GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

March 31, 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 three months or less to be cash equivalents. There were no cash equivalents at March 31, 2000, or December 31, 1999. There were no significant non-cash investing or financing activities during the periods ended March 31, 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. 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.

NOTE 3 - ACCOUNTS RECEIVABLE

Of the net revenue interest amount of $63,315 due from oil and gas sales and joint interest billings as of March 31, 2000, $53,652 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.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

March 31, 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.

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 March 31, 2000.

NOTE 5 - FEDERAL AND STATE INCOME TAXES

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 March 31, 2000, the Company had no material commitments.

GLADSTONE ENERGY, INC.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

March 31, 2000

NOTE 7 - COMMON STOCK

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

At March 31, 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

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 March 31, 2000 was $1,500. The Company does not have a commitment on a lease contract. Rent expense for 1999 was $6,088.

NOTE 10 - 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.

NOTES TO FINANCIAL STATEMENTS (Unaudited)

March 31, 2000

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.

The Credit Facility consists of a regular revolver which at April 1, 2000, had a borrowing base of $215,000. 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 1.25 to 1.0 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 1.25 for 1.0, 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").

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.

Net Income (Loss). The Company had a net loss for the three month period ended March 31, 2000 of ($90,144) compared to the net loss of ($26,189) for the corresponding period of 1999, representing ($.11) per share for the period in 2000 and ($.03) per share for the same period in 1999.

Revenues. Revenues for the three month period ended March 31, 2000 were $82,564 compared with $8,139 for the corresponding period in 1999, a 914% 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.

Costs and Expenses. Costs and expenses for the three month period ended March 31, 2000 increased $137,858, or 395%, to $172,724 versus $34,866 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 $7,416, or 41%, from $18,192 for the three month period ended March 31, 1999 to $10,776 for the same period in 2000 because improved reporting procedures have been implemented.

Cash decreased $84,573 to $49,769 at March 31, 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 increased $22,494 to $63,315 from $40,821 during the three months ended March 31, 2000 and accounts payable decreased $43,003 to $94,455 from $137,458 during the three months ended March 31, 2000. The increase in accounts receivable is primarily related to increased revenue from the Right Hand Creek Properties which has been accrued but not received as well as higher oil prices for the period, 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 March 31, 2000 was ($56,932) or (.07) per share for the three month period in 2000 compared to ($18,737), or ($.02) 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.

For the three months ended March 31, 2000, net cash used in operating activities was $68,619 compared to $34,558 for the three months ended March 31, 1999. Significant uses of cash in operations for the three months ended March 31, 2000, in addition to our net loss, was cash used to reduce payable. Additionally, accounts receivable increased.

The Company maintains a $15 million credit facility (the "Credit Facility") with Compass Bank, which is secured by a first lien deed of trust providing a security interest in the Right Hand Creek Properties. This facility expires on August 1, 2001. At April 1, 2000, the outstanding balance under the line of credit was $215,000 and the borrowing base was $215,000. Interest on the outstanding balance accrues on the first of each month 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. At April 1, 2000, this rate was 10%.

The Credit Facility requires the Company to comply with certain financial covenants such as a minimal current ratio, a minimal amount of tangible net worth, a minimal quick ratio and a maximum amount of debt to cash flow. The Credit Facility also 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) certain permitted indebtedness, or (ii) to pledge assets outside of the Credit Facility, other than certain permitted liens.

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