Profile

PetroleumDevelopment Corporation (NASDAQ: PETD) (PDC) is a rapidly growing independentoil and gas producer based in Bridgeport, W.Va. The Company's drilling andproduction operations are in the Rocky Mountains, Appalachian Basin, andMichigan. Approximately 82% of the Company's 2004 production was natural gas,and 72% of total production was provided by the Rocky Mountains operating area.PDC also owns and operates an Appalachian-based natural gas marketing company.

Sustainedprofitable growth is PDC's driving principle. Few peers can match the Company'srecord of increasing reserves, production and shareholder value over the pastdecade. We invite you to examine our 10-year comparison of key financial andoperating measures on pages 16 and 18, respectively. PDC expects to continueexceptional operating and financial performance in 2005 and beyond by combiningkey core-area acquisitions and drilling. PDC continues to expand its technical,geological and operating expertise to generate new opportunities.

2004Highlights

•           15thconsecutive profitable year 

•           97%drilling success on a record 158 gross wells 

•           Recordproduction of 12.7 billion cubic feet equivalent (Bcfe), up 21% from 2003's10.4 Bcfe

•           Recordproved reserves of 217 Bcfe, 69% in core Rocky Mountains operating area

•           Recorddrilling partnership sales of $100 million; $115 million in potentialpartnerships to be offered for sale in 2005

•           Recordoil and gas sales from Company well interests of $67.9 million

•           RecordAdjusted Cash Flow* of $62.5 million in 2004

•           Recordsales from natural gas marketing of $93.2 million

•           Recordnet income of $34.1 million ($2.05 per fully diluted share)

* See noteon page 17 for definition

Letter tothe Shareholders

We arepleased to be able to report another year of outstanding performance forPetroleum Development Corporation. While commodity prices were key to oursuccess, more important is our continued strong growth in the importantoperating categories. The combination of prices and performance generated newCompany records across a variety of operating and financial measures and higherper-share prices. 

Our greatermarket capitalization led to our inclusion during 2004 on the S&P SmallCap600 list. In 2003, we were added to the Russell 3000 index. As a component ofthese indices, we enjoy increased interest from institutions in our stock, withpositive effects for liquidity and share price. 

Each of ourfour business segments contributed to our 2004 performance. We set a new recordof $100 million in partnership sales in 2004. Proceeds from these partnershipsalong with a $50 million carryover from 2003 resulted in record revenue andprofits for our Drilling and Completion segment. In fact, with the rapidincrease in partnership activity, we were unable to complete all of thedrilling we had planned for the Company in addition to the drilling commitmentsfor the partnerships. We expect to be able to execute a more aggressivedevelopment program for the Company in 2005 in addition to maintaining thepartnership activity at 2004 levels.

Ourdrilling activity continues to focus on our western properties, with thepartnerships drilling in Colorado's Wattenberg and Grand Valley Fields. We arealso conducting infill drilling on our NECO (northeast Colorado) properties forthe Company, and we drilled the first of several planned exploratory wells innorthwest Colorado. In total we drilled 158 wells with four dry holes in 2004.

In additionto drilling new wells, our development activity included 42 recompletions inWattenberg Field on wells we purchased in 1999 and 2000. These recompletionscontinue to provide excellent production and economic results. We expect tobegin recompletion operations on some of our earlier Colorado partnership wellsin 2006. We also completed behind pipe zones on 10 wells in the AppalachianBasin.

Our 2004production increased to record levels of 10.4 billion cubic feet (Bcf) ofnatural gas and 381 thousand barrels (MBbl) of oil. This represents totalproduction of 12.7 Bcfe (1 Bbl = 6 Mcfe), up 21% from 10.4 Bcfe in 2003. Since1999, we have increased our production at a compound annual rate of 20% peryear, a record not many of our peers have matched. Despite this excellentincrease, we were limited in our drilling of new wells by the tight market fordrilling rigs. We plan to increase our Company drilling investment in 2005,with $80 million of our $108 million capital budget allocated to drillingprojects.

Our naturalgas marketing and well operations segments also made record contributions tothe total results. Strong gas prices helped to improve marketing margins, andwe continue to add to the properties we operate as we drill more wells for ourpartnerships and others.

We continueto seek growth through acquisitions that meet our economic and operatingcriteria. We made several offers for producing properties during 2004, but in astrong, perhaps even frothy, market other companies were willing to pay morethan we were. 

We expectto have other acquisition opportunities in 2005. Our cash flow exceeded ourcapital expenditures allowing us to pay down long-term debt to $21 million in2004 from $53 million at year-end 2003. We enter 2005 with a very strongbalance sheet and the potential for continued outstanding cash flow puts us inan excellent position to continue our growth this year. At December 31, 2004,our debt to equity ratio was an attractive 12.8%.

We areunequivocally optimistic about our many opportunities going forward. There isevery indication that our drilling partnerships will continue to sell verywell, as our first 2005 partnership was fully subscribed for $40 million inonly a few days. By the time of the annual meeting in June, we expect to haveclosed a second $40 million partnership with a third partnership planned laterin the year with $35 million to be offered. The majority of partnershipdrilling is to be conducted in Wattenberg and Grand Valley Fields.

The hotmarket for producing properties extends to proven undeveloped properties. As aresult we believe the relative attractiveness of exploratory drilling hasincreased and we plan an active exploratory program in 2005 on severaldifferent prospects. While this program could create substantial value for theCompany in the future, exploratory wells are accompanied by increased dry holerisk when compared to our bread and butter development wells. Under thesuccessful efforts method of accounting we use, exploratory wells must beexpensed in the period when we determine that they are not productive. A dryhole may also require expensing of acreage associated with the prospect. Thiscould result in greater earnings volatility for the Company, even for anexploratory program that successfully develops significant new prospects forfuture drilling. We discuss our exploratory plans in some depth later in thisreport, and will keep you informed of our progress as the program advances.

On theother end of the risk scale, we will continue our participation with thepartnerships in Wattenberg Field and Grand Valley Fields, and we areaccelerating our Wattenberg Field recompletion work and our NECO infilldrilling. We also plan to continue to seek additional producing propertypurchases in 2005. We will be patient and seek opportunities that add not onlyto our size but also to our future profitability.

It is agreat time to be in the oil and gas business, but success results only from theefforts of our excellent employees. We would like to recognize the outstandingefforts of all of the Company's employees and management in 2004. Working for arapidly growing company creates constant challenges. Our dedicated employeesconsistently deliver outstanding results each and every year. We would alsolike to commend our non-employee directors for their efforts in 2004. Newgovernance requirements are demanding far more of their attention and time.They have been unselfish in their commitment of time, knowledge and concern toadvancing Petroleum Development Corporation. The Company's success does notbelong to any one of us, but to all of us.

Steven R.Williams     Thomas E. Riley

Chairmanand CEO    President

            March31, 2005                       

OperationsReview

Formanagement and reporting purposes, we divide the operations of PetroleumDevelopment Corporation into four segments: Drilling and Development, Oil andGas Sales, Natural Gas Marketing, and Well Operations. In addition, PDCrealizes limited revenue from non-operating activities, principally throughinterest and management fees. The charts on page 7 show the relativecontribution of each of these areas to PDC's revenue and pre-tax income.

Drillingand Development

OurDrilling and Development segment contributed greatly to PDC's success in 2004as in prior years. For our size, we manage one of the country's most activedrilling programs, because we develop properties not just for the Company, butalso for our Company-sponsored partnerships. In 2004, we drilled 158 new wells,157 of which were in three developmental fields in Colorado. Only four of the157 developmental wells we drilled were not productive. We also drilled oneexploratory well to test the development potential of a new area in northwestColorado. Testing of the well was delayed until the second quarter of 2005 byenvironmentally based access restrictions on the federal lease during winterand spring months, so we haven't yet been able to classify the well assuccessful or dry.  PDC's drilling activities and their locations are discussedin more detail later in the report.

Tounderstand how Drilling and Development operations affect the Company, it helpsto think of this segment as a "service company" type activity. PDC sellsinterests in the wells it drills to other investors, primarily publiclyregistered drilling partnerships sponsored by the Company. These Company-sponsoredpartnerships are sold through a nationwide network of NASD investment advisors.Currently more than 140 NASD Broker/Dealers have selling agreements in place tooffer the PDC Drilling Program. The partnerships have been sold in all 50states. PDC closed four partnerships in 2004 with record subscriptions of $100million. The 2004 total was a 28% increase from our 2003 sales of $78.3million. The Company sold all of the interests available in the last threepartnerships, and could have sold more had they been available. 

PDC limitsits partnership sales based on the prospect inventory and the oilfield servicesavailable in our drilling areas. We registered a total of $115 million ofinterests for sale in 2005. Investor interest in the partnerships has increasedin the past several years as natural gas and oil prices have climbed tohistorically high levels. While it is impossible to predict partnership saleswith certainty, based on recent results we believe it is likely that we willsell the full $115 million we plan to offer in 2005. Using our profits andother capital, we purchase an interest in each partnership for the Company. Wemanage the drilling of wells for the Company-sponsored partnerships and others,and charge a mark-up over the cost of drilling the wells, earning a profit onthe activity. By investing the profit from managing the drilling of the wells,we can accelerate our growth of reserves and production. 

PDC and itspartners realize some mutual benefits through our combined efforts such aseconomies of scale in buying goods and services, since our combined purchasesare greater than either entity could realize alone. We also have access toprospects that might not be available without the joint activity. And since weare the largest investor in each partnership, the partnership investors havegreater assurance that we will drill the best wells possible. Like the 2004Partnerships, PDC's 2005 drilling programs focus on two development areas inColorado - Wattenberg Field in the Denver Basin to the east and Grand ValleyField in the Piceance Basin to the west. 

After PDCdrills and completes the wells, it continues to provide additional services toinvestors, including well operations and natural gas marketing. 

Oil and GasSales

Over the years,the Company has acquired interests in producing wells through purchases ofexisting wells and by drilling new wells. Our financial statements reflect theresults of the sale of oil and natural gas from our interest in these wells asOil and Gas Sales. Oil and Gas Sales are determined by the amount of oil andgas produced by the Company's interest in the wells and the price we receivefor the oil and gas we sell. The expenses associated with Oil and Gas Sales arethe costs of operating our share of the wells (including severance and advalorem taxes). Revenue for Oil and Gas Sales in 2004 was $67.9 million, up 44%from $47.0 million in 2003. 

A keyoperating goal is to continue increasing our oil and natural gas production,and thus our Oil and Gas Sales. As the graph below shows, our productionincreased from 10.4 Bcfe to 12.7 Bcfe between 2003 and 2004, a respectable 21% increase. 

Themajority of our production is natural gas. In 2004, we produced a total of 10.4Bcf of natural gas, or 82% of our total equivalent production. Oil productionin 2004 was 381 MBbls, the equivalent of 2.3 Bcf. In addition to the recordproduction results, PDC also enjoyed strong oil and gas prices during 2004. Theaverage price we received for natural gas in 2004 increased to $5.26 per Mcffrom $4.42 per Mcf in 2003, and the average price of oil sold increased to$35.13 per barrel from $29.39 per barrel in 2003. 

Natural GasMarketing

RileyNatural Gas Company (RNG), a wholly owned subsidiary of the Company, engages inmarketing of natural gas for both PDC and for other oil and gas companies,primarily in Appalachia, Michigan and the NECO Area in Colorado. RNG purchasesgas from producers and resells it to end users, utilities and other marketingcompanies. Higher volumes of gas marketed by RNG in 2004 along with highercommodity prices resulted in a revenue increase from $73 million in 2003 to $93million in 2004. With stronger prices, RNG slightly increased its sales margin.As a result, operating income for the segment increased sharply from $689,000to $1,324,000. RNG also provides marketing services for PDC production in itsother producing areas.

WellOperations  

In additionto drilling wells and marketing natural gas for others, we also provide welloperating services to our partnerships and other investors and participants inwells. We charge a competitive fee for these services that allows us to earn aprofit. As we continue to drill new wells for the partnerships and others, andwhen we acquire wells that have other owners, we continue to add to the volumeof the well operating services we provide. In 2004 we recorded revenues of $8.4million for these activities, up from $7.3 million in 2003.

Acquisitions

While notan operating segment, acquisitions help boost reserves and production. During2003, PDC made three significant acquisitions of producing properties. Theseacquisitions helped PDC increase production and oil and gas sales in 2004. 

With theintense interest in oil and gas properties, there were more participants andmoney seeking opportunities in 2004 than in prior years. As a result, we werenot successful in adding to our operation through acquisitions in 2004. We willcontinue to look for properties that can be purchased for a price that willhelp us to increase the future profitability of the Company.

Areas ofOperations

PetroleumDevelopment Corporation conducts oil and natural gas operations in seven statesdivided by the Company into three regions; the Rocky Mountains, AppalachianBasin, and Michigan. Combined, the operations include almost 2,700 gross wellswith equivalent gross proved reserves of 459 Bcfe. On average we own about 51%of the working interest in the wells. The Company has drilled most of the wellsin which it owns an interest and operates nearly all of the wells.

RockyMountains Region

PDC'sEvans, Colorado field office, about 40 miles northeast of Denver, serves as ourlocal base of operations. Our Rocky Mountains operations focus on WattenbergField and the NECO area in the Denver Basin, and Grand Valley Field in thePiceance Basin. Currently we plan to continue to concentrate our 2005development drilling activity in these three Colorado fields. We will evaluateadditional acquisitions and internally generated opportunities in the Rockiesto continue growing our prospect inventory for the future.

Rapidreserve and production growth in our Rocky Mountains region continued in 2004.All 157 development wells drilled by the Company in 2004 were drilled in theRockies, and with only four dry holes. Since adding the Rockies as a new corearea in 1999, we have tried to capitalize on select development opportunities.In 2004, these opportunities included recompleting old wells and drilling newdevelopment wells.

We beganrecompleting Wattenberg Field Codell wells in 2000 with a 10-well program.Since then we have recompleted over 100 wells with almost universally goodresults including 42 wells in 2004.  In 2005, we plan to recomplete as many ofthe remaining wells from the original purchases as possible, approximately 65in total. 

Strongenergy prices also increased the attractiveness of completing behind-pipe zonesin the Appalachian Basin. We opened new producing zones in 10 wells during2004. These low-cost completions a particularly effective use of our investmentdollars.

Also during2004, we began adding to the Company's proved reserves and production throughinfill drilling on our NECO properties in Northeast Colorado.  We drilled atotal of 20 NECO wells here in the fourth quarter 2004 and plan to drill about70 wells in 2005. 

During thefourth quarter of 2004 we drilled a 12,000' exploratory well in Sand Wash Basinin the northwest corner of Colorado. The well, with a cost to date of $4.4million, tests the Almond Formation. Because of drilling equipment problems, wefinished drilling and completion later than expected and began testing the wellwhen winter access stipulations for the area forced us to shut down until theend of the second quarter of 2005. Until then, we can't classify the well assuccessful or dry. If it, or any of our exploratory wells, is dry we will berequired to write off the entire investment. If that happens it will reduce ourprofitability for the quarter and the year.

We arecontinuing the exploratory program in 2005 and have additional wells areplanned in our Rockies operating areas, including wells in Sand Wash Basindepending on results of initial wells. Drilling operations are currentlyunderway on a second exploratory test well in northwestern Colorado in the SandWash Basin.

DenverBasin, the NECO area

Yuma &Washington Counties, Colorado and Cheyenne County, Kansas

In April2003, PDC purchased a majority interest in almost 260 wells in Washington andYuma counties in the eastern part of the Denver Basin, and across the stateborder in Kansas. In 2004, we received approval for infill drilling in BeecherIsland and Republican Fields resulting in approximately 80 to 100 additionaldevelopment well locations. These shallow gas wells, typically drilled on40-acre spacing, offer low drilling and development costs and predictableresults with little dry hole risk. 

The NECOArea Profile

2004Activity

•           Drilled20 infill wells

•           Continuedadding to acreage position

•           Developednew prospects for additional drilling

2005 Plans

•           Drillup to approximately 70 shallow Niobrara infill and field extension wells

•           Seekadditional acquisition opportunities and undeveloped acreage

•           Identifyadditional new prospect areas for future development

DenverBasin / Wattenberg Field 

WattenbergField, Weld County, Colorado

PDC beganWattenberg Field operations in the fourth quarter of 1999 with initial drillingoperations, the acquisition of 53 producing wells and added another 168producing wells in April 2000. We obtained development locations along withthose acquisitions and through several other farmout agreements. Whileestablishing our prospect inventory, we began an active Wattenberg Fielddevelopment program. During 2004, we continued that program with 97 successfulnew wells. At the end of 2004, we had a total of 610 producing wells inWattenberg Field, all of which we operate. Wattenberg Field continues to play amajor role in our future drilling plans. We expect to drill another 80 to 90 inthe field during 2005. While most new wells will be Codell Formation tests, wewill include some J-Sand, D-Sand and Dakota wells. 

PDC'srecompletion program on some of our purchased Wattenberg Field wells is oneexample of how we add great value to existing production with minimalinvestment. Codell wells can experience substantial increases in productionlevels by recompleting the Codell after a five- to 10-year producing period. Wecontinued the cost-effective recompletion program in 2004 with 42 additionalrecompletions, and plan to accelerate the program in 2005 with about 65 plannedrecompletions.

PiceanceBasin / Grand Valley Field

GarfieldCounty, Colorado

In December1999, PDC signed a lease for the right to develop the 7,500-acre Puckett leasein Garfield County, Colorado, our first step in preparing to drill in GrandValley. Since then, we have added to our lease position through severaltransactions. As a result, we have access to approximately 14,000 acres in thegas-rich Grand Valley Field of the Piceance Basin. During 2004, we drilled 36successful new wells and no dry holes. Our 2005 drilling plans includecontinued development of our Grand Valley Field acreage position. We expect todrill 35 to 45 new wells in the field during 2005. Our plans call for abouthalf of our Company and partnership investment to be directed to the area. Ourextensive acreage position in the area provides us with numerous, qualitydrilling opportunities. Strong natural gas prices forecasted for 2005, evenconsidering seasonal price differentials in the Rockies, provide for compellingoverall economics.

WattenbergField Profile (20% to 40% WI)

•           Infilldevelopment drilling

•           Productiontargets from about 6,500' to 8,500'

•           Niobrara,Codell, J-Sand and Dakota formations

•           100or more development locations available

•           PDCoperates over 610 Wattenberg Field wells

•           Wellsproduce gas/oil mixture

•           Constitutesa majority of PDC's oil production

2004Activity

•           Drilled97 successful new wells with four dry holes 

•           Strongprospect inventory

2005 Plans

•           Drill80 to 90 new wells

•           Currentlyhave drilling rights to more than 100  additional Wattenberg sites for 2005 andbeyond

•           Seekadditional acquisition opportunities and  undeveloped drilling locations 

GrandValley Field Profile (20% to 50% WI)

•           Leaseson over 14,000 acres available for development as of the end of 2004

•           Welldepths range from 6,000' to 10,000'

•           WilliamsFork and Cameo formations

•           2,000'gross producing interval includes 150' to 300'  of net pay in numerous stacked-channelsandstone sequences

•           40-acrespacing, with infill drilling on 20s

•           PDCdrilled 100th Grand Valley well in early 2005

2004Activity

•           PDCdrilled 36 successful wells and no dry holes

•           Initialproducing rates for wells average about 700 Mcf/d

•           Soughtadditional acquisition opportunities and undeveloped drilling locations

2005 Plans

•           Drill35 to 45 new wells (20% to 50% WI)

•           Seekadditional acquisition opportunities and undeveloped acreage 

MichiganBasin

AntrimShale, Michigan

PDCcommenced Michigan drilling operations in 1997. At year-end 2004, PDC had 204producing wells in Michigan and we produced 1.76 Bcfe during 2004. No new wellswere drilled in Michigan during the year. The Antrim shale is generally locatedat shallower depths of approximately 1,000 feet in productive areas. Economicgas reserves are found in areas of fractured shale that is initiallywater-filled. Dewatering is necessary before gas production can begin fromfractured shale. After dewatering is complete, production peaks and the wellsbegin a long, gradual decline. As with Appalachian Basin wells, Michigan wellstend to enjoy long and predictable productive lives exceeding 20 years. We haveno current plans for additional drilling operations in the region.

AppalachianBasin

WestVirginia and Pennsylvania

In 2004,PDC's Appalachian Basin properties contributed about 14.5% of PDC's totalproduction. Most West Virginia properties are located in the north-central partof the state in close proximity to our Bridgeport headquarters. A secondconcentration of Appalachian wells is located in west-central Pennsylvania,with a field office located in Mahaffey, Pa. Most of our Pennsylvania wellshave been drilled or acquired since 1995. 

At the endof 2004, we operated 1,476 wells in the Appalachian region. Our Appalachianregion production was 1.84 Bcfe during 2004. We did not drill any wells in theregion during 2004. Most PDC wells in the region are Devonian and Mississippianaged sandstones and siltstones. Low decline rates and productive livesexceeding 25 to 30 years are common, providing an excellent production basethat can be accurately forecasted due to a flat, per-well decline curve.Appalachian natural gas production typically sells at a premium compared to gasproduced in most other areas because of its proximity to major northeast U.S.gas markets. 

During2004, PDC's subsidiary Riley Natural Gas was involved in wholesale and retailpurchases and sales of natural gas in the Appalachian area, as well as Michiganand Northeast Colorado. RNG is a natural gas marketing company operating out ofour Bridgeport headquarters. RNG purchases gas from more than 100 unaffiliatedproducers and resells the gas to end-users and other marketers. During 2004,RNG marketed $120.3 million of natural gas, or 19 Bcf, for PDC and otherproducers. RNG also manages our gas marketing activities in the Rockies and ouroil and natural gas hedging activities.

MichiganBasin Profile

•           Fracturedshale, dewatered and produced similar to coalbed methane wells

•           PDCoperates 204 wells

•           Welldepths of approximately 1,000'

•           Representsabout 13.9% of PDC's 2004 total production

2004Activity

•           Nonew wells drilled

2004Michigan Reserves

                        Gas(MMcf)     Oil (MBbl)

ProvedDeveloped          24,895         52

Proved Undeveloped     630                 0

2005 Plans

•           Maximizeexisting production

AppalachianBasin Profile

•           PDC'soriginal operating area

•           1,476wells operated

•           Productionfrom long-lived Mississippian and Devonian tight formations

•           Representsabout 14.5% of PDC's 2004 total production

2004Appalachian Reserves

            Gas(MMcf)     Oil (MBbl) 

ProvedDeveloped      41,384 48        

2005 Plans

•           Additionalzone completions - workovers

•           Maximizeexisting production

10-YearFinancial Data

PDC'searnings and cash flow from operations increased to new Company records in2004.  Several factors contributed to the increases.  Revenue and income fromsales of oil and gas from Company interests in wells increased due to highernatural gas production and prices in 2004.  The average sales prices for ourproduction in 2004 were $5.26 per Mcf of natural gas and $35.13 per barrel ofcrude oil.  This compares to $4.42 per Mcf of gas and $29.39 per barrel of oilin 2003.  The resulting average price per Mcfe was $5.37 in 2004 compared to$4.50 per Mcfe in 2003.  Higher natural gas prices were the main catalyst forthe increase in PDC's revenue from gas marketing activities.  Drilling revenueand income from partnership activities increased in 2004 as the last three ofour four partnership offerings sold out for total sales of $100 million.  Webegan 2005 with a carry-over of $42.5 million in undrilled partnership funds. These wells will be drilled and completed in the first quarter of 2005. We alsosold out our first 2005 partnership with $40 million in subscriptions inJanuary. 

PDC set anew annual production record of 12.7 Bcfe in 2004, a 21% increase from our 2003production of 10.4 Bcfe. New wells and Wattenberg Field and Appalachianrecompletions all contributed to healthy production growth.  The Companydrilled 158 new wells in 2004 with only four dry holes. Net earnings in 2004were $34.1 million, or $2.05 per diluted share. Our Adjusted Cash Flow fromoperations totaled $62.5 million in 2004. Capital expenditures during 2004 totaled$42.2 million financed with cash flow from operations. In addition strong cashflow from operations allowed us to reduce long term debt by $32 million.  Atyear-end, long-term debt was $21 million. 

•        Adjusted Cash Flow - The United States Securities and ExchangeCommission has disclosure requirements for public companies allowing referencesto Non-GAAP financial measures to be provided if the Company explains therelevance of the information. The Company must also reconcile the Non-GAAPfinancial measure to related GAAP information. "Adjusted Cash Flow" is aNon-GAAP financial measure provided by PDC in this annual report. Adjusted CashFlow is net income before deferred income taxes, depreciation, depletion, andamortization. PDC believes Adjusted Cash Flow is relevant because it is ameasure of cash available to fund the Company's capital expenditures and toservice its debt. PDC also believes Adjusted Cash Flow is a valuable measurefor estimating the value of the Company's operations.

10-YearOperating Data

Drillingsuccess, increased production and higher reserves are the highlights of 2004'soperating results. We drilled a total of 157 development wells in 2004, and allbut four of them were completed as producing wells.  Production increased 21% andreserves increased 9.0% through a combination of drilling, well recompletionsand acquisitions.  Higher gas and oil prices magnified the impact of increasedproduction from a financial perspective, as the average gas price we receivedincreased from $4.42 per Mcf in 2003 to $5.26 per Mcf in 2004. PDC continues tobe one of the most active drillers among small independents. We now operateover 2,700 wells in our three core areas. Our $42.2 million capital budget in2004 was effectively applied to increasing the assets of the Company, boostingoil and gas production to record levels of 12.7 Bcfe, a 21% from 2003's 10.4Bcfe. Colorado provided the production jump. The production increases resultedfrom new wells drilled in the second half of 2003 and in 2004, recompletions ofWattenberg Field Codell wells and completion of behind pipe formations in theAppalachian Basin.