GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

NOTE 1 - ORGANIZATION

Gladstone Resources, Inc. (the "Company") was incorporated in the State of Washington on July 19, 1916. In March, 1973, the Company acquired 100% ownership of Brooks NM, Inc., a Texas corporation (now named NM Corporation).

At the Company's Annual Meeting of Stockholders, on July 15, 1999, the stockholders of the Company approved an amendment to the Company's Restated Articles of Incorporation authorizing a 1 for 5 reverse stock split, which became effective August 10, 1999. All share and per share numbers have been adjusted retroactively to record the effects of the reverse split.

On August 10, 1999, the Company changed its name to Gladstone Energy, Inc. and merged its wholly owned subsidiary, NM Corporation, into the Company. All financial information for 1998 is for the Company and its then existing subsidiary, NM Corporation, and is prepared on a consolidated basis.

At the Company's 1999 Annual Meeting of Stockholders, the stockholders of the Company also approved the merger of the Company into a wholly-owned subsidiary of the Company organized under the laws of the State of Delaware ("Gladstone-Delaware") in order to effect the change of the Company's state of incorporation from Washington to Delaware (the "Reincorporation"). In connection with the Reincorporation, the stockholders adopted provisions of the Certificate of Incorporation of Gladstone-Delaware which, among other provisions, authorizes up to 10 million shares of common stock, par value $.001 per share and up to 5 million shares of preferred stock, par value $.001 per share. The Reincorporation occurred on August 13, 1999. In the Reincorporation, each outstanding share of the Company's common stock, no par value (after giving effect to the reverse stock split) was automatically converted into one share of the common stock, par value $.001 of Gladstone-Delaware.

On an accrual basis, the Company uses the successful efforts method of accounting. This method follows the premise that an enterprise is to capitalize only those costs it incurs that directly result in an asset that has future benefits measured in terms of future cash flows.

For 1998 financial information only, which is for the Company and its then existing subsidiary, NM Corporation, and which was prepared on a consolidated basis, all intercompany transactions have been eliminated.

For purposes of the statements of cash flows, the Company considers all short-term debt securities purchased with a maturity of three months or less to be cash equivalents. There were no cash equivalents at September 30, 1999, or December 31, 1998. There were no significant non-cash investing or financing activities during the periods ended September 30, 1999 and December 31, 1998.

Depreciation, depletion and amortization are calculated using the straight-line and unit of production method over the estimated useful lives of the assets or production of the estimated recoverable oil and gas reserves.

For income tax reporting, the Company uses accounting methods that recognize depreciation sooner than for financial statement reporting As a result, the basis of property and equipment for financial reporting exceeds its tax basis by the cumulative amount that accelerated depreciation exceeds straight-line depreciation. Also, for tax purposes the Company deducts intangible drilling costs and capitalizes them on the successful efforts accounting method. Deferred income taxes had been recorded in prior years for the excess deductions, which will be taxable in future periods through reduced depreciation and cost depletion deductions for tax purposes. Currently no deferred tax and no tax benefits have been calculated since the Company does not have the ability to generate taxable income in excess of the net operating loss carryover.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were used.

NOTE 3 - MARKETABLE (TRADING) SECURITIES

Cost and fair market value of marketable equity securities at September 30, 1999, and December 31, 1998, are as follows:

NOTE 4 - ACCOUNTS RECEIVABLE

Of the net revenue interest amount of $99,396 due from oil and gas sales and joint interest billings as of September 30, 1999, $44,042 has been received from the operators and participants as of the date of this report. The sales to the customers are on open accounts receivable, which are unsecured.

NOTE 5 - PROPERTY AND EQUIPMENT

In March 1973, the Company acquired 100% ownership of Brooks NM, Inc. (NM Corporation), a Texas corporation, in exchange for 453,000 shares of common stock. As of August 10, 1999, NM Corporation was merged with the parent company. The Company currently owns oil and gas interests in Louisiana, New Mexico and Texas.

The Company owns a 28.71% net revenue interest in 5 producing gas wells in San Juan County, New Mexico. In 1994, the Company participated in a re-entry well drilled to replace a shut-in well. The new well began production in October 1994.

Currently, the Company has producing wells in Pecos County in Texas, San Juan County in New Mexico, and in Beauregard and Allen Parishes of Louisiana. On January 19, 1999, the Company sold its oil and gas properties in Schleicher and Kent Counties, Texas to EXCO Resources, Inc., a Texas corporation ("EXCO"). These properties included 66 gross productive wells (9.75 net productive wells) with current net production of approximately 42.18 barrels of oil and 126,000 cubic feet of natural gas per day, and 6 gross (.75 net) non-producing wells. These properties constituted approximately 90.418% of the gross productive wells (71.17% net productive wells) and approximately 88.68% of the barrels of oil and 59.38% of the cubic feet of natural gas per day produced by all of the Company's oil and gas properties held at that time.

The Company closed, on July 15, 1999, an acquisition of 12.25% working interest in the Righthand Creek Field located in Beauregard and Allen Parishes of Louisiana. The effective date of the acquisition was May 1, 1999. The interest consists of 6 producing wells (.735 net productive wells) with current net production of approximately 55 barrels of oil and 3,000 cubic feet of natural gas per day, 1 injection well, and 2 gross (.245 net) non-producing wells. As of the date of this report, the operator is in the process of re-working one of the non-producing wells and is preparing to spud an offset well.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

A summary of changes in the Company's gas reserves (in MCF's) is as follows (oil reserves have been included as MCF's by multiplying barrels by 6). ALL RESERVE AMOUNTS, INCLUDING THE REVISIONS, HAVE BEEN FURNISHED BY THE COMPANY MANAGEMENT AND HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT PETROLEUM ENGINEERS. The Company believes there are no "proved undeveloped reserves" at September 30, 1999.

NOTE 6 - FEDERAL AND STATE INCOME TAXES

A reconciliation of income tax expense (benefit) computed by applying the U.S. federal tax rates to loss from continuing operations before income taxes and extraordinary items and recorded income tax expense (benefit) is as follows:

The components of the Company's deferred income taxes for 1998 are as follows:

Net operating loss deductions and credits carryforward consists of the following:

Utilization of losses will be limited due to change of control which occurred in this period.

At December 31 1998, there was $289,609 of statutory depletion carryforward to 1999.

At December 31 1998, there was a Section 179 depreciation carryforward of $55,000 to 1999.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

NOTE 7 - COMMITMENT AND CONTINGENCY

At September 30, 1999, the Company had no material commitments.

NOTE 8 - COMMON STOCK

Currently the Company's common stock is not traded on any exchange or automated quotation system.

At September 30, 1999, there were no outstanding stock options issued by the Company.

The following shares of common stock were outstanding for the periods under report.

At the Annual Shareholders' Meeting, held on July 15, 1999, a one for five reverse split was approved, which was effected August 10, 1999.

With the reincorporation to Delaware, 10,000,000 shares of common stock, par value $.001 per share were authorized and 5,000,000 shares of preferred stock, par value $.001, were authorized.

NOTE 9 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters included the following:

1. Year 2000 Readiness Disclosure

2. Major Customers

NOTE 10 - RENT EXPENSE

The Company currently pays rent of $575.00 per month to Humphrey Oil Corporation, inclusive of phone service. Rent expense through September 30, 1999 was $5,088. The Company does not have a commitment on a lease contract. Rent expense for 1998 was $6,606.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

NOTE 11 - ACQUISITION OF PROPERTIES

The Company closed, on July 15, 1999, with an effective date of May 1, 1999, an acquisition of 12.25% working interest in the Right Hand Creek Field located in Beauregard and Allen Parishes of Louisiana (collectively, the "Right Hand Creek Properties") from Humphrey Oil Interests, L.P., a Texas limited partnership ("Humphrey") (Charles B. Humphrey, a Director of the Company, is the limited partner in Humphrey and President of Humphrey Oil Corporation, its general partner) being 50% of the interest acquired by Humphrey from EXCO Resources, Inc. effective May 1, 1999. The Right Hand Creek Properties include 6 gross productive wells (.735 net productive wells) with current net production of approximately 55 barrels of oil and 2 gross (.245 net) non-producing wells that will require recompletions and/or workovers. The Right Hand Creek Properties include 725.3 gross (88.85 net) developed acres and 234.22 gross (28.69 net) undeveloped acres. Based on independent engineering estimates as of June 1, 1999, the Right Hand Creek Properties are estimated to contain 956,097 gross (85,396 net) barrels of oil and no gross or net million cubic feet of natural gas or proved reserves. The aggregate purchase price paid for the Right Hand Creek Properties was $349,125. The Company borrowed $230,000 of the purchase price under a new credit facility and the balance of the purchase price was paid out of working capital.

NOTE 12 - CREDIT AGREEMENT

On July 15, 1999, the Company entered into a credit facility (the "Credit Facility") with Compass Bank (the "Lender"). The Credit Facility provides for borrowings up to $15 million, subject to borrowing base limitations.

The Credit Facility consists of a regular revolver which at October 1, 1999, had a borrowing base of $230,000. A portion of the borrowing base is available for the issuance of letters of credit. All borrowings under the Credit Facility are secured by a first lien deed of trust providing a security interest in certain oil and natural gas working interests in the Right Hand Creek Properties.

The Credit Facility provides that the unpaid principal balance of the loans shall bear interest, payable as it accrues on the 1st day of each month, commencing September 1, 1999, and at maturity (stated or by acceleration), at a rate per annum equal to the lesser of the (i) Highest Lawful Rate or (ii) 1% over the CBIR rate from time to time in effect, as therein defined. The Credit Facility also permits the Company to repay and reborrow amounts under the Credit Facility without any penalty, thereby, allowing the Company the flexibility to utilize any available cash to reduce its outstanding indebtedness and thus, its cost of borrowed funds.

Under the terms of the Credit Facility, the Company must not permit its Current Ratio (as defined) of Current Assets (as defined) to its Current Liabilities (as defined) to be less than 1.21 for 5.0 at any time. Furthermore, the Company must not permit its Tangible Net Worth (as defined) to be less at any time than $1.00 plus (i) 50% of positive Net Income (as defined) for all quarterly periods ending subsequent to December 31, 1998, plus (ii) 100% of any Equity Infusions (as defined) to Debt Service (as defined) to be less than 1.21 for 5.0, determined as of the end of each fiscal quarter of the Company on or after September 30, 1999.

A new Borrowing Base shall be determined as of each April 1 and October 1 during the Revolving Credit Period (the "semi-annual determinations"), or at such other or additional times during the Revolving Credit Period as the Lender in its reasonable discretion and at its sole cost may elect ("discretionary determinations"), and the Lender shall determine a new Borrowing Base at such additional times, but no more often than one (1) time in any 12-month period without Lender's consent, as the Company may request ("Borrower requested determinations").

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

September 30, 1999

The Borrowing Base shall be automatically reduced as of the 1st day of each month commencing February 1, 2000, and continuing through the Revolving Credit Period. The initial monthly reduction shall be in the amount of $5,000 per month. At the time of each new semi-annual determination, the Lender, in its sole discretion may increase or decrease the amount of such monthly reduction. If a Borrowing Base Deficiency (as defined) exists after giving effect to a redetermination, then the Company must either (i) prepay the principal of the outstanding Loans or (ii) cause to be created first and prior perfected Liens (subject only to Permitted Liens, as defined) in favor of the Lender, by instruments satisfactory to the Lender, on producing oil and gas properties, which in the opinion of the Lender would increase the Borrowing Base by an amount sufficient, in combination with clause (i) preceding, to eliminate such Borrowing Base deficiency.

The Credit Facility contains a number of covenant affecting the Company's liquidity and capital resources, including restrictions a the Company's ability (i) to incur indebtedness other than (a) under the Credit Facility or (b) Permitted Indebtedness, as defined, or (ii) to pledge assets outside of the Credit Facility, other than Permitted Liens, and with respect to the Company's maintenance of a minimum net worth.

Sale and Acquisition of Properties. On January 19, 1999, the Company sold its oil and gas properties in Schleicher and Kent Counties, Texas (the "Properties Sale") to EXCO Resources, Inc., a Texas corporation ("EXCO"). These properties included 66 gross productive wells (9.75 net productive wells) with current net production of approximately 42.18 barrels of oil and 126,000 cubic feet of natural gas per day, and 6 gross (.75 net) non-producing wells. These properties constituted approximately 90.418% of the gross productive wells (71.17% net productive wells) and approximately 88.68% of the barrels of oil and 59.38% of the cubic feet of natural gas per day produced by all of the Company's oil and gas properties. The Company's results of operations were significantly affected by the Properties Sale.

The Company closed, on August 10, 1999, with an effective date of May 1, 1999, an acquisition of 12.25% working interest in the Right Hand Creek Field located in Beauregard and Allen Parishes of Louisiana (collectively, the "Right Hand Creek Properties") from Humphrey Oil Interest, L.P., a Texas limited partnership ("Humphrey") (Charles B. Humphrey, a Director of the Company, is the limited partner in Humphrey and President of Humphrey Oil Corporation, its general partner) being 50% of the interest acquired by Humphrey from EXCO Resources, Inc. effective May 1, 1999. The Right Hand Creek Properties include 6 gross productive wells (.735 net productive wells) with current net production of approximately 55 barrels of oil and no cubic feet of natural gas per day, 1 injection well, and 2 gross (.245 net) non-producing wells that will require recompletions and/or workovers. The Right Hand Creek Properties include 725.3 gross (88.85 net) developed acres and 234.22 gross (28.69 net) undeveloped acres. Based on independent engineering estimates as of June 1, 1999, the Right Hand Creek Properties are estimated to contain 956,097 gross (85,396 net) barrels of oil and no gross or net million cubic feet of natural gas or proved reserves. The Company's revenues were significantly affected by the acquisition.

Net Income (Loss). The Company had a net loss for the three month period ended September 30, 1999 of ($31,913) compared to the net loss of ($55,750) for the corresponding period of 1998, representing ($.04) per share for the period in 1999 and ($.07) per share for the same period in 1998. The Company had a net loss for the nine month period ended September 30, 1999 of ($92,085) compared to the net loss of ($297,011) for the corresponding period of 1998, representing ($.11) per share for the period in 1999 and ($.35) per share for the same period in 1998. Earnings per share figures have been adjusted retroactively to record the effects of the reverse split.

Revenues. Revenues for the three month period ended September 30, 1999 were $95,556 compared with $62,615 for the corresponding period in 1998, a 52% increase. These increases in revenues were primarily a result of the acquisition of the Right Hand Creek Properties, which was effective as of May 1, 1999. Revenues for the nine month period ended September 30, 1999 were $142,771 compared with $206,907 for the corresponding period in 1998, a 31% decrease. These decreases in revenues were primarily a result of the Properties Sale, which was effective as of October 1, 1998.

Costs and Expenses. Costs and expenses for the three month period ended September 30, 1999 increased $51,488, or 96, to $105,233 versus $53,745 for the corresponding period of 1998. General and administrative expenses increased due to administrative fees paid to prepare for and conduct or implement the annual meeting, the change of incorporation from Washington to Delaware, the 1 for 5 reverse split, and reporting related to these actions and to the addition of an officers and directors insurance policy that had not previously been carried. Legal, auditing, and accounting fees increased $9,776, or 405%, from $2,414 for the three month period ended September 30, 1998 to $12,190 for the same period in 1999, due to legal and accounting time necessary to prepare for and conduct or implement the annual meeting, the change of incorporation from Washington to Delaware, the 1 for 5 reverse split. Costs and expenses for the nine month period ended September 30, 1999 decreased $107,213, or 34%, to $210,229 versus $317,442 for the corresponding period of 1998. Decreases in most expense items were primarily a result of the Properties Sale, which occurred on January 1, 1999, but was effective as of October 1, 1998. General and administrative expenses increased due to administrative fees paid to prepare for and conduct or implement the annual meeting, the change of incorporation from Washington to Delaware, the 1 for 5 reverse split, reporting related to these actions, and to improve reporting procedures in readiness of future activities and to the addition of an officers and directors insurance policy that had not previously been carried. Legal, auditing, and accounting fees increased $58,990, or 441%, from $13,367 for the nine month period ended September 30, 1998 to $72,357 for the same period in 1999, due to legal and accounting time necessary to prepare for and conduct or implement the annual meeting, the change of incorporation from Washington to Delaware, the 1 for 5 reverse split, reporting related to these actions, as well as improving reporting procedures in readiness of future activities.

Prior to the third quarter of 1999, the Company has financed its operating and capital expenditure requirements principally through cash flow from operations. The Company funded capital expenditures in the third quarter in part through borrowing under the Credit Facility.

Cash increased $85,074 to $108,446 at September 30, 1999, from $23,372 at December 31, 1998, as a result of the Properties Sale and the prepayment by participating parties of the Cache Creek #1 well. The sale price received in the Properties Sale was $315,000, and has been utilized for the payment of expenses with the remainder being invested in a money market savings until it can be used for future acquisitions. The amount of participating parties remaining prepayment of drilling and completion costs as of September 30, 1999 for the Cache Creek #1 well was $3,786. Accounts receivable increased $93,267 to $99,396 from $6,129 during the nine months ended September 30, 1999 and accounts payable increased $33,614 to $55,343 from $21,729 during the nine months ended September 30, 1999. The increase in accounts receivable is primarily due to the Right Hand Creek Properties acquisition as well as higher oil prices for the period, while the increase in accounts payable is primarily due to lease operating expenses related to the Right Hand Creek Properties, and to the drilling of the Cache Creek #1 well. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA") for the nine month period ended September 30, 1999 was ($48,890) or (.06) per share for the nine month period in 1999 compared to ($141,266), or ($.17) per share for the same period in 1998. (Per share figures have been adjusted retroactively to record the effects of the reverse split.) Management is of the opinion that any significant acquisitions, projects or drilling and/or recompletion work will require debt and/or equity financing. There is no assurance that the Company will be able to borrow additional amounts under the Credit Facility or obtain other debt and/or equity financing for any significant activities. The Company plans to raise capital through a private offering to qualified investors with the capital raised being used to acquire oil and gas properties to increase and solidify the company's cash flow and reserve base.

On July 15, 1999, the Company entered into a credit facility (the "Credit Facility") with Compass Bank (the "Lender"). The Credit Facility provides for borrowings up to $15 million, subject to borrowing base limitations.

The Credit Facility consists of a regular revolver which at October 1,1999, had a borrowing base of $230,000. The Company borrowed $230,000 under the Credit Facility on July 15, 1999 to pay a portion of the purchase price for the Company's interest in the Right Hand Creek Properties. A portion of the borrowing base is available for the issuance of letter of credit. All borrowings under the Credit Facility are secured by a first lien deed of trust providing a security interest in certain oil and natural gas working interests in the Right Hand Creek Field.

The Credit Facility provides that the unpaid principal balance of the loans shall bear interest, payable as it accrues on the 1st day of each month, commencing September 1, 1999, and at maturity (stated or by acceleration), at a rate per annum equal to the lesser of the (i) Highest Lawful Rate or (ii) 1% over the CBIR rate from time to time in effect, as therein defined. The Credit Facility also permits the Company to repay and reborrow amounts under the Credit Facility without any penalty, thereby allowing the Company the flexibility to utilize any available cash to reduce its outstanding indebtedness and, thus, its cost of borrowed funds.

Under the terms of the Credit Facility, the Company must not permit its Current Ratio (as defined) of Current Assets (as defined) to its Current Liabilities (as defined) to be less than 1.21 for 5.0 at any time. Furthermore, the Company must not permit its Tangible Net Worth (as defined) to be less at any time than $1.00 plus (i) 50% of positive Net Income (as defined) for all quarterly periods ending subsequent to December 31, 1998, plus (ii) 100% of any Equity Infusions (as defined) occurring subsequent to December 31, 1998. Furthermore, the Company must not permit the ratio of Cash Flow (as defined) to Debt Service (as defined) to be less than 1.21 for 5.0, determined as of the end of each fiscal quarter of the Company on or after September 30, 1999. On September 30, 1999, the Company was in compliance with the current ratio covenant, the net worth covenant, and the cash flow covenant.)

A new Borrowing Base shall be determined as of each April 1 and October 1during the Revolving Credit Period (the "semi-annual determinations"), or at such other or additional times during the Revolving Credit Period as the Lender in its reasonable discretion and at its sole cost may elect ("discretionary determinations"), and the Lender shall determine a new Borrowing Base at such additional times, but no more often than one (1) time in any 12-month period without Lender's consent, as the Company may request ("Borrower requested determinations").

The Borrowing Base shall be automatically reduced as of the 1st day of each month commencing February 1, 2000, and continuing through the Revolving Credit Period. The initial monthly reduction shall in the amount of $5,000 per month. At the time of each new semi-annual determination, the Lender in its sole discretion may increase of decrease the amount of such monthly reduction. If a Borrowing Base Deficiency (as defined) exists after giving effect to a redetermination, then the Company must either (i) prepay the principal of the outstanding Loans or (ii) cause to be created first and prior perfected Liens (subject only to Permitted Liens, as defined) in favor of the Lender, by instruments satisfactory to the Lender, on producing oil and gas properties, which in the opinion of the Lender would increase the Borrowing Base by an amount sufficient, in combination with clause (i) preceding, to eliminate such Borrowing Base deficiency.

The Credit Facility contains a number of covenants affecting the Company's liquidity and capital resources, including restrictions on the Company's ability(i) to incur indebtedness other than (a) under the Credit Facility or (b)Permitted Indebtedness, as defined, or (ii) to pledge assets outside of the Credit Facility, other than Permitted Liens, and with respect to the Company's maintenance of a minimum net worth.

The impact of inflation, as always, is difficult to assess. During the three years ended December 1998, the oil and gas industry remained depressed. As a result, the Company experienced continued weakness in demand and in prices received for its oil and gas production. The general softening of the market has, however, also reduced the cost of labor, materials, contract services, and other operating costs. The Company cannot anticipate whether the present trend of low inflation will remain; however, a sudden increase in inflation and/or an increase in operating costs coupled with a continuation of low oil prices could have an adverse effect on the operations of the Company.

The Company's timely receipt of royalty income will largely depend upon performance of computer systems and computer-controlled equipment of the operators of the Company's oil and gas producing properties and other third parties including oil and natural gas purchasers and significant service providers such as electric utility companies and natural gas plant, pipeline and gathering system operators. The Company is seeking written verification from its operators that they will be Year 2000 compliant. The Company anticipates that the cost of seeking verification will be minimal. The Company believes that it is not practical to independently verify the response it receives because the cost would not be affordable.

The Company has undertaken an inventory of its financial software and hardware systems for Year 2000 readiness. The Company used an outside consultant to assist in this review. The outside consultant has completed his review and identified the required upgrades. All required upgrades to the Company's financial software and hardware system were completed by October 30, 1999. The cost of the outside consultant, as well as the cost of upgrades, is expected to be minimal.

The failure to remediate critical systems (software or hardware), or the failure of a material third party to resolve critical Year 2000 issues could have a serious adverse impact on the Company's ability to continue operations and meet obligations. Any Year 2000 problems that do occur will likely manifest themselves in reduced production through equipment shut down or impaired liquidity through an inability of the Company's customers to take delivery or to process payment. At the current time, the Company believes that any interruption in operation will be minor and short-lived. As the Company's review has been completed, it has been determined that due to the minor and short-lived nature of any interruption in operation, a contingency plan is unnecessary at this time. However, management has appointed specific staff member to closely monitor the situation and to take any and all actions necessary to deal with any interruptions, should they occur.

On August 10, 1999, the Company changed its name from Gladstone Resources, Inc. to Gladstone Energy, Inc.