|                                                     | Proceeds from sale of fixed assets  exploration and
    production                 |                                                                                         |                                           | 155,779     |            |            |          |           |           |            |         |            |           
|                                                     | Proceeds from sale of fixed assets  oilfield services                              |                                                                                         |                                           | 4,653,771   |            |            |          | 104,911    |           |            |         | 235,000     |           
|                                                     | Proceeds from sale of investments and marketable securities                         |                                                                                         |                                           |            |            |            |          |           |           |            |         | 750,000     |           
|                                                     | Acquisitions  exploration and production, net of cash
    acquired                 |                                                                                         |                                           | (516,239    | )          |            |          |           |           |            |         |            |           
|                                                     | Acquisitions  oilfield services, net of cash acquired                              |                                                                                         |                                           | (1,188,469  | )          |            |          |           |           |            |         |            |           
|                                                     | Payments on note receivable                                                         |                                                                                         |                                           | 16,311      |            |            |          | 15,103     |           |            |         | 7,844       |           
|                                                     | Increase in other assets                                                            |                                                                                         |                                           | (199,813    | )          |            |          | (288,093   | )         |            |         | (88,547     | )         
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|                                                     |                                                                                     |                                                                                         | Net cash used in investing activities     |             |            | (9,941,874 | )        |            |           | (6,901,591 | )       |             |            | (16,217,609 | )
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|Cash flows from financing activities                 |                                                                                     |                                                                                         |                                           |             |            |            |          |            |           |            |         |            
|                                                     | Proceeds from notes payable                                                         |                                                                                         |                                           | 295,000     |            |            |          |           |           |            |         |            |           
|                                                     | Proceeds from borrowings on long-term debt                                          |                                                                                         |                                           | 5,844,558   |            |            |          | 11,452,861 |           |            |         | 21,749,993  |           
|                                                     | Proceeds from issuance of common stock                                              |                                                                                         |                                           | 9,666,147   |            |            |          | 824,234    |           |            |         | 1,947,205   |           
|                                                     | Equity issuance costs                                                               |                                                                                         |                                           | (319,644    | )          |            |          |           |           |            |         |            |           
|                                                     | Repayment of notes payable                                                          |                                                                                         |                                           | (663,540    | )          |            |          |           |           |            |         |            |           
|                                                     | Repayment of long-term debt                                                         |                                                                                         |                                           | (8,018,319  | )          |            |          | (8,359,919 | )         |            |         | (7,414,285  | )         
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|                                                     |                                                                                     |                                                                                         | Net cash provided by financing activities |             |            | 6,804,202  |          |            |           | 3,917,176  |         |             |            | 16,282,913  |  
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|Net increase (decrease) in cash and cash equivalents |                                                                                     |                                                                                         | 2,324,852                                 |             |            |            | (139,883 | )          |           |            | 201,119 |            
|Cash and cash equivalents, beginning of period       |                                                                                     |                                                                                         | 727,134                                   |             |            |            | 867,017  |            |           |            | 665,898 |            
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          
|Cash and cash equivalents, end of period             |                                                                                     | $                                                                                       | 3,051,986                                 |             |            | $          | 727,134  |            |           | $          | 867,017 |            
|                                                     |                                                                                     |                                                                                         |                                           |             |            |            |          |            |          



F-7



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


CONSOLIDATED FINANCIAL STATEMENTS


CONSOLIDATED STATEMENTS OF CASH FLOWS 
(Continued)


|                                                                                                              |  |                                 |           |  |      |   |           |      |  |   |           | 
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | --------- |  | ---- | - | --------- | ---- |  | - | --------- | 
|                                                                                                              |  | For the Year Ended December 31, |          
|                                                                                                              |  |                                 |          
|                                                                                                              |  | 2004                            |           |  | 2003 |   |           | 2002 | 
|                                                                                                              |  |                                 |           |  |      |   |           |      | 
|Supplemental cash flow disclosures:                                                                           |  |                                 |           |  |      |   |           |      |  |   |           | 
|Cash paid for interest, net of amounts capitalized                                                            |  | $                               | 436,380   |  |      | $ | 1,589,606 |      |  | $ | 383,449   | 
|Non-cash transactions:                                                                                        |  |                                 |           |  |      |   |           |      |  |   |           | 
|Non-cash costs capitalized in the full cost pool for oil and gas
    properties                               |  |                                 | 1,070,065 |  |      |   | 2,714,974 |      |  |   | 2,056,283 | 
|Property and equipment acquired through capital lease or
    assumption of debt                               |  |                                 | 195,000   |  |      |   | 967,975   |      |  |   |          | 
|Oil and gas properties acquired through seller financed debt                                                  |  |                                 |          |  |      |   | 263,381   |      |  |   | 607,236   | 
|Stock based compensation for options and warrants granted in
    connection with debt, recorded as loan costs |  |                                 |          |  |      |   | 5,790,719 |      |  |   | 5,015,490 | 
|Conversion of 8% subordinated convertible notes and accrued
    interest to common stock                      |  |                                 | 308,282   |  |      |   | 1,478,550 |      |  |   | 2,274,859 | 
|Conversion of 7% subordinated convertible notes and accrued
    interest to common stack                      |  |                                 | 487,479   |  |      |   | 1,757,016 |      |  |   |          | 
|Issuance of common stock to partially repay related party debt                                                |  |                                 | 500,000   |  |      |   |          |      |  |   |          | 
|Issuance of additional notes in lieu of cash interest payment on
    7% subordinated convertible notes        |  |                                 | 795,000   |  |      |   | 379,000   |      |  |   |          | 
|Sale of oil and gas property for note receivable                                                              |  |                                 |          |  |      |   |          |      |  |   | 1,620,000 | 
|Warrants valuation recorded as offering cost                                                                  |  |                                 | 120,000   |  |      |   |          |      |  |   |          | 



F-8



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|         |                                                                
|-------- | ---------------------------------------------------------------
|Note 1  | Organization and Summary of Significant Accounting
    Policies





| |                      
| | ---------------------
| | Basis of Presentation





| |                  
| | -----------------
| | Reclassifications





| |                    
| | -------------------
| | Accounts Receivable





| |                   
| | ------------------
| | Hedging Activities





F-9



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                     |  |         |       |  |           |   |      | 
|------------------------------------ |  | ------- | ----- |  | --------- | - | ---- | 
|                                     |  | MMBtu   |       |  | Amount    |  
|Effective Dates                      |  | Per Day |       |  | Per MMBtu |  
|                                     |  |         |       |  |           |  
|April 1, 2002  October 31, 2002     |  |         | 1,000 |  |           | $ | 1.80 | 
|October 1, 2002  September 30, 2003 |  |         | 1,000 |  |           |   | 2.97 | 
|November 1, 2002  March 31, 2003    |  |         | 1,000 |  |           |   | 3.00 | 
|April 1, 2003  March 31, 2004       |  |         | 3,500 |  |           |   | 4.71 | 







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





| |                    
| | -------------------
| | Environmental Costs





| |                     
| | --------------------
| | Management Estimates



F-10



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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



|                                  |  |              |               | 
|--------------------------------- |  | ------------ | ------------- | 
|Assets                            |  | Useful Lives |              
|                                  |  |              |              
|Buildings                         |  |              | 30 years      | 
|Site improvements                 |  |              | 15 years      | 
|Machinery, equipment and vehicles |  |              | 5  20  years | 
|Office furniture and equipment    |  |              | 3  10  years | 



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







F-11



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










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





| |                  
| | -----------------
| | Long-Lived Assets





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





| |                  
| | -----------------
| | Intangible Assets





F-12



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                      
| | ---------------------
| | Per Share Information





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







| |              
| | -------------
| | Stock Options



|                                                                                                                                     |  |                                 |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                                                     |  | For the Year Ended December 31, |           
|                                                                                                                                     |  |                                 |           
|                                                                                                                                     |  | 2004                            |            |   | 2003 |   |            | 2002 | 
|                                                                                                                                     |  |                                 |            |   |      |   |            |      | 
|Net loss as reported                                                                                                                 |  | $                               | (4,633,400 | ) |      | $ | (9,924,880 | )    |  | $ | (1,556,866 | )
|Deduct: Total stock-based employee compensation expense,
    determined under fair value based method for all awards, net of
    tax |  |                                 | (1,702,904 | ) |      |   | (26,244    | )    |  |   | (2,448,341 | )
|                                                                                                                                     |  |                                 |            |   |      |   |            |      | 
|Pro forma net loss                                                                                                                   |  | $                               | (6,336,304 | ) |      | $ | (9,951,124 | )    |  | $ | (4,005,207 | )
|                                                                                                                                     |  |                                 |            |   |      |   |            |      | 
|Basic and diluted loss per share as reported                                                                                         |  | $                               | (0.49      | ) |      | $ | (1.23      | )    |  | $ | (0.22      | )
|Basic and diluted loss per share-pro forma                                                                                           |  | $                               | (0.67      | ) |      | $ | (1.23      | )    |  | $ | (0.56      | )





F-13



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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





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







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



F-14



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                           |  |      |         |  |      |   |         | 
|------------------------------------------ |  | ---- | ------- |  | ---- | - | ------- | 
|                                           |  | 2004 |         |  | 2003 |  
|                                           |  |      |         |  |      |  
|Asset retirement obligation at January 1   |  | $    | 520,638 |  |      | $ | 447,357 | 
|Liabilities incurred in the current period |  |      | 93,349  |  |      |   | 56,008  | 
|Accretion expense                          |  |      | 21,036  |  |      |   | 17,273  | 
|                                           |  |      |         |  |      |  
|Asset retirement obligation at December 31 |  | $    | 635,023 |  |      | $ | 520,638 | 
|                                           |  |      |         |  |      |  



| |                                          
| | -----------------------------------------
| | Recently Issued Accounting Pronouncements









F-15



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|         |                    
|-------- | -------------------
|Note 2  | Accounts Receivable



|                                          |                                      |              |           |           |      |   |           |           |  
|----------------------------------------- | ------------------------------------ | ------------ | --------- | --------- | ---- | - | --------- | --------- | -
|                                          |                                      | December 31, |          
|                                          |                                      |              |          
|                                          |                                      | 2004         |           |           | 2003 |  
|                                          |                                      |              |           |           |      |  
|Accounts receivable oil field services    |                                      | $            | 2,739,816 |           |      | $ | 1,171,886 |          
|Revenue receivable oil and gas production |                                      |              | 722,372   |           |      |   | 652,401   |          
|Other receivables                         |                                      |              | 116,736   |           |      |   | 22,355    |          
|                                          |                                      |              |           |           |      |  
|                                          | Total receivables                    |              |           | 3,578,924 |      |   |           | 1,846,642 |  
|                                          | Less allowance for doubtful accounts |              |           | (85,476   | )    |   |           | (80,000   | )
|                                          |                                      |              |           |           |      |  
|                                          | Net receivables                      |              | $         | 3,493,448 |      |   | $         | 1,766,642 |  
|                                          |                                      |              |           |           |      |  



|         |                       
|-------- | ----------------------
|Note 3  | Property and Equipment



|                                            |                               |              |            |            |      |   |            |            |  
|------------------------------------------- | ----------------------------- | ------------ | ---------- | ---------- | ---- | - | ---------- | ---------- | -
|                                            |                               | December 31, |           
|                                            |                               |              |           
|                                            |                               | 2004         |            |            | 2003 |  
|                                            |                               |              |            |            |      |  
|Buildings, site costs and improvements      |                               | $            | 776,517    |            |      | $ | 2,208,587  |           
|Machinery, equipment, vehicles and aircraft |                               |              | 13,779,444 |            |      |   | 15,758,828 |           
|Office furniture and equipment              |                               |              | 257,253    |            |      |   | 276,135    |           
|                                            |                               |              |            |            |      |  
|                                            | Total cost                    |              |            | 14,813,214 |      |   |            | 18,243,550 |  
|                                            | Less accumulated depreciation |              |            | (6,048,887 | )    |   |            | (8,199,722 | )
|                                            |                               |              |            |            |      |  
|                                            | Net property and equipment    |              | $          | 8,764,327  |      |   | $          | 10,043,828 |  
|                                            |                               |              |            |            |      |  



|         |            
|-------- | -----------
|Note 4  | Intangibles



|                              |  |              |            |   |      |   |            |  
|----------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                              |  | December 31, |           
|                              |  |              |           
|                              |  | 2004         |            |   | 2003 |  
|                              |  |              |            |   |      |  
|Loan costs                    |  | $            | 4,032,489  |   |      | $ | 8,812,297  |  
|Non-compete                   |  |              | 300,000    |   |      |   | 300,000    |  
|Goodwill                      |  |              | 225,000    |   |      |   | 225,000    |  
|Other                         |  |              | 55,870     |   |      |   | 55,870     |  
|                              |  |              |            |   |      |  
|                              |  |              | 4,613,359  |   |      |   | 9,393,167  |  
|Less accumulated amortization |  |              | (3,116,283 | ) |      |   | (5,440,178 | )
|                              |  |              |            |   |      |  
|Net intangibles               |  | $            | 1,497,076  |   |      | $ | 3,952,989  |  
|                              |  |              |            |   |      |  



F-16



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                        |  |            |           |  |            |   |         |             |  |   |              |  |  |            |            |   |  |   |           | 
|--------------------------------------- |  | ---------- | --------- |  | ---------- | - | ------- | ----------- |  | - | ------------ |  |  | ---------- | ---------- | - |  | - | --------- | 
|                                        |  |            |           |  |            |   |         | Accumulated |  |   |             
|                                        |  | Non-cash   |           |  | Cash       |   |         | Total       |  |   | Amortization |  |  | Net        |           
|Description of Notes or Agreement       |  | Loan Costs |           |  | Loan Costs |   |         | Loan Costs  |  |   | 12/31/2004   |  |  | Book Value |           
|                                        |  |            |           |  |            |   |         |             |  |   |              |  |  |            |           
|8% subordinated convertible notes       |  | $          | 1,375,464 |  |            | $ | 51,159  |             |  | $ | 1,426,623    |  |  | $          | (1,270,968 | ) |  | $ | 155,655   | 
|7% subordinated convertible notes       |  |            | 2,178,944 |  |            |   | 72,605  |             |  |   | 2,251,549    |  |  |            | (1,384,924 | ) |  |   | 866,625   | 
|$25,000,000 development credit facility |  |            |          |  |            |   | 166,506 |             |  |   | 166,506      |  |  |            | (63,944    | ) |  |   | 102,562   | 
|Various other financing arrangements    |  |            |          |  |            |   | 187,811 |             |  |   | 187,811      |  |  |            | (8,333     | ) |  |   | 179,478   | 
|                                        |  |            |           |  |            |   |         |             |  |   |              |  |  |            |           
|Total                                   |  | $          | 3,554,408 |  |            | $ | 478,081 |             |  | $ | 4,032,489    |  |  | $          | (2,728,169 | ) |  | $ | 1,304,320 | 
|                                        |  |            |           |  |            |   |         |             |  |   |              |  |  |            |           



Note 5  Notes Receivable




Note 6  Accrued Liabilities




|                                                              |  |              |           |  |      |   |         | 
|------------------------------------------------------------- |  | ------------ | --------- |  | ---- | - | ------- | 
|                                                              |  | December 31, |          
|                                                              |  |              |          
|                                                              |  | 2004         |           |  | 2003 |  
|                                                              |  |              |           |  |      |  
|Production taxes payable  current portion                    |  | $            | 235,919   |  |      | $ | 282,752 | 
|Oil and gas revenue payable to oil and gas property owners    |  |              | 130,308   |  |      |   | 158,318 | 
|Accrued interest                                              |  |              | 223,195   |  |      |   | 223,060 | 
|Other accrued liabilities, principally accrued drilling costs |  |              | 3,906,990 |  |      |   | 302,639 | 
|                                                              |  |              |           |  |      |  
|                                                              |  | $            | 4,496,412 |  |      | $ | 966,769 | 
|                                                              |  |              |           |  |      |  

F-17



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 7  Long-Term Debt and Convertible
Notes Payable




|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              |            |  |      |   |            | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---- | - | ---------- | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | December 31, |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 2004         |            |  | 2003 |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              |            |  |      |  
|8% subordinated convertible notes payable, due
    June 13, 2006                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $            | 2,493,000  |  |      | $ | 2,793,000  | 
|7% subordinated convertible notes payable, due
    April 22, 2007                                                                                                                                                                                                                                                                                                                                                                                                                       |  |              | 11,516,698 |  |      |   | 11,184,000 | 
|$25,000,000 development credit facility with U.S. Bank,
    repaid in full and terminated on January 13, 2005                                                                                                                                                                                                                                                                                                                                                                           |  |              | 5,000,000  |  |      |   | 5,500,000  | 
|Bridge loan with related party; interest at 7%, repaid in full
    during 2004                                                                                                                                                                                                                                                                                                                                                                                                          |  |              |           |  |      |   | 3,000,000  | 
|Note payable to seller (for a 50% interest in an airplane), with
    interest at 7.25% due on a quarterly basis. The Company is
    required to make annual principal payments equal to 5% of the
    current outstanding principal until paid in full. The seller can
    call the note if the bank calls its note for the original
    purchase of the airplane. The note is collateralized by the
    Companys 50% interest in the airplane with a net book
    value of $2,167,717 |  |              | 2,326,201  |  |      |   | 2,326,201  | 
|Various revolving credit and term loans with LaSalle Bank with
    interest at prime plus 1.25%, repaid in full and terminated on
    January 13, 2005                                                                                                                                                                                                                                                                                                                                  |  |              | 3,582,533  |  |      |   | 1,391,505  | 
|Various other collateralized notes repaid in full and terminated
    no later than January 31, 2005                                                                                                                                                                                                                                                                                                                                                                                     |  |              | 546,058    |  |      |   | 1,797,943  | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              |            |  |      |  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $            | 25,464,490 |  |      | $ | 27,992,649 | 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |              |            |  |      |  



|                         |  |                       |            | 
|------------------------ |  | --------------------- | ---------- | 
|                         |  | Long-Term Debt        |           
|Year Ending December 31, |  | and Convertible Notes |           
|                         |  |                       |           
|2005                     |  | $                     | 124,354    | 
|2006                     |  |                       | 2,603,495  | 
|2007                     |  |                       | 11,621,668 | 
|2008                     |  |                       | 99,721     | 
|2009                     |  |                       | 9,222,924  | 
|Thereafter               |  |                       | 1,792,328  | 
|                         |  |                       |           
|                         |  | $                     | 25,464,490 | 
|                         |  |                       |           





| |                               
| | ------------------------------
| | Convertible Subordinated Notes



| |                                  
| | ---------------------------------
| | 8% Convertible Subordinated Notes



F-18



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)














| |                                  
| | ---------------------------------
| | 7% Convertible Subordinated Notes







F-19



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                                        
| | ---------------------------------------
| | $25,000,000 Development Credit Facility





| |                                                       
| | ------------------------------------------------------
| | Bridge Loan and Related Agreements  Related
    Party







|                  |  |         |         |  |        |   |      |       |  |   |           | 
|----------------- |  | ------- | ------- |  | ------ | - | ---- | ----- |  | - | --------- | 
|                  |  | Options |         |  | Option |   |      | Loan  | 
|Date of Grant     |  | Granted |         |  | Price  |   |      | Costs | 
|                  |  |         |         |  |        |   |      |       | 
|November 25, 2002 |  |         | 320,000 |  |        | $ | 8.75 |       |  | $ | 2,281,718 | 
|May 23, 2003      |  |         | 150,000 |  |        |   | 8.75 |       |  |   | 730,130   | 
|June 18, 2003     |  |         | 125,000 |  |        |   | 8.75 |       |  |   | 642,841   | 
|June 26, 2003     |  |         | 225,000 |  |        |   | 8.75 |       |  |   | 1,120,358 | 
|                  |  |         |         |  |        |   |      |       | 
|                  |  |         | 820,000 |  |        |   |      |       |  | $ | 4,775,047 | 
|                  |  |         |         |  |        |   |      |       | 





| |                                
| | -------------------------------
| | Revolving Credit and Term Loans



F-20



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                       
| | ----------------------
| | 2003 Debt Paid in Full



Note 8  Stockholders Equity




| |            
| | -----------
| | Stock Split





| |                                           
| | ------------------------------------------
| | Private Institutional Placements of Equity





| |                                      
| | -------------------------------------
| | Warrants and Options to Non-Employees











F-21



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                               |  |                  |           |                |                 |                  |                 |   |      | 
|------------------------------ |  | ---------------- | --------- | -------------- | --------------- | ---------------- | --------------- | - | ---- | 
|                               |  |                  |           | Warrant/Option |                 | Weighted Average |                
|                               |  | Number of Shares |           |                | Price Per Share |                  | Price Per Share |  
|                               |  |                  |           |                |                 |                  |                 |  
|Outstanding, December 31, 2001 |  |                  | 462,422   |                |                 | $3.22 - $6.00    |                 | $ | 5.75 | 
|Granted                        |  |                  | 770,000   |                |                 | 7.34 - 9.06      |                 |   | 8.37 | 
|Canceled or forfeited          |  |                  | (39,158   | )              |                 | 6.00             |                 |   | 6.00 | 
|Exercised                      |  |                  | (163,264  | )              |                 | 6.00             |                 |   | 6.00 | 
|                               |  |                  |           |                |                 |                  |                 |  
|Outstanding, December 31, 2002 |  |                  | 1,030,000 |                |                 | 3.22 - 9.06      |                 |   | 7.66 | 
|Granted                        |  |                  | 1,163,500 |                |                 | 8.75             |                 |   | 8.75 | 
|Exercised                      |  |                  | (83,350   | )              |                 | 7.34             |                 |   | 7.34 | 
|                               |  |                  |           |                |                 |                  |                 |  
|Outstanding, December 31, 2003 |  |                  | 2,110,150 |                |                 | 3.22 - 9.06      |                 |   | 8.27 | 
|Granted                        |  |                  | 47,746    |                |                 | 7.88 - 8.75      |                 |   | 8.24 | 
|                               |  |                  |           |                |                 |                  |                 |  
|Outstanding, December 31, 2004 |  |                  | 2,157,896 |                |                 | $3.22 - $9.06    |                 | $ | 8.17 | 
|                               |  |                  |           |                |                 |                  |                 |  

|                |  |                   |           |  |                  |  |         |                  |  |        |                   |  |  |                  |           |  |  |   |      | 
|--------------- |  | ----------------- | --------- |  | ---------------- |  | ------- | ---------------- |  | ------ | ----------------- |  |  | ---------------- | --------- |  |  | - | ---- | 
|                |  | Number            |           |  | Weighted Average |  |         |                  |  | Number |                   |  | 
|Range of        |  | Outstanding at    |           |  | Remaining        |  |         | Weighted Average |  |        | Exercisable at    |  |  | Weighted Average |          
|Exercise Prices |  | December 31, 2004 |           |  | Contractual Life |  |         | Exercise Price   |  |        | December 31, 2004 |  |  | Exercise Price   |          
|                |  |                   |           |  |                  |  |         |                  |  |        |                   |  |  |                  |          
|$3.22           |  |                   | 40,000    |  |                  |  | 1 years |                  |  | $      | 3.22              |  |  |                  | 40,000    |  |  | $ | 3.22 | 
|$5.99           |  |                   | 220,000   |  |                  |  | 2 years |                  |  | $      | 5.99              |  |  |                  | 220,000   |  |  | $ | 5.99 | 
|$7.34 - 9.06    |  |                   | 686,650   |  |                  |  | 3 years |                  |  | $      | 8.50              |  |  |                  | 686,650   |  |  | $ | 8.50 | 
|$7.88 - 8.75    |  |                   | 1,191,246 |  |                  |  | 4 years |                  |  | $      | 8.55              |  |  |                  | 1,191,246 |  |  | $ | 8.55 | 
|$8.75           |  |                   | 20,000    |  |                  |  | 5 years |                  |  | $      | 8.75              |  |  |                  | 20,000    |  |  | $ | 8.75 | 
|                |  |                   |           |  |                  |  |         |                  |  |        |                   |  |  |                  |          
|                |  |                   | 2,157,896 |  |                  |  |         |                  |  |        |                   |  |  |                  | 2,157,896 |  |  |   |      | 
|                |  |                   |           |  |                  |  |         |                  |  |        |                   |  |  |                  |          



|                           |  |                  |      | 
|-------------------------- |  | ---------------- | ---- | 
|                           |  | Weighted Average |     
|Period Ending December 31, |  | Fair Value       |     
|                           |  |                  |     
|2002                       |  | $                | 6.51 | 
|2003                       |  | $                | 4.98 | 
|2004                       |  | $                | 4.80 | 



| |                                    
| | -----------------------------------
| | Options Under Employee Option Plans



F-22



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                               |  |                  |           |              |           |                  |                 |   |      | 
|------------------------------ |  | ---------------- | --------- | ------------ | --------- | ---------------- | --------------- | - | ---- | 
|                               |  |                  |           | Option Price |           | Weighted Average |                
|                               |  | Number of Shares |           |              | Per Share |                  | Price Per Share |  
|                               |  |                  |           |              |           |                  |                 |  
|Outstanding, December 31, 2001 |  |                  | 1,049,600 |              |           | $1.50 - $5.00    |                 | $ | 3.30 | 
|Granted                        |  |                  | 345,000   |              |           | 7.00 - 8.70      |                 |   | 8.70 | 
|Canceled or forfeited          |  |                  | (6,200    | )            |           | 3.00 - 5.00      |                 |   | 3.59 | 
|Exercised                      |  |                  | (247,500  | )            |           | 1.50 - 5.00      |                 |   | 1.93 | 
|                               |  |                  |           |              |           |                  |                 |  
|Outstanding, December 31, 2002 |  |                  | 1,140,900 |              |           | 1.50 - 8.70      |                 |   | 5.23 | 
|Granted                        |  |                  | 10,000    |              |           | 8.75             |                 |   | 8.75 | 
|Canceled or forfeited          |  |                  | (61,781   | )            |           | 3.82 - 8.70      |                 |   | 7.28 | 
|Exercised                      |  |                  | (62,819   | )            |           | 1.50 - 5.00      |                 |   | 3.38 | 
|                               |  |                  |           |              |           |                  |                 |  
|Outstanding, December 31, 2003 |  |                  | 1,026,300 |              |           | 1.50 - 8.75      |                 |   | 5.25 | 
|Granted                        |  |                  | 403,750   |              |           | 4.26             |                 |   | 4.26 | 
|Canceled or forfeited          |  |                  | (118,500  | )            |           | 3.00 - 8.75      |                 |   | 7.22 | 
|Exercised                      |  |                  | (146,300  | )            |           | 1.50 - 5.00      |                 |   | 2.92 | 
|                               |  |                  |           |              |           |                  |                 |  
|Outstanding, December 31, 2004 |  |                  | 1,165,250 |              |           | $1.50 - $8.70    |                 | $ | 5.00 | 
|                               |  |                  |           |              |           |                  |                 |  

|                |  |                   |           |  |                  |  |          |                  |  |        |                   |  |  |                  |           |  |  |   |      | 
|--------------- |  | ----------------- | --------- |  | ---------------- |  | -------- | ---------------- |  | ------ | ----------------- |  |  | ---------------- | --------- |  |  | - | ---- | 
|                |  | Number            |           |  | Weighted Average |  |          |                  |  | Number |                   |  | 
|Range of        |  | Outstanding at    |           |  | Remaining        |  |          | Weighted Average |  |        | Exercisable at    |  |  | Weighted Average |          
|Exercise Prices |  | December 31, 2004 |           |  | Contractual Life |  |          | Exercise Price   |  |        | December 31, 2004 |  |  | Exercise Price   |          
|                |  |                   |           |  |                  |  |          |                  |  |        |                   |  |  |                  |          
|$1.50           |  |                   | 111,000   |  |                  |  | 1 year   |                  |  | $      | 1.50              |  |  |                  | 111,000   |  |  | $ | 1.50 | 
|$3.00-3.82      |  |                   | 183,000   |  |                  |  | 1 year   |                  |  | $      | 3.81              |  |  |                  | 183,000   |  |  | $ | 3.81 | 
|$5.00           |  |                   | 264,000   |  |                  |  | 2 years  |                  |  | $      | 5.00              |  |  |                  | 264,000   |  |  | $ | 5.00 | 
|$5.00           |  |                   | 6,000     |  |                  |  | 3 years  |                  |  | $      | 5.00              |  |  |                  | 6,000     |  |  | $ | 5.00 | 
|$8.70           |  |                   | 237,500   |  |                  |  | 3 years  |                  |  | $      | 8.70              |  |  |                  | 237,500   |  |  | $ | 8.70 | 
|$4.26           |  |                   | 10,000    |  |                  |  | 5 years  |                  |  | $      | 4.26              |  |  |                  | 10,000    |  |  | $ | 4.26 | 
|$4.26           |  |                   | 353,750   |  |                  |  | 10 years |                  |  | $      | 4.26              |  |  |                  | 353,750   |  |  | $ | 4.26 | 
|                |  |                   |           |  |                  |  |          |                  |  |        |                   |  |  |                  |          
|                |  |                   | 1,165,250 |  |                  |  |          |                  |  |        |                   |  |  |                  | 1,165,250 |  |  |   |      | 
|                |  |                   |           |  |                  |  |          |                  |  |        |                   |  |  |                  |          

F-23



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                           |  |                  |      | 
|-------------------------- |  | ---------------- | ---- | 
|                           |  | Weighted Average |     
|Period Ending December 31, |  | Fair Value       |     
|                           |  |                  |     
|2002                       |  | $                | 7.10 | 
|2003                       |  | $                | 5.25 | 
|2004                       |  | $                | 4.22 | 





| |        
| | -------
| | Options



Note 9  Income Taxes




|                                        |  |                                  |            |   |      |   |            |      |  |   |            |  
|--------------------------------------- |  | -------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                        |  | For the Years Ended December 31, |           
|                                        |  |                                  |           
|                                        |  | 2004                             |            |   | 2003 |   |            | 2002 | 
|                                        |  |                                  |            |   |      |   |            |      | 
|Current income tax expense              |  | $                                |           |   |      | $ |           |      |  | $ |           |  
|Deferred income tax benefit             |  |                                  | (1,784,000 | ) |      |   | (4,003,321 | )    |  |   | (1,226,874 | )
|Change in valuation allowance and other |  |                                  | 1,784,000  |   |      |   | 4,003,321  |      |  |   | 82,846     |  
|                                        |  |                                  |            |   |      |   |            |      | 
|Total income tax benefit                |  | $                                |           |   |      | $ |           |      |  | $ | (1,144,028 | )
|                                        |  |                                  |            |   |      |   |            |      | 



|                                          |  |                                 |     |    |      |  |     |      |  |  |     |   
|----------------------------------------- |  | ------------------------------- | --- | -- | ---- |  | --- | ---- |  |  | --- | --
|                                          |  | For the Year Ended December 31, |    
|                                          |  |                                 |    
|                                          |  | 2004                            |     |    | 2003 |  |     | 2002 | 
|                                          |  |                                 |     |    |      |  |     |      | 
|Federal income tax rate                   |  |                                 | (34 | )% |      |  | (34 | )%   |  |  | (34 | )%
|State income tax rate                     |  |                                 | (6  | )  |      |  | (6  | )    |  |  | (6  | ) 
|Other temporary and permanent differences |  |                                 |    |    |      |  |    |      |  |  | 1   |   
|Change in valuation allowance and other   |  |                                 | 40  |    |      |  | 40  |      |  |  | (3  | ) 
|                                          |  |                                 |     |    |      |  |     |      | 
|Effective tax rate                        |  |                                 | 0   | %  |      |  | 0   | %    |  |  | (42 | )%
|                                          |  |                                 |     |    |      |  |     |      | 

F-24



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |                                  |                          |   |            |            |   |   |            |            |  
|------------------------ | -------------------------------- | ------------------------ | - | ---------- | ---------- | - | - | ---------- | ---------- | -
|                         |                                  | December 31,             |  
|                         |                                  |                          |  
|                         |                                  | 2004                     |   |            | 2003       |  
|                         |                                  |                          |   |            |            |  
|Deferred tax assets      |                                  |                          |   |            |            |   |   |           
|                         | Accruals and other               |                          | $ | 132,000    |            |   | $ | 741,000    |           
|                         | Net operating loss carry-forward |                          |   | 10,387,000 |            |   |   | 9,551,000  |           
|                         |                                  |                          |   |            |            |  
|                         | Gross deferred tax assets        |                          |   | 10,519,000 |            |   |   | 10,292,000 |           
|                         |                                  |                          |   |            |            |  
|Deferred tax liabilities |                                  |                          |   |            |            |   |   |           
|                         | Property and equipment           |                          |   | 4,694,000  |            |   |   | 4,872,000  |           
|                         |                                  |                          |   |            |            |  
|                         | Gross deferred tax liabilities   |                          |   | 4,694,000  |            |   |   | 4,872,000  |           
|                         |                                  |                          |   |            |            |  
|                         | Net deferred tax asset           |                          |   | 5,825,000  |            |   |   | 5,420,000  |           
|                         |                                  | Less valuation allowance |   |            | (5,825,000 | ) |   |            | (5,420,000 | )
|                         |                                  |                          |   |            |            |  
|                         | Deferred tax asset               |                          | $ |           |            |   | $ |           |           
|                         |                                  |                          |   |            |            |  







Note 10  Commitments and Contingencies




| |                       
| | ----------------------
| | Gas Gathering Contract



F-25



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                 
| | ----------------
| | Lease Agreements



|                         |  |   |         | 
|------------------------ |  | - | ------- | 
|Year Ending December 31, |  |  
|                         |  |  
|2005                     |  | $ | 122,413 | 
|2006                     |  |   | 111,795 | 
|2007                     |  |   | 87,743  | 
|2008                     |  |   | 18,675  | 
|2009                     |  |   | 14,175  | 
|                         |  |   |        
|                         |  | $ | 354,801 | 
|                         |  |   |        





| |                               
| | ------------------------------
| | Financial Consulting Agreement





| |            
| | -----------
| | Regulations





| |              
| | -------------
| | Environmental





| |                               
| | ------------------------------
| | Fixed Price Delivery Contracts



Note 11  Retirement Plan




F-26



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 12  Industry Segments








|                                                    |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|--------------------------------------------------- |  | --------- | ---------- |  | ---------- | - | ---------- | ------------- |  | - | ---------- | - |  | - | ---------- | -
|                                                    |  | Oil Field |            |  | Oil & Gas  |   |            | Corporate and |  |   |           
|                                                    |  | Services  |            |  | Production |   |            | Other         |  |   | Total      |  
|                                                    |  |           |            |  |            |   |            |               |  |   |            |  
|Revenue                                             |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2002                                   |  | $         | 8,570,631  |  |            | $ | 2,367,713  |               |  | $ |           |   |  | $ | 10,938,344 |  
|December 31, 2003                                   |  |           | 11,634,457 |  |            |   | 6,589,281  |               |  |   |           |   |  |   | 18,223,738 |  
|December 31, 2004                                   |  |           | 14,720,979 |  |            |   | 6,267,453  |               |  |   |           |   |  |   | 20,988,432 |  
|Depreciation, depletion, amortization and accretion |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2002                                   |  |           | 1,485,495  |  |            |   | 273,936    |               |  |   | 23,155     |   |  |   | 1,782,586  |  
|December 31, 2003                                   |  |           | 1,420,952  |  |            |   | 1,561,247  |               |  |   | 92,048     |   |  |   | 3,074,247  |  
|December 31, 2004                                   |  |           | 1,450,450  |  |            |   | 3,611,056  |               |  |   | 136,475    |   |  |   | 5,197,981  |  
|Ceiling write-down                                  |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2002                                   |  |           |           |  |            |   |           |               |  |   |           |   |  |   |           |  
|December 31, 2003                                   |  |           |           |  |            |   | 2,975,000  |               |  |   |           |   |  |   | 2,975,000  |  
|December 31, 2004                                   |  |           |           |  |            |   | 4,100,000  |               |  |   |           |   |  |   | 4,100,000  |  
|Operating income (loss)                             |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2002                                   |  |           | 37,285     |  |            |   | (299,079   | )             |  |   | (1,670,865 | ) |  |   | (1,932,659 | )
|December 31, 2003                                   |  |           | 1,411,218  |  |            |   | (1,629,866 | )             |  |   | (2,061,353 | ) |  |   | (2,280,001 | )
|December 31, 2004                                   |  |           | 2,669,319  |  |            |   | (4,823,147 | )             |  |   | (2,144,479 | ) |  |   | (4,298,307 | )
|Total assets, net                                   |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2003                                   |  |           | 9,069,144  |  |            |   | 40,220,115 |               |  |   | 5,977,019  |   |  |   | 55,266,278 |  
|December 31, 2004                                   |  |           | 10,972,094 |  |            |   | 48,001,256 |               |  |   | 5,074,913  |   |  |   | 64,048,263 |  
|Capital expenditures                                |  |           |            |  |            |   |            |               |  |   |            |   |  |   |            |  
|December 31, 2002                                   |  |           | 1,561,357  |  |            |   | 14,695,044 |               |  |   | 865,505    |   |  |   | 17,121,906 |  
|December 31, 2003                                   |  |           | 459,820    |  |            |   | 6,076,125  |               |  |   | 197,567    |   |  |   | 6,733,512  |  
|December 31, 2004                                   |  |           | 2,246,622  |  |            |   | 15,652,421 |               |  |   | 52,921     |   |  |   | 17,951,964 |  

Note 13  Significant Customers




F-27



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|          |                                    
|--------- | -----------------------------------
|Note 14  | Fair Value of Financial Instruments





|          |                   
|--------- | ------------------
|Note 15  | Earnings Per Share









|          |                 
|--------- | ----------------
|Note 16  | Subsequent Event



| |                              
| | -----------------------------
| | Senior Secured Notes Facility





F-28



---



##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












|          |                                     
|--------- | ------------------------------------
|Note 17  | Supplemental Oil and Gas Information



| |                                        
| | ---------------------------------------
| | Proved Oil and Gas Reserves (Unaudited)



|                                           |  |             |             |   |           |  |          |  
|------------------------------------------ |  | ----------- | ----------- | - | --------- |  | -------- | -
|                                           |  | Natural Gas |             |   | Crude Oil | 
|                                           |  | (Mcf)       |             |   | (Barrels) | 
|                                           |  |             |             |   |           | 
|Proved reserves as of December 31, 2001    |  |             | 9,224,600   |   |           |  | 138,164  |  
|Sales or other deletions                   |  |             |            |   |           |  | (128,788 | )
|Revisions of previous estimates            |  |             | (2,042,255  | ) |           |  | 85,277   |  
|Extension, discoveries and other additions |  |             | 89,284,734  |   |           |  | 141,169  |  
|Production                                 |  |             | (676,879    | ) |           |  | (53,122  | )
|                                           |  |             |             |   |           | 
|Proved reserves as of December 31, 2002    |  |             | 95,790,200  |   |           |  | 182,700  |  
|Revisions of previous estimates            |  |             | (90,374,776 | ) |           |  | 1,991    |  
|Extension, discoveries and other additions |  |             | 3,175,927   |   |           |  | 66,102   |  
|Production                                 |  |             | (1,080,456  | ) |           |  | (57,654  | )
|                                           |  |             |             |   |           | 
|Proved reserves as of December 31, 2003    |  |             | 7,510,895   |   |           |  | 193,139  |  
|Purchases of reserves in place             |  |             | 1,476,067   |   |           |  |         |  
|Revisions of previous estimates            |  |             | (1,230,288  | ) |           |  | 16,535   |  
|Extension, discoveries and other additions |  |             | 1,239,700   |   |           |  | 17,571   |  
|Production                                 |  |             | (953,428    | ) |           |  | (33,668  | )
|                                           |  |             |             |   |           | 
|Proved reserves as of December 31, 2004    |  |             | 8,042,946   |   |           |  | 193,577  |  
|                                           |  |             |             |   |           | 

F-29



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | operational issues at the existing Labarge wells;                                                                                                                                                                               
|
| |  | a lack of financial resources to rectify the operational issues
    on a timely basis or to complete exploration on other wells; and                                                                                            
|
| |  | geological studies that indicate the producing Pipeline wells
    were producing from the sands rather than the coals thus leading
    the Company to change the classification of Pipeline from a coal
    play to a sand play.









| |                                                  
| | -------------------------------------------------
| | Proved Developed Oil and Gas Reserves (Unaudited)



|                          |  |             |            |               |            |  |         | 
|------------------------- |  | ----------- | ---------- | ------------- | ---------- |  | ------- | 
|                          |  |             |            | Crude Oil and |           
|                          |  | Natural Gas |            |               | Condensate | 
|Proved Developed Reserves |  | (Mcf)       |            |               | (Barrels)  | 
|                          |  |             |            |               |            | 
|December 31, 2002         |  |             | 38,590,600 |               |            |  | 182,700 | 
|December 31, 2003         |  |             | 4,724,523  |               |            |  | 124,968 | 
|December 31, 2004         |  |             | 3,773,033  |               |            |  | 117,031 | 



| |                                         
| | ----------------------------------------
| | Costs Incurred in Oil and Gas Activities



|                           |          |                                  |            |           |           |   |           |           |           |   |            |           |           | 
|-------------------------- | -------- | -------------------------------- | ---------- | --------- | --------- | - | --------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                           |          | For the Year Ended December 31,  |           
|                           |          |                                  |           
|                           |          | 2004                             |            |           | 2003      |   |           | 2002      |          
|                           |          |                                  |            |           |           |   |           |           |          
|Property acquisition costs |          |                                  |            |           |           |   |           |           |           |   |            |          
|                           | Proved   |                                  | $          | 516,239   |           |   | $         | 1,099,120 |           |   | $          | 72,383    |          
|                           | Unproved |                                  |            | 3,717,280 |           |   |           | 661,224   |           |   |            | 2,279,587 |          
|                           |          |                                  |            |           |           |   |           |           |          
|                           |          | Total property acquisition costs |            |           | 4,233,519 |   |           |           | 1,760,344 |   |            |           | 2,351,970 | 
|Development costs          |          |                                  | 6,156,131  |           |           |   | 3,167,700 |           |           |   | 786,095    |          
|Exploration costs          |          |                                  | 5,294,148  |           |           |   | 3,491,953 |           |           |   | 11,955,351 |          
|                           |          |                                  |            |           |           |   |           |           |          
|Total costs                |          | $                                | 15,683,798 |           |           | $ | 8,419,997 |           |           | $ | 15,093,416 |          
|                           |          |                                  |            |           |           |   |           |           |          

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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                            
| | ---------------------------
| | Aggregate Capitalized Costs



|                                                                                      |       |                    |             |            |      |   |            |            | 
|------------------------------------------------------------------------------------- | ----- | ------------------ | ----------- | ---------- | ---- | - | ---------- | ---------- | 
|                                                                                      |       | As of December 31, |            
|                                                                                      |       |                    |            
|                                                                                      |       | 2004               |             |            | 2003 |  
|                                                                                      |       |                    |             |            |      |  
|Proved oil and gas properties                                                         |       | $                  | 41,210,195  |            |      | $ | 28,194,858 |           
|Unproved oil and gas properties                                                       |       |                    | 15,595,508  |            |      |   | 12,715,834 |           
|                                                                                      |       |                    |             |            |      |  
|                                                                                      | Total |                    |             | 56,805,703 |      |   |            | 40,910,692 | 
|Less accumulated depreciation, depletion, and amortization and
    ceiling write-down |       |                    | (12,418,315 | )          |      |   | (4,748,515 | )         
|                                                                                      |       |                    |             |            |      |  
|Net capitalized costs                                                                 |       | $                  | 44,387,388  |            |      | $ | 36,162,177 |           
|                                                                                      |       |                    |             |            |      |  



| |                          
| | -------------------------
| | Costs Not Being Amortized



|                                |  |   |            | 
|------------------------------- |  | - | ---------- | 
|Year Ended December 31,         |  |  
|                                |  |  
|2004                            |  | $ | 6,700,461  | 
|2003                            |  |   | 1,644,654  | 
|2002 and prior                  |  |   | 7,250,393  | 
|                                |  |   |           
|Total costs not being amortized |  | $ | 15,595,508 | 
|                                |  |   |           







F-31



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                            
| | ---------------------------
| | Capitalized Financing Costs



|                                                                                   |  |                    |           |  |      |   |           | 
|---------------------------------------------------------------------------------- |  | ------------------ | --------- |  | ---- | - | --------- | 
|                                                                                   |  | As of December 31, |          
|                                                                                   |  |                    |          
|                                                                                   |  | 2004               |           |  | 2003 |  
|                                                                                   |  |                    |           |  |      |  
|Beneficial conversion feature related to the
    8% subordinated convertible notes |  | $                  | 1,165,500 |  |      | $ | 1,165,500 | 
|Capitalized interest                                                               |  |                    | 2,880,608 |  |      |   | 2,246,019 | 
|Capitalized amortization of loan costs                                             |  |                    | 5,440,961 |  |      |   | 4,885,586 | 
|                                                                                   |  |                    |           |  |      |  
|Total capitalized finance costs                                                    |  | $                  | 9,487,069 |  |      | $ | 8,297,105 | 
|                                                                                   |  |                    |           |  |      |  



| |                       
| | ----------------------
| | Oil and Gas Operations



|                                                                                                      |  |                                 |            |   |      |   |            |      |  |   |            |  
|----------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                      |  | For the Year Ended December 31, |           
|                                                                                                      |  |                                 |           
|                                                                                                      |  | 2004                            |            |   | 2003 |   |            | 2002 | 
|                                                                                                      |  |                                 |            |   |      |   |            |      | 
|Revenue                                                                                               |  | $                               | 6,267,453  |   |      | $ | 6,589,281  |      |  | $ | 2,367,713  |  
|Production costs and taxes                                                                            |  |                                 | (2,635,892 | ) |      |   | (2,920,493 | )    |  |   | (1,820,692 | )
|Depreciation, depletion, amortization, accretion and ceiling
    write-down                           |  |                                 | (7,677,968 | ) |      |   | (4,442,097 | )    |  |   | (196,627   | )
|                                                                                                      |  |                                 |            |   |      |   |            |      | 
|Results of operations from producing activities (excluding
    corporate overhead and interest costs) |  | $                               | (4,046,407 | ) |      | $ | (773,309   | )    |  | $ | 350,394    |  
|                                                                                                      |  |                                 |            |   |      |   |            |      | 
|Depletion per Mcf equivalent                                                                          |  | $                               | 3.06       |   |      | $ | 0.92       |      |  | $ | 1.11       |  
|                                                                                                      |  |                                 |            |   |      |   |            |      | 

F-32



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                                       |  |                    |             |   |      |   |             |      |  |   |              |  
|------------------------------------------------------ |  | ------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ------------ | -
|                                                       |  | As of December 31, |            
|                                                       |  |                    |            
|                                                       |  | 2004               |             |   | 2003 |   |             | 2002 | 
|                                                       |  |                    |             |   |      |   |             |      | 
|Future cash inflows                                    |  | $                  | 56,584,600  |   |      | $ | 51,591,800  |      |  | $ | 303,392,537  |  
|Future production costs                                |  |                    | (18,552,100 | ) |      |   | (16,204,800 | )    |  |   | (109,060,912 | )
|Future development costs                               |  |                    | (3,450,000  | ) |      |   | (2,912,800  | )    |  |   | (16,424,600  | )
|Future income tax expense                              |  |                    | (399,302    | ) |      |   | (2,765,262  | )    |  |   | (59,269,174  | )
|                                                       |  |                    |             |   |      |   |             |      | 
|Future net cash flows                                  |  |                    | 34,183,198  |   |      |   | 29,708,938  |      |  |   | 118,637,851  |  
|10% annual discount for estimated timing on cash flows |  |                    | (10,470,718 | ) |      |   | (8,887,283  | )    |  |   | (63,585,181  | )
|                                                       |  |                    |             |   |      |   |             |      | 
|Standardized measure of discounted future cash flows   |  | $                  | 23,712,480  |   |      | $ | 20,821,655  |      |  | $ | 55,052,670   |  
|                                                       |  |                    |             |   |      |   |             |      | 



|                                      |  |                    |       |  |      |   |       |      |  |   |       | 
|------------------------------------- |  | ------------------ | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                                      |  | As of December 31, |      
|                                      |  |                    |      
|                                      |  | 2004               |       |  | 2003 |   |       | 2002 | 
|                                      |  |                    |       |  |      |   |       |      | 
|Weighted average gas price per Mcf    |  | $                  | 6.07  |  |      | $ | 6.06  |      |  | $ | 3.11  | 
|Weighted average oil price per barrel |  | $                  | 40.25 |  |      | $ | 31.34 |      |  | $ | 31.20 | 





F-33



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                 |  |                                 |            |   |      |   |              |      |  |   |             |  
|---------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | ------------ | ---- |  | - | ----------- | -
|                                                                 |  | For the Year Ended December 31, |           
|                                                                 |  |                                 |           
|                                                                 |  | 2004                            |            |   | 2003 |   |              | 2002 | 
|                                                                 |  |                                 |            |   |      |   |              |      | 
|Beginning of period                                              |  | $                               | 20,821,655 |   |      | $ | 55,052,670   |      |  | $ | 5,622,483   |  
|Extensions, discoveries and other additions                      |  |                                 | 2,911,800  |   |      |   | 9,004,500    |      |  |   | 77,054,495  |  
|Purchases of reserves in place                                   |  |                                 | 2,839,535  |   |      |   |             |      |  |   |            |  
|Sales and transfers                                              |  |                                 |           |   |      |   |             |      |  |   | (547,245    | )
|Net change in sales and transfer prices, net of production costs |  |                                 | (4,117,528 | ) |      |   | 76,822,907   |      |  |   | 371,265     |  
|Revision of previous quantity estimates                          |  |                                 | 241,269    |   |      |   | (170,455,255 | )    |  |   | (1,590,027  | )
|Development costs incurred during the period                     |  |                                 | 5,023,365  |   |      |   | 976,462      |      |  |   | 786,095     |  
|Sales of oil and gas, net of production costs and taxes          |  |                                 | (3,631,561 | ) |      |   | (3,678,788   | )    |  |   | (547,021    | )
|Changes in future development costs                              |  |                                 | (3,025,685 | ) |      |   | 13,143,811   |      |  |   | (252,092    | )
|Net change in income taxes                                       |  |                                 | 1,816,525  |   |      |   | 26,834,091   |      |  |   | (25,423,043 | )
|Changes in production rates and other                            |  |                                 | (1,461,405 | ) |      |   | 4,718,632    |      |  |   | (1,337,938  | )
|Accretion of discount                                            |  |                                 | 2,294,510  |   |      |   | 8,402,625    |      |  |   | 915,698     |  
|                                                                 |  |                                 |            |   |      |   |              |      | 
|End of period                                                    |  | $                               | 23,712,480 |   |      | $ | 20,821,655   |      |  | $ | 55,052,670  |  
|                                                                 |  |                                 |            |   |      |   |              |      | 



Note 18  Quarterly Consolidated Financial
Information (Unaudited)




|                                 |  |                                                |        |   |        |   |        |       |  |   |        |   |  |   |        |  
|-------------------------------- |  | ---------------------------------------------- | ------ | - | ------ | - | ------ | ----- |  | - | ------ | - |  | - | ------ | -
|                                 |  | Quarter                                        |       
|                                 |  |                                                |       
|                                 |  | First                                          |        |   | Second |   |        | Third |  |   | Fourth |  
|                                 |  |                                                |        |   |        |   |        |       |  |   |        |  
|                                 |  | ($ in thousands, except per share information) |       
|2004                             |  |                                                |        |   |        |   |        |       |  |   |        |   |  |   |        |  
|Total revenue                    |  | $                                              | 3,567  |   |        | $ | 5,045  |       |  | $ | 6,606  |   |  | $ | 5,770  |  
|Gross profit                     |  | $                                              | 1,628  |   |        | $ | 2,518  |       |  | $ | 3,542  |   |  | $ | 2,774  |  
|Net (loss) income                |  | $                                              | (1,765 | ) |        | $ | (1,102 | )     |  | $ | 3,121  |   |  | $ | (4,887 | )
|(Loss) earning per share         |  | $                                              | (0.19  | ) |        | $ | (0.12  | )     |  | $ | 0.33   |   |  | $ | (0.49  | )
|(Loss) earning per diluted share |  | $                                              | (0.19  | ) |        | $ | (0.12  | )     |  | $ | 0.29   |   |  | $ | (0.49  | )
|2003                             |  |                                                |        |   |        |   |        |       |  |   |        |   |  |   |        |  
|Total revenue                    |  | $                                              | 3,605  |   |        | $ | 5,003  |       |  | $ | 5,241  |   |  | $ | 4,375  |  
|Gross profit                     |  | $                                              | 1,450  |   |        | $ | 2,706  |       |  | $ | 2,764  |   |  | $ | 2,160  |  
|Net (loss) income                |  | $                                              | (622   | ) |        | $ | (224   | )     |  | $ | (4,525 | ) |  | $ | (4,554 | )
|(Loss) earning per share         |  | $                                              | (0.08  | ) |        | $ | (0.03  | )     |  | $ | (0.55  | ) |  | $ | (0.57  | )
|(Loss) earning per diluted share |  | $                                              | (0.08  | ) |        | $ | (0.03  | )     |  | $ | (0.55  | ) |  | $ | (0.57  | )

F-34



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##### Table of Contents



INFINITY, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Note 19  Schedule of Condensed Financial
Information




F-35



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##### Table of Contents



EXHIBIT INDEX


|        |      |  |                         |                                                                                                                                                                   
|------- | ---- |  | ----------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |                        
|Number  |      |  | Description of Exhibits
|        |      |  |                        
|        | 21   |  |                         | Subsidiaries of the Registrant                                                                                                                                    
|        | 23.1 |  |                         | Consent of Ehrhardt, Keefe, Steiner & Hottman, P.C.                                                                                                               
|        | 23.2 |  |                         | Consent of Netherland Sewell and Associates, Inc.                                                                                                                 
|        | 31.1 |  |                         | Certification of Chief Executive Officer of Periodic Report
    Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302
    of the Sarbanes-Oxley act of 2002).
|        | 31.2 |  |                         | Certification of Chief Financial Officer of Periodic Report
    Pursuant to Rule 13a_14(a) and Rule 15d-14(a) (Section 302
    of the Sarbanes-Oxley act of 2002).
|        | 32.1 |  |                         | Certification of Chief Executive Officer Pursuant to
    18 U.S.C. Section 1350 (Section 906 of the
    Sarbanes-Oxley Act of 2002)                               
|        | 32.2 |  |                         | Certification of Chief Financial Officer Pursuant to
    18 U.S.C. Section 1350 (Section 906 of the
    Sarbanes-Oxley Act of 2002)