GLADSTONE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2000

NOTE 1 - ORGANIZATION

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 purposes of the statements of cash flows, the Company considers all short-term debt securities purchased with a maturity of six months or less to be cash equivalents. There were no cash equivalents at September 30, 2000, or December 31, 1999. There were no significant non-cash investing or financing activities during the periods ended September 30, 2000 and 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.

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. The Company had not assigned any future tax benefits to the accumulated losses in prior periods due to the projected losses in future years. The increase in oil and gas prices during the current period and the sale of the properties has resulted in a positive tax benefit being recorded in the current period.

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 - ACCOUNTS RECEIVABLE

Of the net revenue interest amount of $20,908 due from oil and gas sales and joint interest billings as of September 30, 2000, $19,097 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, and generally are received within 60 days.

NOTE 4 - PROPERTY AND EQUIPMENT

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.

The Company owns a 28.125% net revenue interest in 5 producing gas wells in San Juan County, New Mexico. These wells were sold in October, 2000, effective for production purposes as of August 1, 2000.

GLADSTONE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2000

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 47.5 barrels of oil per day, 1 injection well, and 2 gross (.245 net) non-producing wells. The Company sold 30% of its interest in these properties in September, 2000, effective for production purposes as of August 1, 2000. The balance of the Company's interest is being sold, subject to stockholder approval, in December, 2000, effective for production purposes as of September 1, 2000.

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, 2000.

NOTE 5 - FEDERAL AND STATE INCOME TAXES

As noted in Note 2, due to the amount of losses that are currently being carried forward, along with the carryover percentage depletion, the Company had adjusted the future tax benefit to zero. During the current period the allowance adjusting deferred tax benefits has been adjusted, due to changing oil prices and the estimated future income, to $148,487.

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

There are limitations on the use of the losses due to change of control which occurred in 1999.

At December 31 1999, there was $298,732 of statutory depletion carryover to 2000.

At December 31 1999, there was $10,000 of Section 179 depreciation carryover to 2000.

At December 31, 1999, there was $109,071 in capital loss carryover to 2000.

NOTE 6 - COMMITMENT AND CONTINGENCY

At September 30, 2000, the Company had commitments, subject to stockholder approval, to sell of its New Mexico gas wells and the balance of the Louisiana oil wells.

GLADSTONE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
September 30, 2000

NOTE 7 - COMMON STOCK

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

At September 30, 2000, 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. All share and per share numbers have been adjusted retroactively to record the effects of the reverse split.

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 8 - 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. Major Customers

2. Oil and Gas Reserves

NOTE 9 - RENT EXPENSE

The Company currently pays rent of $500.00 per month to Humphrey Oil Corporation, inclusive of phone service. Rent expense through September 30, 2000 was $5,060, which includes an expense adjustment. The Company does not have a commitment on a lease contract. Rent expense for 1999 was $6,088.

NOTE 10 - ACQUISITION AND DIVESTITURE 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. The note was paid in full from the sale of the 30% of the Righthand Creek property for $201,000. The Company has contracted to sell the remaining interest in the Righthand Creek property, subject to stockholder approval, for $434,000 to EXCO Resources, Inc. The Company also sold the San Juan County New Mexico properties to EXCO Resources, Inc. for $267,000.

NOTE 11 - 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. This agreement has been terminated and the note associated therewith paid in full.

Net Income (Loss). The Company had net income for the three month period ended September 30, 2000 of $288,915 compared to the net loss of ($21,517) for the corresponding quarter of 1999, representing $.34 and ($.03) per share, respectively. The Company had net income for the nine month period ended September 30, 2000 of $255,956 compared to the net loss of ($92,085) for the corresponding period of 1999, representing $.30 per share for the period in 2000 and ($.11) per share for the same period in 1999.

Revenues. Revenues for the three month period ended September 30, 2000 were $74,813 compared with $133,036 for the corresponding period in 1999, a 44% decrease. This decrease was due to the sale on August 31, but effective August 1, 2000, of 30% of the Company's interest in the Righthand Creek Properties, the sale on October 10, 2000, but effective August 1, 2000, of the Company's properties in San Juan County, New Mexico, and the pending sale, subject to stockholder approval, of the Company's remaining interest in the Righthand Creek Properties that would be effective as of September 1, 2000 (collectively the "Property Sales"). Revenues for the nine month period ended September 30, 2000 were $295,643 compared with $155,816 for the corresponding period in 1999, a 90% 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. This increase was partially offset by the Property Sales.

Costs and Expenses. Costs and expenses for the three month period ended September 30, 2000, decreased $101,584, or 64%, to $57,025 versus $158,609 for the corresponding period of 1999. This decrease was primarily due to reduced dry hole and abandonment loss (decreased $22,264 or 90% to $2,500), depletion (decreased $20,415 or 68% to $9,413), and prospect expenses (decreased $21,115 or 100% to none), as a result of the Property Sales, and reduced legal, auditing and accounting expenses (decreased $17,345 or 78% to $4,728) because improved reporting procedures have been implemented. Costs and expenses for the nine month period ended September 30, 2000 increased $53,789, or 20%, to $310,833 versus $257,044 for the corresponding period of 1999. General and administrative expenses increased due to the abandonment of dry holes and the associated acreage, and an officers and directors insurance policy that had not previously been carried. Legal, auditing, and accounting fees decreased $52,899, or 73%, from $72,397 for the nine month period ended September 30, 1999 to $19,458 for the same period in 2000 because improved reporting procedures have been implemented and the Company completed its reorganization.

Cash decreased $22,549 to $111,793 at September 30, 2000, from $134,342 at December 31, 1999, as a result of the cost of dry holes drilled and payments on bank loans. Accounts receivable decreased $19,913 to $20,908 from $40,821 during the nine months ended September 30, 2000 and accounts payable decreased $124,282 to $13,176 from $137,458 during the nine months ended September 30, 2000. The decrease in accounts receivable is primarily related to the Property Sales, while the decrease in accounts payable is primarily due to paying invoices due on the drilling of a dry hole and an unsuccessful recompletion of a shut-in well related to the Right Hand Creek Properties, as well as to final payments on the drilling of the Cache Creek #1 dry hole in 1999.

Earnings (loss) before interest, taxes, depreciation, depletion and amortization ("EBITDA") for the three-month period ended September 30, 2000 is $35,601 or .04 per share compared to $10,077, or $.01 per share for the corresponding period of 1999.   EBITDA for the nine month period ended September 30, 2000 was $68,318 or $.08 per share for the nine month period in 2000 compared to ($48,981), or ($.06) per share for the same period in 1999.  (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.

For the nine months ended September 30, 2000, net cash provided from operating activities was $131,089 compared to $98,969 used for the nine months ended September 30, 1999. Cash was provided from operations. Additionally, accounts receivable decreased due to the Property Sales.

The Company paid off and closed out their credit facility (the "Credit Facility") with Compass Bank.

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. This improvement has continued and actually increased in the first three quarters of 2000. 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.

During the third quarter of the fiscal year, there is no Other Information to disclose.