HALFF ENERGY
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SUMMARY OF OPERATIONS

Halff Energy, founded in 1985, is a growth-oriented general partnership. Halff Energy is based in Dallas, Texas and owned by eight descendants of Henry M. Halff (1874-1934), a prominent West Texas rancher. Halff Energy manages Permian Basin mineral interests passed down to these descendants by Henry M. Halff. This property is owned by 18 entities (including trusts). Their interests comprise approximately 16,000 net mineral acres, primarily in Crockett, Midland, Reagan, and Upton Counties, Texas. About 9,231 net mineral acres are leased, and the majority of these properties are producing at this time. Surface acreage ownership is minimal. The gross mineral acreage in which Halff Energy owners own is approximately 70,000 acres. An affiliated corporation, Halff Royalties, Inc., was formed in 1994, to facilitate acquisition of additional mineral interests by some partners of Halff Energy. Halff Royalties, which is managed by Halff Energy, owns diverse mineral interests in several states. It acquired approximately 12,000 net mineral acres in Crockett and Frio Counties in 2004. Members of Halff Energy periodically consider new acquisitions of mineral interests, and working interest arrangements.

BUSINESS PHILOSOPHY

Halff Energy strives to manage the mineral holdings of its owners with prudence and foresight. It is a pro-active partnership that believes strongly in integrity in all of its dealings, and reliance on facts, careful analysis, and scientific and professional expertise in arriving at critical decisions. Halff Energy also stresses informed involvement of its owners in its management, economy and conservative business practices in its operation, and an equal regard for current opportunities in the energy market and long-term stability and growth of its revenues. Halff Energy seeks: new leasing with reputable operators, using Halff Energy's own lease form and seeking terms that meet or exceed prevailing market values; effective drilling and production practices on its lands: analysis and exploration of new prospects; close cooperation with co-owners in its owners' land, and with operators; scrutiny and adoption of efficient business strategies and revenue diversification options; and evaluation of mineral acquisition opportunities that may complement the family's core holdings. A positive attitude and enthusiastic teamwork are hallmarks of Halff Energy's interaction among owners, staff, and consultants. The dedication of its owners and personnel has proven to be its greatest asset.

ASSOCIATED MINERAL OWNERS

Owners outside of Halff Energy who own portions of the same mineral properties that Halff Energy partners hold include other family members operating a sister company, Halff Interests, and other West Texas families who secured interests in many of the Halff holdings many years ago. Halff Energy cooperates extensively with Halff Interests and with other co-owners of its acreage.

PARTNERSHIP FUNCTIONS

The partnership's primary functions include the following:

Income Management. Royalty checks are made out to individuals or affiliated entities and mailed to the Halff Energy office. The office records these checks, deposits them in the individuals' or entities' bank accounts, and insures that payments are correct. The office provides reports needed to monitor income and file taxes. It also furnishes revenue and production information to the entities and their accountants. To provide these services, the partnership uses Wolfepak accounting software.

Land Records. Halff Energy is responsible for providing owners with useful, accurate information concerning their holdings. To provide this service, the partnership uses the GWIZ Land System.

Lease Negotiation. Oil companies periodically make lease offers to one or more owners. Halff Energy is responsible for receiving these offers, contacting owners about them, analyzing the offers, consulting with experts (e.g. geologists), coordinating efforts with other landowners, making recommendations to owners, and negotiating leases, under the direction of the owners. Halff Energy owners, not Halff Energy, are the lessors of their acreage, and must approve all lease offers or counter offers before Halff Energy presents them to potential lessees. Therefore, it is Halff Energy's responsibility to prudently advise its owners concerning lease offers, and to recommend one or more courses of action. Halff Energy owners have never failed to reach a consensus, and thereby have always acted together, in responding to a lease offer or formulating a counter offer. Halff Energy closely coordinates its leasing activities with its sister company, Halff Interests, although each entity is owned and operated independently.

Production Monitoring. Halff Energy monitors production on its land, for productive management of operations and conformity with government regulations and lease terms. When it faces production problems or deviations from optimal practices or regulations, it conducts thorough research, consults with experts, formulates recommendations for corrective action, and works extensively with operators to remedy any production problems.

Property Analysis and Business Planning. Halff Energy continually inventories and analyzes the geology and production of all its producing and non-producing properties, in order to better plan for revenue augmentation and stabilization. In a related task, Halff Energy developed a business plan that will optimize the exploration of our holdings and stabilize our long-range returns from them.

Mineral-Interest Acquisitions. Halff Energy is an active, growth-oriented company. Some Halff Energy owners are interested in expanding their holdings through the acquisition of mineral royalties, non-operating drilling deals, and non-operating working interests within and outside of West Texas. Halff Energy routinely evaluates the possible acquisition of mineral royalties in producing and non-producing areas that have potential for production. Working interests in promising projects also are considered, as are cooperative ventures with other individuals or entities that may wish to acquire minerals.

Other Tasks. Halff Royalties, Inc. has acquired some mineral interests throughout the United States. Halff Energy manages theses properties. In addition, some or all owners may periodically ask the office for special studies or research pertaining to their mineral interests. These studies range from general research on alternative sources of energy to specific investigations of the potential sales price of certain minerals. The office provides to owners detailed information on the status of their holdings and on the oil and gas market in general. Annual reports are supplemented by weekly status reports to all owners.

CURRENT ACTIVITY

Henry Petroleum and Concho Oil and Gas have been very active on our leases, developing the Spraberry-Wolfcamp in Upton County by using multi-zone, large-scale fracturing techniques. Concho has used large amounts of water and sand in its "frac" jobs, to produce oil and gas in commercial quantities, from overlook and low-porosity Spraberry-Wolfcamp zones. This has been one of the most innovative large plays in recent times in Upton County. Trek Oil & Gas has used 3-D seismic, with success, to develop the Wolfcamp and Clearfork on our leases in a remote area of Crockett County.

In recent years, Halff Energy leases have been developed by EOG in the Amacker-Tippett Field, using 3-D seismic data to locate and produce porous Wolfcamp porosity buildups. EOG and Hunt Oil also have been successful in using horizontal drilling for the development of the Devonian horizon in the Amacker-Tippett Field. Both operators remain active in the redevelopment of the Wolfcamp in the Amacker-Tippett Field.

PARTNERSHIP MANAGEMENT, OFFICE AND PERSONNEL

Halff Energy's management is overseen by one of the partners, appointed periodically by the partners to the position of managing partner. The current managing partner is Bro Halff, a Dallas native. The partnership maintains its office at 5430 Glen Lakes Drive, Suite 210, Dallas, TX, 75205, approximately 6 miles north of downtown Dallas, near the intersection of Walnut Hill Lane and North Central Expressway.

The Halff Energy office is staffed by a full-time geological manager, a part-time land manager, a part-time land record/accounting administrator, and two accounting clerks, each experienced in the oil and gas industry. Halff Energy is a member of Geomap, and DrillingInfo.Com. Our staff is active in many professional societies and regularly attends meetings, expositions, and seminars concerning the oil and gas business.

Halff Energy maintains a strong team of expert consultants, who routinely advise its staff and owners. These experts include petroleum geologists in Dallas and Midland, petroleum engineers in Midland, a consulting land man in Midland, oil and gas attorneys in Dallas and Austin, a petroleum investment and management expert in Midland, and several accounting firms. Halff Energy's books are audited annually.

LOOKING TO THE FUTURE

Halff Energy seeks to expand leasing, drilling and exploration on its land, in response to a growing demand for petroleum products. The partnership is proud to be one of two Texas-based family businesses (the other being Halff Interests) that manage the minerals passed on to the descendants of Henry M. Halff, a pioneering West Texas rancher and entrepreneur. The Halff family has managed these assets for more than 75 years, since the demise of Henry M. Halff in 1934. The family has witnessed decades of growth, adversity, and progress in the West Texas oil industry. Its members feel privileged to be a part of this industry. They strive to do all in their power to advance it with the same integrity, energy, optimism, and enthusiasm that Henry M. Halff brought to bear on his life and career.