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SECURITES AND EXCHANGE COMMISSIONWashington D. C. 20549

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FORM 10-K

Annual Report Pursuant to Section 13 or 15(d)
Of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2001

Commission File Number 1-15639

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CARBON ENERGY CORPORATION(Exact name of Registrant as specified in its Charter)

Colorado(State of Incorporation)

84-1515097(I.R.S. Employer Identification No.)1700 Broadway, Suite 1150
Denver, Colorado(Address of principal executive offices)

80290(Zip Code)


Registrants
telephone number, including area code: (303) 863-1555

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

Title of each class

Name of Exchange on which registeredCommon Stock, (no par value)

American Stock Exchange


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

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

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

The
aggregate market value of the voting stock excluding shares held by persons who may be considered affiliates of the registrant as of March 22, 2002 is $9,286,612.

Indicate
the number of shares outstanding of each of the registrant's classes of common stock, as of March 22, 2002.

Class

Outstanding at
March 22, 2002Common Stock, no par value

6,127,925 shares


The
Company's Proxy Statement for the 2002 Annual Meeting of Shareholders
is incorporated by Reference into Part III

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TABLE OF CONTENTS



|         |  | Part I                                                                               
|-------- |  | -------------------------------------------------------------------------------------
|Item 1.  |  | Business                                                                             
|Item 2.  |  | Properties                                                                           
|Item 3.  |  | Legal Proceedings                                                                    
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  
|         |  | Part II                                                                              
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 
|Item 6.  |  | Selected Financial Data                                                              
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7a. |  | Quantitative and Qualitative Disclosures about Market Risk                           
|Item 8.  |  | Financial Statements and Supplementary Data                                          
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|         |  | 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                                       
|         |  | Part IV                                                                              
|Item 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                     





PART I

ITEM 1. BUSINESS

GENERAL

Carbon Energy Corporation (the Company or Carbon) was incorporated on September 14, 1999 under the Colorado Business Corporation Act. The Company's
business is comprised of the assets and properties of Bonneville Fuels Corporation (BFC), which conducts the Company's operations in the United States and the assets and properties of CEC
Resources Ltd. (CEC), which conducts the Company's operations in Canada. As the parent company, Carbon provides management services to BFC and CEC.

Carbon
is an independent oil and gas company engaged in the exploration, development and production of natural gas and crude oil in the United States and Canada. The Company's core areas
in the United States include the Piceance Basin in Colorado, the Uintah Basin in Utah, the Permian Basin in New Mexico and Texas and Southwest Kansas. The Company's core areas in Canada include the
Carbon Field area of Central Alberta and Southeast Saskatchewan.

All
amounts are presented in U.S. dollars unless otherwise noted.

At
December 31, 2001, the Company had 59.0 billion cubic feet of natural gas equivalent ("Bcfe" where one barrel of oil is equivalent to six thousand cubic feet of gas)
proved reserves compared to 56.8 Bcfe at December 31, 2000. The Company's estimated reserves at December 31, 2000 included volumes attributable to Carbon's working interests in 40
natural gas wells located in the Kutz Field, San Juan County, New Mexico. The Kutz property was sold January 5, 2001. The proved reserves for the Kutz
property were estimated to be 38,000 barrels of oil and 5.6 Bcf of natural gas (5.8 Bcfe) and at December 31, 2000 had an estimated pretax present value, discounted at 10% of
$24 million. After adjusting for this property sale, proved reserves at December 31, 2001 increased by 8.0 Bcfe or 16% compared to December 31, 2000. Net proved natural gas
reserves totaled 53.9 Bcf of gas at December 31, 2001 compared to 45.4 Bcf at year end 2000, an increase of 8.5 Bcf or 19%. Crude oil and natural gas liquids at December 31, 2001 totaled
851,000 barrels compared to 930,000 barrels at year end 2000, a decrease of 79,000 barrels or 8%. Of these proved reserves, approximately 91% on a Mcfe basis are gas and approximately 82% are
categorized as proved developed. At December 31, 2001, the pretax net present value of the reserves using year end prices and costs held constant and discounted at 10% was $55.8 million.

At
December 31, 2001, Carbon's U.S. exploration and production operations were comprised of working interests in 260 producing oil and gas wells. Carbon operates 151 of these
wells. The Company had an interest in over 166,000 net acres of oil and gas leases primarily located in the Piceance Basin of Colorado, the Uintah Basin of Utah, the Permian Basin of New Mexico and
Southwest Kansas. During 2001, BFC produced 2.8 Bcf of gas and 81,100 barrels of oil and natural gas liquids, amounting to 3.3 Bcfe or an average of 9.0 MMcfe per day. The addition of 7.1 Bcfe to
Carbon's net proved reserves resulted in a reserve replacement of 316% of the Company's 2001 production in the United States.

At
December 31, 2001, Carbon's Canadian exploration and production operations were comprised of working interests in 75 producing oil and natural gas wells located in Alberta and
Saskatchewan. Carbon operates 39 of these wells. The Company had an interest in over 36,000 net acres of oil and gas leases. During 2001, CEC produced 2.4 Bcf of gas and 58,600 barrels of oil and
natural gas liquids, amounting to 2.8 Bcfe or an average of 7.6 MMcfe per day. The addition of .9 Bcfe to Carbon's net proved reserves resulted in a reserve replacement of 131% of the Company's 2001
production in Canada.

For
information regarding Carbon's geographic segments, see Note 7 to the Consolidated Financial Statements.

BFC
was acquired by the Company on October 29, 1999 in a stock purchase. On August 11, 1999, CEC entered into a stock purchase agreement with Bonneville Pacific Corporation
(BPC), parent company of BFC, which provided for the purchase by CEC from BPC of all outstanding shares of BFC for $23.9 million in cash and the assumption of certain liabilities, subject to
certain adjustments. Rights and obligations of CEC under the stock purchase agreement were assigned to Carbon. The purchase of BFC stock under the stock purchase agreement was completed by Carbon
rather than CEC. Yorktown Energy Partners III, LP (Yorktown) purchased 4,500,000 shares of Carbon for $24.8 million. The funds from this purchase were used to acquire the BFC shares under the
stock purchase agreement and to pay expenses incurred in connection with the purchase and related transactions. The total cash purchase price after adjustments for BFC was $23.5 million.

On
January 21, 2000, Carbon commenced an exchange offer for shares of CEC. In the exchange offer, Carbon offered to exchange one share of Carbon stock for each share of CEC stock.
On February 18, 2000, the Company completed its offer to exchange Carbon shares for shares of CEC. Of the 1.5 million outstanding shares of CEC, over 97% of the shares were exchanged.
Carbon began trading its shares on the American Stock Exchange on February 24, 2000 under the trading symbol CRB. On February 28, 2000, at the request of CEC, the Securities and Exchange
Commission (SEC) approved the delisting of CEC's common stock from the American Stock Exchange.

On
November 22, 2000, CEC initiated an offer to purchase shares (the Offer) of CEC stock that were not owned by Carbon. The Offer was completed on February 6, 2001. CEC
conducted the Offer in order to avoid the administrative costs and time involved in corresponding with a small number of minority shareholders. The Offer was made by CEC at the direction of the Board
of Directors of CEC. The Board of Directors of CEC maintained a neutral position in regard to the Offer because of potential conflicts of interest. Of the approximate 39,000 shares of CEC that were
not acquired by Carbon in the original Offer to Exchange, approximately 34,000 shares of CEC stock were purchased by CEC pursuant to the Offer. Carbon currently owns 99.7% of the stock of CEC.

BUSINESS STRATEGY

The Company's objective is to build shareholder value through consistent growth in reserves and production and to increase net asset value, cash flow, and
earnings per share. Our business strategy is to grow through the exploration and development of oil and gas properties, by the acquisition of complementary properties and through the optimization of
gathering, compression and processing facilities. In addition we will seek opportunities to acquire additional leases and drilling opportunities based on internally generated geological and
engineering concepts. Management believes that the Company's existing infrastructure and its acreage position in the Piceance Basin in Colorado and the Uintah Basin in Utah and the Carbon and Rowley
areas of Alberta, Canada provide the Company with an excellent opportunity to achieve its objectives. The Company will also pursue property acquisition opportunities in its areas of operations.

EMPLOYEES AND OFFICES

As of December 31, 2001, the Company had 27 employees located in Denver, Colorado and nine in Calgary, Alberta. None of these employees are represented by
a labor union. The Company's executive offices are located at 1700 Broadway, Suite 1150, Denver, Colorado 80290, and its telephone number is (303) 863-1555.

ITEM 2. PROPERTIES

United States

Piceance and Uintah BasinsAt December 31, 2001, Carbon owned working interests in 145 (125.6 net) producing wells in the Piceance Basin of
Colorado and Uintah Basin of Utah. Carbon operates 128 of these wells. For the year ended December 31, 2001, the Company participated in the drilling of 19 wells (14.7 net), of which 18 (13.7
net) were completed as natural gas wells. The Company has leasehold rights in approximately 160,000 gross and 135,000 net acres of which approximately 122,000 gross and 103,000 net acres are
undeveloped and approximately 86,000 gross and 68,000 net acres are held by production. Carbon's focus in the United States during 2002 is to continue the development of its natural gas properties in
the Rocky Mountains, with emphasis on the Piceance and Uintah Basins.

Permian
BasinAt December 31, 2001, Carbon owned working interests in 94 (23.0 net) producing wells in the Permian Basin of New Mexico and Texas. Carbon operates 18 of
these wells. For the year ended December 31, 2001, the Company participated in the drilling of 14 wells (5.6 net), of which four (1.1 net) were completed as natural gas wells and nine (4.0 net)
were completed as oil wells. The Company has leasehold rights in approximately 26,000 gross and 9,000 net acres of which approximately 9,000 gross and 4,000 net acres are undeveloped and approximately
8,000 gross and 3,000 net acres are held by production.

Southwest
KansasAt December 31, 2001, Carbon owned working interests in 20 (7.1 net) producing wells in Southwest Kansas. Carbon operates four of these wells. For the
year ended December 31, 2001, the Company did not participate in any drilling activities in this area. The Company has leasehold rights in approximately 15,000 gross and 10,000 net acres of
which approximately 11,000 gross and 8,000 net acres are undeveloped.

MontanaAt
December 31, 2001, Carbon owned a working interest and operated one (1.0 net) producing well in Montana. For the year ended December 31, 2001, the
Company participated in the drilling of two wells (2.0 net), of which one (1.0 net) was completed as an oil well. The Company has leasehold rights in approximately 10,000 gross and net acres of which
approximately 10,000 gross and net acres are undeveloped.

San
Juan BasinIn January 2001, the Company closed the sale of its entire working interest and related leasehold rights in the San Juan Basin of New Mexico, receiving
net proceeds of approximately $6.8 million. The proceeds were used to repay amounts outstanding under the Company's credit facilities and to finance the Company's exploration and development
program.

Canada

AlbertaAt December 31, 2001, Carbon owned working interests in 66 (43.3 net) producing wells primarily in the Carbon and Rowley areas of
Alberta. Carbon operates 39 of these wells. For the year ended December 31, 2001, the Company participated in the drilling of eleven wells (10.5 net), all of which were completed as gas wells.
The Company has leasehold rights in approximately 57,000 gross and 36,000 net acres of which approximately 21,000 gross and 16,000 net acres are undeveloped. Carbon's focus in Canada during 2002 is to
continue the development of its natural gas properties in Central Alberta, with emphasis on the Carbon and Rowley areas.

SaskatchewanAt
December 31, 2001, Carbon owned non-operating working interests in nine (2.8 net) producing wells in Southeast Saskatchewan. For the year
ended December 31, 2001, the Company did not participate in any drilling activities in this area. The Company has leasehold rights in approximately 2,000 gross and 500 net acres of which
approximately 160 gross and 40 net acres are undeveloped.

RESERVES

The table below sets forth the Company's estimated quantities of historical proved reserves after royalty burdens and the present values attributable to those
reserves as of December 31, 2001, 2000 and 1999. The estimates for the Company's reserves in the United States were prepared by Ryder Scott Company, an independent reservoir engineering firm.
The estimates for the Company's reserves in Canada were prepared by Sproule Associates Limited, independent geological and petroleum engineering consultants. Additional information regarding the
Company's proved and proved developed oil and gas reserves and the standardized measure of discounted net cash flow and changes therein are described in Note 11 to the Consolidated Financial
Statements.

|                                                                                             |                        | United States |        | Canada(1)
|-------------------------------------------------------------------------------------------- | ---------------------- | ------------- | ------ | ---------
|
|
|Estimated proved reserves                                                                    |                        |               |        |          
|                                                                                             | Natural gas (MMcf)     |               |        | 33,992   
|                                                                                             | Oil and liquids (MBbl) |               |        | 412      
|                                                                                             |                        | Total MMcfe   |        |          
|Proved developed reserves (MMcfe)(2)                                                         |                        |               | 31,355 |          
|Natural gas price as of December 31 ($/Mcf)                                                  |                        | $             | 2.25   |          
|Oil and liquids price as of December 31 ($/Bbl)                                              |                        |               | 18.45  |          
|Present value of estimated future net revenues before future income taxes, discounted at 10% |                        | $             | 31,107 |          

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The
estimate of net proved reserves at December 31, 2000 included volumes attributable to the Company's working interest in 40 natural gas wells located in the San Juan Basin of
New Mexico. These properties were sold in January 2001. The proved reserves for these properties were estimated to be 38,000 barrels of oil and 5.6 Bcf of natural gas. The pretax net present
value of these reserves using year end 2000 prices and costs held constant and discounted at 10% was $24.0 million.

In
accordance with applicable requirements of the SEC, estimates of the Company's future net revenues are determined using sale prices estimated to be in effect as of the date of the
reserve estimates and are held constant throughout the life of the properties (except to the extent provided by contractual arrangements in existence at year end). Also in accordance with the
applicable SEC guidelines, future production costs are held constant at the level observed at the date of the reserve estimate. Declines in the price of oil or gas decrease reserve values by lowering
the future net revenues attributable to the reserves and may also reduce the quantities of reserves that are recoverable on an economic basis. Price increases may have the opposite effect. A
significant decline in prices of natural gas or oil could have a material adverse effect on the Company's financial condition and results of operations. Prices received for future production and
future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of the estimates.

There
are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and gas
reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way, and estimates of other engineers might differ
materially from those shown above. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretations and judgment. Results of drilling, testing and
production may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness of such
estimates depends primarily on the accuracy of the assumptions upon which they were based. In general, the volume of production from Carbon's oil and gas properties decline as reserves of oil and gas
are depleted. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the proved reserves of
the Company will decline as reserves are produced. Reserves generated from future activities of the Company are highly
dependent upon the level of success in acquiring or discovering additional reserves and the costs incurred in doing so.

Since
January 1, 2001, the Company has filed the Department of Energy Form EIA-23, "Annual Survey of Domestic Oil and Gas Reserves," as required by operators of oil
and gas properties in the United States. There are differences between the reserves as reported on Form EIA-23 and reserves as reported herein. Form EIA-23 requires that
operators report on total proved reserves for operated wells only and that reported reserves be reported on a gross basis rather than on a net basis.

PRODUCTION

The following table sets forth information regarding net oil and natural gas production, average sales prices and other production information. Average sales
prices for natural gas, oil and liquids are inclusive of hedging gains and losses for the years ended December 31, 2001, 2000 and 1999.

|                                            |                         | United States(1) |      | Canada(2)
|------------------------------------------- | ----------------------- | ---------------- | ---- | ---------
|
|Quantities produced and sold                |                         |                  |      |          
|                                            | Natural gas (MMcf)      |                  |      | 2,810    
|                                            | Oil and liquids (Bbl)   |                  |      | 81,091   
|                                            |                         | Total MMcfe(3)   |      |          
|Average sales price                         |                         |                  |      |          
|                                            | Natural gas ($/Mcf)     |                  | $    | 2.94     
|                                            | Oil and liquids ($/Bbl) |                  |      | 25.49    
|Average production (lifting) costs ($/Mcfe) |                         | $                | 0.50 |          

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PRODUCTIVE WELLS

The following table sets forth information regarding the number of productive wells in which the Company held a working interest at December 31, 2001.

|                         |                        | Productive Wells(1)
|------------------------ | ---------------------- | -------------------
|
|
|United States            |                        |                    
|                         | Permian Basin          |                    
|                         | Piceance/Uintah Basins |                    
|                         | Southwest Kansas       |                    
|                         | Montana                |                    
|                         |                        |                    
|                         |                        | Total              
|                         |                        |                    
|Canada                   |                        |                    
|                         | Alberta                |                    
|                         | Saskatchewan           |                    
|                         |                        |                    
|                         |                        | Total              
|                         |                        |                    
|                         |                        |                    
|                         |                        |                    
|United States and Canada |                        | 282                
|                         |                        |                    

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DRILLING ACTIVITY

The Company engages in exploratory and developmental drilling on its own and in association with other oil and gas companies. The following table sets forth the
wells drilled for the years ended December 31, 2001, 2000 and 1999.

|               |             | United States(1)  |       | Canada(2)
|-------------- | ----------- | ----------------- | ----- | ---------
|
|Gross wells(3) |             |                   |       |          
|               | Development |                   |       |          
|               |             | Natural gas       |       | 6        
|               |             | Oil               |       | 7        
|               |             | Non-productive(4) |       |         
|               |             |                   |       |          
|               |             |                   | Total |          
|               |             |                   |       |          
|               | Exploratory |                   |       |          
|               |             | Natural gas       |       | 16       
|               |             | Oil               |       | 3        
|               |             | Non-productive    |       | 3        
|               |             |                   |       |          
|               |             |                   | Total |          
|               |             |                   |       |          
|Net wells(5)   |             |                   |       |          
|               | Development |                   |       |          
|               |             | Natural gas       |       | 4.7      
|               |             | Oil               |       | 2.5      
|               |             | Non-productive    |       |         
|               |             |                   |       |          
|               |             |                   | Total |          
|               |             |                   |       |          
|               | Exploratory |                   |       |          
|               |             | Natural gas       |       | 10.1     
|               |             | Oil               |       | 2.5      
|               |             | Non-productive    |       | 2.5      
|               |             |                   |       |          
|               |             |                   | Total |          
|               |             |                   |       |          

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At
December 31, 2001, the Company was participating in the drilling of three gross (2.0 net) wells in Canada.

DEVELOPED AND UNDEVELOPED ACREAGE

The following table sets forth the leasehold acreage held by the Company at December 31, 2001.

|              |                            | Developed Acreage(1) |        | Undeveloped Acreage(2)
|------------- | -------------------------- | -------------------- | ------ | ----------------------
|
|United States |                            |                      |        |                       
|              | Permian Basin              |                      | 17,361 |                       
|              | Piceance and Uintah Basins |                      | 38,048 |                       
|              | Southwest Kansas           |                      | 4,280  |                       
|              | Montana                    |                      | 40     |                       
|              | Wyoming                    |                      | 2,354  |                       
|              |                            |                      |        |                       
|              |                            | Total                |        | 62,083                
|              |                            |                      |        |                       
|Canada        |                            |                      |        |                       
|              | Alberta                    |                      | 35,680 |                       
|              | Saskatchewan               |                      | 1,520  |                       
|              |                            |                      |        |                       
|              |                            | Total                |        | 37,200                
|              |                            |                      |        |                       

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MARKETING

The Company sells all of its natural gas, oil and natural gas liquids production from wells that it operates. The Company's oil and natural gas production is
generally sold to end users, marketers, refineries and other purchasers.

The
Company generally enters into short-term gas sales contracts for the sale of natural gas from its properties. As of December 31, 2001, the Company did not have any
commitments to natural gas sales contracts that had fixed prices or price ceilings. The Company is typically paid on an index basis, net of
transportation charges incurred by the buyer. As of December 31, 2001, the Company has entered into various natural gas transportation agreements in Canada. The Company typically assigns these
transportation agreements to a buyer of the Company's production during the term of the natural gas sales contract between the Company and the buyer. The rights and obligations under these
transportation agreements will revert back to the Company upon expiration of the natural gas sales contracts.

In
the United States, oil is typically sold under contracts extending up to a year at prices based upon fluctuating monthly market postings, which generally approximates the price of
West Texas Intermediate crude oil adjusted to reflect transportation costs and quality. In Canada, oil and natural gas liquids are typically sold under short-term contracts at market
prices based upon posted prices at Alberta and Saskatchewan adjusted to reflect transportation costs and quality.

For
information regarding major purchasers of the Company's oil and natural gas, see Note 8 to the Consolidated Financial Statements.

COMPETITION

The oil and natural gas industry is highly competitive. The Company encounters competition from other oil and natural gas companies including major oil companies,
other independent oil and natural gas concerns and individual producers and operators for the acquisition of producing properties and exploration and development prospects. The Company also competes
with other oil and natural gas companies in attempting to secure drilling rigs and other equipment necessary for drilling and completion of wells. The Company competes with a large number of companies
having substantially larger technical staffs and greater financial and operational resources. The ability of the Company to increase reserves in the future will be dependent on its ability to generate
successful prospects on its existing lands, to acquire producing properties and to acquire additional leases and prospects for future development and exploration.

TITLE TO PROPERTIES

Title to the Company's properties is subject to royalty, overriding royalty, carried, net profits, working and similar interests customary in the oil and gas
industry. The Company's properties may also be subject to liens incident to operating agreements, as well as other customary encumbrances, easements and restrictions and for current taxes not yet due.
For acquisitions of properties, the Company will conduct a title examination on all material properties. Prior to the commencement of drilling operations, a title examination and, if necessary,
curative work will be performed. The methods of title examination adopted by the Company are reasonable in the opinion of management and are designed
to insure that production from its properties, if obtained, will be salable for the account of the Company.

GOVERNMENT REGULATION

United States

The Company's United States operations are regulated at the federal, state and local levels. Natural gas and oil exploration, development, production and
marketing activities are subject to various laws and regulations which may be periodically changed for a variety of political, economical and other reasons.

In
the past, the federal government has regulated the prices at which oil and natural gas could be sold. The Natural Gas Wellhead Decontrol Act of 1989 removed all price controls
affecting producing wellhead sales effective January 1, 1993. While sales by producers of oil, natural gas, and natural gas liquids can currently be made at uncontrolled market prices, Congress
could reenact price controls in the future. The Company's natural gas sales are affected by regulation of intrastate and interstate transportation. In recent years the Federal Energy Regulatory
Commission (FERC) has issued a series of orders that has increased competition by, among other things, removing the transportation barriers to market access. These orders have had a significant impact
upon gas markets in the United States and have fostered the development of a large spot market for gas and increased competition for gas markets. As a result of the FERC orders, producers can access
gas markets directly but face increased competition for these markets. The Company believes that these changes have generally improved the Company's access to transportation and has enhanced the
marketability of its natural gas production. To date the Company believes it has not experienced any material adverse effects as a result of these FERC orders; however the Company cannot predict what
new regulations may be adopted by FERC and other regulatory authorities and the effect, if any, subsequent regulations may have on the Company.

The
Company's oil and natural gas operations are regulated by administrative agencies under statutory provisions of the states where such operations are conducted and by certain agencies
of the Federal government for operations on federal oil and gas leases. All of the jurisdictions in which the Company owns or operates producing oil and natural gas properties have statutory
provisions regulating the exploration for and production of crude oil and natural gas. These statutes include the regulation of the size of drilling and spacing units and the number of wells which may
be drilled in an area and the unitization or pooling of oil and natural gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells,
typically prohibit the venting or flaring of natural gas, and impose certain requirements regarding the apportionment of production from fields
and individual wells. The effect of these regulations may limit the amount of oil and natural gas the Company can produce from its wells and to limit the number of wells or location at which the
Company can drill. State commissions establish rules for reclamation of sites, plugging bonds, reporting and other matters.

Increasingly,
a number of city and county governments have enacted oil and natural gas regulations which have increased the involvement of local governments in the permitting of oil and
natural gas operations and impart additional restrictions or conditions on the conduct of operators to mitigate the impact of operations on the local community. These local restrictions have the
potential to delay and increase the cost of oil and natural gas operations.

Canada

The oil and natural gas industry in Canada is subject to extensive controls and regulations imposed by various levels of government. Federal authorities do not
regulate the price of oil and gas in export trade but instead rely on market forces to establish these prices. Legislation exists that regulates the quantities of oil and natural gas which may be
removed from the provinces and exported from Canada. The Company does not expect that any of these controls and regulations will affect the Company in a manner significantly different than other oil
and natural gas companies of similar size.

The
provinces in which the Company operates have legislation and regulation which govern land tenure, royalties, production rates and environmental protection. The royalty regime in the
provinces in which the Company operates is a significant factor in the profitability of the Company's production. Crown royalties are determined by government regulation and are typically calculated
as a percentage of the value of production. The value of the production and the rate of royalties payable depends on prescribed reference prices, well productivity, geographical location and the type
or quality of the product produced.

In
Alberta, the Company is entitled to a credit against Crown royalties on most of the properties in which the Company has an interest in by virtue of the Alberta Royalty Tax Credit
(ARTC). The credit is determined by applying a rate to a maximum of CDN $2.0 million of Crown royalties payable in Alberta for each company or associated group of companies. The rate is a
function of the royalty tax credit par prices which is determined quarterly by the Alberta Department of Energy. The rate ranges from 25% to 75% depending upon petroleum prices for the previous
quarter.

ENVIRONMENTAL REGULATION

United States

The Company, as a lessee and operator of natural gas and oil properties, is subject to various federal, state and local laws and regulations in the United States
that provide for restriction and prohibition on releases or emissions of various substances produced in association with certain oil and gas industry operations which can affect the location of wells
and facilities and can determine the extent to which exploration and development is permitted. In addition, legislation requires that well and facility sites and access be abandoned and reclaimed to
the satisfaction of federal or state authorities, as applicable. These laws and regulations may, among other things, impose liability and penalties on the lessee for the cost of pollution cleanup resulting from operations, subject the lessee to liability for pollution damages, require suspension or cessation of operations in affected areas, and impose
restrictions on the injection of liquids into subsurface aquifers that may contaminate ground water.

The
Company has made, and will continue to make, expenditures in its efforts to comply with environmental regulations. The Company believes it is in compliance with applicable
environmental laws and regulations in effect and that continued compliance with existing requirements will not have a material adverse impact on the Company. The Company has not been notified of, nor
has any knowledge of any existing or pending environmental claims. Changes in existing environmental laws or the adoption of new environmental laws could have the potential to adversely affect the
Company's operations. In connection with the Company's acquisition of BFC, environmental assessments of BFC's oil and gas properties were performed. No material noncompliance or clean-up
liabilities requiring action were discovered. However, environmental assessments were performed on only a percentage of the Company's properties according to the value of the properties established at
the time of acquisition. The Company believes that it is reasonably likely that the trend in environmental legislation and regulation will continue toward stricter standards. No assurance can be given
as to future capital expenditures which may be required for compliance with prospective environmental regulations.

Canada

In Canada, the oil and natural gas industry is currently subject to environmental regulations pursuant to provincial and federal legislation. Environmental
legislation provides for restrictions on releases or emissions of various substances produced or utilized in association with certain oil and gas industry operations. In addition, legislation requires
that well and facility sites be abandoned and reclaimed to the satisfaction of provincial authorities. A breach of such regulations may result in the imposition of fines and penalties, the suspension
of operations and potential civil liability. The Environmental Protection and Enhancement Act imposes environmental standards and requires compliance with various legislative criteria including
reporting and monitoring in Alberta. The Alberta Energy and Utility Board, pursuant to its governing legislation, also plays a role with respect to the regulation of environmental impacts of oil and
gas activities.

OPERATING HAZARDS

The oil and gas industry involves a variety of operating risks including the risk of fire, explosion, blow-outs, pipe failure, casing collapse,
abnormally pressured formations, and environmental hazards such as oil spills, gas leaks, ruptures and discharge of toxic substances. The occurrence of any of these events might result in substantial
losses to the Company due to injury and loss of life, severe damage to and destruction of property and natural resources and investigation and penalties and suspension of operations. The Company
maintains insurance against some, but not all, potential risks. There can be no assurance that any such insurance that is obtained will be adequate to cover all losses or exposure for liability.
Furthermore, the Company cannot predict whether such insurance will continue to be available at premium levels that justify its purchase.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor its subsidiaries are engaged in any material legal proceedings.

The
Company was the plaintiff in Bonneville Fuels Corporation vs. Williams Production RMT Company, brought in District Court of Garfield County, Colorado. Bonneville claimed oil and gas
leasehold interests reserved pursuant to an assignment between Bonneville and a third party, subsequently acquired by Williams Production RMT Company. Bonneville also sought damages for breach of the
operating agreement governing the lands in question. On March 7, 2002, the Court denied Bonneville's claims.

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

None.





PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

On February 24, 2000, Carbon Energy shares began trading on the American Stock Exchange under the trading symbol CRB. The Company's equity securities
consist of common stock with no par value. The range of the high and low closing prices for each quarterly period since the Company's common stock has traded is as follows:

Quarter Ended

High

LowMarch 31, 2001

$
8.80

$
6.81June 30, 2001


12.31


8.80September 30, 2001


9.90


8.20December 31, 2001


9.59


8.60March 31, 2000

$
6.50

$
5.88June 30, 2000


5.88


5.50September 30, 2000


6.56


5.50December 31, 2000


6.75


5.63


On
March 22, 2002, the closing price of the common stock was $8.40. There were approximately 40 holders of record of the common stock and 6.1 million shares outstanding.

The
Company has not paid dividends on its common stock since inception and does not anticipate doing so in the future. Future payments of dividends, if any, will depend on the Company's
earnings, capital requirements, loan restrictions, financial condition and other relevant factors. There is no assurance that the Company will ever pay dividends.

ITEM 6. SELECTED FINANCIAL DATA

The table below sets forth selected historical financial and operating data for Carbon and its predecessor, BFC, as of or for each of the years in the
five-year period ended December 31, 2001. For 1999, the table presents the activities of the Company for November and December 1999 (the Company's operating activities prior
to November 1, 1999 were minimal) and Carbon's predecessor, BFC, for the period January through October 1999, and a pro forma presentation for the combined operating and cash flow data
for the year ended December 31, 1999. The twelve month figures as of or for the years ended December 31, 1997 and 1998 are for Carbon's predecessor, BFC. Future results may differ
substantially from historical results because of changes in oil and natural gas prices, production increases or declines and other factors. This information should be read in conjunction with the
financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations," presented elsewhere herein. Please see Note 7 and
Note 12 to the Consolidated Financial Statements for information on geographic segments and quarterly data for 2001 and 2000.

|                    |                                                 |         |   |         |      |   |        | As of or
for the
Two Months
Ended
December 31,
1999 |   | As of or
for the
Ten Months
Ended
October 31,
1999 |     |   |         |       |  
|------------------- | ----------------------------------------------- | ------- | - | ------- | ---- | - | ------ | --------------------------------------------------- | - | -------------------------------------------------- | --- | - | ------- | ----- | -
|
|
|
|Operating Data:     |                                                 |         |   |         |      |   |        |                                                     |   |                                                    |     |   |         |       |  
|                    | Revenues                                        |         | $ | 21,955  |      | $ | 16,603 |                                                     | $ | 10,299                                             |     | $ | 1,775   |       | $
|                    | Net earnings (loss)                             |         |   | 1,573   |      |   | 1,456  |                                                     |   | 147                                                |     |   | (491    | )     |  
|                    | Earnings (loss) per share:                      |         |   |         |      |   |        |                                                     |   |                                                    |     |   |         |       |  
|                    |                                                 | Basic   |   | $       | 0.26 |   | $      | 0.25                                                |   |                                                    | n/a |   | $       | (0.12 | )
|                    |                                                 | Diluted |   |         | 0.25 |   |        | 0.25                                                |   |                                                    | n/a |   |         | (0.12 | )
|Cash Flow Data:     |                                                 |         |   |         |      |   |        |                                                     |   |                                                    |     |   |         |       |  
|                    | Cash provided by (used in) operating activities |         | $ | 14,232  |      | $ | 3,755  |                                                     | $ | (713                                               | )   | $ | 999     |       | $
|                    | Cash used in investing activities               |         |   | (17,297 | )    |   | (8,266 | )                                                   |   | (28,841                                            | )   |   | (24,110 | )     |  
|                    | Cash provided by financing activities           |         |   | 3,089   |      |   | 3,526  |                                                     |   | 28,056                                             |     |   | 24,106  |       |  
|                    | EBITDA(1)                                       |         |   | 10,734  |      |   | 8,763  |                                                     |   | 3,483                                              |     |   | 239     |       |  
|Balance Sheet Data: |                                                 |         |   |         |      |   |        |                                                     |   |                                                    |     |   |         |       |  
|                    | Total assets                                    |         | $ | 62,368  |      | $ | 62,480 |                                                     |   | n/a                                                |     | $ | 39,298  |       | $
|                    | Working capital                                 |         |   | (5,051  | )    |   | (267   | )                                                   |   | n/a                                                |     |   | 232     |       |  
|                    | Long-term debt                                  |         |   | 17,870  |      |   | 15,082 |                                                     |   | n/a                                                |     |   | 9,100   |       |  
|                    | Stockholders' equity                            |         |   | 33,854  |      |   | 32,235 |                                                     |   | n/a                                                |     |   | 24,315  |       |  

---





ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The financial statements and related notes thereto included elsewhere herein are those of the Company and its predecessor, BFC. The following discussion should be
read in conjunction with the financial statements and notes thereto.

RESULTS OF OPERATIONSCOMPARISON OF 2001 RESULTS TO 2000

The following table and the discussion that follows present comparative revenue, sales volumes, average sales prices, expenses and the percentage change between
periods for the years ended December 31, 2001 and 2000. The Company's Canadian operations were established in February 2000 through an exchange offer of Carbon shares for shares of CEC.
The results for the Company's Canadian operations for 2000 in the following table are pro forma to reflect the acquisition of CEC as if it had occurred on January 1, 2000. No other adjustments
from reported net income were made in the preparation of this schedule.

|                                         |                                    | United States
For the Year Ended
December 31, |       | Canada
For the Year Ended
December 31, |       
|---------------------------------------- | ---------------------------------- | --------------------------------------------- | ----- | -------------------------------------- | ------
|
|
|Revenues:                                |                                    |                                               |       |                                        |       
|                                         | Oil and gas revenues               |                                               | $     | 10,341                                 |       
|                                         | Marketing and other, net           |                                               |       | 532                                    |       
|                                         |                                    |                                               |       |                                        |       
|                                         |                                    | Total revenues                                |       |                                        | 10,873
|Daily sales volumes:                     |                                    |                                               |       |                                        |       
|                                         | Natural gas (MMcf)                 |                                               |       | 7.7                                    |       
|                                         | Oil and liquids (Bbl)              |                                               |       | 222                                    |       
|                                         | Equivalents production (MMcfe 6:1) |                                               |       | 9.0                                    |       
|Average price realized:                  |                                    |                                               |       |                                        |       
|                                         | Natural gas (Mcf)                  |                                               | $     | 2.94                                   |       
|                                         | Oil and liquids (Bbl)              |                                               |       | 25.49                                  |       
|Direct lifting costs                     |                                    | $                                             | 1,654 |                                        | $     
|Average direct lifting costs/Mcfe        |                                    |                                               | 0.50  |                                        |       
|Other production costs                   |                                    |                                               | 1,901 |                                        |       
|General and administrative, net          |                                    |                                               | 2,767 |                                        |       
|Depreciation, depletion and amortization |                                    |                                               | 3,536 |                                        |       
|Interest expense, net                    |                                    |                                               | 653   |                                        |       
|Income tax provision                     |                                    |                                               | 135   |                                        |       

Revenues
for oil and gas sales of BFC for the year ended December 31, 2001 were $10.3 million, a 6% decrease from 2000. The decrease was due primarily to decreased natural
gas sales and natural production declines in all operating areas partially offset by increased oil production and increased oil and gas prices.

Revenues
for oil, liquids and gas sales of CEC for the year ended December 31, 2001 were $11.1 million, an increase of 86% from 2000. The increase was due primarily to
increased oil, liquids and gas production and higher gas prices.

BFC's
average production for the year ended December 31, 2001 was 222 barrels of oil per day and 7.7 million cubic feet (MMcf) of gas per day, a decrease of 13% from 2000
on a Mcf equivalent (Mcfe) basis where one barrel of oil is equal to six Mcf of gas. In January 2001, the Company divested its entire working interests and related leasehold rights in the San
Juan Basin. Exclusive of this disposition, the Company would have increased its production for the year ended December 31, 2001 compared to 2000 by 4% on an Mcfe basis. The increase in
production was due to successful drilling activities conducted during 2001 in the Piceance and Permian Basins, offset by natural production declines in all operating areas. For the year ended
December 31, 2001, the Company participated in the drilling of 35 gross and 22.3 net wells compared to 15 gross and 6.7 net wells during 2000.

CEC's
average production for the year ended December 31, 2001 was 161 barrels of oil and liquids per day and 6.6 MMcf of gas per day, an increase of 62% from 2000 on an Mcfe
basis. The increase was due primarily to successful drilling and recompletion activities in the Carbon and Rowley areas of Central Alberta. For the year ended December 31, 2001, the Company
participated in the drilling of 11 gross and 10.5 net wells compared to eight gross and 4.9 net wells in 2000.

Average
oil prices realized by BFC increased 11% from $23.03 per barrel for the year ended December 31, 2000 to $25.49 for 2001. The average oil price includes hedge gains of
$25,000 for the year ended December 31, 2001 compared to hedge losses of $414,000 for 2000. Average natural gas prices realized by BFC increased 5% from $2.80 per Mcf for the year ended
December 31, 2000 to $2.94 per Mcf for 2001. The average natural gas price includes hedge losses of $1.5 million for the year ended December 31, 2001 compared to hedge losses of
$2.6 million for 2000.

Average
oil and liquids prices realized by CEC decreased 7% from $23.33 per barrel for the year ended December 31, 2000 to $21.76 for 2001. The average oil and liquids price
includes hedge gains of $33,000 for the year ended December 31, 2001 compared to hedge losses of $186,000 for 2000. Average natural gas prices realized by CEC increased 21% from $3.34 per Mcf
for the year ended December 31,
2000 to $4.05 for 2001. The average natural gas price includes hedge losses of $571,000 for the year ended December 31, 2001 compared to hedge losses of $987,000 for 2000.

Net
marketing and other revenues for BFC increased 117% from $245,000 for the year ended December 31, 2000 to $532,000 for 2001. This increase was primarily due to
mark-to-market gains of $1.2 million on a derivative contract that did not qualify for hedge accounting treatment under provisions of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." In conjunction with the adoption of SFAS No. 133, on January 1, 2001, the Company
recorded a derivative loss (net of tax) of $1.5 million as the cumulative effect of a change in accounting principle related to this derivative contract. For additional information see
Note 1 to the Consolidated Financial Statements. The increase in the mark-to-market gains of $1.2 million was partially offset by a $625,000 write off of an
outstanding account receivable related to sales of the Company's gas production. The counterparty to this sales transaction has filed for Chapter 11 bankruptcy protection and the Company is currently
pursuing its available options regarding collection of this account. In addition, during the fourth quarter of 2001, the Company wrote off all outstanding oil and gas hedges with Enron North America
(Enron). The write off reduced before tax earnings by $328,000, consisting of $82,000 related to oil and gas hedge contracts that had settled prior to Enron's Chapter 11 filing and $246,000 related to
contracts that would have settled in 2002. The Company expects to reclassify as an increase to earnings $246,000 ($153,000 after tax) of net unrealized hedging gains related to these Enron positions
from other comprehensive income during the next twelve months.

Direct
lifting costs incurred by BFC were $1.7 million or $.50 per Mcfe for the year ended December 31, 2001 compared to $1.6 million or $.42 per Mcfe for 2000. The
per Mcfe increase was primarily due to well and equipment repairs in the Permian and Piceance Basins performed in 2001.

Other
production costs incurred by BFC consisting primarily of severance taxes and production overhead were $1.9 million for the year ended December 31, 2001 compared to
$2.2 million for 2000. The decrease was primarily due to lower severance taxes due to declines in gas production.

Direct
lifting costs incurred by CEC were $1.6 million or $.58 per Mcfe for the year ended December 31, 2001 compared to $873,000 or $.50 per Mcfe for 2000. The increase
was primarily due to increased compression costs in the Company's Carbon area which contributed to a corresponding increase in gas production.

General
and administrative expenses incurred by BFC, net of overhead reimbursements, increased 39% from $2.0 million for the year ended December 31, 2000 to
$2.8 million for 2001. The increase was primarily due to a reduction in overhead reimbursements as a result of the sale of the Company's San Juan Basin properties, salary increases, personnel
additions and increased consulting costs in conjunction with the Company's higher level of capital expenditures and legal expenses related to the
case of Bonneville Fuels Corporation vs. Williams Production RMT Company. For more information regarding this case, see Item 3, Legal Proceedings, to the Form 10-K.

General
and administrative expenses incurred by CEC, net of overhead reimbursements, increased 26% from $1.4 million for the year ended December 31, 2000 to
$1.7 million for 2001. The increase was primarily due to salary increases, personnel additions and increased consulting costs in conjunction with the Company's higher level of capital
expenditures.

Interest
expense incurred by BFC decreased 29% from $917,000 for the year ended December 31, 2000 to $653,000 for 2001. The decrease was due primarily to a reduction in average
debt balances throughout 2001 as a result of proceeds received from the divestiture of the Company's San Juan Basin properties, decreased margin deposits related to the Company's derivative positions
and a decrease in interest rates, partially offset by increased funding requirements for capital expenditures.

Interest
expense incurred by CEC decreased 12% from $208,000 for the year ended December 31, 2000 to $183,000 for 2001. The decrease was due primarily to a reduction in debt as a
result of increased cash flow from operating activities and a decline in interest rates, partially offset by increased funding requirements for capital expenditures.

Depreciation,
depletion and amortization (DD&A) of oil and gas assets is determined based upon the units of production method. This expense is typically dependent upon historical
capitalized costs incurred to find, develop and recover oil and gas reserves. However, the Company's current DD&A rate is determined primarily by the purchase price the Company allocated to oil and
gas properties in connection with its acquisition of BFC and CEC and the proved reserves the Company acquired in the acquisitions. For information regarding full cost accounting and DD&A, see
Note 1 to the Consolidated Financial Statements.

DD&A
expense incurred by BFC decreased 13% from $4.0 million for the year ended December 31, 2000 to $3.5 million for 2001. The decrease was due primarily to
decreased production. DD&A was $1.07 per Mcfe for the years ended December 31, 2001 and 2000.

DD&A
expense incurred by CEC increased 59% from $1.7 million for the year ended December 31, 2000 to $2.7 million for 2001. The increase resulted primarily from
increased production. DD&A expense was $.98 per Mcfe for the year ended December 31, 2000 compared to $.97 per Mcfe for 2001.

Income
tax expense incurred by BFC was $135,000 for the year ended December 31, 2001, an effective rate of 37%. This compares to income tax expense of $44,000 or an effective rate
of 8% for 2000. The effective rate in 2000 was the result of a reversal of valuation allowance of $192,000.

Income
tax expense incurred by CEC was $2.0 million for the year ended December 31, 2001 compared to $681,000 for 2000. The effective rate was 40% for both years.

RESULTS OF OPERATIONSCOMPARISON OF 2000 RESULTS TO 1999

The following table and the discussion that follows present comparative pro forma revenue, sales volumes, average sales prices, expenses and the percentage change
between periods for the years ended December 31, 2000 and 1999. For 1999, the U.S. pro forma results are for the activities of the Company for November and December 1999 (the Company's
operating activities prior to November 1, 1999 were minimal) and Carbon's predecessor, BFC, for the period January through October 1999. For 1999, the Canadian pro forma results are the
results of CEC prior to the acquisition of CEC by the Company. No other adjustments from reported net income were made in the preparation of this schedule.

|                                         |                                    | United States
For the Year Ended
December 31, |       | Canada
For the Year Ended
December 31, |       
|---------------------------------------- | ---------------------------------- | --------------------------------------------- | ----- | -------------------------------------- | ------
|
|
|Revenues:                                |                                    |                                               |       |                                        |       
|                                         | Oil and gas revenues               |                                               | $     | 11,054                                 |       
|                                         | Marketing and other, net           |                                               |       | 245                                    |       
|                                         |                                    |                                               |       |                                        |       
|                                         |                                    | Total revenues                                |       |                                        | 11,299
|Daily sales volumes:                     |                                    |                                               |       |                                        |       
|                                         | Natural gas (MMcf)                 |                                               |       | 9.2                                    |       
|                                         | Oil and liquids (Bbl)              |                                               |       | 190                                    |       
|                                         | Equivalents production (MMcfe 6:1) |                                               |       | 10.3                                   |       
|Average price realized:                  |                                    |                                               |       |                                        |       
|                                         | Natural gas (Mcf)                  |                                               | $     | 2.80                                   |       
|                                         | Oil and liquids (Bbl)              |                                               |       | 23.03                                  |       
|Direct lifting costs                     |                                    | $                                             | 1,602 |                                        | $     
|Average direct lifting costs/Mcfe        |                                    |                                               | 0.42  |                                        |       
|Other production costs                   |                                    |                                               | 2,172 |                                        |       
|General and administrative, net          |                                    |                                               | 1,989 |                                        |       
|Depreciation, depletion and amortization |                                    |                                               | 4,042 |                                        |       
|Exploration and impairment expense       |                                    |                                               |      |                                        |       
|Interest expense, net                    |                                    |                                               | 917   |                                        |       
|Income tax provision (benefit)           |                                    |                                               | 44    |                                        |       

Revenues
for oil and gas sales of BFC for the year ended December 31, 2000 were $11.1 million, a 16% increase from 1999. The increase was due primarily to
increased oil and gas prices partially offset by natural production declines in all operating areas.

Revenues
for oil, liquids and gas sales of CEC for the year ended December 31, 2000 were $5.9 million, a 73% increase from 1999. The increase was due primarily to increased
oil, liquids and gas production and higher oil, liquids and gas prices.

BFC's
average production for the year ended December 31, 2000 was 190 barrels of oil per day and 9.2 million cubic feet (MMcf) of gas per day, a decrease of 16% from 1999
on a Mcf equivalent (Mcfe) basis where one barrel of oil is equal to six Mcf of gas. The decrease was due primarily to natural production declines on existing properties partially offset by new gas
well connections in Utah. Successful drilling activities in the Permian Basin resulted in increased oil production during the fourth quarter of 2000. For the year ended December 31, 2000, the
Company participated in the drilling of 15 gross and 6.7 net wells compared to 13 gross and 7.1 net wells during 1999.

CEC's
average production for the year ended December 31, 2000 was 122 barrels of oil and liquids per day and 4.0 MMcf of gas per day, an increase of 18% from 1999 on an Mcfe
basis. The increase was due primarily to acquisitions, successful well drilling activities and optimization of the Company's natural gas gathering and compression facilities, primarily in the Carbon and Rowley areas of
Central Alberta. For the year ended December 31, 2000, the Company participated in the drilling of eight gross and 4.9 net wells. CEC did not have any drilling activity in 1999.

Average
oil prices realized by BFC increased 32% from $17.44 per barrel for the year ended December 31, 1999 to $23.03 for 2000. The average oil price includes hedge losses of
$414,000 for the year ended December 31, 2000. There was no oil hedge activity for 1999. Average natural gas prices realized by BFC increased 35% from $2.07 per Mcf for the year ended
December 31, 1999 to $2.80 per Mcf for 2000. The average natural gas price includes hedge losses of $2.6 million for the year ended December 31, 2000 compared to hedge losses of
$65,000 for 1999.

Average
oil and liquids prices realized by CEC increased 29% from $18.08 per barrel for the year ended December 31, 1999 to $23.33 for 2000. The average oil and liquids price
includes hedge losses of $186,000 for the year ended December 31, 2000. There was no oil hedge activity for 1999. Average natural gas prices realized by CEC increased 53% from $2.18 per Mcf for
the year ended December 31, 1999 to $3.34 for 2000. The average natural gas price includes hedge losses of $977,000 for the year ended December 31, 2000 compared to hedge losses of
$216,000 for 1999.

Net
marketing and other revenues for BFC decreased 67% from $742,000 for the year ended December 31, 1999 to $245,000 for 2000. The decrease is primarily due to decreased levels
of activity and margins on the marketing of third party natural gas and a pipeline imbalance reconciliation recorded by BFC in 1999.

Direct
lifting costs incurred by BFC were $1.6 million or $.42 per Mcfe for the year ended December 31, 2000 compared to $1.5 million or $.34 per Mcfe for 1999. The
per Mcfe increase was related to operating approximately the same number of wells with lower production per well. Compared to the year ended December 31, 1999, BFC saw an increase in well
service costs due to vendor price increases. This increase was partially offset by well workover expenses incurred during 1999.

Other
production costs incurred by BFC consisting primarily of severance taxes and production overhead were $2.2 million for the year ended December 31, 2000 compared to
$1.9 million for 1999. The increase was primarily due to higher severance taxes due to increased oil and gas prices, partially offset by a reduction in production.

Direct
lifting costs incurred by CEC were $873,000 or $.50 per Mcfe for the year ended December 31, 2000 compared to $575,000 or $.39 per Mcfe for 1999. The per Mcfe increase was
primarily due to credits received by CEC in 1999 for gas processing fees related to prior periods and increases in well service costs due to vendor price increases.

Exploration
and impairment expense was recorded by the Company's predecessor, BFC, under the successful efforts method of accounting and consists primarily of unsuccessful drilling and
geological and geophysical costs. Effective as of the date of the acquisition of BFC, Carbon utilizes the full cost method of accounting. Under this method, all exploration costs associated with
continuing efforts to acquire or review prospects and outside geological and seismic consulting work are capitalized.

General
and administrative expenses incurred by BFC, net of overhead reimbursements, decreased 22% from $2.6 million for the year ended December 31, 1999 to
$2.0 million for 2000. The decrease was due primarily to expenses incurred during 1999 of approximately $1.0 million for severance payments incurred as a result of the acquisition of BFC
by Carbon. This decrease was partially offset by costs related to a change in the location of the administrative office of the Company and costs for reporting, printing and regulatory filings relating
to the Company being a publicly held company in 2000. In addition, during 1999, BFC reversed $95,000 of an employee retention bonus accrued in 1998 due to the pending sale of the company to Carbon.

General
and administrative expenses incurred by CEC, net of overhead reimbursements decreased 9% from $1.5 million for the year ended December 31, 1999 to
$1.4 million for 2000. The decrease was due primarily to a change in location of certain administrative functions of the Company from Calgary, Alberta to Denver, Colorado.

Interest
expense incurred by BFC increased 65% from $556,000 for the year ended December 31, 1999 to $917,000 for 2000. The increase was due primarily to increased borrowings to
maintain margin requirements on certain of the Company's derivative positions.

Interest
expense incurred by CEC increased 28% from $163,000 for the year ended December 31, 1999 to $208,000 for 2000. The increase was due primarily to increased borrowings for
acquisitions, drilling and development activity.

Depreciation,
depletion and amortization (DD&A) of oil and gas assets is determined based upon the units of production method. This expense is typically dependent upon historical
capitalized costs incurred to find, develop and recover oil and gas reserves. However, the Company's current DD&A rate is determined primarily by the purchase price the Company allocated to oil and
gas properties in connection with its acquisition of BFC and CEC and the proved reserves the Company acquired in the acquisitions.

DD&A
expense incurred by BFC increased 49% from $2.7 million for the year ended December 31, 1999 to $4.0 million for 2000. The increase was due primarily to
increased property costs recorded as a result of the acquisition of BFC. DD&A expense was $.61 per Mcfe for the year ended December 31, 1999 compared to $1.07 per Mcfe for 2000.

DD&A
expense incurred by CEC increased 12% from $1.5 million for the year ended December 31, 1999 to $1.7 million for 2000. The increase resulted primarily from
increased production. DD&A expense was $1.03 per Mcfe for the year ended December 31, 1999 compared to $.98 per Mcfe for 2000.

Income
tax expense incurred by BFC was $44,000 for the year ended December 31, 2000, an effective rate of 8%. The effective rate in 2000 was the result of a reversal of a
valuation allowance of $192,000. BFC did not record a provision for income taxes in 1999.

Income
tax expense incurred by CEC was $681,000 for the year ended December 31, 2000 an effective rate of 40%. This compares to an income tax benefit of $206,000 for 1999.

EFFECTS OF CHANGING PRICES

The U.S. economy experienced considerable inflation during the late 1970's and early 1980's but in recent years inflation has been fairly stable at relatively low
levels. Changing prices, or a change in the dollar's purchasing power, distorts the traditional measures of financial performance which are generally expressed in terms of the actual number of dollars
exchanged and do not take into account changes in the purchasing power of the monetary unit. This results in the reporting of many transactions over an extended period as though the dollars received
or expended were of common value, which does not accurately portray financial performance.

Inflation,
as well as a recessionary period, can cause significant swings in the interest rates that companies pay on bank borrowings. These factors are anticipated to continue to affect
the Company's operations both positively and negatively for the foreseeable future.

Oil
and gas prices fluctuate over time as a function of market economics. Refer to the price change tables in the discussions "Results of OperationsComparison of 2001
results to 2000, and 2000 results to 1999" for information on product price fluctuation over the past three years. These tables depict the effect of changing prices on the revenue stream of the
Company and its predecessor, BFC.

Operating
expenses have been relatively stable but are a critical component of profitability since they represent a larger percentage of revenues when lower product prices prevail.
Competition in the industry can significantly affect the cost of acquiring leases, although in recent years this factor has been less important as more operators have withdrawn from active exploration
programs.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, the Company had $62.4 million of assets. Total capitalization was $51.7 million, consisting of 65% of stockholders'
equity and 35% of debt.

U.S. FacilityThe Company's credit facility is an oil and gas reserve based line-of-credit with Wells
Fargo Bank West National Association (Wells Fargo) and had a borrowing base of $20.0 million with outstanding borrowings of $15.6 million at December 31, 2001. The facility is
secured by certain U.S. oil and gas properties of the Company and is scheduled to convert to a term note on October 1, 2002. The Company is currently in negotiations with Wells Fargo to extend
the revolving phase of the facility. However, there can be no guarantee that the Company will be able to successfully negotiate such an extension. This facility is scheduled to have a maturity date of
either the economic half life of the Company's remaining U.S. based reserves on the last day of the revolving period, or October 1, 2006, whichever is earlier. Subject to possible changes in
the borrowing base, Wells Fargo has agreed that it will not require the Company to make any principal payments under the term loan section of the facility until January 2003 at the earliest. As
such, no amounts under the Wells Fargo facility have been classified as current in the December 31, 2001 balance sheet. The facility bears interest at a rate equal to LIBOR plus 1.75% or Wells
Fargo Prime, at the option of the Company. The Company's average borrowing rate was approximately 3.9% at December 31, 2001. The borrowing base is based upon the lender's evaluation of the
Company's proved oil and gas reserves, generally determined semi-annually.

The
credit agreement contains various covenants, which prohibit or limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, sell properties or merge
with another entity.
The Company is also required to maintain certain financial ratios. The Company was in compliance with all debt covenants at December 31, 2001 and throughout 2001.

Canadian FacilityIn June 2001, the Company secured an increase to approximately $9.0 million from approximately
$4.1 million in the borrowing base of its facility with the Canadian Imperial Bank of Commerce (CIBC). Outstanding borrowings against the facility were $2.3 million at
December 31, 2001. The Canadian facility is secured by the Canadian oil and gas properties of the Company. The revolving phase of the Canadian facility expires on March 31, 2002. The
Company is currently in negotiations with CIBC to extend the revolving phase to April 1, 2003. However, there can be no guarantee that the Company will be able to successfully negotiate such an
extension. If the revolving commitment is not renewed, the loan will be converted into a term loan and will be reduced by consecutive monthly payments over a period not to exceed 24 months.
Subject to possible changes in the borrowing base, CIBC has agreed that it will not require the Company to make any principal payments under the term loan section of the facility until
January 2003 at the earliest. As such, no amounts under the CIBC facility have been classified as current in the December 31, 2001 balance sheet. The Canadian facility bears interest at
the CIBC Prime rate plus 1/2%. The Company's borrowing rate was 4.5% at December 31, 2001.

The
Canadian facility contains various convenants which limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, sell properties or merge with another
entity. The Company was in compliance with all debt covenants at December 31, 2001 and throughout 2001.

The
agreement with CIBC also provides for $3.5 million of credit which can be utilized for commodity swaps covering a portion of the Company's oil and gas production, forward
exchange contracts and gas purchase and sales transactions. The Company currently utilizes the swap facility to hedge a portion of its Canadian production. For additional information, see
Note 1 to the Consolidated Financial Statements.

Net
cash provided by operations for the years ended December 31, 2001 and 2000 and for the period from the inception of the Company (September 14, 1999) through
December 31, 1999 was $14.2 million, $3.8 million and $1.0 million, respectively. Cash flow from operations increased with the rise in oil and gas production combined with
higher prices and lower interest rates, more than offsetting the increases in lease operating expenses, production taxes, and general and administrative expenses. In addition, decreases in working
capital requirements, especially a decline in margin deposit requirements for the Company's derivative accounts contributed to the increase in net cash provided by operations in 2001 compared to 2000.

Net
cash used by investing activities for the years ended December 31, 2001 and 2000 and for the period from the inception of the Company (September 14, 1999) through
December 31, 1999 was $17.3 million, $8.3 million and $24.1 million, respectively. Net cash provided by financing activities for the
years ended December 31, 2001 and 2000 and for the period from inception of the Company (September 14, 1999) through December 31, 1999 was $3.1 million, $3.5 million
and $24.1 million, respectively. During 2001 in the United States, the Company spent $16.6 million primarily to fund development and exploration activities in the Permian and Piceance
Basins. The Company also received $6.8 million in proceeds related to the disposition of the Company's entire working interest and related leasehold rights in the San Juan Basin. During 2001 in
Canada, the Company spent $6.7 million primarily to fund development activities in the Carbon area of Central Alberta. During 2000 in the United States, the Company spent $4.4 million
primarily to fund development and exploration activities in the Permian Basin. During 2000 in Canada, the Company spent $3.1 million primarily to fund development activities in the Carbon area
of Central Alberta. During 1999, investing and financing cash flows were due primarily to Carbon's acquisition of BFC and the sale of Carbon shares to facilitate the acquisition of BFC.

Carbon's
primary cash requirements will be to finance acquisitions, exploration and development expenditures, repayment of debt, and general working capital needs. At December 31,
2001, the Company had no cash balances as all available cash is used to pay down the Company's debt and a working capital deficit of approximately $5.1 million. The Company anticipates that
capital expenditures, exclusive of acquisitions (if any) or divestitures will approximate $6.7 million in 2002. Carbon believes that available borrowings under its credit agreements and
projected operating cash flows will be sufficient to cover its working capital, capital expenditures, planned development activities and debt service requirements for the next 12 months.
Nevertheless, Carbon may explore outside funding opportunities including equity or additional debt financings for use in expanding Carbon's operations or in consummating any significant acquisition.
Carbon does not know, however, whether any financing can be accomplished on terms that are acceptable to the Company.

The
Company's future cash flow is subject to a number of variables, including the level of production and oil and natural gas prices as well as any unanticipated expenses. Also,
borrowings under Carbon's credit facilities are subject to a number of conditions, including compliance with various covenants and borrowing base calculations. As a result, there can be no assurance
that the operations and other capital resources will provide cash in sufficient amounts to maintain planned levels of capital expenditures or to meet the other cash needs described above.

The
table below sets forth the Company's contractual obligations (including its revolving credit facilities discussed above) at December 31, 2001 and the effect such obligations
are expected to have on its liquidity and cash flow in future periods (in thousands).

|                                         |  | Payments Due By Period
|---------------------------------------- |  | ----------------------
|
|Revolving credit facility                |  | $                     
|Operating leases / management agreements |  |                       
|                                         |  |                       
|                                         |  | $                     
|                                         |  |                       





DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K includes "forward-looking statements". All statements other than statements of historical facts included in the
Annual Report on Form 10-K are forward-looking statements. Such statements address activities, events or developments that the Company expects, believes, projects, intends or
anticipates will or may occur, including such matters as future capital, development and exploration expenditures, reserve estimates (including estimates of future net revenues associated with such
reserves and the present value of such future net revenues), future production of oil and natural gas, business strategies, expansion and growth of the Company's operations, cash flow and anticipated
liquidity, prospect development and property acquisition, obtaining financial or industry partners for prospect or program development, or marketing of oil and natural gas. Although the Company
believes that the expectations reflected in the forward-looking statements and the assumptions upon which such forward-looking statements are based are reasonable, it can give no assurance that such
expectations and assumptions will prove to be correct. Factors that could cause actual results to differ materially ("Cautionary Statements") are described, in among other places in the Marketing,
Competition, and Government Regulation sections in this Form 10-K and under "Management's Discussion and Analysis of Financial Condition and Results of Operations." These factors
include, but are not limited to general economic conditions, the market price of oil and natural gas, the risks associated with exploration, the Company's ability to find, acquire, market, develop and
produce new properties, operating hazards attendant to the oil and natural gas business, uncertainties in the estimation of proved reserves and in the projection of future rates of production and
timing of development expenditures, the strength and financial resources of the Company's competitors, the Company's ability to find and retain skilled personnel, climatic conditions, labor relations,
availability and cost of material and equipment, environmental risks, the results of financing efforts, and regulatory developments. All written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. The Company undertakes no obligation to update any forward-looking statements to reflect
future events or developments.

CRITICAL ACCOUNTING POLICES

The following summarizes several of our critical accounting policies. See a complete list of significant accounting policies in Note 1 to the Consolidated
Financial Statements.

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

Property and EquipmentThe Company follows the full cost method of accounting for its oil and gas properties, whereby all
costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and direct overhead related to
exploration and development activities) are capitalized.

Capitalized
costs are accumulated on a country-by-country basis and are depleted using the units of production method based on proved reserves of oil and gas. The
Company presently has two cost centersthe United States and Canada. For purposes of the depletion calculation, oil and gas reserves are converted to a common unit of measure on the basis
of six thousand cubic feet of gas to one barrel of oil. A reserve is provided for the estimated future cost of site restoration, dismantlement and abandonment activities as a component of depletion.
Investments in unproved properties are recorded at the lower of cost or fair market value and are not depleted pending the determination of the existence of proved reserves.

Pursuant
to full cost accounting rules, capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future
net revenue from estimated production of proved oil and gas reserves using a 10% discount factor and unescalated oil and gas prices as of the end of the period; plus (2) the cost of properties
not being amortized, if any; plus (3) the lower of cost or estimated fair market value of unproved properties included in the costs being amortized, if any; less (4) related income tax
effects. The costs reflected in the accompanying financial statements do not exceed this limitation for the Company's oil and gas reserves in Canada. At December 31, 2001, the current daily
pricing of natural gas and oil were at a level whereby the Company's capitalized costs in the United States exceeded the above limit by approximately $1.0 million. Subsequent to
December 31, 2001, the current daily prices increased, which resulted in the present value of the Company's future net revenues for reserves in the United States, discounted at 10%, exceeding
the Company's capitalized costs. Accordingly, the Company is not required to record a write down of properties. A decline in gas and oil prices from current levels, or other factors, without other
mitigating circumstances could cause a future write-down of capitalized costs and a non-cash charge against future earnings.

Proceeds
from disposal of interests in oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustment would
significantly alter the rate of depletion.

Buildings,
transportation and other equipment are depreciated on the straight-line method with lives ranging from 3 to 7 years.

Commodity Derivative Instruments and Hedging ActivitiesPursuant to Company guidelines, the Company is to engage in these
activities only as a hedging mechanism. The Company has a Risk Management Committee to administer its production hedging program and approve all production hedging transactions. Gains or losses from
financial instruments that qualify for hedge accounting treatment are recognized as an adjustment to sales revenue when the transactions being hedged are finalized. Gains or losses from financial
instruments that do not qualify for hedge accounting treatment are recognized currently as other income or expense. The cash flows from such agreements are included in operating activities in the
consolidated statements of cash flows.

The
Company follows Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which provides accounting and
reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability
measured at its fair value which is determined by using market pricing. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Market risk is estimated as the potential change in fair value of interest sensitive investments resulting from an immediate hypothetical change in interest
rates. The sensitivity analysis presents the change in fair value of these instruments and changes in the Company's earnings and cash flows assuming an immediate one percent change in floating
interest rates. As the Company presently only has floating rate debt, interest rate changes would not affect the fair value of these instruments but would impact future earnings and cash flows
assuming all other factors are held constant. The carrying amount of the Company's floating rate debt approximates its fair value. At December 31, 2001, the Company had $15.6 million of
floating rate debt through its facility with Wells Fargo and $2.3 million through its facility with CIBC. Assuming constant debt levels, earnings and cash flow impacts for the next twelve month period from December 31, 2001 due to a one percent change in interest
rates would be approximately $156,000 before taxes for the facility with Wells Fargo and $23,000 before taxes for the facility with CIBC.

FOREIGN CURRENCY RISK

The Canadian dollar is the functional currency of CEC and is subject to foreign currency exchange rate risk on cash flows related to sales, expenses, financing
and investing transactions. The Company has not entered into any foreign currency forward contracts or other similar financial investments to manage this risk.

COMMODITY PRICE RISK

Oil and gas commodity markets are influenced by global as well as regional supply and demand. Worldwide political events can also impact commodity prices. The
Company may use certain financial instruments including swaps, collars, futures and other contracts in an attempt to reduce exposure to the market fluctuations in the price of oil and natural gas.
Hedging may limit the Company's exposure to adverse price limits, hedging also limits the benefit of price increases and is subject to a number of risks, including credit risk of the counterparty to
the hedge. For additional information, see Note 1 to the Consolidated Financial Statements.

Pursuant
to Company guidelines, the Company is to engage in these activities only as a hedging mechanism. The Company has a Risk Management Committee to administer its production hedging
program and approve all production hedging transactions. Gains or losses from financial instruments that qualify for hedge accounting treatment are recognized as an adjustment to sales revenue when
the transactions being hedged are finalized. Gains or losses from financial instruments that do not qualify for hedge accounting treatment are recognized currently as other income or expense. The cash
flows from such agreements are included in operating activities in the consolidated statements of cash flows.

The
table below sets forth the Company's fixed price swap positions on its natural gas production as of December 31, 2001.

|BFC Contracts     |  | CEC Contracts | 
|----------------- |  | ------------- | 
|
|
|Gas               |  |               | 
|01/01/02-12/31/02 |  | 730,000       | 
|                  |  |               | 

In
addition, the Company utilizes collars that establish a price between a floor and ceiling to hedge natural gas and oil prices. The table below sets forth the Company's natural gas and
oil collars in place at December 31, 2001.

|                  |  | CEC Contracts
|----------------- |  | -------------
|
|
|Oil               |  |              
|01/01/02-12/31/02 |  | 36,500       
|Gas               |  |              
|01/01/02-10/31/02 |  | 288,000      

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Carbon Energy Corporation
Consolidated Financial Statements





INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Report of Independent Public Accountants                                                                                                                                   
|Consolidated Balance SheetsDecember 31, 2001 and 2000                                                                                                                     
|Consolidated Statements of OperationsFor the Years Ended December 31, 2001 and 2000 and the Period from Inception (September 14, 1999)
through December 31, 1999          
|Consolidated Statements of Stockholders' EquityFor the Years Ended December 31, 2001 and 2000 and the Period from
Inception (September 14, 1999) through December 31, 1999
|Consolidated Statements of Cash FlowsFor the Years Ended December 31, 2001 and 2000 and the Period from Inception (September 14, 1999) through
December 31, 1999          
|Notes to Consolidated Financial Statements                                                                                                                                 





REPORT OF INDENDENT PUBLIC ACCOUNTANTS



To
Carbon Energy Corporation:

We
have audited the accompanying consolidated balance sheets of Carbon Energy Corporation (a Colorado corporation) and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2001 and 2000 and the period from inception (September 14, 1999)
through December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our
audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carbon Energy Corporation and subsidiaries as
of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001 and 2000 and the period from inception (September 14,
1999) through December 31, 1999, in conformity with accounting principles generally accepted in the United States.

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

|                                | ARTHUR ANDERSEN LLP
|------------------------------- | -------------------
|Denver, Colorado
March 22, 2002 |                    





CARBON ENERGY CORPORATION        CONSOLIDATED BALANCE SHEETS  (in thousands)

|                                           |                                                                   | December 31,                                                                                                                                         |                            
|------------------------------------------ | ----------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------
|
|ASSETS                                     |                                                                  
|Current assets:                            |                                                                   |                                                                                                                                                      |                            
|                                           | Cash                                                              |                                                                                                                                                      | $                          
|                                           | Current portion of employee trust                                 |                                                                                                                                                      |                            
|                                           | Accounts receivable, trade                                        |                                                                                                                                                      |                            
|                                           | Accounts receivable, other                                        |                                                                                                                                                      |                            
|                                           | Amounts due from broker                                           |                                                                                                                                                      |                            
|                                           | Prepaid expenses and other                                        |                                                                                                                                                      |                            
|                                           | Current derivative asset                                          |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      | Total current assets       
|                                           |                                                                   |                                                                                                                                                      |                            
|Property and equipment, at cost:           |                                                                   |                                                                                                                                                      |                            
|                                           | Oil and gas properties, using the full cost method of accounting: |                                                                                                                                                      |                            
|                                           |                                                                   | Unproved properties                                                                                                                                  |                            
|                                           |                                                                   | Proved properties                                                                                                                                    |                            
|                                           | Furniture and equipment                                           |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      | 71,177                     
|                                           |                                                                   | Less accumulated depreciation, depletion and amortization                                                                                            |                            
|                                           |                                                                   |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      | Property and equipment, net
|                                           |                                                                   |                                                                                                                                                      |                            
|Deposits and other long-term assets        |                                                                   |                                                                                                                                                      | 448                        
|                                           |                                                                   |                                                                                                                                                      |                            
|Total assets                               |                                                                   | $                                                                                                                                                    | 62,368                     
|                                           |                                                                   |                                                                                                                                                      |                            
|LIABILITIES AND STOCKHOLDERS' EQUITY       |                                                                  
|Current liabilities:                       |                                                                   |                                                                                                                                                      |                            
|                                           | Accounts payable and accrued expenses                             |                                                                                                                                                      | $                          
|                                           | Accrued production taxes payable                                  |                                                                                                                                                      |                            
|                                           | Income taxes payable                                              |                                                                                                                                                      |                            
|                                           | Undistributed revenue and other                                   |                                                                                                                                                      |                            
|                                           | Current derivative liability                                      |                                                                                                                                                      |                            
|                                           | Deferred income taxes                                             |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      | Total current liabilities  
|                                           |                                                                   |                                                                                                                                                      |                            
|Long-term debt                             |                                                                   |                                                                                                                                                      | 17,870                     
|Other long-term liabilities                |                                                                   |                                                                                                                                                      | 18                         
|Deferred income taxes                      |                                                                   |                                                                                                                                                      | 2,577                      
|Commitments and contingencies (Note 4)     |                                                                   |                                                                                                                                                      |                            
|Minority interest                          |                                                                   |                                                                                                                                                      | 29                         
|Stockholders' equity:                      |                                                                   |                                                                                                                                                      |                            
|                                           | Preferred stock, no par value:                                    |                                                                                                                                                      |                            
|                                           |                                                                   | 10,000,000 shares authorized, none outstanding                                                                                                       |                            
|                                           | Common stock, no par value:                                       |                                                                                                                                                      |                            
|                                           |                                                                   | 20,000,000 shares authorized, issued, and 6,079,225 shares and 6,021,626 shares outstanding at December 31, 2001 and December 31, 2000, respectively |                            
|                                           | Retained earnings                                                 |                                                                                                                                                      |                            
|                                           | Accumulated other comprehensive loss                              |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      |                            
|                                           |                                                                   |                                                                                                                                                      | Total stockholders' equity 
|                                           |                                                                   |                                                                                                                                                      |                            
|Total liabilities and stockholders' equity |                                                                   | $                                                                                                                                                    | 62,368                     
|                                           |                                                                   |                                                                                                                                                      |                            

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





CARBON ENERGY CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)

|                                                                |                                                                              | For the Year
Ended December 31, |             | For the Period
from Inception
(September 14, 1999)
through
December 31, 1999 |       
|--------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------- | ----------- | ---------------------------------------------------------------------------- | ------
|
|Revenues:                                                       |                                                                              |                                 |             |                                                                              |       
|                                                                | Oil and gas sales                                                            |                                 | $           | 21,421                                                                       |       
|                                                                | Marketing and other, net                                                     |                                 |             | 534                                                                          |       
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                |                                                                              |                                 | 21,955      |                                                                              |       
|Expenses:                                                       |                                                                              |                                 |             |                                                                              |       
|                                                                | Oil and gas production costs                                                 |                                 |             | 5,181                                                                        |       
|                                                                | Depreciation, depletion and amortization                                     |                                 |             | 6,234                                                                        |       
|                                                                | General and administrative, net                                              |                                 |             | 4,503                                                                        |       
|                                                                | Interest, net                                                                |                                 |             | 836                                                                          |       
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                |                                                                              | Total operating expenses        |             |                                                                              | 16,754
|                                                                | Minority interest                                                            |                                 |             | 27                                                                           |       
|                                                                |                                                                              |                                 |             |                                                                              |       
|Income (loss) before income taxes                               |                                                                              |                                 | 5,174       |                                                                              |       
|                                                                | Income tax provision:                                                        |                                 |             |                                                                              |       
|                                                                |                                                                              | Current                         |             |                                                                              | 1,518 
|                                                                |                                                                              | Deferred                        |             |                                                                              | 573   
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                |                                                                              |                                 | Total taxes |                                                                              |       
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                | Net income (loss) before cumulative effect of change in accounting principle |                                 |             | 3,083                                                                        |       
|Cumulative effect of change in accounting principle, net of tax |                                                                              |                                 | (1,510      | )                                                                            |       
|                                                                |                                                                              |                                 |             |                                                                              |       
|Net income (loss)                                               |                                                                              | $                               | 1,573       |                                                                              | $     
|                                                                |                                                                              |                                 |             |                                                                              |       
|Average number of common shares outstanding:                    |                                                                              |                                 |             |                                                                              |       
|                                                                | Basic                                                                        |                                 |             | 6,055                                                                        |       
|                                                                | Diluted                                                                      |                                 |             | 6,294                                                                        |       
|Earnings (loss) per sharebasic:                                |                                                                              |                                 |             |                                                                              |       
|                                                                | Net income (loss) before cumulative effect of change in accounting principle |                                 | $           | 0.51                                                                         |       
|                                                                | Cumulative effect of change in accounting principle, net of tax              |                                 |             | (0.25                                                                        | )     
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                |                                                                              | $                               | 0.26        |                                                                              | $     
|                                                                |                                                                              |                                 |             |                                                                              |       
|Earnings (loss) per sharediluted:                              |                                                                              |                                 |             |                                                                              |       
|                                                                | Net income (loss) before cumulative effect of change in accounting principle |                                 | $           | 0.49                                                                         |       
|                                                                | Cumulative effect of change in accounting principle, net of tax              |                                 |             | (0.24                                                                        | )     
|                                                                |                                                                              |                                 |             |                                                                              |       
|                                                                |                                                                              | $                               | 0.25        |                                                                              | $     
|                                                                |                                                                              |                                 |             |                                                                              |       

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





CARBON ENERGY CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  For the Years Ended December 31, 2001 and 2000 and  the Period from Inception (September 14, 1999) through
December 31, 1999  (in thousands)

|                                   |                                                                 | Common Stock               |       | Retained
Earnings
(Accumulated
Deficit) |        | Accumulated
Other
Comprehensive
Income (Loss) |   |       |      
|---------------------------------- | --------------------------------------------------------------- | -------------------------- | ----- | --------------------------------------- | ------ | --------------------------------------------- | - | ----- | -----
|
|Balances, September 14, 1999       |                                                                 |                           |       | $                                       |       |                                               | $ |      |      
|                                   | Issuance of common stock                                        |                            | 4,510 |                                         |        | 24,806                                        |   |       |     
|                                   | Net loss                                                        |                            |      |                                         |        |                                              |   |       | (491 
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      
|Balances, December 31, 1999        |                                                                 | 4,510                      |       |                                         | 24,806 |                                               |   | (491  | )    
|                                   | Issuance of common stock                                        |                            | 10    |                                         |        | 55                                            |   |       |     
|                                   | Issuance of common stock for acquisition of CEC Resources Ltd.  |                            | 1,483 |                                         |        | 6,518                                         |   |       |     
|                                   | Vesting of restricted stock grants                              |                            | 19    |                                         |        | 116                                           |   |       |     
|                                   | Currency translation adjustment                                 |                            |      |                                         |        |                                              |   |       |     
|                                   | Net income                                                      |                            |      |                                         |        |                                              |   |       | 1,456
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      
|Balances, December 31, 2000        |                                                                 | 6,022                      |       |                                         | 31,495 |                                               |   | 965   |      
|Comprehensive income:              |                                                                 |                            |       |                                         |        |                                               |   |       |      
|                                   | Net income                                                      |                            |       |                                         |        |                                               |   |       | 1,573
|                                   | Cumulative effect of change in accounting principle, net of tax |                            |       |                                         |        |                                               |   |       |      
|                                   | Currency translation adjustment                                 |                            |       |                                         |        |                                               |   |       |      
|                                   | Reclassification adjustment for settled contracts               |                            |       |                                         |        |                                               |   |       |      
|                                   | Changes in fair value of outstanding hedge positions            |                            |       |                                         |        |                                               |   |       |      
|                                   | Impaired oil and gas hedging swaps                              |                            |       |                                         |        |                                               |   |       |      
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      
|                                   |                                                                 | Total comprehensive income |       |                                         |        |                                               |   |       |      
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      
|Common stock issued                |                                                                 | 35                         |       |                                         | 175    |                                               |   |      |      
|Vesting of restricted stock grants |                                                                 | 22                         |       |                                         | 129    |                                               |   |      |      
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      
|Balances, December 31, 2001        |                                                                 | 6,079                      |       | $                                       | 31,799 |                                               | $ | 2,538 |      
|                                   |                                                                 |                            |       |                                         |        |                                               |   |       |      

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





CARBON ENERGY CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)

|                                        |                                                                                          | For the Year Ended December 31,                                             |                                       | For the Period
from Inception
(September 14, 1999)
through
December 31, 1999 |        
|--------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------------- | -------
|
|Cash flows from operating activities:   |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        | Net income (loss)                                                                        |                                                                             | $                                     | 1,573                                                                        |        
|                                        | Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                             |                                       |                                                                              |        
|                                        |                                                                                          | Depreciation, depletion and amortization expense                            |                                       |                                                                              | 6,234  
|                                        |                                                                                          | Non cash settlement of derivative contracts                                 |                                       |                                                                              | (1,437 
|                                        |                                                                                          | Deferred income tax                                                         |                                       |                                                                              | 573    
|                                        |                                                                                          | Cumulative effect of change in accounting principle                         |                                       |                                                                              | 1,510  
|                                        |                                                                                          | Minority interest                                                           |                                       |                                                                              | 27     
|                                        |                                                                                          | Vesting of restricted stock grants                                          |                                       |                                                                              | 129    
|                                        |                                                                                          | Changes in operating assets and liabilities, net of effects of acquisition: |                                       |                                                                              |        
|                                        |                                                                                          | Decrease (increase) in:                                                     |                                       |                                                                              |        
|                                        |                                                                                          |                                                                             | Accounts receivable                   |                                                                              |        
|                                        |                                                                                          |                                                                             | Amounts due from broker               |                                                                              |        
|                                        |                                                                                          |                                                                             | Employee trust                        |                                                                              |        
|                                        |                                                                                          |                                                                             | Prepaid expenses and other assets     |                                                                              |        
|                                        |                                                                                          | Increase (decrease) in:                                                     |                                       |                                                                              |        
|                                        |                                                                                          |                                                                             | Accounts payable and accrued expenses |                                                                              |        
|                                        |                                                                                          |                                                                             | Undistributed revenue                 |                                                                              |        
|                                        |                                                                                          |                                                                             | Derivative liabilities                |                                                                              |        
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        |                                                                                          | Net cash provided by operating activities                                   |                                       |                                                                              | 14,232 
|Cash flows from investing activities:   |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        | Capital expenditures for oil and gas properties                                          |                                                                             |                                       | (23,324                                                                      | )      
|                                        | Proceeds from property sale                                                              |                                                                             |                                       | 6,758                                                                        |        
|                                        | Acquisition of Bonneville Fuels                                                          |                                                                             |                                       |                                                                             |        
|                                        | Acquisition of CEC Resources                                                             |                                                                             |                                       | (203                                                                         | )      
|                                        | Capital expenditures for support equipment                                               |                                                                             |                                       | (528                                                                         | )      
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        |                                                                                          | Net cash used in investing activities                                       |                                       |                                                                              | (17,297
|Cash flows from financing activities:   |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        | Proceeds from note payable                                                               |                                                                             |                                       | 47,833                                                                       |        
|                                        | Principal payments on note payable                                                       |                                                                             |                                       | (44,919                                                                      | )      
|                                        | Proceeds from issuance of common stock                                                   |                                                                             |                                       | 175                                                                          |        
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        |                                                                                          | Net cash provided by financing activities                                   |                                       |                                                                              | 3,089  
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|Effect of exchange rate changes on cash |                                                                                          |                                                                             | (45                                   | )                                                                            |        
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|Net increase (decrease) in cash         |                                                                                          |                                                                             | (21                                   | )                                                                            |        
|Cash, beginning of period               |                                                                                          |                                                                             | 21                                    |                                                                              |        
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|Cash, end of period                     |                                                                                          | $                                                                           |                                      |                                                                              | $      
|                                        |                                                                                          |                                                                             |                                       |                                                                              |        
|Supplemental cash flow information:     |                                                                                          |                                                                             |                                       |                                                                              |        
|                                        | Cash paid for interest                                                                   |                                                                             | $                                     | 889                                                                          |        
|                                        | Cash paid for taxes                                                                      |                                                                             |                                       | 531                                                                          |        

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





CARBON ENERGY CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Operations and Significant Accounting Policies

Nature of OperationsCarbon Energy Corporation (Carbon) was incorporated in September 1999 under the laws of the State
of Colorado to facilitate the acquisition of Bonneville Fuels Corporation (BFC) and subsidiaries. The acquisition of BFC closed on October 29, 1999 and was accounted for as a purchase. In
February 2000, Carbon completed an offer to exchange common shares of Carbon for common shares of CEC Resources, Ltd. (CEC), an Alberta, Canada company. Over 97% of the shareholders of
CEC accepted the offer for exchange. This acquisition closed on February 17, 2000 and was also accounted for as a purchase. In November 2000, CEC initiated an offer to purchase shares of
CEC stock that were not owned by Carbon. The offer was completed in February 2001 with the acquisition of approximately 34,000 of the 39,000 shares of CEC stock that were not owned by Carbon.
Carbon currently owns 99.7% of the stock of CEC as further described in Note 2 to the Consolidated Financial Statements. Collectively, Carbon, CEC, BFC and its subsidiaries are referred to as
the Company. The Company's operations currently consist of the acquisition, exploration, development, and production of oil and natural gas properties located primarily in Colorado, Kansas, New
Mexico, Texas, Utah, and the Canadian provinces of Alberta and Saskatchewan.

All
amounts are presented in U.S. dollars unless otherwise noted.

Principles of ConsolidationThe consolidated financial statements include the accounts of Carbon and its subsidiaries all of
which are wholly owned, except CEC of which the Company owns approximately
99.7% of the equity at year end. All significant intercompany transactions and balances have been eliminated.

Cash EquivalentsThe Company considers all highly liquid instruments with original maturities of three months or less when
purchased to be cash equivalents.

Amounts Due from BrokerThis account generally represents net cash margin deposits held by a brokerage firm for the Company's
futures accounts.

Property and EquipmentThe Company follows the full cost method of accounting for its oil and gas properties, whereby all
costs incurred in the acquisition, exploration and development of properties (including costs of surrendered and abandoned leaseholds, delay lease rentals, dry holes and direct overhead related to
exploration and development activities) are capitalized.

Capitalized
costs are accumulated on a country-by-country basis and are depleted using the units of production method based on proved reserves of oil and gas. The
Company presently has two cost centersthe United States and Canada. For purposes of the depletion calculation, oil and gas reserves are converted to a common unit of measure on the basis
of six thousand cubic feet of gas to one barrel of oil. A reserve is provided for the estimated future cost of site restoration, dismantlement and abandonment activities as a component of depletion.
Investments in unproved properties are recorded at the lower of cost or fair market value and are not depleted pending the determination of the existence of proved reserves.

Pursuant
to full cost accounting rules, capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future
net revenue from estimated production of proved oil and gas reserves using a 10% discount factor and unescalated oil and gas prices as of the end of the period; plus (2) the cost of properties
not being amortized, if any; plus (3) the lower of cost or estimated fair market value of unproved properties included in the costs being amortized, if any; less (4) related income tax
effects. The costs reflected in the accompanying financial statements do not exceed this limitation for the Company's oil and gas reserves in Canada. At December 31, 2001, the current daily pricing of natural gas and oil were at a level
whereby the Company's capitalized costs in the United States exceeded the above limit by approximately $1.0 million. Subsequent to December 31, 2001, the current daily prices increased,
which resulted in the present value of the Company's future net revenues for reserves in the United States, discounted at 10%, exceeding the Company's capitalized costs. Accordingly, the Company is
not required to record a write down of properties. A decline in gas and oil prices from current levels, or other factors, without other mitigating circumstances could cause a future
write-down of capitalized costs and a non-cash charge against future earnings.

Proceeds
from disposal of interests in oil and gas properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustment would
significantly alter the rate of depletion.

Buildings,
transportation and other equipment are depreciated on the straight-line method with lives ranging from 3 to 7 years.

Employee TrustThe employee trust represents amounts which were used to satisfy obligations to persons who were terminated as
a result of the Company's acquisition of BFC. Effective October 31, 2001, all remaining amounts in the trust were returned to the Company and the trust was terminated.

Undistributed RevenueThis account represents amounts due to other owners of jointly owned oil and gas properties for their
share of revenue from the Company's oil and gas properties.

Revenue RecognitionThe Company follows the sales method of accounting for natural gas revenues. Under this method, revenues
are recognized based on actual volumes of gas sold to purchasers. The volumes of gas sold may differ from the volumes to which the Company is entitled based on its interests in the properties,
creating gas imbalances. At December 31, 2001, wellhead imbalances related to the Company's interests were minimal. Revenue is deferred and a liability is recorded for those properties where
the estimated remaining reserves will not be sufficient to enable the underproduced owner to recoup its entitled share through production.

The
Company records sales and related cost of sales on gas and electricity marketing transactions using the accrual method of accounting (i.e., the transaction is recorded when the
commodity is purchased and/or delivered). The Company's gas marketing contracts are generally month-to-month and provide that the Company will sell gas to end users which is
produced from the Company's properties and/or acquired from third parties.

Income TaxesThe Company accounts for income taxes under the liability method which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to
reverse.

Commodity Derivative Instruments and Hedging ActivitiesThe Company may use certain financial instruments including swaps,
collars, futures and other contracts in an attempt to reduce exposure to market fluctuations in the price of oil and natural gas.

Pursuant
to Company guidelines, the Company is to engage in these activities only as a hedging mechanism. The Company has a Risk Management Committee to administer its production hedging
program and approve all production hedging transactions. Gains or losses from financial instruments that qualify for hedge accounting treatment are recognized as an adjustment to sales revenue when
the transactions being hedged are finalized. Gains or losses from financial instruments that do not qualify for hedge accounting treatment are recognized currently as other income or expense. The cash
flows from such agreements are included in operating activities in the consolidated statements of cash flows. The following table sets forth the hedge gains/(losses) realized by the Company for 2001, 2000,
and 1999 (in thousands).

|            |  | For the Year Ended
December 31, 2001 |        |   |   | For the Period
February 18,
through
December 31,
2000 |   | For the Period
from Inception
(September 14, 1999)
through
December 31, 1999 |       
|----------- |  | ------------------------------------ | ------ | - | - | ----------------------------------------------------- | - | ---------------------------------------------------------------------------- | ------
|
|
|
|Oil         |  | $                                    | 25     |   | $ | 33                                                    |   | $                                                                            | (414  
|Natural gas |  |                                      | (1,475 | ) |   | (571                                                  | ) |                                                                              | (2,608

The
table below sets forth the Company's fixed price swap positions on its natural gas production as of December 31, 2001.

|BFC Contracts     |  | CEC Contracts | 
|----------------- |  | ------------- | 
|
|
|Gas               |  |               | 
|01/01/02-12/31/02 |  | 730,000       | 
|                  |  |               | 

In
addition, the Company utilizes collars that establish a price floor and ceiling to hedge natural gas and oil prices. The table below sets forth the Company's natural gas and oil
collars in place at December 31, 2001.

CEC ContractsTime Period

Bbl/
MMBtu

Average
Floor
Bbl/
MMBtu

Average
Ceiling
Bbl/
MMBtu

Derivative
Asset/
(Liability)(thousands)Oil01/01/02-12/31/02

36,500

$
22.00

$
27.50

$
95Gas01/01/02-10/31/02

288,000

$
2.40

$
3.39

$
101


On
January 1, 2001, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which provides accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. It also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge
accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a
company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting treatment.

The
table below sets forth the financial statement impact to the Company of recording derivative instruments designated as hedges and derivative instruments not designated as hedges upon
the adoption of SFAS No. 133 on January 1, 2001.

Amount(millions)Balance SheetDerivative liability

$
(7.2
)Deferred tax asset


2.9Cumulative effect of a change in accounting principle (other comprehensive loss)


2.8Statement of OperationsCumulative effect of a change in accounting principle (derivative loss)

$
1.5


For
the year ending December 31, 2001, net hedging losses of $2.9 million ($1.7 million after tax) were transferred from other comprehensive income, and the change
in the fair market value of outstanding derivative liabilities for contracts designated as hedges decreased by $2.0 million ($1.1 million after tax). As of December 31, 2001, the
Company had net unrealized derivative gains of $247,000 ($133,000 after tax). The Company expects to reclassify $265,000 of these net gains to earnings during the next twelve month period.

Foreign Currency TranslationThe functional currency of CEC is the Canadian dollar. Assets and liabilities related to the
Company's Canadian operations are generally translated at current exchange rates, and related translation adjustments are reported as a component of stockholders' equity. Income statement accounts are
translated at the average rates during the period. As a result of the change in the value of the Canadian dollar relative to the US dollar, the Company reported non-cash currency
translation losses of $526,000 and $225,000 for the years ended December 31, 2001 and 2000, respectively.

Comprehensive IncomeThe Company follows the provisions of SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive income includes net income and certain items recorded directly to stockholders' equity and classified as other comprehensive income. The following table sets forth the calculation of
comprehensive income for the years ended December 31, 2001 and 2000.

For the Year Ended December 31,2001

2000(in thousands)Net income

$
1,573

$
1,456Other comprehensive income (loss), net of tax:Currency translation adjustment


(526
)

(225
)Cumulative effect of change in accounting principleJanuary 1, 2001


(2,768
)

Reclassification adjustment for settled contracts


1,737


Changes in fair value of outstanding hedge positions


1,146


Impairment of oil and gas hedging swaps


153


Other comprehensive income (loss)


(258
)

(225
)Comprehensive income

$
1,315

$
1,231


The
impaired oil and gas hedging swaps relate to a fourth quarter 2001 non-cash provision of $246,000 ($153,000 net of tax) related to the write-off of all
outstanding oil and gas hedges with Enron North America (Enron). The write off reduced before tax earnings for the year ended December 31, 2001 by $328,000, consisting of $82,000 related to oil and gas hedge contracts that had settled
prior to Enron's Chapter 11 filing and $246,000 related to contacts that would have settled in 2002. In accordance with generally accepted accounting principles, the Company will record additional
non-cash revenues of $246,000 during the course of 2002 as these hedges would have expired.

Earnings (Loss) Per ShareThe Company uses the weighted average number of shares outstanding in calculating basic earnings per
share data. When dilutive, options are included as share equivalents using the treasury stock method and are included in the calculations of diluted per share data.

Accounting EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The actual results could differ from those estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations," which addresses financial accounting and
reporting for business combinations. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 is not expected to have a
material impact on the Company's financial position or results of operations.

In June 2001, the FASB issued SFAS No. 142. "Goodwill and Other Intangible Asset," which addresses, among other things, the financial accounting and reporting for goodwill
subsequent to an acquisition. The new standard eliminates the requirement to amortize acquired goodwill; instead, such goodwill shall be reviewed at least annually for impairment. SFAS No. 142
is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 142 is not expected to have a material impact on the Company's financial position or results of
operations.

In
July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The asset retirement liability will be allocated to operating expense by using a systematic and rational method. The statement is effective for fiscal years
beginning June 15, 2002. The Company has not yet determined the impact of adoption of this statement.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which provides a single accounting model for
long-lived assets to be disposed of and changes the criteria that would have to be met to classify an asset as held-for-sale. The statement also requires expected
future operating losses from discontinued operations to be recognized in the periods in which the losses are incurred, which is a change from the current requirement of recognizing such operating
losses as of the measurement date. The statement is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate that the adoption of the statement will have a
material effect on the Company's financial position or results of operations.

2. Acquisition and Disposition of Assets:

Acquisition of CEC Resources Ltd.On February 17, 2000, Carbon completed the acquisition of approximately 97% of
the stock of CEC. An offer to exchange shares of Carbon stock for shares of CEC stock resulted in the issuance of 1,482,826 shares of Carbon stock to holders of CEC stock. The acquisition was
accounted for as a purchase. In February 2001, CEC acquired approximately 34,000 of the 39,000 remaining shares of CEC stock that were not owned by Carbon. Carbon currently owns 99.7% of the
stock of CEC. See Note 1 to the Consolidated Financial Statements for additional information.

The
following unaudited pro forma information presents a summary of the consolidated results of operations as if the acquisition had occurred at January 1, 2000. Because Carbon
had minimal operating activities prior to November 1, 1999, the pro forma information presented is for the year ended December 31, 2000 only.

For the Year Ended
December 31, 2000(in thousands, except per share data)Total revenue

$
17,174Net income


1,549Earnings per share:Basic

$
0.26Diluted


0.26


These
unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of results of operations that actually would have resulted had the
combination occurred at January 1, 2000, or future results of operations of the consolidated entities.

Disposition of Oil and Gas AssetsIn January 2001, the Company closed the sale of its entire working interests and
related leasehold rights in the San Juan Basin, receiving net proceeds of approximately $6.8 million. Proceeds from the sale were credited directly to the full cost pool and no gain or loss was
recognized. The proceeds were used to repay amounts outstanding under the Company's credit facilities and to finance the Company's exploration and development program.

3. Long-term Debt

U.S. FacilityThe Company's credit facility is an oil and gas reserve based line-of-credit with Wells
Fargo Bank West National Association (Wells Fargo) and had a borrowing base of $20.0 million with outstanding borrowings of $15.6 million at December 31, 2001. The facility is
secured by certain U.S. oil and gas properties of the Company and is scheduled to convert to a term note on October 1, 2002. The Company is currently in negotiations with Wells Fargo to extend
the revolving phase of the facility. However, there can be no guarantee that the Company will be able to successfully negotiate such an extension. This facility is scheduled to have a maturity date of
either the economic half life of the Company's remaining U.S. based reserves on the last day of the revolving period, or October 1, 2006, whichever is earlier. Subject to possible changes in
the borrowing base, Wells Fargo has agreed that it will not require the Company to make any principal payments under the term loan section of the facility until January 2003 at the earliest. As
such, no amounts under the Wells Fargo facility have been classified as current in the December 31, 2001 balance sheet. The facility bears interest at a rate equal to LIBOR plus 1.75% or Wells
Fargo Prime, at the option of the Company. The Company's average borrowing rate was approximately 3.9% at December 31, 2001. The borrowing base is based upon the lender's evaluation of the
Company's proved oil and gas reserves, generally determined semi-annually.

Scheduled
maturities of indebtedness under the U.S. facility for the next five years are as follows:

Year

Maturities(in thousands)2002

$
2003


3,9012004


3,9012005


3,9012006


3,901


The
credit agreement contains various covenants, which prohibit or limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, sell properties or merge
with another entity. The Company is also required to maintain certain financial ratios.

Canadian FacilityIn June 2001, the Company secured an increase to approximately $9.0 million from approximately
$4.1 million in the borrowing base of its facility with the Canadian Imperial Bank of Commerce (CIBC). Outstanding borrowings against the facility were $2.3 million at
December 31, 2001. The Canadian facility is secured by the Canadian oil and gas properties of the Company. The revolving phase of the Canadian facility expires on March 31, 2002. The
Company is currently in negotiations with CIBC to extend the revolving phase to April 1, 2003. However, there can be no guarantee that the Company will be able to successfully negotiate such an
extension. If the revolving commitment is not renewed, the loan will be converted into a term loan and will be reduced by consecutive monthly payments over a period not to exceed 24 months.
Subject to possible changes in the borrowing base, CIBC has agreed that it will not require the Company to make any principal payments under the term loan section of the facility until
January 2003 at the earliest. As such, no amounts under the CIBC facility have been classified as current in the December 31, 2001 balance sheet. The Canadian facility bears interest at
the CIBC Prime rate plus 1/2%. The Company's borrowing rate was 4.50% at December 31, 2001.

Scheduled
maturities of indebtedness under the Canadian facility for the next five years are as follows:

Year

Maturities(in thousands)2002

$
2003


1,1332004


1,133


The
Canadian facility contains various covenants which limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, sell properties, or merge with another
entity.

The
agreement with CIBC also provides for $3.5 million of credit which can be utilized for commodity swaps covering a portion of the Company's oil and gas production, forward
exchange contracts and firm gas purchase and sales transactions. The Company currently utilizes the swap facility to hedge a portion of its Canadian production as described in Note 1 to the
Consolidated Financial Statements.

4. Commitments and Contingencies

Operating LeasesThe Company leases office space and certain equipment under non-cancelable operating leases.
Associated with these commitments are non-cancelable management fees of approximately $127,000. The annual minimum payments related to those commitments are as follows (in thousands):

United States

Canada2002

$
386

$
3732003


325


712004


301


2005


76


2006





Total

$
1,088

$
444


Transportation AgreementsThe Company has entered into various natural gas transportation agreements in Canada. The Company
typically assigns these transportation agreements to a buyer of the Company's production during the term of the natural gas sales contract between the Company and the buyer. The Company is typically
paid on an index basis, net of transportation charges incurred by the buyer. The
rights and obligations under these transportation agreements will revert back to the Company upon expiration of the natural gas sales contracts.

Regulation and LitigationThe Company is subject to governmental and regulatory controls arising in the ordinary course of
business. The Company is also a party to various lawsuits incidental to its business. It is the opinion of the Company's management that there are no claims or litigation involving the Company that
are likely to have a material adverse effect on its financial position or results of operations.

5. Stock Options and Award Plans

In 1999, the Company adopted a stock option plan. All salaried employees of the Company and its subsidiaries are eligible to receive both incentive stock options
and nonqualified stock options. Directors and consultants who are not employees of the Company or its subsidiaries are eligible to receive nonqualified stock options, but not incentive stock options
under the plan. The option price for the incentive stock options granted under the plan is not to be less than 100% of the fair market value of the shares subject to the options. The option price for the nonqualified stock options granted under the plan is not to be less than 85% of the fair market value of the shares subject to the
options. The aggregate number of shares of common stock which may be issued under options granted pursuant to the plan, may not exceed 700,000 shares.

The
specific terms of grant and exercise are determined by the Company's Board of Directors unless and until such time as the Board of Directors delegates the administration of the plan
to a committee. The options vest over a three-year period and expire ten years from the date of grant. A summary of the status of the Company's stock option plan as of December 31,
2001, 2000 and 1999 and changes during these periods is presented below:

|                                                               |                            | For the Year Ended
December 31, 2001 |         | For the Year Ended
December 31, 2000 |      | For the Period from Inception
(September 14, 1999) through
December 31, 1999
|-------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------------------------------------ | ---- | ----------------------------------------------------------------------------
|
|Outstanding at beginning of period                             |                            | 590,500                              |         | $                                    | 5.30 |                                                                             
|Granted                                                        |                            | 34,000                               |         |                                      | 8.16 |                                                                             
|Exercised                                                      |                            | (36,099                              | )       |                                      | 5.14 |                                                                             
|Forfeited                                                      |                            | (36,567                              | )       |                                      | 5.56 |                                                                             
|                                                               |                            |                                      |         |                                      |      |                                                                             
|                                                               | Outstanding at end of year |                                      | 551,834 |                                      | $    | 5.47                                                                        
|                                                               |                            |                                      |         |                                      |      |                                                                             
|Options exercisable at year end                                |                            | 374,156                              |         |                                      |      |                                                                             
|Shares available for grant at year end                         |                            | 112,067                              |         |                                      |      |                                                                             
|Weighted-average fair value of options granted during the year |                            |                                      |         | $                                    | 2.93 |                                                                             



The following table summarizes information about the Company's stock options outstanding at December 31, 2001:

Options Outstanding

Options
ExercisableRange of
Exercise Prices

Options
Outstanding
at
Year end

Weighted-
Average
Remaining
Contractual
Life (Years)

Weighted-
Average
Exercise
Price

Options
Exercisable
at
Year end

Weighted-
Average
Exercise
Price$4.18 - $5.87

517,834

5.6

$
5.29

374,156

$
5.20$6.00 - $8.98

34,000

9.4

$
8.16



$
$4.18 - $8.98

551,834

5.9

$
5.47

374,156

$
5.20


The
Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for these plans. Under APB Opinion No. 25, no
compensation costs are recognized for option grants that are equal to or greater than the market price at the time of the grant. If compensation costs for this plan had been determined consistent with
SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's net income (loss) and income (loss) per share would have been as follows:

For the Year
Ended
December 31, 2001

For the Year
Ended
December 31, 2000

For the Period
from Inception
(September 14, 1999)
through
December 31, 1999(in thousands except per share data)Net income (loss):As reported

$
1,573

$
1,456

$
(491
)Pro forma


1,362


1,276


(504
)Net income (loss) per share:As reported:Basic

$
0.26

$
0.25

$
(0.12
)Diluted


0.25


0.25


(0.12
)Pro forma:Basic

$
0.22

$
0.22

$
(0.12
)Diluted


0.22


0.22


(0.12
)


The
fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions:

|                           |  | 2001  |   | 2000  |   | 1999  |  
|-------------------------- |  | ----- | - | ----- | - | ----- | -
|Expected option lifeyears |  | 4.50  |   | 3.50  |   | 5.00  |  
|Risk-free interest rate    |  | 4.24  | % | 6.36  | % | 5.97  | %
|Dividend yield             |  | 0.00  | % | 0.00  | % | 0.00  | %
|Volatility                 |  | 33.70 | % | 25.79 | % | 24.00 | %

In
1999, the Company adopted a restricted stock plan for selected employees, directors and consultants of the Company and its subsidiaries. The aggregate number of shares of common stock
which may be issued under the plan may not exceed 300,000 shares. No shares were granted under this plan during 2001. The number of shares granted under this plan were 27,500 and 40,000 for 2000 and
1999, respectively. The Company recognized compensation expense related to these grants of $129,000 and $116,000 for the years ended December 31, 2001 and 2000, respectively. The shares vest
over a three year period.

6. Income Taxes

The following table sets forth the difference between the provision for income taxes and the amounts computed by applying the statutory federal rate (in
thousands).

|                                                             |  | For the Year Ended
December 31, |        | For the Period
from Inception
(September 14, 1999)
through
December 31, 1999 |  
|------------------------------------------------------------ |  | ------------------------------- | ------ | ---------------------------------------------------------------------------- | -
|
|Tax expense at 35% of income before income taxes             |  | $                               | 1,811  |                                                                              | $
|State income taxes                                           |  |                                 | 9      |                                                                              |  
|Change in the valuation allowance against deferred tax asset |  |                                 |       |                                                                              |  
|Impact of higher statutory rates on                          |  |                                 |        |                                                                              |  
|Canadian income                                              |  |                                 | 401    |                                                                              |  
|Canadian resource allowance                                  |  |                                 | (1,016 | )                                                                            |  
|Canadian Crown payments (net of Alberta Royalty Tax Credit)  |  |                                 | 934    |                                                                              |  
|Other                                                        |  |                                 | (48    | )                                                                            |  
|                                                             |  |                                 |        |                                                                              |  
|                                                             |  | $                               | 2,091  |                                                                              | $
|                                                             |  |                                 |        |                                                                              |  

Deferred
income taxes generally result from recognizing income and expenses at different times for financial and tax reporting. In the U.S., the largest differences are the tax effects
of the capitalization of certain development, exploration and other costs, recording proceeds from the sale of properties in the full cost pool and the provision for impairment of oil and gas
properties. In Canada, the largest difference results from accelerated recovery of capital expenditures for tax purposes. The following table sets forth the Company's long-term tax assets
and liabilities at December 31, 2001 and 2000.

|                                   |                                           | December 31, 2001              |    
|---------------------------------- | ----------------------------------------- | ------------------------------ | ---
|
|
|Deferred tax asset:                |                                           |                                |    
|                                   | Net operating loss carryforward           |                                | $  
|                                   |                                           |                                |    
|                                   |                                           | Gross deferred tax assets      |    
|Deferred tax liability:            |                                           |                                |    
|                                   | Property and equipment                    |                                |    
|                                   | Taxes related to unrealized hedging gains |                                |    
|                                   | Other                                     |                                |    
|                                   |                                           |                                |    
|                                   |                                           | Gross deferred tax liabilities |    
|                                   |                                           |                                |    
|Net deferred tax asset (liability) |                                           | $                              | 672
|                                   |                                           |                                |    



|                                   |                                 | December 31, 2000              |    
|---------------------------------- | ------------------------------- | ------------------------------ | ---
|
|
|Deferred tax asset:                |                                 |                                |    
|                                   | Net operating loss carryforward |                                | $  
|                                   | Other                           |                                |    
|                                   |                                 |                                |    
|                                   |                                 | Gross deferred tax assets      |    
|Deferred tax liability:            |                                 |                                |    
|                                   | Property and equipment          |                                |    
|                                   |                                 |                                |    
|                                   |                                 | Gross deferred tax liabilities |    
|                                   |                                 |                                |    
|Net deferred tax asset (liability) |                                 | $                              | (44
|                                   |                                 |                                |    

As
of December 31, 2001, the Company had net operating loss carryforwards for federal income tax purposes of $6.3 million which expire in the years 2019 through 2021.

7. Business and Geographical Segments

Segment information has been prepared in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise
and Related Information" (SFAS
No. 131). For the years ended December 31, 2001 and 2000, Carbon had two reportable and geographic segments: BFC and CEC, representing oil and gas operations in the United States and
Canada, respectively. The segments are strategic business units which operate in unique geographic locations. The segment data presented below was prepared on the same basis as Carbon's consolidated
financial statements (in thousands).

|                                                                      |                                          | For the Year Ended December 31, 2001 |        |        |        |        |        |      
|--------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------ | ------ | ------ | ------ | ------ | ------ | -----
|
|
|
|Revenues:                                                             |                                          |                                      |        |        |        |        |        |      
|                                                                      | Oil and gas sales                        |                                      | $      | 10,341 |        | $      | 11,080 |      
|                                                                      | Marketing and other, net                 |                                      |        | 532    |        |        | 2      |      
|                                                                      |                                          |                                      |        |        |        |        |        |      
|                                                                      |                                          |                                      | 10,873 |        |        | 11,082 |        |      
|Expenses:                                                             |                                          |                                      |        |        |        |        |        |      
|                                                                      | Oil and gas production costs             |                                      |        | 3,555  |        |        | 1,626  |      
|                                                                      | Depreciation, depletion and amortization |                                      |        | 3,536  |        |        | 2,698  |      
|                                                                      | General and administrative, net          |                                      |        | 2,767  |        |        | 1,736  |      
|                                                                      | Interest, net                            |                                      |        | 653    |        |        | 183    |      
|                                                                      |                                          |                                      |        |        |        |        |        |      
|                                                                      |                                          | Total operating expenses             |        |        | 10,511 |        |        | 6,243
|                                                                      | Minority interest                        |                                      |        |       |        |        | 27     |      
|                                                                      |                                          |                                      |        |        |        |        |        |      
|Income before income taxes                                            |                                          |                                      | 362    |        |        | 4,812  |        |      
|Income tax provision                                                  |                                          |                                      | 135    |        |        | 1,956  |        |      
|                                                                      |                                          |                                      |        |        |        |        |        |      
|Net income before cumulative effect of change in accounting principle |                                          |                                      | 227    |        |        | 2,856  |        |      
|Cumulative effect of change in accounting principle, net of tax       |                                          |                                      | (1,510 | )      |        |       |        |      
|                                                                      |                                          |                                      |        |        |        |        |        |      
|Net income                                                            |                                          | $                                    | (1,283 | )      | $      | 2,856  |        | $    
|                                                                      |                                          |                                      |        |        |        |        |        |      
|Total assets                                                          |                                          | $                                    | 42,429 |        | $      | 19,939 |        | $    
|                                                                      |                                          |                                      |        |        |        |        |        |      



8. Major Customers

For the year ended December 31, 2001, revenues from one customer of the Company's Canadian operations represented approximately 34% of the Company's
consolidated revenues.

For
the year ended December 31, 2000, revenues from one customer of the Company's U.S. operations and one customer of the Company's Canadian operations represented approximately
16% and 20%, respectively, of the Company's consolidated revenues.

For
the period from inception (September 14, 1999) through December 31, 1999, revenues from three customers of the Company's U.S. operations represented 28%, 12% and 12%,
respectively, of the Company's consolidated revenues.

Management
believes that the loss of any individual purchaser would not have a long-term material adverse impact on the financial position or results of operations of the
Company.

9. Fair Value of Financial Instruments

The Company's financial instruments consist of cash, cash equivalents, accounts receivable, inventories, accounts payable, other accrued liabilities and
long-term debt. Except for long-term debt, the carrying amounts of such financial instruments approximate fair value due to their short maturities. As a result of the variable
interest rates on the Company's debt facilities at December 31, 2001, the fair market value of long-term debt was not materially different from its carrying amount. The Company's
derivative instruments, which are intended to manage commodity price risks are recorded at fair market value. See Note 1 to the Consolidated Financial Statements for additional information.

10. Marketing, Trading and Other Activities

The Company engages in natural gas trading activities in the United States which involve purchasing natural gas from third parties and selling natural gas to
other parties. These transactions are typically short-term in nature and involve positions whereby the underlying quantities generally offset. The Company has reduced its efforts
concerning the marketing of third party natural gas and anticipates that natural gas trading activities will significantly decline in 2002. Trading income associated with these activities is presented
on a net basis in the statements of operations as a component of marketing and other revenues. The following table sets forth the gross trading activities and other significant components of marketing
and other revenue (in thousands).

|                                  |                           | For the Year
Ended December 31,   |       |    
|--------------------------------- | ------------------------- | --------------------------------- | ----- | ---
|
|
|Revenues, gross                   |                           | $                                 | 4,145 |    
|Operating expenses, gross         |                           |                                   | 4,037 |    
|                                  |                           |                                   |       |    
|                                  | Net trading income (loss) |                                   |       | 108
|Non-hedge derivative contracts    |                           |                                   | 1,290 |    
|Impairment of accounts receivable |                           |                                   | (625  | )  
|Impairment of oil and gas hedges  |                           |                                   | (328  | )  
|Transportation and gathering      |                           |                                   | 90    |    
|Section 29 tax credits            |                           |                                   |       |    
|Other                             |                           |                                   | (1    | )  
|                                  |                           |                                   |       |    
|                                  |                           | Total marketing and other revenue |       | $  
|                                  |                           |                                   |       |    



11. Disclosures about Oil and Gas Activities

(A)  Costs
Incurred in Oil and Gas Producing Activities

The
following table sets forth costs incurred in oil and gas property acquisition, exploration and development activities for the years ended December 31, 2001 and 2000 and the
period from inception (September 14, 1999) through December 31, 1999.

|                              |                     | United
States |       | Canada |  | Total
|----------------------------- | ------------------- | ------------- | ----- | ------ |  | -----
|
|2001                          |                     |               |       |        |  |      
|Acquisition of properties(1): |                     |               |       |        |  |      
|                              | Proved properties   |               | $     |       |  | $    
|                              | Unproved properties |               |       | 1,540  |  |      
|Exploration(2)                |                     |               | 9,513 |        |  | 214  
|Development(3)                |                     |               | 5,300 |        |  | 5,440
|                              |                     |               |       |        |  |      
|                              | Total               |               | $     | 16,353 |  | $    
|                              |                     |               |       |        |  |      
|2000(4)                       |                     |               |       |        |  |      
|Acquisition of properties:    |                     |               |       |        |  |      
|                              | Proved properties   |               | $     |       |  | $    
|                              | Unproved properties |               |       | 1,217  |  |      
|Exploration                   |                     |               | 2,895 |        |  | 19   
|Development                   |                     |               | 1,495 |        |  | 3,627
|                              |                     |               |       |        |  |      
|                              | Total               |               | $     | 5,607  |  | $    
|                              |                     |               |       |        |  |      
|1999(5)                       |                     |               |       |        |  |      
|Acquisition of properties:    |                     |               |       |        |  |      
|                              | Proved properties   |               | $     | 24,535 |  | $    
|                              | Unproved properties |               |       | 7,879  |  |      
|Exploration                   |                     |               | 347   |        |  |     
|Development                   |                     |               | 138   |        |  |     
|                              |                     |               |       |        |  |      
|                              | Total               |               | $     | 32,899 |  | $    
|                              |                     |               |       |        |  |      

---



The
following table sets forth the aggregate capitalized costs relating to oil and gas activities at the end of each of the years indicated.

|                                          |                                            | December 31, 2001     |       
|----------------------------------------- | ------------------------------------------ | --------------------- | ------
|
|
|Oil and gas properties, full cost method: |                                            |                       |       
|                                          | Unevaluated properties not being amortized |                       | $     
|                                          | Evaluated costs                            |                       |       
|                                          |                                            |                       |       
|Total capitalized costs                   |                                            |                       | 48,139
|                                          | LessAccumulated DD&A                      |                       |       
|                                          |                                            |                       |       
|                                          |                                            | Net capitalized costs |       
|                                          |                                            |                       |       

|                                          |                                            | December 31, 2000     |       
|----------------------------------------- | ------------------------------------------ | --------------------- | ------
|
|
|Oil and gas properties, full cost method: |                                            |                       |       
|                                          | Unevaluated properties not being amortized |                       | $     
|                                          | Evaluated costs                            |                       |       
|                                          |                                            |                       |       
|Total capitalized costs                   |                                            |                       | 38,506
|                                          | LessAccumulated DD&A                      |                       |       
|                                          |                                            |                       |       
|                                          |                                            | Net capitalized costs |       
|                                          |                                            |                       |       

The
Company anticipates that substantially all unevaluated costs will be classified as evaluated costs within five years.

The
table below sets forth the estimated quantities of year end proved reserves after royalty burdens at December 31, 2001, 2000 and 1999. The reserve estimates for properties
located in the United States were prepared by Ryder Scott Company, an independent reservoir engineering firm, and the Canadian reserve estimates were prepared by Sproule Associates Limited, independent geological petroleum engineering consultants.

|                              |                                       | Oil and Liquids
(MBbl) |     | Natural Gas
(MMcf) |    
|----------------------------- | ------------------------------------- | ---------------------- | --- | ------------------ | ---
|
|Balance, September 14, 1999   |                                       |                       |     |                   |    
|                              | Revisions of previous estimates       |                        | 2   |                    |   
|                              | Purchases of reserves in place        |                        | 235 |                    |   
|                              | Production                            |                        | (9  | )                  |   
|                              |                                       |                        |     |                    |    
|Balance, December 31, 1999    |                                       | 228                    |     |                   |    
|                              | Revisions of previous estimates       |                        | 278 |                    |   
|                              | Extensions, discoveries and additions |                        | 70  |                    | 146
|                              | Purchases of reserves in place        |                        |    |                    | 355
|                              | Production                            |                        | (69 | )                  | (40
|                              |                                       |                        |     |                    |    
|Balance, December 31, 2000    |                                       | 507                    |     | 461                |    
|                              | Revisions of previous estimates       |                        | (10 | )                  | (51
|                              | Extensions, discoveries and additions |                        | 34  |                    | 79 
|                              | Purchases of reserves in place        |                        |    |                    | 9  
|                              | Production                            |                        | (81 | )                  | (59
|                              | Sales of reserves in place            |                        | (38 | )                  |   
|                              |                                       |                        |     |                    |    
|Balance, December 31, 2001    |                                       | 412                    |     | 439                |    
|                              |                                       |                        |     |                    |    
|Proved developed reserves(2): |                                       |                        |     |                    |    
|                              | December 31, 1999                     |                        | 212 |                    |   
|                              | December 31, 2000                     |                        | 382 |                    | 411
|                              | December 31, 2001                     |                        | 401 |                    | 352

---

In accordance with applicable requirements of the Securities and Exchange Commission (SEC), estimates of the Company's proved reserves and future
net revenues are made using sale prices estimated to be in effect as of the date of the reserve estimates and are held constant throughout the life of the properties (except to the extent contractual
arrangements in existence at year end specifically
provide for escalation). Price declines decrease reserve values by lowering the future net revenues attributable to the revenues and may reduce the quantities of reserves that are recoverable on an
economic basis. Price increases may have the opposite effect. A significant decline in prices of natural gas or oil could have a material adverse effect on the Company's financial condition and
results of operations. Future prices received for production and future production costs may vary, perhaps significantly, from the prices and costs assumed for purposes of these estimates.

There
are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. Oil and gas
reserve engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be measured in an exact way, and estimates of other engineers might differ
materially from those shown above. The accuracy of any reserve estimate is a function of the quality of available data and engineering and geological interpretations and judgment. Results of drilling,
testing and production may justify revisions. Accordingly, reserve estimates are often materially different from the quantities of oil and natural gas that are ultimately recovered. The meaningfulness
of such estimates depends primarily on the accuracy of the assumptions upon which they were based. In general, the volume of production from oil and gas properties the Company owns declines as
reserves are depleted. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities or both, the proved reserves of the Company will decline as reserves are produced. Reserves generated from future activities of the Company are
therefore highly dependent upon the level of success in acquiring or discovering additional reserves and the costs incurred in doing so.

The
standardized measure schedule is presented pursuant to the disclosure requirements of the SEC and Statement of Financial Accounting Standards No. 69, "Disclosures About Oil
and Gas Producing Activities" (SFAS No. 69).

The
standardized measure is intended to provide a standard of comparable measurement of the Company's estimated proved oil and gas reserves based on pricing and costs existing as of
December 31, 2001, 2000 and 1999. Pursuant to SFAS No. 69, future oil and gas revenues are calculated by multiplying the oil and gas production volumes expected to be produced in each
year throughout the life of the properties by the oil and prices in effect at the end of the reporting period. Future price changes are considered only to the extent provided by contractual
arrangement in existence at year end. Production and development costs are based upon costs at each year end and are held constant for the life of the properties. Future income tax expenses are
estimated by applying the statutory tax rate of 35% in the United States and a combined Federal and Provincial rate ranging from 37 - 41% in Canada with recognition of tax
basis, net operating loss carryforwards and other statutory deductions. Estimates for future general and administrative and interest expense have not been considered. For standardized measure
purposes, the Company estimates future income taxes using the "year-by-year" method. For ceiling test purposes, the Company estimates future income taxes using the
"short-cut" method. Discounted amounts are based on a 10% annual discount rate.

The following table sets forth the Company's standardized measure of discounted future net cash flows at December 31, 2001, 2000 and 1999.

|                                                         |                       | December 31, 2001 |        
|-------------------------------------------------------- | --------------------- | ----------------- | -------
|
|
|Future oil and gas revenue                               |                       | $                 | 84,038 
|Future production costs                                  |                       |                   | (24,141
|Future development costs                                 |                       |                   | (6,734 
|Future income tax expense                                |                       |                   | (6,224 
|                                                         |                       |                   |        
|                                                         | Future net cash flows |                   |        
|10% annual discount for estimated timing of cash flows   |                       |                   | (18,235
|                                                         |                       |                   |        
|Standardized measure of discounted future net cash flows |                       | $                 | 28,704 
|                                                         |                       |                   |        

The
computation of the standardized measure of discounted future net cash flow relating to proved oil and gas reserves at December 31, 2001 was based on average oil and liquids
prices of $18.45 per barrel in the United States and $13.02 per barrel in Canada, and average natural gas prices of $2.25 per Mcf in the United States and $2.30 per Mcf in Canada.

|                                                         |                       | December 31, 2000 |        
|-------------------------------------------------------- | --------------------- | ----------------- | -------
|
|
|Future oil and gas revenue                               |                       | $                 | 326,156
|Future production costs                                  |                       |                   | (51,331
|Future development costs                                 |                       |                   | (7,923 
|Future income tax expense                                |                       |                   | (75,844
|                                                         |                       |                   |        
|                                                         | Future net cash flows |                   |        
|10% annual discount for estimated timing of cash flows   |                       |                   | (79,804
|                                                         |                       |                   |        
|Standardized measure of discounted future net cash flows |                       | $                 | 111,254
|                                                         |                       |                   |        

The
computation of the standardized measure of discounted future net cash flow relating to proved oil and gas reserves at December 31, 2000 was based on average oil and liquids
prices of $25.50 per barrel in the United States and $21.73 per barrel in Canada, and average natural gas prices of $9.76 per Mcf in the United States and $9.00 per Mcf in Canada.

|                                                         |                       | December 31, 1999 |        
|-------------------------------------------------------- | --------------------- | ----------------- | -------
|
|
|Future oil and gas revenue                               |                       | $                 | 68,542 
|Future production costs                                  |                       |                   | (19,473
|Future development costs                                 |                       |                   | (5,916 
|Future income tax expense                                |                       |                   | (772   
|                                                         |                       |                   |        
|                                                         | Future net cash flows |                   |        
|10% annual discount for estimated timing of cash flows   |                       |                   | (16,952
|                                                         |                       |                   |        
|Standardized measure of discounted future net cash flows |                       | $                 | 25,429 
|                                                         |                       |                   |        

---

The
computation of the standardized measure of discounted future net cash flow relating to proved oil and gas reserves as of December 31, 1999 was based on average oil prices of
$24.41 per barrel and natural gas prices of $2.05 per Mcf.

The
standardized measure of discounted future net cash flows should not be construed to be an estimate of the fair value of the Company's proved reserves. Changes in the demand for oil
and gas, price changes, reserve recovery variances and other factors make such estimates inherently imprecise and subject to revision.

The
tables below set forth the principle sources of changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2001 and 2000 and the
period from inception (September 14, 1999) through December 31, 1999.

|                                                                                                                       |                                                                      | December 31, 2001 |        
|---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------- | -------
|
|
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year |                                                                      | $                 | 111,254
|Changes resulting from:                                                                                                |                                                                      |                   |        
|                                                                                                                       | Sales and transfers of oil and gas produced, net of production costs |                   |        
|                                                                                                                       | Net change in sales price and future production costs                |                   |        
|                                                                                                                       | Net changes in future development costs                              |                   |        
|                                                                                                                       | Net changes due to extensions, discoveries and improved recovery     |                   |        
|                                                                                                                       | Revision of previous quantity estimates                              |                   |        
|                                                                                                                       | Purchase of reserves in place                                        |                   |        
|                                                                                                                       | Sales of reserves in place                                           |                   |        
|                                                                                                                       | Accretion of discount                                                |                   |        
|                                                                                                                       | Net change in income tax                                             |                   |        
|                                                                                                                       | Other                                                                |                   |        
|                                                                                                                       |                                                                      |                   |        
|                                                                                                                       |                                                                      | Net changes       |        
|                                                                                                                       |                                                                      |                   |        
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year       |                                                                      | $                 | 28,704 
|                                                                                                                       |                                                                      |                   |        



|                                                                                                                       |                                                                      | December 31, 2000 |        
|---------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------- | -------
|
|
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at beginning of year |                                                                      | $                 | 25,429 
|Changes resulting from:                                                                                                |                                                                      |                   |        
|                                                                                                                       | Sales and transfers of oil and gas produced, net of production costs |                   |        
|                                                                                                                       | Net change in sales price and future production costs                |                   |        
|                                                                                                                       | Net changes in future development costs                              |                   |        
|                                                                                                                       | Net changes due to extensions, discoveries and improved recovery     |                   |        
|                                                                                                                       | Revision of previous quantity estimates                              |                   |        
|                                                                                                                       | Purchase of reserves in place                                        |                   |        
|                                                                                                                       | Accretion of discount                                                |                   |        
|                                                                                                                       | Net change in income tax                                             |                   |        
|                                                                                                                       | Other                                                                |                   |        
|                                                                                                                       |                                                                      |                   |        
|                                                                                                                       |                                                                      | Net changes       |        
|                                                                                                                       |                                                                      |                   |        
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year       |                                                                      | $                 | 111,254
|                                                                                                                       |                                                                      |                   |        

---

|                                                                                                                                    |                                                                      | December 31, 1999 |       
|----------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------- | ------
|
|
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at inception (September 14, 1999) |                                                                      | $                 |      
|Changes resulting from:                                                                                                             |                                                                      |                   |       
|                                                                                                                                    | Sales and transfers of oil and gas produced, net of production costs |                   |       
|                                                                                                                                    | Net change in sales price and future production costs                |                   |       
|                                                                                                                                    | Revision of previous quantity estimates                              |                   |       
|                                                                                                                                    | Purchase of reserves in place                                        |                   |       
|                                                                                                                                    | Accretion of discount                                                |                   |       
|                                                                                                                                    | Other                                                                |                   |       
|                                                                                                                                    |                                                                      |                   |       
|                                                                                                                                    |                                                                      | Net changes       |       
|                                                                                                                                    |                                                                      |                   |       
|Standardized measure of discounted future net cash flows relating to proved oil and gas reserves, at end of year                    |                                                                      | $                 | 25,429
|                                                                                                                                    |                                                                      |                   |       

---



12. Quarterly Financial Data (Unaudited)

The following table sets forth the Company's quarterly results of operations for 2001 and 2000.

|                           |  | 2001 |      
|-------------------------- |  | ---- | -----
|
|
|Operating revenues         |  | $    | 8,303
|Operating expenses         |  |      | 1,368
|Operating margin           |  |      | 6,935
|Net income (loss)          |  |      | 1,016
|Basic earnings per share   |  |      | 0.17 
|Diluted earnings per share |  |      | 0.16 

|                           |  | 2000
|-------------------------- |  | ----
|
|Operating revenues         |  | $   
|Operating expenses         |  |     
|Operating margin           |  |     
|Net income                 |  |     
|Basic earnings per share   |  |     
|Diluted earnings per share |  |     

In
the fourth quarter of 2001, the Company commenced reporting its Canadian royalty expense, net of Alberta Royalty Tax Credit, as a component of oil and gas revenues. Formerly this
expense was presented as a component of operating expenses. The above table reflects this methodology. The following table sets forth the Company's quarterly results of operations as originally
reported.

|                   |  | 2001
|------------------ |  | ----
|
|
|Operating revenues |  | $   
|Operating expenses |  |     

|                   |  | 2000
|------------------ |  | ----
|
|Operating revenues |  | $   
|Operating expenses |  |     





Bonneville Fuels Corporation
and Subsidiaries

Consolidated Financial Statements



INDEX TO FINANCIAL STATEMENTS



|                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------
|Independent Auditor's Report                                                                                                                     
|Consolidated Balance SheetsOctober 31, 1999 and December 31, 1998                                                                               
|Consolidated Statements of OperationsFor the Period From January 1, 1999 through October 31, 1999 and the Years Ended December 31, 1998 and
1997
|Consolidated Statement of Stockholder's EquityFor the Period From January 1, 1997 through October 31, 1999                                      
|Consolidated Statements of Cash FlowsFor the Period From January 1, 1999 through October 31, 1999 and the Years Ended
December 31, 1998 and 1997
|Notes to Consolidated Financial Statements                                                                                                       





INDEPENDENT AUDITOR'S REPORT

Board
of Directors
Bonneville Fuels Corporation
Denver, Colorado

We
have audited the accompanying consolidated balance sheets of Bonneville Fuels Corporation and subsidiaries as of October 31, 1999 and December 31, 1998 and the related
consolidated statements of operations, stockholder's equity, and cash flows for the period from January 1, 1999 through October 31, 1999 and the years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bonneville Fuels Corporation and subsidiaries
as of October 31, 1999 and December 31, 1998, and the results of their operations and their cash flows for the 10-month period ended October 31, 1999 and the years
ended December 31, 1998 and 1997, in conformity with generally accepted accounting principles.

Hein + Associates
LLP
March 1, 2000





BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS

|                                                    |                                                                                | October 31,                                               |                             | December 31, |            
|--------------------------------------------------- | ------------------------------------------------------------------------------ | --------------------------------------------------------- | --------------------------- | ------------ | -----------
|
|ASSETS                                              |                                                                                |                                                           |                             |              |            
|Current assets:                                     |                                                                                |                                                           |                             |              |            
|                                                    | Cash                                                                           |                                                           | $                           | 249,000      |            
|                                                    | Restricted cash in Rabbi Trust                                                 |                                                           |                             | 898,000      |            
|                                                    | Accounts receivable, trade                                                     |                                                           |                             | 2,499,000    |            
|                                                    | Accounts receivable, other                                                     |                                                           |                             | 69,000       |            
|                                                    | Amounts due from broker                                                        |                                                           |                             | 1,519,000    |            
|                                                    | Prepaid expenses and other                                                     |                                                           |                             | 131,000      |            
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | Total current assets        |              |            
|                                                    |                                                                                |                                                           |                             |              |            
|Property and equipment, at cost:                    |                                                                                |                                                           |                             |              |            
|                                                    | Oil and gas properties, using the successful efforts method:                   |                                                           |                             |              |            
|                                                    |                                                                                | Unproved properties                                       |                             |              | 3,025,000  
|                                                    |                                                                                | Proved properties                                         |                             |              | 34,128,000 
|                                                    | Furniture and equipment                                                        |                                                           |                             | 499,000      |            
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | 37,652,000                  |              |            
|                                                    |                                                                                | Less accumulated depreciation, depletion and amortization |                             |              | (21,022,000
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | Property and equipment, net |              |            
|                                                    |                                                                                |                                                           |                             |              |            
|Other assets:                                       |                                                                                |                                                           |                             |              |            
|                                                    | Deposits and other                                                             |                                                           |                             | 240,000      |            
|                                                    | Rabbi Trust                                                                    |                                                           |                             | 648,000      |            
|                                                    | Deferred loan costs, net                                                       |                                                           |                             | 29,000       |            
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | Total other assets          |              |            
|                                                    |                                                                                |                                                           |                             |              |            
|Total assets                                        |                                                                                | $                                                         | 22,912,000                  |              | $          
|                                                    |                                                                                |                                                           |                             |              |            
|LIABILITIES AND STOCKHOLDER'S EQUITY                |                                                                                |                                                           |                             |              |            
|Current liabilities:                                |                                                                                |                                                           |                             |              |            
|                                                    | Accounts payable and accrued expenses                                          |                                                           | $                           | 2,490,000    |            
|                                                    | Accrued production taxes payable                                               |                                                           |                             | 284,000      |            
|                                                    | Undistributed revenue                                                          |                                                           |                             | 637,000      |            
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | Total current liabilities   |              |            
|                                                    |                                                                                |                                                           |                             |              |            
|Commitments and contingencies (notes 2, 4, 6 and 8) |                                                                                |                                                           |                            |              |            
|Long-term debt                                      |                                                                                |                                                           | 9,800,000                   |              |            
|Stockholder's equity:                               |                                                                                |                                                           |                             |              |            
|                                                    | Common stock, $.01 par value; 1,000 shares authorized, issued, and outstanding |                                                           |                             |             |            
|                                                    | Additional paid-in capital                                                     |                                                           |                             | 3,475,000    |            
|                                                    | Retained earnings                                                              |                                                           |                             | 6,226,000    |            
|                                                    |                                                                                |                                                           |                             |              |            
|                                                    |                                                                                |                                                           | Total stockholder's equity  |              |            
|                                                    |                                                                                |                                                           |                             |              |            
|Total liabilities and stockholder's equity          |                                                                                | $                                                         | 22,912,000                  |              | $          
|                                                    |                                                                                |                                                           |                             |              |            

See
accompanying notes to these consolidated financial statements.





BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF OPERATIONS

|                           |                                                  | For the Ten
Months Ended
October 31, |            | For the Year Ended
December 31,
|-------------------------- | ------------------------------------------------ | ------------------------------------ | ---------- | -------------------------------
|
|Revenues:                  |                                                  |                                      |            |                                
|                           | Oil and gas sales                                |                                      | $          | 7,820,000                      
|                           | Gas marketing and transportation                 |                                      |            | 9,805,000                      
|                           | Electricity sales                                |                                      |            | 1,782,000                      
|                           | Other                                            |                                      |            | 619,000                        
|                           |                                                  |                                      |            |                                
|                           |                                                  |                                      | 20,026,000 |                                
|                           |                                                  |                                      |            |                                
|Expenses:                  |                                                  |                                      |            |                                
|                           | Oil and gas production costs                     |                                      |            | 2,860,000                      
|                           | Gas marketing and transportation                 |                                      |            | 9,773,000                      
|                           | Cost of electricity                              |                                      |            | 1,729,000                      
|                           | Depreciation, depletion and amortization expense |                                      |            | 2,092,000                      
|                           | Exploration expense                              |                                      |            | 800,000                        
|                           | Impairment expense                               |                                      |            | 60,000                         
|                           | General and administrative expense               |                                      |            | 1,620,000                      
|                           | Interest expense                                 |                                      |            | 454,000                        
|                           |                                                  |                                      |            |                                
|                           |                                                  |                                      | 19,388,000 |                                
|                           |                                                  |                                      |            |                                
|Income (Loss) Before Taxes |                                                  |                                      | 638,000    |                                
|Tax Expense (Benefit):     |                                                  |                                      |            |                                
|                           | Current                                          |                                      |            |                               
|                           | Deferred                                         |                                      |            |                               
|                           |                                                  |                                      |            |                                
|Net Income (Loss)          |                                                  | $                                    | 638,000    |                                
|                           |                                                  |                                      |            |                                

See
accompanying notes to these financial statements.



BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES    CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY  FOR THE PERIOD FROM JANUARY 1, 1997 THROUGH OCTOBER 31, 1999

|                            |                                                     | Common Stock |   |   |   |   |   |           |          
|--------------------------- | --------------------------------------------------- | ------------ | - | - | - | - | - | --------- | ---------
|
|
|Balances, January 1, 1997   |                                                     | 1,000        |   | $ |  |   | $ | 1,812,000 |          
|                            | Net income                                          |              |  |   |   |  |   |           |         
|                            |                                                     |              |   |   |   |   |   |           |          
|Balances, December 31, 1997 |                                                     | 1,000        |   |   |  |   |   | 1,812,000 |          
|                            | Intercompany payables converted to equity by parent |              |  |   |   |  |   |           | 1,663,000
|                            | Net loss                                            |              |  |   |   |  |   |           |         
|                            |                                                     |              |   |   |   |   |   |           |          
|Balances, December 31, 1998 |                                                     | 1,000        |   |   |  |   |   | 3,475,000 |          
|                            | Net income                                          |              |  |   |   |  |   |           |         
|                            |                                                     |              |   |   |   |   |   |           |          
|Balances, October 31, 1999  |                                                     | 1,000        |   | $ |  |   | $ | 3,475,000 |          
|                            |                                                     |              |   |   |   |   |   |           |          

See
accompanying notes to these financial statements.





BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                   |                                                                                                  | For the Ten
Months Ended
October 31,             |                         | For the Year Ended
December 31,       |           
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------ | ----------------------- | ------------------------------------- | ----------
|
|Cash flows from operating activities:              |                                                                                                  |                                                  |                         |                                       |           
|                                                   | Net income (loss)                                                                                |                                                  | $                       | 638,000                               |           
|                                                   | Adjustments to reconcile net income (loss) to net cash provided by operating activities:         |                                                  |                         |                                       |           
|                                                   |                                                                                                  | Deferred taxes                                   |                         |                                       |          
|                                                   |                                                                                                  | Depreciation, depletion and amortization expense |                         |                                       | 2,071,000 
|                                                   |                                                                                                  | Impairment of property and equipment             |                         |                                       | 60,000    
|                                                   |                                                                                                  | Amortization of loan costs                       |                         |                                       | 16,000    
|                                                   |                                                                                                  | Changes in operating assets and liabilities:     |                         |                                       |           
|                                                   |                                                                                                  |                                                  | Decrease (increase) in: |                                       |           
|                                                   |                                                                                                  |                                                  |                         | Accounts receivable, trade            |           
|                                                   |                                                                                                  |                                                  |                         | Amount due from broker                |           
|                                                   |                                                                                                  |                                                  |                         | Prepaid expenses and other            |           
|                                                   |                                                                                                  |                                                  |                         | Rabbi Trust                           |           
|                                                   |                                                                                                  |                                                  |                         | Other assets                          |           
|                                                   |                                                                                                  |                                                  | Increase (decrease in): |                                       |           
|                                                   |                                                                                                  |                                                  |                         | Accounts payable and accrued expenses |           
|                                                   |                                                                                                  |                                                  |                         | Accrued production taxes payable      |           
|                                                   |                                                                                                  |                                                  |                         | Undistributed revenues                |           
|                                                   |                                                                                                  |                                                  |                         | Deferred gain and other liabilities   |           
|                                                   |                                                                                                  |                                                  |                         | Taxes payable to parent               |           
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|                                                   |                                                                                                  | Net cash provided (used) by operating activities |                         |                                       | (1,712,000
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|Cash flows from investing activities:              |                                                                                                  |                                                  |                         |                                       |           
|                                                   | Capital expenditures for oil and gas properties                                                  |                                                  |                         | (4,731,000                            | )         
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|                                                   |                                                                                                  | Net cash used in investing activities            |                         |                                       | (4,731,000
|Cash flows from financing activities:              |                                                                                                  |                                                  |                         |                                       |           
|                                                   | Proceeds from note payable                                                                       |                                                  |                         | 6,675,000                             |           
|                                                   | Payments on note payable                                                                         |                                                  |                         | (2,725,000                            | )         
|                                                   | Production payment received                                                                      |                                                  |                         |                                      |           
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|                                                   |                                                                                                  | Net cash provided by financing activities        |                         |                                       | 3,950,000 
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|Net increase (decrease) in cash and equivalents    |                                                                                                  |                                                  | (2,493,000              | )                                     |           
|Cash, beginning of year                            |                                                                                                  |                                                  | 2,742,000               |                                       |           
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|Cash, end of year                                  |                                                                                                  | $                                                | 249,000                 |                                       | $         
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|Supplemental disclosures of cash flow information: |                                                                                                  |                                                  |                         |                                       |           
|                                                   | Cash paid for interest                                                                           |                                                  | $                       | 453,000                               |           
|                                                   |                                                                                                  |                                                  |                         |                                       |           
|                                                   | Noncash investing and financing activities-intercompany payable contributed to capital by parent |                                                  | $                       |                                      |           
|                                                   |                                                                                                  |                                                  |                         |                                       |           

See
accompanying notes to these financial statements.





BONNEVILLE FUELS CORPORATION AND SUBSIDIARIES        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Significant Accounting Policies

Nature of OperationBonneville Fuels Corporation (BFC), which was a wholly-owned subsidiary of Bonneville Pacific Corporation
(BPC), was incorporated in the State of Colorado in April 1987 and began doing business in June 1987. The Company owns four subsidiaries, Bonneville Fuels Marketing Corporation (BFMC),
Bonneville Fuels Management Corporation (BFM Corp.), Bonneville Fuels Operating Corporation (BFO), and Colorado Gathering Corporation (CGC). Collectively, these entities are referred to as the
Company. The Company's principal operations include exploration for and production of oil and gas reserves, marketing of natural gas, and gathering of natural gas. The Company from time to time also
purchases and resells electricity.

The
Company was acquired by Carbon Energy Corporation (Carbon) on October 29, 1999 for approximately $23,858,000. The accompanying financial statements do not include the purchase
price adjustments that will be recorded by Carbon.

Principles of ConsolidationThe consolidated financial statements include the accounts of BFC and its four wholly-owned
subsidiaries. All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements. The Company consolidates its pro rata share of oil and
gas ventures in these consolidated financial statements.

Cash EquivalentsThe Company considers all highly liquid debt instruments purchased with an original maturity of three months
or less to be cash equivalents.

Restricted Cash in Rabbi TrustRestricted cash in Rabbi Trust represents payments to be made within the next year to severed
employees.

Gas MarketingThe Company's marketing contracts are generally month-to-month or up to eighteen months,
and provide that the Company will sell gas to end users which is produced from the Company's properties and acquired from third parties.

Amounts Due From BrokerThis account generally represents net cash margin deposits held by a brokerage firm for the Company's
trading accounts.

Oil and Gas Producing ActivitiesThe Company follows the "successful efforts" method of accounting for its oil and gas
properties, all of which are located in the continental United States. Under this method of accounting, all property acquisition costs and costs of exploratory and development wells are capitalized
when incurred, pending determination of whether the well has found proved reserves. If an exploratory well has not found proved reserves, the costs of drilling the well are charged to expense. The
costs of development wells are capitalized whether productive or nonproductive.

Geological
and geophysical costs and the costs of carrying and retaining undeveloped properties are expensed as incurred. Depreciation and depletion of capitalized costs for producing
oil and gas properties is computed using the units-of-production method based upon proved reserves for each field.

In
1997, the Company began to accrue for future plugging, abandonment, and remediation using the negative salvage value method whereby costs are expensed through additional depletion
expense over the remaining economic lives of the wells. Management's estimate of the total future costs to plug, abandon, and remediate the Company's share of all existing wells, including those
currently shut in is approximately $3,500,000 net of salvage values. The total cumulative amount accrued as additional depletion for plugging and abandonment is $612,000 at October 31, 1999.

The
Company follows Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for Impairment of Long-Lived Assets". This statement limits net capitalized
costs of proved oil and gas properties to the aggregate undiscounted future net revenues related to each field. If the net capitalized costs exceed the limitation, impairment is provided to reduce the
carrying value of the properties in the field to estimated actual value. The impairment is included as a reduction of gross oil
and gas properties in the accompanying balance sheet. For the 10 months ended October 31, 1999 and the years ended December 31, 1998 and 1997, the Company recorded impairments of
$60,000, $1,858,000 and $312,000, respectively. Factors causing the impairment of oil and gas properties were the decline in oil prices worldwide and the re-assessment of reserve values on
certain producing properties in 1998 and re-assessment of reserve values on a drilling venture in 1999. The primary factor causing the impairments in 1997 was the reevaluation of certain
undeveloped leases.

Gains
and losses are generally recognized upon the sale of interests in proved oil and gas properties based on the portion of the property sold. For sales of partial interests in
unproved properties, the Company treats the proceeds as a recovery of costs with no gain recognized until all costs have been recovered.

Revenue RecognitionThe Company recognizes revenue for oil and gas production upon delivery of the commodity to the purchaser.

The
Company records sales and related cost of sales on gas and electricity marketing transactions using the accrual method of accounting (i.e., the transaction is recorded when the
commodity is purchased and/or delivered).

Undistributed RevenueRepresents amounts due to other owners of jointly owned oil and gas properties for their revenue from
the properties.

Energy Marketing ArrangementsIn 1998, BFC entered into an agreement to manage certain natural gas contracts of an unrelated
entity. This agreement was terminated on April 30, 1999. For some contracts, BFC takes title to the gas purchased to service these contracts prior to the sale under the contracts. For these
contracts, BFC records all revenue, expenses, receivables and payables associated with the contracts. In contracts where title is not taken, BFC records only the margin associated with the
transaction.

Other Property and EquipmentDepreciation of other property and equipment is calculated using the straight-line
method over the estimated useful lives (ranging from 3 to 25 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating expense as incurred. Material
expenditures which increase the life of an asset are capitalized and depreciated over the estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the
related accumulated depreciation or amortization are removed from the accounts, and any gains or losses are reflected in current operations.

Deferred Loan CostsCosts associated with the Company's note payable have been deferred and are being amortized using the
effective interest method over the original term of the note.

Gas BalancingThe Company uses the sales method of accounting for amounts received from natural gas sales resulting from
production credited to the Company in excess of its revenue interest share. Under this method, all proceeds from production credited to the Company are recorded as revenue until such time as the
Company has produced its share of related estimated remaining reserves. Thereafter, additional amounts received are recorded as a liability.

Income TaxesThe Company accounts for income taxes under the liability method which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. BPC includes the Company's operations in its consolidated tax return. Income taxes are allocated by BPC as if the Company were a separate taxpayer.

Accounting for Hedged TransactionsThe Company periodically enters into futures, forwards, and swap contracts as hedges of
commodity prices associated with the production of oil and gas and with the purchase and sale of natural gas in order to mitigate the risk of market price fluctuations. Changes in the market value of
futures, forwards, and swap contracts are not recognized until the related production occurs or until the related gas purchase or sale takes place. Realized losses from any positions which were closed
early are deferred and recorded as an asset or liability in the accompanying balance sheet, until the related production, purchase or sale takes place. Gains and losses incurred on these contracts are
included in oil and gas revenue or in gas marketing costs in the accompanying statements of operations.

Accounting EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts reported in these financial statements and the accompanying notes. The actual results could differ from those estimates.

Impact of Recently Issued Accounting Pronouncements (Unaudited)In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This pronouncement is effective for fiscal quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 requires companies to report all derivatives at fair value as either assets or liabilities and bases the accounting treatment of the derivatives on the reasons an entity holds the
instrument. The Company is currently reviewing the effects SFAS No. 133 will have on the financial statements in relation to the Company's hedging activities.

2. Parent Company Bankruptcy and Related Transactions

In 1991, BPC filed a petition for re-organization under Chapter 11 of the U.S. Bankruptcy Code. In 1998, BPC emerged from bankruptcy.

In
1998, BPC approved the conversion of $1,633,000 in taxes payable to equity.

There
are no significant expenses incurred by Bonneville Pacific Corporation on behalf of Bonneville Fuels Corporation, nor by Bonneville Fuels Corporation on behalf of Bonneville
Pacific Corporation.

3. Long-term Debt

The Company has an asset-based line-of-credit with a bank which provides for borrowing up to the borrowing base (as defined). The
borrowing base was $16,900,000 at October 31, 1999. At October 31, 1999, outstanding borrowings amounted to $9,800,000. The Company has issued letters of credit totaling $2,167,000,
which further reduces the amount available for borrowing under the base. This facility is collateralized by certain oil and gas properties of the Company and is scheduled to convert to a term note on
July 1, 2001. This term loan is scheduled to have a maturity of either the economic half life of the Company's remaining reserves on the date of conversion, or July 1, 2006, whichever is
earlier. The facility bears interest at prime (8.5% at October 31, 1999). The borrowing base is based upon the lender's evaluation of BFC's proved oil and gas reserves, generally determined
semi-annually. The future minimum principal payments under the term note will be dependent upon the bank's evaluation of the Company's reserves at that time.

The
Company also has an accounts receivable-based credit facility which includes a revolving line-of-credit with the bank which provides for borrowings and
letters of credit up to $1,500,000. There were no outstanding borrowings under this facility at October 31, 1999, however, there was a letter of credit issued in the amount of $40,000, which
reduces the amount available under this line. This facility bears interest at prime (8.5% at October 31, 1999). This facility is collateralized by certain trade receivables of BFC and has a
maturity date of July 1, 2001.

The
credit agreement contains various covenants which prohibit or limit the Company's ability to pay dividends, purchase treasury shares, incur indebtedness, repay debt to the parent,
sell properties or merge with another entity. The Company is also required to maintain certain financial ratios. The bank waived the non-merger covenants in connection with the acquisition
by Carbon.

4. Salary Continuation Plan

In 1999, the Company established a Salary Continuation Plan (the "Plan"). The Plan provides for continuation of salary and health, dental, disability, and life
insurance benefits for a certain period of time based on employment contracts or length of service, if the employee is terminated within 2 years following the effective date of the Company's
acquisition by Carbon. The maximum amount which could be disbursed under the Plan is $1,546,000.

The
employees will be required to pay any increased premiums for the insurance benefits and the Plan insurance commitment is capped at the above amount.

Terminations
as of October 31, 1999 will require payment out of the Rabbi Trust in the amount of $438,000. Cost associated with these terminations has been expensed in the current
period, and accrued for as of October 31, 1999. No additional terminations are expected as of October 31, 1999.

Subsequent
to October 31, 1999, contracts with various employees have resulted in the actual payment or agreement to pay an additional $460,000 from the trust within the next
12 months. These payments will be expensed subsequent to October 31, 1999.

The
Company has deposited the maximum amount noted above in a Rabbi Trust cash account. This Trust is restricted from disbursing funds except for the payment of benefits or upon the
insolvency of the Company. The amounts to be paid in 2000 are recorded as a current asset. All remaining amounts are recorded as a long-term asset. The trustee fees were not material for
the period ending October 31, 1999.

5. Exploration Expense

Exploration expense consists of the following:

|                                              |  | For the
Ten Months
Ended
October 31, |         | For the Year Ended
December 31,
|--------------------------------------------- |  | ------------------------------------ | ------- | -------------------------------
|
|Annual rental payments on unproved properties |  | $                                    | 20,000  |                                
|Geological and geophysical cost               |  |                                      | 476,000 |                                
|Dry hold costs and abandonments               |  |                                      | 304,000 |                                
|                                              |  |                                      |         |                                
|                                              |  | $                                    | 800,000 |                                
|                                              |  |                                      |         |                                



6. Commitments

Office LeaseThe Company leases office space under a noncancellable operating lease. Total rental expense was approximately
$123,000, $139,000 and $58,000 for the 10 months ended October 31, 1999 and for the years ended December 31, 1998 and 1997, respectively. The Company has a lease agreement which
provides for total minimum rental commitments of:

Remaining 1999

$
24,0002000


152,0002001


158,0002002


164,0002003


28,000$
526,000


Well Connection ReimbursementThe Company entered into a contract with an unrelated party in 1997 to connect certain wells to
sales pipelines. The Company is obligated to reimburse the unrelated party for the difference between the gathering fees generated by these wells and the cost of connection. The accompanying financial
statements contain an accrual of $250,000, representing management's current estimate of the potential liability under this agreement.



7. Income Taxes

The components of the net deferred tax assets are as follows:

As of
October 31,

As of
December 31,1999

1998Excess of tax basis over book basis of oil and gas properties

$
3,153,000

$
1,873,000Deferred tax assets


3,153,000


1,873,000Less valuation allowance


(3,153,000
)

(1,873,000
)Net deferred tax assets

$


$



The
effective tax rate of the Company differed from the Federal statutory rate primarily due to changes in the valuation allowance on the deferred tax assets.

8. Concentrations of Credit Risk and Price Risk Management

Concentrations of Credit RiskSubstantially all of the Company's accounts receivable at October 31, 1999 result from
crude oil and natural gas sales and/or joint interest billings to companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall
credit risk, either positively or negatively, since these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral from a
customer or joint interest owner, the Company analyzes the entity's net worth, cash flows, earnings, and credit ratings. Receivables are generally not collateralized. Historical credit losses incurred
on trade receivables by the Company have been insignificant.

The
Company's revenues are predominantly derived from the sale of natural gas and management estimates that over 85% of the value of the Company's properties is derived from natural gas
reserves.

Energy Financial InstrumentsBFC uses energy financial instruments and long-term user contracts to minimize its
risk of price changes in the spot and fixed price natural gas and crude oil markets. Energy risk management products used include commodity futures and options contracts, fixed-price swaps, and basis
swaps. Pursuant to company guidelines BFC is to engage in these activities only as a hedging mechanism against price volatility associated with pre-existing or anticipated gas or crude oil
sales in order to protect profit margins. As of October 31, 1999, BFC has financial contracts which hedge a total of 4.1 Bcf (billion cubic feet) of production through December 31, 2001.

The
difference between the current market value of the hedging contracts and the original market value of the hedging contracts was an unfavorable $1,733,000 as of October 31,
1999. These amounts are not reflected in the accompanying financial statements. In the event energy financial instruments do not qualify for hedge accounting, the difference between the current market
value and the original contract value would be currently recognized in the statement of operations. In the event that the energy financial instruments are terminated prior to the delivery of the item
being hedged, the gains and losses at the time of the termination are deferred until the period of physical delivery. Such deferrals were immaterial at October 31, 1999.

9. Financial Instruments

SFAS Nos. 107 and 127 require certain entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly,
management's best estimate is that the carrying amount of cash, receivables, notes payable, accounts payable, undistributed revenue, and accrued expenses approximates the fair value of these instruments. See Note 8 for a discussion regarding the fair value of energy financial instruments.

10. Unaudited Supplemental Oil and Gas Reserve Information

Estimated Reserve Oil and Gas QuantitiesThe table below sets forth the estimated quantities of year end proved reserves at
October 31, 1999 and December 31, 1998 and 1997. The estimates were prepared by Ryder Scott Company, an independent reservoir engineering firm.

Proved Oil and Gas Reserves

Oil

Natural Gas(MBbl)

(MMcf)December 31, 1996

227

26,512Revisions to previous estimates

3

(1,569
)Extensions and discoveries

32

427Purchase of minerals in place

99

916Production

(63
)
(3,146
)December 31, 1997

298

23,140Revisions to previous estimates

(101
)
976Extensions and discoveries

34

5,011Purchase of minerals in place

0

0Production

(65
)
(3,272
)December 31, 1998

166

25,855Revisions to previous estimates

46

2,044Extensions and discoveries

78

6,937Purchase of minerals in place

0

0Production

(55
)
(3,505
)October 31, 1999

235

31,331Proved developed reserves:December 31, 1997

298

22,623December 31, 1998

166

25,855October 31, 1999

221

26,801


Standardized MeasureThe Standardized Measure schedule is presented below pursuant to the disclosure requirements of the
Securities and Exchange Commission and Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Producing Activities" (SFAS 69). Future cash flows are
calculated using year end oil and gas prices and operating expenses, and are discounted using a 10% discount factor.

Oil
and gas prices at October 31, 1999 and December 31, 1998 and 1997 of $19.68, $10.69 and $16.91 respectively, per barrel of oil and $2.50, $1.84 and $1.81 respectively,
per Mcf of gas were used in the estimation of Bonneville's reserves and future net cash flows.

Future
development and production costs are computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year,
based on year end costs and assuming continuation of existing economic conditions. Future income tax expense has not been provided based on the availability of net operating loss carry forwards and
other deductions available to the parent of the Company.

The
standardized measure is intended to provide a standard of comparable measurement of Bonneville's estimated proved oil and gas reserves based on economic and operating conditions
existing as of October 31, 1999, and December 31, 1998 and 1997. Pursuant to SFAS 69, future oil and gas revenues are calculated by applying to the proved oil and gas reserves the
oil and gas prices at the end of each reporting period relating to such reserves. Future price changes are considered only to the extent provided by contractual arrangement in existence at the report
date. Production and development costs are based upon costs at the report date. Discounted amounts are based on a 10% annual discount rate. Changes in the demand for oil and gas, price changes and
other factors make such estimates inherently imprecise and subject to revision.

Standardized Measure of Discounted Future Net Cash Flows Relating to
Estimated Proved Oil and Gas Reserves
(thousands of dollars)

|                                                         |  | October 31,
1999 |         | December 31,
1998 |   | December 31,
1997 |  
|-------------------------------------------------------- |  | ---------------- | ------- | ----------------- | - | ----------------- | -
|Future oil and gas revenue                               |  | $                | 82,818  |                   | $ | 49,428            |  
|Future production and development costs                  |  |                  | (26,490 | )                 |   | (18,507           | )
|                                                         |  |                  |         |                   |   |                   |  
|Future net cash flows                                    |  |                  | 56,328  |                   |   | 30,921            |  
|Discount @ 10%                                           |  |                  | (22,192 | )                 |   | (10,426           | )
|                                                         |  |                  |         |                   |   |                   |  
|Standardized measure of discounted future net cash flows |  | $                | 34,136  |                   | $ | 20,495            |  
|                                                         |  |                  |         |                   |   |                   |  

Change in Standardized Measure of Discounted Future
Net Cash Flows from Estimated Proved Oil and Gas Reserves
(thousands of dollars)

|                                                                     |  | October 31,
1999 |        | December 31,
1998 |   | December 31,
1997 |  
|-------------------------------------------------------------------- |  | ---------------- | ------ | ----------------- | - | ----------------- | -
|Standardized measure-beginning of period                             |  | $                | 20,495 |                   | $ | 19,629            |  
|Sales and transfers of oil and gas produced, net of production costs |  |                  | (4,960 | )                 |   | (3,754            | )
|Net changes in prices and production costs                           |  |                  | 10,834 |                   |   | (999              | )
|Extensions, discoveries and other additions                          |  |                  | 4,576  |                   |   | 4,699             |  
|Purchase of reserves in place                                        |  |                  |       |                   |   | 147               |  
|Revisions of future development costs                                |  |                  | (310   | )                 |   | 87                |  
|Revisions of previous quantity estimates                             |  |                  | 2,818  |                   |   | 279               |  
|Accretion of discount                                                |  |                  | 1,708  |                   |   | 1,963             |  
|Other                                                                |  |                  | (1,025 | )                 |   | (1,556            | )
|                                                                     |  |                  |        |                   |   |                   |  
|Net increase (decrease)                                              |  |                  | 13,641 |                   |   | 866               |  
|                                                                     |  |                  |        |                   |   |                   |  
|Standardized measure-end of period                                   |  | $                | 34,136 |                   | $ | 20,495            |  
|                                                                     |  |                  |        |                   |   |                   |  



Costs Incurred in Property Acquisition,
Exploration and Development Activities
(in thousands)

|                           |                      | Ten Months
Ended
October 31,
1999 |       | Year Ended
December 31,
1998 |  | Year Ended
December 31,
1997
|-------------------------- | -------------------- | --------------------------------- | ----- | ---------------------------- |  | ----------------------------
|Acquisition of properties: |                      |                                   |       |                              |  |                             
|                           | Proved properties    |                                   | $     |                             |  | $                           
|                           | Unproved properties  |                                   |       | 248                          |  |                             
|Exploration                |                      |                                   | 3,088 |                              |  | 1,932                       
|Development                |                      |                                   | 1,371 |                              |  | 3,784                       
|                           |                      |                                   |       |                              |  |                             
|                           | Total costs incurred |                                   | $     | 4,707                        |  | $                           
|                           |                      |                                   |       |                              |  |                             

Capitalized Costs Related to Oil and Gas
Producing Activities
(in thousands)

|                   |                                         | October 31,
1999             |                       | December 31,
1998 |       
|------------------ | --------------------------------------- | ---------------------------- | --------------------- | ----------------- | ------
|Capitalized costs: |                                         |                              |                       |                   |       
|                   | Unproven properties not being amortized |                              | $                     | 3,025             |       
|                   | Properties being amortized:             |                              |                       |                   |       
|                   |                                         | Productive and nonproductive |                       |                   | 33,970
|                   |                                         | Gas transportation system    |                       |                   | 158   
|                   |                                         |                              |                       |                   |       
|                   |                                         |                              | Costs being amortized |                   |       
|                   | Total capitalized costs                 |                              |                       | 37,153            |       
|                   | Less: Accumulated DD&A                  |                              |                       | (21,022           | )     
|                   |                                         |                              |                       |                   |       
|                   |                                         | Net capitalized costs        |                       | $                 | 16,131
|                   |                                         |                              |                       |                   |       

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

None.



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

For Part III, the information set forth in the Company's definitive Proxy Statement for the Company's 2002 Annual Meeting of Shareholders, to be filed, is
incorporated by reference into this Report.



PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

|(a)                                                                                                                                                                                                                             |  | (1)                  |  | Financial Statements:                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- |  | ----------------------------------------------------------------
|                                                                                                                                                                                                                                |  |                      |  | See indexes to Financial Statements of Carbon and BFC in Item 8.
|Schedules are omitted because of the absence of the conditions under which they are required or because the information is included in the Consolidated Financial Statements or notes to the Consolidated
Financial Statements.
|(b)                                                                                                                                                                                                                             |  | Reports on Form 8-K:
|The following report was filed by the Company on Form 8-K during the quarter ended December 31, 2001: None.                                                                                                                    
|(c)                                                                                                                                                                                                                             |  | Exhibits:           

|Exhibit
Number |  | Description of Exhibit
|-------------- |  | ----------------------
|3.1            |  |                       
|3.2            |  |                       
|10.1           |  |                       
|10.2           |  |                       
|10.3           |  |                       
|10.4           |  |                       
|10.5           |  |                       
|10.6           |  |                       
|10.7           |  |                       
|               |  |                       

|10.8 |  |  |  | Credit agreement dated as of September 22, 2000 between Bonneville Fuels Corporation and Wells Fargo Bank West, National Association, incorporated by reference in Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q, No. 1-15639, filed
November 14, 2000.
|---- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.9 |  |  |  | Financing commitment dated as of September 15, 2000 between CEC Resources Ltd. and Canadian Imperial Bank of Commerce, incorporated by reference to Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q, No. 1-15639, filed November 14,
2000.               
|23.1 |  |  |  | Consent of Arthur Andersen LLP *                                                                                                                                                                                                                                     
|23.2 |  |  |  | Consent of Hein + Associates LLP *                                                                                                                                                                                                                                   
|23.3 |  |  |  | Consent of Ryder Scott Company, L.P. *                                                                                                                                                                                                                               
|23.4 |  |  |  | Consent of Sproule Associates Limited *                                                                                                                                                                                                                              
|24   |  |  |  | Power of Attorney *                                                                                                                                                                                                                                                  
|99   |  |  |  | Letter from Registrant to the Securities and Exchange Commission relating to Arthur Andersen LLP*                                                                                                                                                                    

---





SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

Date:
April 1, 2002

| |  | CARBON ENERGY CORPORATION
| |  | -------------------------
| |  | By:                      
| |  | By:                      

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons of the Registrant and in the capacities and on the dates
indicated:

|Date          |  | Name and Title           |   |  | Signature                                 
|------------- |  | ------------------------ | - |  | ------------------------------------------
|              |  |                          |   |  |                                           
|April 1, 2002 |  | Cortlandt S. Dietler,    | ) |  |                                           
|              |  | Director                 | ) |  |                                           
|              |  |                          | ) |  |                                           
|April 1, 2002 |  | David H. Kennedy,        | ) |  |                                           
|              |  | Director                 | ) |  | /s/PATRICK R. MCDONALD                    
|              |  |                          | ) |  |                                           
|April 1, 2002 |  | Bryan H. Lawrence,       | ) |  | Patrick R. McDonald, for himself and as   
|              |  | Director                 | ) |  | Attorney-in-Fact for the named directors  
|              |  |                          | ) |  | who together constitute all of the members
|April 1, 2002 |  | Peter A. Leidel,         | ) |  | of Registrant's Board of Directors        
|              |  | Director                 | ) |  |                                           
|              |  |                          | ) |  |                                           
|April 1, 2002 |  | Patrick R. McDonald,     | ) |  |                                           
|              |  | Director                 | ) |  |                                           
|              |  |                          | ) |  |                                           
|April 1, 2002 |  | Harry A. Trueblood, Jr., | ) |  |                                           
|              |  | Director                 | ) |  |                                           
|              |  |                          | ) |  |                                           





EXHIBIT INDEX

|Exhibit Number |  | Description of Exhibit                                                                          
|-------------- |  | ------------------------------------------------------------------------------------------------
|23.1           |  | Consent of Arthur Andersen LLP                                                                  
|23.2           |  | Consent of Hein + Associates LLP                                                                
|23.3           |  | Consent of Ryder Scott Company, L.P.                                                            
|23.4           |  | Consent of Sproule Associates Limited                                                           
|24             |  | Power of Attorney                                                                               
|99             |  | Letter from Registrant to the Securities and Exchange Commission relating to Arthur Andersen LLP