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

At the Company's 1999 Annual Meeting of Stockholders, the stockholders of the Company 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 Gl adstone-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. The stockholders of the Company also 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 contained herein give effect to the reverse stock split.

The net loss for fiscal 1999 was $204,066, or $.24 per share, compared to net loss of $486,267, or $.57 per share, in fiscal 1998. This difference of $282,201 was primarily the result of an asset impairment charge taken in 1998.

Oil and gas sales decreased $40,509, or 15%, to $223,943 in fiscal 1999 from $264,002 in fiscal 1998. On the basis of 6 mcf of gas being equivalent to 1 barrel of oil, total fiscal 1999 gas production decreased 33%. The total oil and gas revenue drop of 15% was due to the sale of properties in January 1999 which was partially offset by the July acquisition of properties.

The Company's costs and expenses decreased $175,391, or 34%, to 341,104 in fiscal 1999 from $516,495 in fiscal 1998. Oil and gas production costs decreased $34,324 or 26%, to $130,912 in fiscal 1999 from $130,912 due to decreased production. Dry hole and abandonment costs decreased $129,376 or 53% to $114,388 in fiscal 1999 due to smaller participation in fewer wells. Depletion, depreciation and amortization decreased from $102,215 to $65,697, or 36%, in fiscal 1999 due to decreased production. General and administrative costs increased from $11,162 to $43,115 or 386% in fiscal 1999 as a result of 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, as well as improving reporting procedures in readiness of future activities. Legal, audit and accounting costs increased from $12,704 to $75,501, or 594%, in fiscal 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, as well as improving reporting procedures in readiness of future activities.

The net loss for fiscal 1998 was $486,267, or $.11 per share, compared to net loss of $196,662, or $.05 per share, in fiscal 1997. This difference of $289,605 was primarily the result of a decrease in revenue, as discussed below.

Oil and gas sales decreased $247,475, or 48%, to $264,002 in fiscal 1998 from $511,477 in fiscal 1997. Fiscal 1998 oil and gas production was 28% lower than 1997 (continued depletion of current properties with no new wells being added). On the basis of 6 mcf of gas being equivalent to 1 barrel of oil, total fiscal 1998 gas production decreased 32%. The total oil and gas revenue drop of 48% was due to decrease in production and a decrease in prices.

The Company's costs and expenses decreased $104,618, or 16%. Oil and gas production costs decreased $7,343 or 5%, to $130,912 in fiscal 1998 from $138,255 due to decreased production. Dry hole and abandonment costs decreased $218,867 or 47% to $243,764 in fiscal 1998 due to participation in fewer wells. Depletion, depreciation and amortization decreased from $133,103 to $102,215, or 23%, in fiscal 1998 due to decreased production. General and administrative costs decreased from $12,851 to $11,162 or 13% in fiscal 1998 as a result of small decreases in a variety of items. The Company reversed entry of an accrued tax to the State of Texas for franchise taxes that resulted in a current year income of $35,648. Legal, audit and accounting costs increased from $9,623 to $12,704, or 32%, in fiscal 1998 as a result of the Company's proposed merger with Exco Resources, Inc., which merger was terminated January 19, 1999. The decreases in costs were more than offset by an asset impairment charge of $181,946 to reflect the value of the Schleicher and Kent County properties that were sold on January 19, 1999. See Note 9 to the Financial Statements.

Cash increased $110,970 to $134,342 at December 31, 1999, from $23,372 at December 31, 1998. Accounts receivable increased $34,692 to $40,821 from $52,077 during the corresponding periods, and accounts payable increased $115,729 to $137,458 from $21,729. These amounts for cash, accounts receivable and accounts payable reported by the Company at its fiscal year-end Balance Sheet dates reflect temporary fluctuations related to the timing and status of the Company's projects and the timing of payments, invoices and billings related to such projects. Accounts receivable includes accounts due from joint interest owners for operating and drilling costs paid by the Company on their behalf.

The Company has financed its operating and capital expenditure requirements to date principally through cash flow from operations. 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 March 30, 2000 had a borrowing base of $215,000. A portion of the borrowing base is available for the issuance of letters of credit. All borrowing 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 located in Allen and Beauregard Parishes, Louisiana (collectively the "Right Hand Creek Properties") acquired by the Company on July 19, 1999, until an effective date of May 1, 1999, from Humphrey Oil Interest L.P., a Texas limited partnership ("Humphrey") and being 50% of the interest acquired by Humphrey from EXCO Resources, Inc. effective May 1, 1999.

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 costs of borrowed funds. During the period covered by this report, $230,000 in borrowings were outstanding under the Credit Facility.

The impact of inflation, as always, is difficult to assess. During 1997 and 1998, the oil and gas industry remained depressed; however as of December 31, 1999, oil prices had made a rebound and were consistently improving. The general softening of the market prior to and into 1999 had reduced the cost of labor, materials, contract services, and other operating costs; therefore, the increase in oil prices could cause an increase in operating costs. The Company cannot anticipate where cost and revenue trends will head; however, a sudden increase in inflation and/or an increase in operating costs coupled with a cessation of the current improved trend of oil prices could have an adverse effect on the operations of the Company.

Other than the historical and factual matters set forth herein, the matters and items set forth in this report are forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, the following:

Certain Industry and Marketing Risks. The Company's operations are subject to the risks and uncertainties associated with drilling for, and production and transport of, oil and natural gas. The Company must incur significant expenditures for the identification and acquisition of properties and for the drilling and completion of wells. Drilling activities are subject to numerous risks, including the risk that no commercial productive oil or gas reservoirs will be encountered. The Company's operations may be materially curtailed, delayed or canceled as a result of numerous factors, including the presence of unanticipated pressure or irregularities in formations, accidents, title problems, weather conditions, compliance with governmental requirements and shortages or delays in the delivery of equipment. The Company's prospects for future growth and profitability will depend predominately on its ability to replace present reserves through acquisition as well as its ability to successfully develop additional reserves. The Company's ability to market its oil and gas production is dependent upon the availability and capacity of oil and gas gathering systems and pipelines. Federal and state regulation of oil and gas production and transportation, general economic conditions, changes in supply and in demand all could materially adversely affect the Company's ability to market its oil and gas production.

Uncertainty of Estimates of Oil and Gas Reserves. Numerous uncertainties are inherent in estimating quantities of proved oil and gas reserves, including many factors beyond the control of the Company. This report contains an estimate of the Company's proved oil and gas reserves based upon reports of the Company's operators. The process of estimating gas and oil reserves is complex, requiring significant decisions and assumptions in the evaluation of available geological, engineering and economic data for each reservoir. As a result, such estimates are inherently an imprecise evaluation of reserve quantities. Actual future production, revenue, taxes, development expenditures, operating expenses and quantities of recoverable gas and oil reserves may vary substantially from those assumed in the estimate. Any significant variance in these assumptions could materially affect the estimated quantity and value of reserves set forth in this report. In addition, the Company's reserves may be subject to downward or upward revision, based upon production history, results of future exploration and development, prevailing oil and gas prices and other factors.

Inability to Develop Additional Reserves. The Company's future success as an oil and natural gas producer, as is generally the case in the industry, depends upon its ability to find, develop and acquire additional oil and gas reserves that are economically recoverable. Except to the extent that the Company conducts successful development activities or acquires properties containing proved reserves, the Company's proved reserves will generally decline as reserves are produced. There can be no assurance that the Company will be able to locate additional reserves or that the Company will drill economically productive wells or acquire properties containing proved reserves.

Effects of Changing Oil and Gas Prices. The future financial condition and results of operations of the Company depend upon the prices it receives for its oil and natural gas production and the costs of acquiring, developing and producing oil and natural gas. Oil and natural gas prices have historically been volatile and are subject to fluctuations in response to changes in supply, market uncertainty and a variety of additional factors that are also beyond the control of the Company. These factors include, without limitation, the level of domestic production, the availability of imported oil and natural gas, actions taken by foreign oil and natural gas producing nations, the availability of transportation systems with adequate capacity, the availability of competitive fuels, fluctuating and seasonal demand for oil and natural gas, conservation and the extent of governmental regulation of production and general economic conditions. A substantial or extended decline in oil or natural gas prices could have a material adverse effect on the estimated value of the Company's oil and gas reserves, and on its financial position, results of operations and access to capital.

Operating Hazards and Uninsured Risks. The Company's operations are subject to the risks inherent in the oil and gas industry, including the risks of fire, explosions, blow-outs, pipe failure, abnormally pressured formations and environmental accidents such as oil spills, gas leaks, ruptures or discharges of toxic gases. The occurrence of any of these risks could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, clean-up responsibilities, regulatory investigation and penalties and suspension of operations. In accordance with customary industry practice, the Company maintains insurance against some, but not all, of the risks described above. There can be no assurance that any insurance will be adequate to cover any losses or liabilities. Further, the Company cannot predict the continued availability of insurance, or availability at commercially acceptable premium levels.

Government Regulation. Oil and gas operations are subject to certain federal, state and local laws and regulations that may be changed from time to time in response to economic and political conditions. Such laws and regulations have generally become more stringent in recent years, often imposing greater environmental operating requirements on an increasing number of parties. Because the requirements imposed by such laws and regulations are frequently changed, the Company is unable to predict the effect or cost of compliance with such requirements or their effects on oil and natural gas usage or prices. In addition, a number of legislative proposals have been introduced in Congress and state legislatures which, if enacted, would significantly affect the oil and gas industry. In view of the many uncertainties which exist with respect to any legislative proposals, the Company cannot predict the effect on the Company of any legislation which might be enacted.

Environmental Liabilities. The Company's operations could result in liability for oil spills, discharge of hazardous materials and other environmental damages. In addition, the Company may be liable for environmental damages caused by previous owners of property purchased by the Company. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could reduce or eliminate the funds available for project investment or result in loss of the Company's properties. Although the Company maintains insurance coverage it considers to be customary in the industry, it is not fully insured against certain of these risks, either because such insurance is not available or because of high premium costs. Accordingly, the Company may be subject to liability or may lose substantial portions of properties due to hazards that cannot be insured against or have not been insured against due to prohibitive premium costs or for other reasons.

Substantial Competition. The oil and gas industry is highly competitive and there are many other companies engaged in the oil and gas business. Many of the companies with which the Company competes have substantially greater financial, technical and other resources and may have greater experience in the oil and gas business than the Company.

Need for Additional Capital. The Company's ability to acquire and exploit oil and gas properties is dependent upon its ability to obtain necessary outside funding or to generate cash flow from operations. There is no assurance that any such required additional funds would be available on satisfactory terms and conditions, if at all. The amount and timing of the Company's future capital requirements, if any, will depend upon a number of factors, including drilling costs, transportation costs, equipment costs, marketing expenses, staffing levels and competitive conditions, and any purchases or disposition of assets, many of which are not within the Company's control. Failure to obtain any required additional financing could materially adversely affect the growth, cash flow and earnings, of the Company. In addition, the Company's pursuit of additional capital could result in the incurrence of additional debt or potentially dilutive issuances of additional equity securities.

Not applicable.

Set forth below is the index to the financial statements of Gladstone Energy, Inc. and Subsidiary.

All other schedules and historical financial information are omitted because they are not applicable, or the required information is shown in the financial statements or notes thereto.

INDEPENDENT AUDITOR'S REPORT

Board of Directors and Stockholders

Gladstone Energy, Inc.

I have audited the accompanying balance sheet of Gladstone Energy, Inc. (a Delaware corporation) as of December 31, 1999, the consolidated balance sheet as of December 31, 1998 and the related statements of operations, stockholders' equity and cash flows for the three years then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audits.

I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audits provide a reasonable basis for my opinion.

In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gladstone Energy, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flow for the three years then ended in conformity with generally accepted accounting principles.

Dallas, Texas

February 4, 2000

GLADSTONE ENERGY, INC.

BALANCE SHEET

December 31, 1999 and 1998

ASSETS

The accompanying notes are an integral part of this financial statement.

GLADSTONE ENERGY, INC.

STATEMENT OF OPERATIONS

Three years ended December 31, 1999

The accompanying notes are an integral part of this financial statement.

GLADSTONE ENERGY, INC.

STATEMENT OF STOCKHOLDERS' EQUITY

Three years ended December 31, 1999

The accompanying notes are an integral part of this financial statement.

GLADSTONE ENERGY, INC.

STATEMENT OF CASH FLOWS

Three years ended December 31, 1999

The accompanying notes are an integral part of this financial statement.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999

NOTE 1 - ORGANIZATION

Gladstone Resources, Inc. was incorporated in the State of Washington on July 19, 1916. The Company sells oil and gas in Louisiana, Texas and New Mexico. The sales to the customers are on open accounts receivable, which are unsecured. As of August 10, 1999, the Company merged its wholly owned subsidiary into the parent company. As of August 12, 1999, the Company did a reorganization under Code Section 3687 of the Internal Revenue Code of 1986 and it merged into Gladstone Energy, Inc.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 purpose of consolidation all intercompany transactions have been eliminated.

For purposes of the statement 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 significant non-cash investing or financing activities during the three year period ended December 31, 1999.

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. Vehicles are depreciated over a five-year life.

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 the company has not assigned any future tax benefits to the accumulated losses.

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.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999

NOTE 3 - ACCOUNTS RECEIVABLE

Of the net revenue interest amount of $40,821 due from oil and gas sales at December 31, 1999, $25,912 has been received from the operators as of the date of this report. Revenue from all sales of oil and gas is generally received within 60 days.

NOTE 4 - INVESTMENT IN LISTED SECURITIES

Under former management, the Company invested $109,071 in Windsor Energy Corporation in 1997, during 1998 the company filed bankruptcy. The shares are no longer listed on an exchange and have no value.

NOTE 5 - PROPERTY AND EQUIPMENT

NM Corporation, the subsidiary of Gladstone Resources, Inc., owned a 28.71% net revenue interest in 6 producing gas wells in San Juan County, New Mexico. The subsidiary was merged into its parent company in 1999.

On January 1, 1982, Gladstone Resources, Inc. purchased producing properties for $550,000 in Kent County, Texas. Previously in 1981, Gladstone purchased a 6.25% interest in a 207 acre lease with one producing well. The 1982 purchase consists of four leases on 3,035 acres with 68 producing wells. The reserves on some of the properties were reduced by production declines. These properties were sold for $20,000 in January, 1999, with an effective date of October 1, 1998, for income and expenses.

From 1990 through 1994, the Company participated in successful wells in Schleicher and Pecos Counties in Texas. The reserves in Schleicher County were estimated by management to be 1,524,300 MCF's in 1994, there are currently seven producing wells and a pipeline. Gladstone Resources, Inc. had a 40.17% revenue interest in the Wilson-Pope wells in Schleicher County. The Schleicher County wells were sold for $295,000 in January, 1999, with an effective date of October 1, 1998, for income and expenses.

The company purchased an interest in producing oil wells in the Right Hand Check Field for $334,125 as of June 30, 1999.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999

NOTE 5 - PROPERTY AND EQUIPMENT (CONTINUED)

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 MANAGEMENT. There are no "proved undeveloped reserves" according to management.

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:

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999

NOTE 6 - FEDERAL AND STATE INCOME TAXES (CONTINUED)

The components of the Company's deferred income taxes for 1999 and 1998 are as follows:

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

NOTE 7 - LONG-TERM DEBT

The Company has a commitment from Compass Bank to receive up to $15,000,000 in loans for oil and gas exploration or purchase of oil and gas properties. Currently the Company has received $230,000 from the bank. The interest rate is 1% over the index rate. The current rate is 8.85% plus 1%. The due date is August 1, 2001. The note requires monthly payments of $5,000 plus interest, beginning February 1, 2000. Also, the bank requires the Company to meet certain financial ratios at year end.

NOTE 8 - SIGNIFICANT ESTIMATES AND CONCENTRATIONS

Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations.

In 1999, the Company had two customers which represent 72% and 19% of its total revenue.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS

December 31, 1999

NOTE 9 - RENT EXPENSE

The Company pays rent on a month-to-month basis. The Company does not have a commitment on a lease contract. Rent expense for 1999, 1998 and 1997 was $6,088, $6,606 and $5,919, respectively.

NOTE 10 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to certain operating agreements by and between the Company and Edward B. Brooks, Jr., Mr. Brooks served as the operator of certain of the Company's oil and gas interests. Pursuant to such operating agreements, the Company paid the following described amounts to Mr. Brooks in 1997 and 1998 and Mr. Brooks paid the following described amounts to the Company in 1997 and 1998.

Mr. Brooks paid the Company $72,602 in 1998 as the Company's share of gas sales from properties in Schleicher County. The Company paid Mr. Brooks $52,306 in 1998 for the Company's share of operating costs on properties in Kent County and Schleicher County. In 1998, the Company also paid Mr. Brooks $4,734 for the Company's share of operating expenses on the Schleicher and Kent County properties that were paid by Mr. Brooks in 1997.

In 1997, the Company paid Mr. Brooks $228,472 for the Company's share of the cost of a seismic study on properties in Stonewall County and the cost of drilling two wells in other counties in Texas which turned out to be non-productive. In 1998, the Company paid Mr. Brooks $18,915 for the Company's share of the seismic study on properties in Stonewall County and $37,591 for the Company's share of the cost of drilling a well in Stonewall County that was nonproductive. In 1998, the Company paid $24,334 to Mr. Brooks for the Company's share of lease costs of properties in Stonewall County.

The Company purchased 50% of the working interest owned by Humphrey Oil Interests, L.P. in the Right Hand Creek field in Louisiana. The Company paid Humphrey Oil Interests, L.P. the same amount that they had paid for the working interest. Some of the Humphrey Oil Interests, L.P. partners are officers and directors of Gladstone Energy, Inc. The cost of the 12.25% working interest and 8.93% revenue interest was $334,125. The gross revenue is averaging $20,150 per month in 1999 and net revenue of $14,438 per month.

The Company pays Humphrey Oil Interests, L.P. for monthly administrative expenses, including employees' time charges, rent, telephone, computer expenses and other office expenses.

OTHER FINANCIAL INFORMATION

Board of Directors and Stockholders

Gladstone Energy, Inc.

My report on my audit of the basic financial statements of Gladstone Energy, Inc. for 1999 and Gladstone Resources, Inc. for 1998 appears on page 3. That audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The information on pages 15 through 20 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, I express no opinion on it.

                                                                            Certified Public Accountant

Dallas, Texas

February 4, 2000

GLADSTONE ENERGY, INC.

EXHIBIT A

SUMMARY OF OPERATIONS

For the year ended December 31,

*Adjusted for 1 for 5 reverse split.

See auditor's report on other financial information

GLADSTONE ENERGY, INC.

December 31, 1999

SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT

SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION AND

AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT

See auditor's report on other financial information

GLADSTONE ENERGY, INC.

CAPATILIZED COSTS OF OIL AND GAS PRODUCING ACTIVITIES

Years ended December 31, 1999

See auditor's report on other financial Information

GLADSTONE ENERGY, INC.

COSTS INCURRED IN OIL AND GAS PROPERTY

ACQUISITION, EXPLORATION AND DEVELOPMENT ACTIVITIES

Three years ended December 31, 1999

See auditor's report on other financial information

GLADSTONE ENERGY, INC.

RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES

For the three years ended December 31, 1999

See auditor's report on other financial information

GLADSTONE ENERGY, INC.

RESERVE QUANTITY INFORMATION

For the three years ended December 31, 1999

Oil quantities are in barrels.

Gas quantities are in MCF'S.

*All undeveloped reserves that may exist are on the same leases as the developed reserves and additional wells, if drilled, may or may not produce additional reserves.

See auditor's report on other financial information

None.

The directors of the Company at March 30, 2000, were as follows:

Mr. Hill was appointed a Director and President of the Company in March 1999. Mr. Hill has been the President of Hill & Hill Production Company, an oil and gas production company, the Secretary and Treasurer of Hill Energy Company, an oil and gas investment company, and the Vice President of HPC Operating Company, an oil and gas operating company, all based in Dallas, Texas, since 1985.

Ms. Murphy was appointed Treasurer, Assistant Secretary and a Director of the Company in March 1999. Ms. Murphy has been the Vice President and Assistant Secretary of Humphrey Oil Corporation since 1989.

Mr. Gifford, was appointed a Director of the Company in March 1999. Mr. Gifford has been the President and a Director of Gifford Operating Company, an oil and gas operating company based in Dallas, Texas, since 1987. Mr. Gifford has also been active as an independent geological consultant since 1980.

Mr. Humphrey was appointed a Director of the Company in March 1999. Mr. Humphrey has been the President, Treasurer, and sole director of Humphrey Oil Corporation, an oil and gas exploration company based in Dallas, Texas, and the President and a Director of Lindenshire, Inc., a real estate development company based in Dallas, Texas, since 1984. Mr. Humphrey also has been engaged in real estate development and investment individually and through numerous other partnerships, joint ventures and corporations since 1984.

Mr. Oliver was appointed a Director of the Company in March 1999. Mr. Oliver has been the President of Petroleum Ventures of Texas, Inc., an oil and gas investment company based in Dallas, Texas, since 1975. Mr. Oliver also has been engaged in geological and engineering consulting since 1953.

The executive officers of the Company at March 30, 1999, were as follows:

For information regarding the business experience of Messr. Hill and Madame Murphy, see the biographies above.

Ms. Irons was appointed the Company's Vice President and Secretary of the Company in March 1999. Ms. Irons has been Vice President of Humphrey Oil Corporation since 1989.

The term of each director and executive officer expires at the annual meeting of shareholders and directors, respectively, or at such times as their respective successors are duly elected and qualified.

None of the executive officers of the Company received any salary or bonus during the fiscal year ended December 31, 1999. The Directors of the Company each received $250.00 as Director's fees in 1999. The table below includes compensation paid by the Company for services rendered in fiscal 1998, and 1997 to Edward B. Brooks, Jr., the former President and Chief Executive Officer of the Company.

No stock options or stock appreciation rights were granted to the President by the Company during fiscal 1999.

No stock options or stock appreciation rights were exercised by the President in fiscal 1999, and no stock options or stock appreciation rights were outstanding at the end of fiscal 1999.

The Company did not have any long-term incentive plans in effect during fiscal 1999.

The Company does not have any employment agreements with any of its officers.

The following table sets forth beneficial owners of five percent or more of the Company's outstanding shares of Common Stock known to the Company as of March 30, 2000. All shares shown in the table reflect sole voting and investment power unless otherwise indicated.

The following table sets forth the number of shares of Common Stock beneficially owned by each director of the Company, each executive officer of the Company and all directors and executive officers as a group as of March 30, 2000. All shares shown in the table reflect sole voting and investment power unless otherwise indicated.

As described in the joint Schedule 13D filed January 29, 1999 by Mr. Wayne Gifford, Mr. Charles B. Humphrey, Mr. Johnathan Hill, Mr. Fred Oliver, Ms. Sheila Irons (individually and as trustee of the Humphrey Childrens Trust), Mr. Katherine Murphy, Mr. David Tyrrell (individually and as trustee of the Katherine Desporte Tyrrell Trust) and Mr. Clay Moore (collectively, the "Purchasers") as a group and certain of the members of the group individually, on January 19, 1999, the Purchasers purchased in two simultaneous transactions (the "Purchases") an aggregate of 3,134,325 shares of Common Stock representing approximately 73.85% of the issued and outstanding shares of Common Stock. The Purchases were made pursuant to the terms of (i) a Stock Purchase Agreement dated January 19, 1999 among the Purchasers and Edward B. Brooks, Jr., Charles V.W. Brooks, Carol Brady, Rebecca Feldt and Debra Brooks Garrett (collectively, the "Brooks Sellers") and (ii) a Stock Purchase Agreement dated January 19, 1999 among the Purchasers and C. J. Cloarec, M.D. and Camrose Optical Co. (collectively, the "Cloarec Sellers"). In connection with the Brooks Purchase, the Brooks Sellers agreed to take or cause to be taken all such action as was necessary to cause Mr. Hill, Mr. Humphrey, Mr. Gifford, Mr. Oliver and Ms. Murphy to be appointed as the sole members of the Board of Directors which occurred in March 1999. Additionally, the newly constituted Board of Directors appointed Mr. Hill as President, Ms. Irons as Vice President and Secretary and Ms. Murphy as Treasurer and Assistant Secretary in March 1999.

Pursuant to certain operating agreements by and between the Company and Edward B. Brooks, Jr., Mr. Brooks served as the operator of certain of the Company's oil and gas interests. Pursuant to such operating agreements, the Company paid the following described amounts to Mr. Brooks in 1997 and 1998 and Mr. Brooks paid the following described amounts to the Company in 1997 and 1998.

Mr. Brooks paid the Company $90,802 and $72,602, respectively, in 1997 and 1998 as the Company's share of gas sales from properties in Schleicher County. The Company paid Mr. Brooks $68,881 and $52,306.19, respectively, in 1997 and 1998 for the Company's share of operating costs on properties in Kent County and Schleicher County. In 1998, the Company also paid Mr. Brooks $4,733.94 for the Company's share of operating expenses on the Schleicher and Kent County properties that were paid by Mr. Brooks in 1997.

In 1997, the Company paid Mr. Brooks $228,472 for the Company's share of the cost of a seismic study on properties in Stonewall County and the cost of drilling two wells in other counties in Texas, which turned out to be non-productive. In 1998, the Company paid Mr. Brooks $18,915.16 for the Company's share of the seismic study on properties in Stonewall County and $37,591.05 for the Company's share of the cost of drilling a well in Stonewall County that was nonproductive. In 1998, the Company paid $24,334.51 to Mr. Brooks for the Company's share of lease costs of properties in Stonewall County.

In 1997 and 1998, the Company reimbursed Mr. Brooks $1,768.90 and $1,159.29, respectively, for expenses incurred by him in operating a Company owned vehicle that was provided to him for Company business.

In 1999, the Company purchased the Right Hand Creek Properties from Humphrey Oil Interests, L.P. for an aggregate purchase price of $345,125. The purchase price for the Right Hand Creek Properties was equal to the price Humphrey Oil Interests, L.P. had paid to acquire such interests. Charles B. Humphrey owns 98% of Humphrey Oil Interests, L.P. and is also Chairman of the Board of the Company. The cost of the 12.25% working interest and 8.93% revenue interest was $334,125.

The Company reimburses Humphrey Oil Corporation, which is the General Partner of Humphrey Oil Interests, L. P. and of which Charles B. Humphrey owns a majority interest, for certain monthly administrative expenses, including employees' time charges, rent, telephone, computer expenses and other office expenses incurred on behalf of the Company. These costs for fiscal 1999 totaled $39,513.47.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Dallas, Texas on the 14^th day of April, 2000.

By:                                                                        

Johnathan M. Hill

President

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

April 14, 2000                                                 /s/   Johnathan M. Hill