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TABLE OF CONTENTS
TABLE OF CONTENTS
PINNACLE GAS RESOURCES, INC. Index to Form 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 3)

Filed by the Registrant ý
Filed by a Party other than the Registrant o
Check the appropriate box:
ý	Preliminary Proxy Statement
o	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o	Definitive Proxy Statement
o	Definitive Additional Materials
o	Soliciting Material under §240.14a-12

Pinnacle Gas Resources, Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
o	No fee required.
ý	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
	(1)	Title of each class of securities to which transaction applies: Common stock, par value $0.01 per share, of Pinnacle Gas Resources, Inc. ("Common Stock")
	(2)	Aggregate number of securities to which transaction applies: 30,320,525 shares of common stock, including 340,493 shares of unvested restricted stock.
	(3)	Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): The filing fee was determined by multiplying 0.0000713 by the sum of: (i) the product of 20,228,770 shares of common stock multiplied by $0.34 per share, plus; (ii) the product of 340,493 shares of unvested restricted common stock multiplied by $0.34 per share, which represents the amount to be received upon the cancellation of such restricted common stock and the payment of merger consideration for such shares, plus (iii) the product of 9,751,262 shares of common stock multiplied by $0.34 per share, representing shares of common stock to be contributed to the acquiring entity in the transactions described on this schedule.
	(4)	Proposed maximum aggregate value of transaction: $10,308,979
	(5)	Total fee paid: $735.03
ý	Fee paid previously with preliminary materials.
o	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
	(1)	Amount Previously Paid:
	(2)	Form, Schedule or Registration Statement No.:
	(3)	Filing Party:
	(4)	Date Filed:

PRELIMINARY COPY—SUBJECT TO COMPLETION, DATED JUNE 23, 2010

PINNACLE GAS RESOURCES, INC.
1 East Alger Street
Sheridan, Wyoming 82801

PROPOSED CASH MERGER—YOUR VOTE IS VERY IMPORTANT

, 2010

To our Stockholders:

After careful consideration, the Board of Directors of Pinnacle Gas Resources, Inc., a Delaware corporation ("Pinnacle"), has unanimously approved an Agreement and Plan of Merger ("Merger Agreement") providing for Pinnacle's acquisition by Powder Holdings, LLC, a Delaware limited liability company ("Powder").

If the merger is completed, each share of our Common Stock issued and outstanding immediately prior to the effective time of the merger (other than shares owned by Powder, Powder Acquisition Co. or any other subsidiary of Powder or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.34 in cash, without interest and less any applicable withholding tax.

At a special meeting of our stockholders, you will be asked to vote on a proposal to adopt the Merger Agreement, as it may be amended from time to time. The special meeting will be held on      , 2010, at 10:00 a.m. Mountain Time, at the offices of Moye White LLP, 1400 16^th Street, Sixth Floor, Denver, Colorado 80202. Notice of the special meeting and the related proxy statement are enclosed.

Our Board of Directors established a special committee of three independent directors who negotiated, reviewed and considered the terms of the Merger Agreement and alternative transactions (the "Special Committee"). The Special Committee determined that the merger, as contemplated by the Merger Agreement, is fair to, and in the best interest of, our stockholders, and the Special Committee unanimously recommended that the Board of Directors approve the merger and the Merger Agreement and recommend its adoption by our stockholders. Our Board of Directors then unanimously determined that the merger and Merger Agreement and the other transactions contemplated thereby are advisable, fair and in the best interest of Pinnacle and its stockholders and recommends that our stockholders vote to approve the merger and adopt the Merger Agreement.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF THE MERGER AND ADOPTION OF THE MERGER AGREEMENT AND, IF NECESSARY, TO ADJOURN THE SPECIAL MEETING FOR THE PURPOSE OF SOLICITING ADDITIONAL PROXIES TO VOTE IN FAVOR OF APPROVING THE MERGER AND ADOPTING THE MERGER AGREEMENT.

If the merger is completed, Pinnacle will no longer be a publicly traded company, our Common Stock will not be quoted on the NASDAQ Global Market and you will not participate in our future earnings or growth.

The accompanying proxy statement provides detailed information about the special meeting, the Merger Agreement and the merger. A copy of the Merger Agreement is attached as Exhibit A to the accompanying proxy statement. We encourage you to read the entire proxy statement and the Merger Agreement carefully. You may also obtain more information about us from documents we have filed with the Securities and Exchange Commission.

Concurrently with the execution of the Merger Agreement, Pinnacle and certain Pinnacle stockholders comprised of certain of our directors and executive officers, DLJ Merchant Banking Partners III, L.P. and affiliated investment funds ("DLJ"), and CCBM, Inc., entered into a voting agreement with Powder pursuant to which they have agreed to vote all shares of Common Stock held by them in favor of the adoption of the Merger Agreement (the "Voting Agreement"). An aggregate of 43.8% of the shares of our outstanding Common Stock entitled to vote at the special meeting are subject to the Voting Agreement and will vote in favor of the Merger and adoption of the Merger Agreement.

Your vote is very important. We cannot complete the merger without the affirmative vote in favor of the adoption of the Merger Agreement of the holders of (i) at least a majority of the outstanding shares of Common Stock entitled to vote, and (ii) at least a majority of the outstanding shares of Common Stock held by persons who are unaffiliated with DLJ, our chief executive officer and our chief financial officer. The failure of any stockholder to vote on the proposal to adopt the Merger Agreement, as it may be amended from time to time, will have the same effect as a vote against the adoption of the Merger Agreement.

Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy in the accompanying reply envelope. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted.

On behalf of your Board of Directors, thank you for your continued support.

Sincerely,

/s/ Peter G. Schoonmaker
President and Chief Executive Officer
                        , 2010

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

This proxy statement is dated                    , 2010 and is first being mailed to stockholders of Pinnacle on or about                    , 2010.

PINNACLE GAS RESOURCES, INC.
1 East Alger Street
Sheridan, Wyoming 82801

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held On            , 2010

To our Stockholders:

        We will hold a special meeting of stockholders of Pinnacle Gas Resources, Inc. ("Pinnacle") at the offices of Moye White LLP, 1400 16^th Street, Sixth Floor, Denver, Colorado 80202, on                  , 2010 at 10:00 a.m. Mountain Time, for the following purposes:

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Adoption of the Merger Agreement.  To consider and vote on a proposal to adopt the Agreement and Plan of Merger (the "Merger Agreement") dated as of February 23, 2010, by and among Pinnacle, Powder Holdings, LLC, a Delaware limited liability company ("Powder") and Powder Acquisition Co., a Delaware corporation and a wholly owned subsidiary of Powder ("Merger Sub"), as it may be amended from time to time. A copy of the Merger Agreement is attached as Exhibit A to the accompanying proxy statement. Pursuant to the terms of the Merger Agreement, Merger Sub will merge with and into Pinnacle and Pinnacle will continue as the surviving corporation (the "Merger"). Upon completion of the Merger, each share of our Common Stock, par value $.01 per share (the "Common Stock"), issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by Powder, Merger Sub or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.34 in cash, without interest and less any applicable withholding tax.

•

Postponement or Adjournment of Special Meeting.  To grant to the proxyholders the authority to vote in their discretion with respect to the approval of any proposal to postpone or adjourn the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement at the special meeting or any postponement or adjournment thereof.

•

Other Matters.  To consider and vote upon any other matter that may properly come before the special meeting or any postponement or adjournment thereof.

        These items of business are described in the attached proxy statement. Only our stockholders of record at the close of business on            , 2010, the record date for the special meeting, are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting.

        Our Board of Directors established a Special Committee of three independent directors who negotiated, reviewed and considered the terms of the Merger Agreement and alternative transactions (the "Special Committee"). The Special Committee determined that the Merger is fair to, and in the best interest of, our stockholders, and recommended that the Board of Directors approve the Merger and the Merger Agreement and recommend its approval by our stockholders. Our Board of Directors then unanimously determined that the Merger and Merger Agreement and the other transactions contemplated thereby are advisable, fair and in the best interest of Pinnacle and its stockholders and recommends that our stockholders vote to approve the Merger and adopt the Merger Agreement.

        The adoption of the Merger Agreement requires the affirmative vote of the holders of (i) at least a majority of the outstanding shares of Common Stock entitled to vote; and (ii) at least a majority of the outstanding shares of Common Stock held by persons who are unaffiliated with DLJ Merchant Banking Partners III, L.P. and affiliated investment funds, our chief executive officer and chief financial officer.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL OF
THE MERGER AND ADOPTION OF THE MERGER AGREEMENT AND, IF NECESSARY,
TO ADJOURN THE SPECIAL MEETING FOR THE PURPOSE OF SOLICITING
ADDITIONAL PROXIES TO VOTE IN FAVOR OF APPROVING THE MERGER
AND ADOPTING THE MERGER AGREEMENT.

        It is important that your shares be represented and voted whether or not you plan to attend the special meeting in person. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy prior to the special meeting. If you are a stockholder of record, voting in person at the meeting will revoke any proxy previously submitted. If your shares are held in "street name," which means shares held of record by a broker, bank or other nominee, you should check the voting form used by that firm to be sure such firm votes those shares in accordance with your instructions. Submitting a proxy by mailing the enclosed proxy card in a timely manner will ensure your shares are represented at the special meeting. Please review the instructions in the accompanying proxy statement and the enclosed proxy card or the information forwarded by your broker, bank or other nominee regarding the voting of your shares.

        Stockholders who do not vote in favor of the proposal to adopt the Merger Agreement will have the right to seek appraisal of the fair value of their shares of Common Stock if the Merger is completed, but only if they deliver a written demand for appraisal before the vote is taken on the Merger Agreement and comply with all applicable requirements of Delaware law, which are summarized in the accompanying proxy statement.

By Order of the Board of Directors,

/s/ Peter G. Schoonmaker
President and Chief Executive Officer

Sheridan, Wyoming
                        , 2010

TABLE OF CONTENTS

SUMMARY TERM SHEET		1
QUESTIONS AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING		11
SPECIAL FACTORS		17
	The Parties Involved in the Merger	17
	Contribution Agreement	18
	Background of the Merger	19
	Waivers and Amendments to Credit Facility	33
	Purpose of the Merger	36
	Recommendation of the Special Committee and Pinnacle's Board of Directors	37
	Fairness of the Merger, Reasons for the Recommendation of the Special Committee and Our Board of Directors	37
	Position of DLJ as to the Fairness of the Merger	41
	Opinion of Financial Advisor to the Special Committee	43
	Effects of the Merger	52
	Effects on Pinnacle if the Merger is Not Completed	53
	Financing of the Merger	54
	Material United States Federal Income Tax Consequences	54
	Interests of Pinnacle's Directors and Executive Officers in the Merger	56
	Litigation Related to the Merger	58
FORWARD-LOOKING STATEMENTS		60
THE SPECIAL MEETING		61
	Date, Time and Place	61
	Purpose	61
	Record Date and Quorum	61
	Vote Required to Adopt of the Merger Agreement	61
	Voting Agreement	61
	Voting and Proxies	62
	Revocability of Proxy	63
	Adjournments and Postponements	63
	Rights of Dissent and Appraisal	63
	Solicitation of Proxies	63
	Other Matters	64
	Questions and Additional Information	64

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THE MERGER AGREEMENT		65
	The Merger and Effective Time	65
	Merger Consideration	65
	Payment Procedures	66
	Treatment of Stock Options and Stock-Based Awards	66
	Certificate of Incorporation; Directors and Officers of the Surviving Corporation	67
	Representations and Warranties	67
	Company Material Adverse Effect Definition	69
	Conduct of Business Pending the Merger	70
	No Solicitation of Transactions	71
	Additional Agreements	73
	Conditions to the Completion of the Merger	74
	Termination of the Merger Agreement	75
	Expenses and Fees	77
	Amendment	77
RIGHTS OF DISSENT AND APPRAISAL		78
INFORMATION REGARDING PINNACLE GAS RESOURCES, INC.		82
	Description of Business	82
	Description of Property	82
	Legal Proceedings	82
	Financial Statements and Supplementary Financial Information	82
	Management's Discussion and Analysis of Financial Condition and Results of Operations	82
	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	82
	Historical Selected Financial Data	82
	Book Value Per Share	82
	Quantitative and Qualitative Disclosures about Market Risk	82
MARKET PRICE AND DIVIDEND DATA		83
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT		84
DIRECTORS AND EXECUTIVE OFFICERS AND CONTROLLING PERSONS OF PINNACLE AND DLJ		87
	Pinnacle	87
	DLJ	89
FUTURE STOCKHOLDER PROPOSALS		91
HOUSEHOLDING OF SPECIAL MEETING MATERIALS		92

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WHERE YOU CAN FIND MORE INFORMATION	93
Exhibit A Merger Agreement	A-1
Exhibit B Voting Agreement	B-1
Exhibit C Fairness Opinion	C-1
Exhibit D Dissenters' Rights Provisions	D-1
Exhibit E Contribution Agreement	E-1
Exhibit F Pinnacle's Annual Report on Form 10-K for year ending December 31, 2009	F-1
Exhibit G Summary of Management's Projections (filed as Exhibit (c)(2) to Schedule 13e-3 Amendment 1 filed on May 25, 2010)
Exhibit H Form of Amended and Restated Limited Liability Company Agreement of Powder Holdings, LLC (filed as Exhibit (d)(3) of Amendment No. 2 to Schedule 13E-3 filed on June 10, 2010)

iii

SUMMARY TERM SHEET

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its exhibits and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. See "Where You Can Find More Information."

Except as otherwise specifically noted in this proxy statement, "Pinnacle," "we," "our," "us" and similar words in this proxy statement refer to Pinnacle Gas Resources, Inc. References to the "surviving corporation" are to Pinnacle, as the surviving corporation in the merger and a direct, wholly owned subsidiary of Powder Holdings, LLC.

The Parties Involved in the Merger (page    )

Pinnacle Gas Resources, Inc., a Delaware corporation, is an independent energy company engaged in the acquisition, exploration and development of domestic on-shore natural gas reserves. It focuses on the development of coal bed methane ("CBM") properties located in the Rocky Mountain Region. Pinnacle holds its CBM acreage primarily in the Powder River Basin in northeastern Wyoming and southern Montana, as well as in the Green River Basin in southern Wyoming.

Powder Holdings, LLC, which we refer to as "Powder," is a privately held Delaware limited liability company that has been formed to acquire Pinnacle. Upon completion of the Merger, Pinnacle will be a direct, wholly owned subsidiary of Powder. Currently Powder is wholly-owned by Scotia Waterous (USA), Inc., which we refer to as "Scotia." Under the terms of the Contribution Agreement, discussed below, Powder is anticipated to hold 9,751,262 shares, or approximately 32.5%, of our outstanding Common Stock immediately prior to the effective time of the Merger, and will be primarily owned by Scotia and DLJ. Pinnacle's chief executive officer and chief financial officer are anticipated to retain their executive positions with Pinnacle and will be issued profits interests with limited voting rights in Powder.

Powder Acquisition Co., which we refer to as "Merger Sub," is a direct, wholly owned subsidiary of Powder and is a Delaware corporation. It was formed solely for the purpose of effecting the Merger, has no assets or liabilities, other than its rights and obligations under the Merger Agreement and the related documents, and has not generated any revenues or incurred material expenses. Merger Sub has no employees and has conducted no business operations.

DLJ Merchant Banking Partners III, L.P. and affiliated investment funds (collectively, "DLJ") is a stockholder of Pinnacle that, as of March     , 2010, beneficially owned 9,751,262 shares, or approximately 32.5% of our outstanding Common Stock. Pursuant to the terms of the Contribution Agreement, discussed below, immediately prior to the effective time of the Merger, DLJ will contribute its shares of Common Stock to Powder in exchange for ownership interests in Powder, after which Powder is expected to be primarily owned by Scotia and DLJ. Pinnacle's chief executive officer and chief financial officer are anticipated to retain their executive positions with Pinnacle and will be issued profits interests with limited voting rights in Powder.

        DLJ and Powder are parties to the voting agreement, discussed below, and have agreed to vote these shares in favor of the Merger.

Contribution Agreement (page    )

        Concurrently with the execution of the Merger Agreement, DLJ, Powder and Scotia entered into a contribution agreement (the "Contribution Agreement"), pursuant to which, subject to the satisfaction of certain conditions, immediately prior to the effective time of the Merger, DLJ will contribute all shares of Common Stock owned by it to Powder, in exchange for ownership interests in Powder. Scotia

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is currently in the process of raising an emerging manager fund (the "SW Fund"). Pursuant to the terms of the Contribution Agreement, if and when the SW Fund is formed, Scotia will cause the SW Fund to agree that, upon the satisfaction or waiver of the conditions in the Merger Agreement and the Contribution Agreement, the SW Fund will contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. If the SW Fund is not formed, Scotia will have the right but not the obligation to contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger.

The Special Meeting (page    )

Date, Time and Place (page    )

        The special meeting of our stockholders will be held on                        , 2010 at the offices Moye White LLP, 1400 16^th Street, Sixth Floor, Denver, Colorado 80202, at 10:00 a.m., Mountain Time.

Purpose (page    )

        At the special meeting you will be asked to approve a proposal to adopt the Merger Agreement, as it may be amended from time to time. You may also be asked to vote to postpone or adjourn the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement and to consider and vote upon any other matter that may properly come before the special meeting or any postponement or adjournment thereof.

Record Date and Quorum (page    )

        You are entitled to vote at the special meeting if you owned shares of Common Stock at the close of business on                        , 2010, the record date for the special meeting. You will have one vote for each share of Common Stock that you owned on the record date. As of March     , 2010, there were 29,980,032 shares of Common Stock entitled to be voted.

        A majority of the outstanding shares of our Common Stock entitled to vote, represented in person or by proxy, will constitute a quorum for purposes of the special meeting.

Vote Required to Adopt the Merger Agreement (page    )

        The adoption of the Merger Agreement requires: (i) the affirmative vote of the holders of at least a majority of the outstanding shares of Common Stock entitled to vote; and (ii) the affirmative vote of at least a majority of the outstanding shares of Common Stock held by persons who are unaffiliated with DLJ, our chief executive officer and chief financial officer. A failure to vote your shares of Common Stock, an abstention or a broker non-vote will have the same effect as voting "AGAINST" the adoption of the Merger Agreement.

        Under the terms of the Voting Agreement discussed below: (i) holders of an aggregate of 43.8% of the outstanding shares of Common Stock entitled to vote (of which the affirmative vote of the holders of at least a majority of such shares is required to adopt the Merger Agreement) have agreed to vote in favor of the Merger and adopt the Merger Agreement; and (ii) holders of 16.4% of the shares of outstanding Common Stock entitled to vote who are unaffiliated with DLJ, our chief executive officer and chief financial officer (of which the affirmative vote of the holders of a majority of such shares is required to adopt the Merger Agreement) have agreed to vote in favor of the Merger and adopt the Merger Agreement.

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Voting Agreement (page    )

        Concurrently with the execution of the Merger Agreement, Pinnacle, and certain Pinnacle stockholders comprised of certain of Pinnacle's directors and executive officers, DLJ and CCBM, Inc. entered into a Voting Agreement with Powder pursuant to which they have agreed to vote all shares of Common Stock held by them in favor of the adoption of the Merger Agreement. A copy of the Voting Agreement is attached as Exhibit B.

        An aggregate of 13,131,680 shares of Common Stock are subject to the Voting Agreement, representing 43.8% of the shares of Common Stock entitled to vote. Of these shares, 3,301,014 shares of Common Stock are held by persons who are not affiliated with DLJ, our chief executive officer or chief financial officer, representing 16.4% of the shares of Common Stock held by such persons.

Voting and Proxies (page    )

        Any stockholder of record entitled to vote at the special meeting may submit a proxy by returning the enclosed proxy card by mail, by telephone, by the Internet or by voting in person by appearing at the special meeting. If your shares of Common Stock are held in "street name" by your broker, bank or other nominee, you should instruct your broker, bank or other nominee on how to vote your shares of Common Stock using the instructions provided by your broker, bank or other nominee. If you do not provide your broker, bank or other nominee with instructions, your shares of Common Stock will not be voted and that will have the same effect as a vote "AGAINST" the adoption of the Merger Agreement.

Revocability of Proxy (page    )

        You have the right to change or revoke your proxy at any time before the vote taken at the special meeting:

•

by delivering to our Corporate Secretary, at Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801 a signed written notice of revocation, bearing a date later than the date of the proxy, stating that the proxy is revoked;

•

by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy—you must vote in person at the meeting to revoke a prior proxy);

•

by submitting a later-dated proxy card; or

•

if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

The Merger (page    )

        You are being asked to consider and vote upon the adoption of the Merger Agreement. If the Merger Agreement is adopted by our stockholders, the other conditions to closing are satisfied or waived and the Merger Agreement is not terminated prior to the effective time of the Merger, Merger Sub will merge with and into Pinnacle and Pinnacle will continue as the surviving corporation as a direct, wholly-owned subsidiary of Powder (the "Merger").

        Upon completion of the Merger, each share of our Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by Powder, Merger Sub or any other subsidiary of Powder or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.34 in cash, without interest and less any applicable withholding tax. In this proxy statement, we refer to the consideration to be paid per share of Common Stock in the Merger as the

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"Merger Consideration." Because DLJ will contribute its shares of Common Stock to Powder immediately prior to the effective time of the Merger, DLJ will not receive any Merger Consideration.

        The Merger is a "going-private" transaction. If the Merger is completed, we will no longer be a publicly traded company, we will not be required to file reports with the Securities and Exchange Commission, or the "SEC," our stock will not be quoted on the NASDAQ Global Market and you will not participate in our future earnings or growth.

        Each restricted stock award that is outstanding (collectively, the "Restricted Stock Awards"), granted under any equity based compensation plan of Pinnacle will, immediately prior to the effective time of the Merger, be automatically cancelled. Under the Merger Agreement, the holder of any such Restricted Stock Award will receive an amount in cash equal to (i) $0.34, multiplied by (ii) the total number of shares of our Common Stock subject to such Restricted Stock Award. There are an aggregate of 980,089 Restricted Stock Awards outstanding, the holders of which will receive approximately $333,230 upon consummation of the Merger.

        The Merger Agreement provides that the parties will close the Merger on the second business day after the satisfaction or waiver of the conditions described under "The Merger Agreement—Conditions to the Completion of the Merger" or at such other time as agreed between Powder, Merger Sub and us.

        We currently anticipate that the Merger will be completed during the third quarter of 2010. However, there can be no assurances that the Merger will be completed at all, or if completed, that it will be completed during the third quarter of 2010. The waiver of certain covenants pursuant to the seventh amendment to our credit facility expired on June 15, 2010 and as a result, we have an event of default and payment of all amounts under the credit facility is due July 15, 2010. To date, our lender has not accelerated our credit facility.

        Default under the credit agreement is also an event of default under the Merger Agreement. As of the date of this proxy statement, Powder has not terminated the Merger Agreement or waived the default. If the Merger is not completed, you will remain subject to all of the risks you are currently subject to as a holder of our Common Stock, including the risk that our lender would then take action to enforce its rights with respect to the outstanding obligations owed to it and that we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws. We can give you no assurance that in a bankruptcy proceeding you would receive any value for your shares. Furthermore, in the event that the Merger is not completed, Pinnacle will seek shareholder approval to conduct a reverse stock split to try to regain compliance with the NASDAQ continued listing requirements; however, there can be no assurance that our shares would continue to be quoted on the NASDAQ Global Market. See "The Merger—Effects on Pinnacle if the Merger is Not Completed."

        Aside from compliance with applicable SEC disclosure requirements, Pinnacle does not believe that any federal or state regulatory requirements must be complied with or approvals obtained in connection with the contemplated Merger.

        Powder or Pinnacle may terminate the Merger Agreement under certain circumstances. See "The Merger—Termination of the Merger Agreement."

Purpose of the Merger (page    )

        For Pinnacle—the primary purpose of the Merger is to enable our unaffiliated stockholders to receive cash for their shares of Common Stock at a premium over the market price of our Common Stock on the date we announced the Merger.

        For DLJ—Scotia advised DLJ that it would be unwilling to proceed with the transaction unless DLJ agreed to "roll over" its investment by contributing all of its shares of Common Stock to Powder.

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Accordingly, the primary purpose for DLJ to engage in the transactions relating to the Merger is to retain an indirect equity interest in Pinnacle, as required by Scotia. DLJ has not purchased any Common Stock in the past two years, other than pursuant to assignments, for no consideration, by Ms. Schnabel to DLJ Merchant Banking III, Inc. of the shares of Common Stock awarded to her pursuant to her role as a Pinnacle director.

Recommendation of the Special Committee and our Board of Directors (page    )

        The Special Committee and our Board unanimously approved the Merger Agreement, including the Merger and the other transactions contemplated by the Merger Agreement, and declared the Merger Agreement fair, advisable and in the best interests of Pinnacle and its stockholders and unanimously recommended that the stockholders adopt the Merger Agreement. For a discussion of the material factors considered by the Special Committee and our Board in reaching their conclusions, see "The Merger—Fairness of the Merger; Reasons for the Recommendation of the Special Committee and our Board of Directors."

        Our Board unanimously recommends that you vote "FOR" the proposal to adopt the Merger Agreement, as it may be amended from time to time, and "FOR" the approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement at the special meeting.

Fairness of the Merger; Reasons for the Recommendation of the Special Committee and the Board of Directors (page    )

        The Special Committee and our Board each determined that the Merger and Merger Agreement are substantively and procedurally fair, advisable and in the best interests of our unaffiliated stockholders. In reaching this conclusion, the Special Committee and our Board of Directors considered, among other factors, the following:

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The fact that Pinnacle had explored a significant number of strategic and financial alternatives over an extended period of time and the thoroughness of the process for exploring and reviewing these alternatives, including consideration of alternative transactions with other third parties.

•

The current and historical prices of our Common Stock and the fact that the Merger Consideration of $0.34 in cash per share of our Common Stock represented a premium of approximately 28% over the market price of our Common Stock immediately prior to the execution of the Merger Agreement.

•

If the Merger is not completed, we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws, and we can give you no assurance that in a bankruptcy proceeding you would receive any value for your shares.

•

The financial analysis and opinion of FBR Capital Markets & Co. ("FBR") delivered to the Special Committee as to the fairness, from a financial point of view as of the date of the opinion, of the $0.34 per share cash Merger Consideration to be received by holders of our Common Stock pursuant to the Merger. See Exhibit C to this proxy statement and "—Opinion of Our Financial Advisor" for more information on the analyses and opinion, including the assumptions made, matters considered and limits of review.

•

The fact that Pinnacle's operations have been constrained by a severe lack of liquidity, which has been exacerbated by the significant amortization payments required from our lender.

•

The fact that Pinnacle has been unable to comply with various covenants contained in the credit agreement with our lender, requiring waivers from our lender and creating the risk that the lender would be unwilling to continue to extend its waivers and could seek to enforce its rights and liens in response to the resulting defaults.

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•

The substantial level of our trade payables outstanding for over 90 days and the resulting pressure from trade vendors, including the risk that key vendors could cease providing services to us which would significantly impair our operations.

•

That although the Merger Agreement includes limitations on soliciting alternative proposals for the acquisition of Pinnacle or our assets, the Board believes these provisions will not, and have not, significantly deterred interested parties from submitting alternative proposals.

Position of DLJ as to the Fairness of the Merger (page    )

        Under the SEC rules, DLJ is required to provide certain information in this proxy statement regarding its position as to the substantive and procedural fairness of the Merger to the unaffiliated stockholders of Pinnacle. DLJ did not undertake a formal evaluation of the fairness of the Merger and is making the statements in this section solely for purposes of complying with the SEC rules. The views of DLJ with respect to the fairness of the Merger are not, and should not be construed as, a recommendation to any stockholder as to how that stockholder should vote on the proposal to adopt the Merger Agreement. DLJ believes the Merger and the terms of the Merger to be fair to Pinnacle's unaffiliated stockholders. This belief is based upon DLJ's knowledge and analysis of Pinnacle, its financial condition and alternative transactions that have been presented to the Board, as well as the other factors discussed under the section "The Merger—Position of DLJ as to the Fairness of the Merger."

Opinion of the Financial Advisor to the Special Committee (page    )

        FBR delivered its opinion to the Special Committee that, as of February 23, 2010, and based upon and subject to the factors and assumptions set forth therein, the $0.34 per share in cash to be received by the holders of the outstanding shares of our Common Stock pursuant to the Merger Agreement was fair from a financial point of view to such stockholders.

        The full text of the written opinion of FBR, dated February 23, 2010, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Exhibit C. FBR provided its opinion for the information and assistance of the Special Committee in connection with its consideration of the transaction. The FBR opinion is not a recommendation as to how any holder of our Common Stock should vote with respect to the transaction.

Financing of the Merger (page    )

        Powder's obligation to complete the Merger is not contingent on its obtaining financing. The amount of funds necessary to pay the aggregate merger consideration to our stockholders and holders of Restricted Stock Awards is anticipated to be approximately $6,993,549, assuming:

•

a purchase price of $0.34 per share; and

•

none of our stockholders validly exercises and perfects its appraisal rights.

        In addition, if the Merger is completed, Powder intends to contribute funds to Pinnacle to pay down our past due trade payables and to pay off or refinance our outstanding indebtedness comprised of the balance owed on our credit facility of $6.1 million, the balance owed on the mortgage of our corporate building of approximately $0.8 million, past due trade payables of approximately $6.1 million, ad valorem taxes due of approximately $1.9 million and estimated transaction expenses of approximately $1.0 million, which totals approximately $15.9 million as of December 31, 2009.

        Powder has informed us that it intends to pay for the acquisition through a cash contribution from the SW Fund. Pursuant to the terms of the Contribution Agreement, and subject to the satisfaction of

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the conditions set forth in the Merger Agreement and Contribution Agreement, if and when the SW Fund is formed, Scotia will cause the SW Fund to agree that, upon the satisfaction or waiver of the conditions in the Merger Agreement and the Contribution Agreement, the SW Fund will contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. If the SW Fund is not formed, Scotia will have the right but not the obligation to contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. If this cash contribution does not occur and Powder is unable to perform its obligations under the Merger Agreement, Pinnacle does not have any direct recourse to pursue remedies against Scotia.

Material United States Federal Income Tax Consequences (page    )

        The exchange of shares of Common Stock for cash in the Merger will be a taxable transaction for United States federal income tax purposes, and possibly for state, local and foreign tax purposes as well. See "The Merger—Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders." You should consult your tax advisor for a complete analysis of the effect of the Merger on your federal, state, local and/or foreign taxes.

Interests of Pinnacle's Directors and Officers in the Merger (page      )

        In considering the recommendation of our Board with respect to the Merger Agreement, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, your interests as a stockholder. These interests include:

•

certain indemnification provisions in the Merger Agreement in favor of our directors and officers, including the maintenance of a six-year "tail" directors' and officers' liability insurance policy to cover directors and officers currently covered by our directors' and officers' liability insurance policy;

•

the payment of cash in exchange for Common Stock and Restricted Stock Awards as a result of the completion of the Merger, resulting in an aggregate payment of $333,230 to our directors and executive officers;

•

the Contribution Agreement among Powder and DLJ (of which one of our directors is affiliated), which will provide DLJ with an equity interest in Powder in return for its share contribution after completion of the Merger;

•

the issuance of profits interests with limited voting rights in Powder to our Chief Executive Officer and Chief Financial Officer if they retain their executive positions with Pinnacle after completion of the Merger. These profits interests would be eligible for distributions only after the SW Fund and DLJ have received distributions equal to the amount of their capital contributed to Powder. Thereafter, distributions will be allocated as follows: (i) 98% to SW Fund and DLJ and 2% to the profits interests until the aggregate distributions to SW Fund and DLJ result in an 8% internal rate of return on the capital contributions of SW Fund and DLJ; (ii) 90% to SW Fund and DLJ and 10% to the profits interests until the aggregate distributions to SW Fund and DLJ results in the greater of a 25% internal rate of return on the capital contributions of SW Fund and DLJ or three times the amount of the capital contributions made by SW Fund and DLJ; and, then (iii) 87.5% to SW Fund and DLJ and 12.5% to the profits interests. The profits interests are anticipated to be allocated 52% to our Chief Executive Officer and 48% to our Chief Financial Officer.

•

the existing change of control arrangements between us and our Chief Executive Officer and Chief Financial Officer providing for, among other things, severance benefits if their employment is terminated under certain circumstances following a change in control of Pinnacle, such as the Merger, including: (i) a lump sum payment equal to 1.5 times the executive's annual

7

base salary, plus payment of a pro-rated bonus; and (ii) immediate vesting of certain options, restricted stock or other compensation; and

•

potential employment arrangements between Powder or any of its affiliates, on the one hand, and one or more executive officers of Pinnacle, on the other hand, although there are no such arrangements as of the date of this proxy statement. If these arrangements are executed, the severance benefits noted above will not be paid.

Litigation Related to the Merger (page      )

        Two putative stockholder class action lawsuits related to the Merger have been filed in the Delaware Court of Chancery since the announcement of the execution of the Merger Agreement. On March 24, 2010, the Delaware Court of Chancery entered an order consolidating the two actions.

        The consolidated complaint generally alleges that our directors breached their fiduciary duties by, among other things, taking actions designed to deter higher offers from other potential acquirers and failing to maximize the value of Pinnacle to its stockholders. In addition, the lawsuit alleges that DLJ, as a controlling stockholder of Pinnacle, along with Powder and Merger Sub violated fiduciary duties to Pinnacle stockholders and that Powder and Merger Sub abetted the alleged breaches of fiduciary duties by the other defendants.

        The lawsuit seeks, among other relief, injunctive relief prohibiting the Merger, and costs of the action including reasonable attorneys' fees.

        On May 24, 2010, Pinnacle and its directors entered into a Memorandum of Understanding in anticipation of settling the shareholder lawsuit. Under the terms of the Memorandum of Understanding, we agreed to make additional proxy disclosures regarding the interests of our executive officers in the surviving entity and furnish additional information regarding FBR's analysis and fairness opinion. In return the shareholders will provide a release of their claims against us, our directors, Powder and DLJ. Pinnacle and its directors, Powder and DLJ do not admit any wrongdoing and will enter into the proposed settlement solely because it would eliminate the distraction, burden and expenses of further litigation. The settlement is subject to confirmatory discovery, negotiation of a definitive settlement agreement, and approval by the Delaware Chancery Court. Powder and DLJ have agreed to the terms of the Memorandum of Understanding.

Conditions to the Completion of the Merger (page      )

        The obligations of Pinnacle, Powder and Merger Sub to consummate the Merger are dependent on the satisfaction or waiver of the following conditions:

•

approval of the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of our Common Stock (excluding the shares of our Common Stock held by DLJ, any of their affiliates, or by our chief executive officer and chief financial officer), which cannot be waived by any party; and

•

no governmental authority having enacted, promulgated, issued, enforced or entered any law, regulation, order or injunction, that makes illegal, enjoins, restrains or otherwise prohibits consummation of the Merger or the other material transactions contemplated by the Merger Agreement.

        In addition, the obligations of Powder and Merger Sub to consummate the Merger are further subject to the satisfaction or waiver of each of the following additional conditions:

•

the representations and warranties of Pinnacle shall be true and correct as of the effective time of the Merger, except where the failure of any such representations and warranties to be true and correct has not had, and would not have, a material adverse effect on us;

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•

we shall have performed or complied with in all material respects our obligations, covenants and agreements in the Merger Agreement at or prior to the effective time of the Merger;

•

no material adverse effect on us shall have occurred since the date of the Merger Agreement;

•

we shall deliver to Powder a certificate, signed on behalf of Pinnacle by the chief executive officer and chief financial officer of Pinnacle (solely in his capacity as an officer of Pinnacle without personal liability), to the effect that the conditions listed above with respect to our representations and warranties, our performance or compliance of obligations, covenants and agreements and no material adverse effect have been satisfied;

•

we shall have received, on or prior to the effective time of the Merger, an agreement acceptable to Powder which waives, for a period of not less than sixty days from the effective time of the Merger, any rights the lender under the credit agreement may have (whether of acceleration or otherwise) as a result of a Change of Control Event (as defined in the credit agreement) being deemed to have occurred as a result of the transactions contemplated by the Merger Agreement; and

•

DLJ shall have contributed their shares to Powder and shall have otherwise complied with each of its obligations under the Contribution Agreement.

        Our obligations to consummate the Merger and the other transactions contemplated by the Merger Agreement are further subject to the satisfaction or waiver of each of the following additional conditions:

•

the representations and warranties of Powder and Merger Sub shall be true and correct as of the effective time of the Merger, except where the failure of any such representations and warranties to be true and correct has not had, and would not have, a material adverse effect on Powder's ability to consummate the transactions;

•

each of Powder and Merger Sub shall have performed or complied with in all material respects its obligations, covenants and agreements in the Merger Agreement at or prior to the effective time of the Merger; and

•

Powder shall have delivered to us a certificate, signed on behalf of Powder by the chief executive officer and chief financial officer of Powder (solely in his or her capacity as an officer of Powder without personal liability), to the effect that the conditions listed above with respect to Powder's and Merger Sub's representations and warranties and Powder's and Merger Sub's performance or compliance of obligations, covenants and agreements have been satisfied.

        We can provide no assurance as to when or if all of the conditions to the Merger can or will be satisfied or waived by the party permitted to do so. Our current event of default under the terms of our credit agreement is a breach of our representations and warranties under the Merger Agreement. As of the date of this proxy statement, Powder has not terminated the Merger Agreement or waived the default.

No Solicitation of Transactions (page      )

        The Merger Agreement provides that we will not, directly or indirectly: (a) solicit, initiate, endorse or take any action to encourage or facilitate (including by way of furnishing information) the submission of any inquiries, proposals or offers or afford access to our employees, business, properties, assets, books or records with respect to the making or completion of any acquisition proposal; (b) engage in any discussions or negotiations with respect to any acquisition proposal; or (c) resolve, propose or agree to do any of the foregoing.

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        Notwithstanding these restrictions, under certain circumstances, our Board, acting through the Special Committee, if such committee still exists, may respond to a third party acquisition proposal or terminate the Merger Agreement and enter into an acquisition agreement with respect to a superior proposal, so long as we comply with certain terms of the Merger Agreement described under "The Merger Agreement—Covenants—No Solicitation."

        See "The Merger Agreement—Covenants—No Solicitation" for the definitions of the terms "acquisition proposal" and "superior proposal" as used above.

Termination of the Merger Agreement (page      )

        The Merger Agreement may be terminated at any time prior to the effective time of the Merger, whether before or after approval by our stockholders under several other circumstances including, without limitation:

•

by the mutual written consent of us, Merger Sub and Powder;

•

by either us or Powder, if the Merger is not closed on or before August 23, 2010, a special meeting of our stockholders was held but the required stockholder approval was not obtained on or before August 23, 2010, or there has been issued any order, decree or ruling which has become final and nonappealable enjoining or otherwise prohibiting the Merger;

•

by Powder if our Board changes its recommendation that the Merger Agreement be adopted by the stockholders, our Board shall not have rejected and recommended that the stockholders reject any tender or exchange offer, or we shall have violated or breached in any material respect any of the non-solicitation covenants discussed above;

•

by Powder if there shall have occurred any material adverse affect on us or we have breached any of our representations or warranties or failed to perform any of our covenants under the terms of the Merger Agreement;

•

by us if Powder or Merger Sub has failed to perform its obligations under the Merger Agreement or breached its representations or warranties which could be expected to have a material adverse affect on Powder or Merger Sub's ability to consummate the Merger; and

•

by us prior to obtaining the required stockholder approval of the Merger, in connection with entering into a written definitive agreement for a superior proposal in full compliance with the Merger Agreement.

        If the Merger Agreement is terminated, we will be obligated to pay to Powder up to a $1.0 million termination fee, depending on the circumstances, and up to $600,000 of Powder's expenses incurred by it in connection with the transactions contemplated by the Merger Agreement. If we do not: (i) cure the existing breach under out credit agreement and the resulting breach under the Merger Agreement, and (ii) Powder terminates the Merger because of such breach, we will be obligated to pay Powder a $500,000 termination fee and reimburse Powder for its expenses.

Rights of Dissent and Appraisal (page      )

        If you do not vote in favor of adopting the Merger Agreement, the Merger is completed and you otherwise comply with the applicable statutory procedures and requirements of Delaware law, summarized elsewhere in this proxy statement, you will be entitled to seek appraisal of the fair value of your shares as set forth in Section 262 of the Delaware General Corporation Law. You must precisely follow these specific procedures to exercise and perfect your rights of dissent and appraisal, or you may lose your appraisal rights.

Security Ownership of Certain Beneficial Owners and Management (page      )

        Exclusive of stock option awards, our directors and executive officers beneficially owned, and had the right to vote an aggregate of 824,593 shares of Common Stock, or approximately 2.8% of our outstanding shares of Common Stock on the record date.

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QUESTIONS AND ANSWERS ABOUT THE MERGER AND SPECIAL MEETING

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger, the Merger Agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a Pinnacle stockholder. Please refer to the "Summary Term Sheet" and the more detailed information contained elsewhere in this proxy statement, the exhibits to this proxy statement and the documents referred to or incorporated by reference in this proxy statement, which you should read carefully. See "Where You Can Find More Information."

Except as otherwise specifically noted in this proxy statement, "Pinnacle," "we," "our," "us" and similar words in this proxy statement refer to Pinnacle Gas Resources, Inc. References to the "surviving corporation" are to Pinnacle, as the surviving corporation in the merger and a direct, wholly owned subsidiary of Powder Holdings, LLC.

Q.    What is the proposed transaction?

A.

The proposed transaction is the acquisition of Pinnacle by Powder Holdings, LLC, a Delaware limited liability company (which we refer to as "Powder") pursuant to the Agreement and Plan of Merger (which we refer to as the "Merger Agreement") dated as of February 23, 2010, by and between Powder, Powder Acquisition Co., a Delaware corporation and a direct, wholly owned subsidiary of Powder (which we refer to as "Merger Sub"), and Pinnacle, as it may be amended from time to time.

Q.    Why am I receiving this proxy statement and proxy card?

A.

Our Board of Directors is soliciting proxies to vote on the adoption of the Merger Agreement at a special meeting of our stockholders. When we ask for your proxy, we must provide you with a proxy statement that contains certain information specified by law. This proxy statement contains information for you to consider in deciding how to vote your shares at the special meeting with respect to the Merger.

Q.    What matters will be voted on at the special meeting?

A.

At the special meeting you will be asked to vote on a proposal to adopt the Merger Agreement, as it may be amended from time to time, pursuant to which Merger Sub will merge with and into Pinnacle, and Pinnacle will continue as the surviving corporation and will become a direct, wholly owned subsidiary of Powder. You may also be asked to vote on a proposal to postpone or adjourn the special meeting to a later date to solicit additional proxies if there are not sufficient votes to adopt the Merger Agreement at the special meeting and to consider and vote upon any other matter that may properly come before the special meeting or any postponement or adjournment thereof.

Q.    What will I receive in the Merger?

A.

If the Merger is completed, each share of our Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by Powder, Merger Sub or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.34 in cash (the "Merger Consideration"), without interest and less any applicable withholding tax. The closing sale price of our Common Stock as quoted on the NASDAQ Global Market on February 23, 2010, the last trading day prior to announcement of the execution of the Merger Agreement, was $0.265 per share. The $0.34 per share to be paid for each share of Common Stock in the Merger represents a premium of approximately 28% to the closing sale price on February 23, 2010.

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Q.    What happens if the Merger is not consummated?

A.

If the Merger Agreement is not adopted by our stockholders or if the Merger is not completed for any other reason, stockholders will not receive any payment for their shares in connection with the Merger. Instead, we will remain an independent public company and the value of shares of our Common Stock will continue to be subject to the risks and uncertainties identified in our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, and any updates to those risks and uncertainties set forth in our subsequent Quarterly Reports on Form 10-Q, including risks and uncertainties associated with our default under our credit facility and other lending arrangements. If we remain an independent public company, we cannot assure you that our shares would continue to be quoted on the NASDAQ Global Market. In the event that the Merger is not completed, Pinnacle will seek shareholder approval to conduct a reverse stock split to try to regain compliance with the NASDAQ continued listing requirements. See "The Merger—Effects on Pinnacle if the Merger is Not Completed." Under specified circumstances, we may be required to pay Powder a termination fee and expenses as described under the caption "The Merger Agreement—Termination of Merger Agreement."

Additionally, the waiver of certain covenants under the current terms of the seventh amendment to our credit facility expired on June 15, 2010 and as a result, we have an event of default and payment of all amounts is due July 15, 2010. To date, our lender has not accelerated the credit facility.

Default under the credit agreement is also an event of default under the Merger Agreement. As of the date of this proxy statement, Powder has not terminated the Merger Agreement or waived the default. Because substantially all of our assets are pledged as collateral under our credit facility, if our lender declares an event of default, it would be entitled to foreclose on and take possession of our assets. If the Merger is not completed, we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws, and we can give you no assurance that in a bankruptcy proceeding you would receive any value for your shares.

Q.    Why is my vote important?

A.

If you fail to vote or fail to instruct your broker or other nominee how to vote on the Merger, your failure to vote will have the same effect as voting "AGAINST" the proposal to adopt the Merger Agreement, as it may be amended from time to time. If you respond with an "ABSTAIN" vote, your proxy will have the same effect as voting "AGAINST" such proposal.

Q.    Will the proceeds I receive for my shares in the Merger be taxable to me?

A.

The exchange of shares of Common Stock for cash in the Merger will be a taxable transaction for United States federal income tax purposes, and possibly for state, local and foreign tax purposes as well. See "The Merger—Material U.S. Federal Income Tax Consequences." You should consult your tax advisor for a complete analysis of the effect of the Merger on your federal, state, local and/or foreign taxes.

Q.    When and where is the special meeting?

A.

The special meeting of our stockholders will be held on                    , 2010 at the offices of Moye White LLP, 1400 16^th Street, Sixth Floor, Denver, Colorado 80202 at 10:00 a.m. Mountain Time.

Q.    Who is entitled to vote at the special meeting?

A.

Holders of our Common Stock at the close of business on                    , 2010, the record date for the special meeting, are entitled to vote.

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Q.    What constitutes a quorum?

A.

Stockholders who hold a majority of the outstanding shares of our Common Stock as of the close of business on the record date and who are entitled to vote must be present or represented by proxy in order to constitute a quorum to conduct business at the special meeting.

Q.    What vote is required for Pinnacle stockholders to adopt the Merger Agreement?

A.

The adoption of the Merger Agreement requires the affirmative vote of the holders of (i) at least a majority of the outstanding shares of Common Stock entitled to vote; and, (ii) at least a majority of the outstanding shares of Common Stock held by persons who are unaffiliated with DLJ, our chief executive officer and chief financial officer.

Q.    What vote is required to adjourn the Special Meeting?

The affirmative vote of the holders of the majority of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to, the adjournment proposal at the special meeting is required to approve the adjournment proposal.

Q.    How many votes do I have?

A.

You have one vote for each share of Common Stock that you owned at the close of business on                    , 2010, the record date for the special meeting.

Q.    How does Pinnacle's Board of Directors recommend that I vote?

A.

Our Board unanimously recommends that you vote "FOR" the proposal to adopt the Merger Agreement, as it may be amended from time to time and "FOR" the approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement at the special meeting. You should read "The Merger—Purpose of the Merger; Recommendation of the Special Committee and Board of Directors" for a discussion of the factors that the Special Committee and our Board considered in deciding to recommend the adoption of the Merger Agreement.

Q.    How do Pinnacle's executive officers and directors intend to vote?

Each of our directors and certain executive officers who own shares of our Common Stock, as well as our stockholders DLJ and CCBM, Inc. have entered into a voting agreement (which we refer to as the "Voting Agreement") with Powder to vote all shares of our Common Stock owned or controlled by them in favor of the adoption of the Merger Agreement.

Q.    Will Pinnacle's executive officers and directors participate in the Merger?

A.

Under the terms of the Merger Agreement, all of Pinnacle's executive officers and directors who own shares of Common Stock will be treated like all other stockholders, receiving the Merger Consideration for each of their shares. Each restricted stock award that is outstanding (collectively, the "Restricted Stock Awards"), granted under any equity based compensation plan of Pinnacle will, immediately prior to the effective time of the Merger, be automatically cancelled. Under the Merger Agreement, the holder of any such Restricted Stock Award will receive an amount in cash equal to (i) $0.34, multiplied by (ii) the total number of shares of our Common Stock subject to such Restricted Stock Award. There are an aggregate of 980,089 shares of Common Stock and Restricted Stock Awards outstanding and held by our directors and executive officers. As a result,

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they will receive approximately $333,230 upon consummation of the Merger in exchange for such Restricted Stock Awards.

While certain of our executive officers and directors hold stock options and/or stock appreciation rights in Pinnacle, because there are no such options or rights with an exercise price less that $0.34 per share of Common Stock, none of them will receive any payment for their stock options or stock appreciation rights as a result of the Merger.

Q.    What effects will the Merger have on Pinnacle?

A.

As a result of the Merger, if completed, we will become a direct, wholly-owned subsidiary of Powder and our Common Stock will cease to be publicly traded. You will no longer have any interest in our future earnings or growth.

Following consummation of the Merger, the registration of our Common Stock under the Securities Exchange Act of 1934, or the "Exchange Act," will be terminated upon application to the SEC, we will no longer be required to file reports with the SEC, we will no longer be a publicly traded company and you will not participate in our earnings or growth. In addition, upon completion of the Merger, shares of our Common Stock will no longer be quoted on the NASDAQ Global Market.

Q.    What do I need to do now?

A.

After carefully reading and considering the information contained in this proxy statement, including the exhibits hereto and the other documents referred to or incorporated by reference in this proxy statement, please vote your shares by completing, signing, dating and returning the enclosed proxy card. If you hold your shares in "street name," please follow the instructions on the voting form provided by your broker, bank or other nominee. You can also attend the special meeting and vote. Do not send your stock certificate(s) with your proxy.

Q.    How do I vote?

A.

You may vote:

•

by completing, signing and dating each proxy card you receive and returning it in the enclosed prepaid envelope;

•

in person by attending and voting at the special meeting; or

•

if you hold your shares in "street name," by following the procedures provided by your broker, bank or other nominee.

If you return your signed proxy card, but do not mark the boxes showing how you wish to vote, your shares will be voted "FOR" the proposal to adopt the Merger Agreement, as it may be amended from time to time, and "FOR" the approval of any proposal to adjourn or postpone the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement at the special meeting, and in accordance with the recommendations of our Board on any other matters properly brought before the special meeting for a vote.

Q.    If my shares are held in "street name" by my broker, bank or other nominee, will my broker, bank or other nominee vote my shares for me?

A.

Your broker, bank or other nominee will only be permitted to vote your shares if you instruct your broker, bank or other nominee how to vote. You should follow the procedures provided by your broker, bank or other nominee regarding the voting of your shares. If you do not instruct your

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broker, bank or other nominee to vote your shares, your shares will not be voted and the effect will be the same as a vote "AGAINST" the adoption of the Merger Agreement.

Q.    What do I do if I receive more than one proxy or set of voting instructions?

A.

If you hold shares in "street name," directly as a record holder or in multiple accounts, you may receive more than one proxy and/or set of voting instructions relating to the special meeting. These should each be voted and returned separately as described elsewhere in this proxy statement in order to ensure that all of your shares are voted.

Q.    How can I change or revoke my vote?

A.

You have the right to change or revoke your proxy at any time before the vote is taken at the special meeting by taking any of the following actions:

•

by delivering to our Corporate Secretary, Ronald T. Barnes, at Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801 a signed written notice of revocation, bearing a date later than the date of your proxy, stating that your proxy is revoked;

•

by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy—you must vote in person at the meeting to revoke a prior proxy);

•

by submitting a later-dated proxy card; or

•

if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

Q.    Will any other business be conducted at the meeting?

A.

Our Board does not know of any other business that will be presented at the meeting. If any other proposal properly comes up for a vote at the meeting in which a proxy has provided discretionary authority, the proxy holders will vote your shares in accordance with their best judgment.

Q.    What happens if I sell my shares before the special meeting?

A.

The record date of the special meeting is earlier than the special meeting and the date when the Merger, if approved, is expected to be completed. If you transfer your shares of Common Stock after the record date but before the special meeting, you will retain your right to vote at the special meeting, but will transfer the right to receive the Merger Consideration. In order to receive the Merger Consideration, you must hold shares upon completion of the Merger.

Q.    Am I entitled to exercise appraisal rights instead of receiving the Merger Consideration for my shares?

A.

Yes. As a holder of our Common Stock, you are entitled to appraisal rights under Delaware law in connection with the Merger if you meet certain conditions and follow certain required procedures. See "Rights of Dissent and Appraisal."

Q.    When is the Merger expected to be completed if approved by Pinnacle stockholders?

A.

We currently anticipate that the Merger will be completed during the third quarter of 2010. In addition to obtaining stockholder approval, all of the other closing conditions in the Merger Agreement must be satisfied or waived. We hope to complete the Merger within two business days after the special meeting. See "The Merger Agreement—The Merger and Effective Time" and "The Merger Agreement—Conditions to the Completion of the Merger."

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Q:    How long after the effective date of the Merger will I receive the Merger Consideration?

A:

We expect the Paying Agent to distribute letters of transmittal within five business days after the effective date of the Merger. Assuming you do not properly exercise your appraisal rights, you should expect payment for your shares approximately 30 days after the Paying Agent receives your properly completed letter of transmittal and stock certificates.

Q.    Should I send in my stock certificates now?

A.

No. Please do not send your certificates in now. After the Merger is completed, you will be sent a letter of transmittal with detailed written instructions for exchanging your Common Stock certificates for the Merger Consideration. If your shares are held in "street name" by your broker, bank or other nominee you will receive instructions from your broker, bank or other nominee as to how to effect the surrender of your "street name" shares after completion of the Merger in exchange for the Merger Consideration.

Q.    What if I have lost a stock certificate?

A.

If any certificate is lost, stolen or destroyed, upon making an affidavit of that fact and posting a bond in the form required by Pinnacle, as the surviving corporation, as indemnity against any claim that may be made against Pinnacle with respect to such certificate, the Paying Agent will pay you the Merger Consideration in exchange for such lost, stolen or destroyed certificate.

Q.    Who is soliciting my vote?

A.

Pinnacle's Board of Directors is soliciting your vote.

Q.    Who can help answer my other questions?

A.

If you have any questions about the Merger, the special meeting or this proxy statement, or if you need additional copies of this proxy statement or the enclosed proxy, you should contact our Corporate Secretary at Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801, Attention: Corporate Secretary, (307) 673-9710 or Georgeson Inc., 199 Water Street, 26th Floor, New York, NY 10038, (212) 440-9800 (banks and brokers), (866) 821-2550 (stockholders) (toll free).

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SPECIAL FACTORS

The Parties Involved in the Merger.

Pinnacle

Pinnacle Gas Resources, Inc.
1 East Alger Street
Sheridan, Wyoming 82801
(307) 673-9711

        Pinnacle Gas Resources, Inc., a Delaware corporation, is an independent energy company engaged in the acquisition, exploration and development of domestic on-shore natural gas reserves. It focuses on the development of CBM properties located in the Rocky Mountain Region. Pinnacle holds its CBM acreage primarily in the Powder River Basin in northeastern Wyoming and southern Montana, as well as in the Green River Basin in southern Wyoming.

        For more information about us, please visit our website at www.pinnaclegas.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. See also "Where You Can Find More Information." Our Common Stock is quoted on the NASDAQ Global Market under the symbol "PINN."

Powder

Powder Holdings, LLC
c/o Scotia Waterous
711 Louisiana Street, Suite 1400
Pennzoil Place, South Tower
Houston, Texas 77002

        Powder Holdings, LLC is a privately held Delaware limited liability company that has been formed by Scotia solely for the purpose of acquiring Pinnacle. Powder currently is 100% owned by Scotia, has no assets or liabilities, other than its rights and obligations under the Merger Agreement and the related documents, and has not generated any revenues or incurred material expenses. Upon completion of the Merger, Pinnacle will be a direct, wholly owned subsidiary of Powder. Currently Powder is wholly-owned by Scotia. Pursuant to the terms of the Contribution Agreement, discussed below, immediately prior to the effective time of the Merger, DLJ will contribute its shares of common stock to Powder in exchange for ownership interests in Powder, after which Powder is expected to be primarily owned by Scotia and DLJ. Pinnacle's Chief Executive Officer and Chief Financial Officer are anticipated to retain their executive positions with Pinnacle and will be issued profits interests with limited voting rights in Powder. Collectively, under the terms of the Contribution Agreement, Powder is anticipated to hold 9,751,262 shares of our outstanding Common Stock immediately prior to the effective time of the Merger. These contributed shares will comprise approximately 32.5% of the outstanding shares of the Common Stock eligible to vote at the special meeting and, under the terms of the Voting Agreement, will vote in favor of the adoption of the Merger Agreement.

Merger Sub

Powder Acquisition Co.
c/o Scotia Waterous
711 Louisiana Street, Suite 1400
Pennzoil Place, South Tower
Houston, Texas 77002

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        Powder Acquisition Co. is a direct, wholly owned subsidiary of Powder and is a Delaware corporation. It was formed solely for the purpose of effecting the Merger, has no assets or liabilities, other than its rights and obligations under the Merger Agreement and the related documents, and has not generated any revenues or incurred material expenses. Merger Sub has no employees and has conducted no business operations.

DLJ

        DLJ is comprised of DLJ Merchant Banking Partners III, L.P., a Delaware limited partnership, DLJ Offshore Partners III, C.V., a Netherlands Antilles limited partnership, DLJ Offshore Partners III-1, C.V., a Netherlands limited partnership, DLJ Offshore Partners III-2, C.V., a Netherlands limited partnership, DLJ MB Partners III GmbH & Co. KG, a German limited partnership, Millennium Partners II, L.P., a Delaware limited partnership, MBP III Plan Investors, L.P., a Delaware limited partnership, and DLJ Merchant Banking III, Inc., a Delaware corporation, ("MB III Inc."). MB III Inc. is an indirect, wholly-owned subsidiary of Credit Suisse Group AG and is also the managing general partner of the partnerships, which constitute a group of private equity investment funds. DLJ currently owns 9,751,262 shares of Common Stock but has agreed, pursuant to the Contribution Agreement, that immediately prior to the effective time of the Merger, subject to the satisfaction of certain conditions, it will contribute all of its shares of Common Stock to Powder, in exchange for ownership interests in Powder. Accordingly, DLJ will not receive any Merger Consideration for these shares.

Contribution Agreement

        Concurrently with the execution of the Merger Agreement, DLJ, Powder and Scotia entered into a contribution agreement (the "Contribution Agreement"), pursuant to which, subject to the satisfaction of certain conditions, immediately prior to the effective time of the Merger, DLJ will contribute all shares of Pinnacle Common Stock owned by it to Powder, in exchange for ownership interests in Powder. Pursuant to the Form of Amended and Restated Limited Liability Company Agreement of Powder Holdings, LLC (the "LLC Agreement") set forth as Exhibit H, Scotia and DLJ Merchant Banking III, Inc. will be paid an annual monitoring fee equal to the lesser of (a) the product of (x) such investor's Class A Unit Sharing Percentage, as defined in the LLC Agreement, and in the case of DLJ Merchant Banking III, Inc., the aggregate Class A Unit Sharing Percentage of all DLJ investors, and (y) $150,000 and (b) 1% of the total capital contributions made by such investor. Capital contributions made by Scotia or DLJ during any year would be reduced by that year's monitoring fee or, if no contributions are made, the monitoring fee may be paid in cash or additional Class A Units. Furthermore, the LLC Agreement provides for a funding fee up to 2% of the fair market value of each capital contribution, which may be paid in cash or Class A Units, as defined in the LLC Agreement. Furthermore, the LLC Agreement provides for the reimbursement of certain expenses relating to the Merger including legal fees, due diligence, and expenses arising out of the negotiation and preparation of the relevant agreements and other related documents, in addition to certain expenses related to the sale or reorganization of Powder Holdings, LLC. Pursuant to the terms of the Contribution Agreement, if and when the SW Fund is formed, Scotia will cause the SW Fund to agree that, upon the satisfaction or waiver of the conditions in the Merger Agreement and the Contribution Agreement, the SW Fund will contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. The SW Fund may not be formed prior to the shareholder meeting. If the SW Fund is not formed, Scotia will have the right but not the obligation to contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. Further, if Scotia does not contribute sufficient funds to Powder to complete the Merger by the effective time, our counterparties are only Powder and Merger Sub, which have no assets or operations. Powder and Merger Sub may seek alternative funding, but no alternative funding arrangements have been made to date. Pinnacle has no recourse to pursue remedies against Scotia if Scotia does not comply with its obligations under the Contribution Agreement.

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Background of the Merger

        During 2008 and continuing into 2009, the market for Rocky Mountain natural gas suffered from severe pricing declines. The market for exploration and production properties quickly changed from a "seller's" to a "buyer's" market. In response to these adverse conditions and market uncertainties, our Board and management considered our long-term strategic alternatives and prospects for continued operations. The Board recognized that there were many uncertainties to consider, including volatile commodity prices, which had resulted in a lack of liquidity and cash flow.

        By early 2009, continuing low gas prices resulted in a significant lack of liquidity. To address the liquidity issues, our Board and management determined it was necessary to implement a strategy to:

•

achieve a strategic transaction by a merger, sale of assets or an infusion of capital;

•

work with our lender to gain time to achieve a strategic transaction;

•

reduce both general and administrative costs and field operations costs;

•

focus on production optimization;

•

reduce our outstanding debt;

•

replace our existing credit facility;

•

attempt to reduce obligations in order to strengthen our balance sheet and improve Pinnacle's attractiveness to a potential strategic partner;

•

re-prioritize existing drilling and exploration opportunities; and

•

preserve cash.

        Pursuant to this strategy, and as discussed further below, we have initiated, reviewed and/or completed the following proposals and transactions:

•

six separate proposals for a merger with us;

•

four proposals regarding a potential sale of our high and low pressure gas gathering systems;

•

four potential sales of certain producing or nonproducing properties;

•

eight approaches for replacement of our credit facilities;

•

completion of the sale of our high pressure gas gathering system; and

•

completion of the sale of a producing or nonproducing property.

        Material discussions and negotiations relating to each of these alternatives are described below.

History of the Merger and Alternative Transactions

        On October 10, 2007, CFO for Pinnacle, Ronald T. Barnes, received a phone call from M. Grant Farn of Scotia inquiring about investment opportunities with Pinnacle. The call was referred to Peter G. Schoonmaker, CEO for Pinnacle, who set up a meeting on October 30, 2007 to discuss the companies, possible opportunities and introductions. Pinnacle and Scotia had no prior relationship before this initial contact.

        On October 30, 2007, Mr. Barnes and Mr. Schoonmaker met with Tym Tombar, M. Grant Farn, and Jay Brown of Scotia in Houston.

        On November 14, 2007, Mr. Schoonmaker met with representatives of Scotia in Denver to discuss potential strategic alliances, such as direct investments in Pinnacle, potential mergers and potential buyouts.

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        On December 18, 2007, Mr. Tombar, Mr. Brown and Don Hansen of Scotia visited Pinnacle's offices and toured Pinnacle's field operations.

        On February 7, 2008, Mr. Schoonmaker met with Mr. Tombar, Mr. Brown, and Mr. Hansen of Scotia in Denver to discuss potential strategic alliances.

        In October and November 2008, Mr. Tombar contacted Mr. Cabes, Mr. McGonagle, and Mr. Gunst of our Board initially by conference call on October 9, 2008 and subsequently through a meeting in Houston on November 4, 2008. At each time, Scotia indicated that it was interested in establishing a portfolio company in the Powder River Basin area, and inquired as to whether Pinnacle might have an interest in pursuing this objective with Scotia. Pinnacle's representatives, in each instance, indicated that as a result of several factors including excessive volatility in the oil and gas and financial markets, and a significant decline in Pinnacle's stock price, Pinnacle first needed to fully evaluate its position before it could pursue a particular strategic path.

        On November 11, 2008, Mr. Tombar provided Mr. Cabes and Mr. Gunst of our Board with background materials on Scotia's fund and objectives. The parties did not discuss at that time any terms of a possible transaction. No further contact occurred between Scotia and non-executive officers of our Board until May 2009.

        On December 31, 2008, Pinnacle entered into a confidentiality agreement with Company "A" to explore potential divestitures of certain of Pinnacle's producing properties. Company "A" had purchased property in the Powder River Basin and was looking to expand its position. Company "A" contacted Pinnacle through legal counsel that was used by both Company "A" and Pinnacle.

        On January 8, 2009, Pinnacle entered into a confidentiality agreement with Company "B" to explore a potential merger.

        On January 14, 2009, Mr. Schoonmaker and Mr. McGonagle met with Company "B" to discuss potential terms and timing of a potential merger.

        On January 22, 2009, Pinnacle entered into a confidentiality agreement with Company "C" to explore a potential merger or buyout. Company "C" was referred to Pinnacle by Company "C's" financial advisor.

        On January 29, 2009, Pinnacle sent to the financial advisor for Company "C" data on Pinnacle to help with the evaluation of a potential merger or buyout.

        On January 30, 2009, Mr. Schoonmaker and Mr. Barnes of Pinnacle met with Mr. Tombar and Mr. Farn of Scotia in Houston to discuss Pinnacle's liquidity concerns, assets, pricing and possible strategic alliances.

        On February 4, 2009, Mr. Schoonmaker met with Mr. Tombar, Mr. Brown and Mr. Hansen of Scotia in Houston to discuss industry outlook, financing alternatives and possible strategic alliances.

        On February 12, 2009, Mr. Tombar, Mr. Brown and Mr. Hansen visited Pinnacle's offices and toured Pinnacle's field operations and engaged in discussions regarding Pinnacle's operations and reserves.

        After reviewing the information exchanged with Company "B," in March 2009, Pinnacle terminated further discussions with Company "B" until Company "B" could resolve its own issues related to Company "B's" debt levels and its inability to raise additional capital. Pinnacle had no further discussions with Company "B".

        On March 24, 2009, a Board meeting was held at which, in part, the possible divestiture of high and low pressure pipelines owned by Pinnacle along with nonstrategic wells or acreage were reviewed. The Board also reviewed potential equity and rights offering transactions presented by various

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investment banks. The Board recommended moving forward on possible transactions as part of our continuing efforts to address our lack of liquidity caused by continuing low gas prices.

        In April 2009, and again in August and September 2009, Mr. Schoonmaker and Mr. Barnes met and reviewed our low pressure gas gathering assets with two separate entities who owned gas gathering assets in the Powder River Basin. Due to Pinnacle's lack of liquidity and development plans in the future, both entities declined to move forward and terminated discussions.

        On April 6, 2009, Pinnacle entered into a confidentiality agreement with Company "D" to explore a potential merger.

        On April 7, 2009, Company "C" met with Pinnacle's third party reserve engineering firm, Netherland, Sewell & Associates, Inc. ("NSAI") to discuss asset valuation.

        On April 8, 2009, we sold our high-pressure gas gathering assets in the Cabin Creek area of Wyoming and undeveloped acres in our Arvada gas project in Wyoming for approximately $3.2 million of net proceeds. We used a portion of the proceeds to reduce the amount borrowed under our credit facility from $10.5 million to $9.0 million, as required under the terms of the Fourth Amendment to Credit Agreement, discussed below. Additionally, in order to address continuing liquidity concerns and to remain in compliance with the terms of our amended credit facility, Pinnacle focused on divesting certain other assets and reducing general and administrative expenses by 40%.

        On April 16, 2009, Mr. Schoonmaker and Mr. McGonagle, Pinnacle's Chairman, met in Denver with Company "C" and its financial advisor to discuss valuation, terms and timing of a potential transaction.

        On April 30, 2009, Pinnacle was advised that Company "C" was deferring any decisions regarding a potential transaction with Pinnacle until the end of 2009, electing to concentrate on its core business while monitoring the weak Rocky Mountain Index pricing attributable to our assets.

        On May 12, 2009, Mr. Schoonmaker and Mr. Barnes presented a reserve valuation of Company "D" to the Board. The valuation was performed by an independent investment banking firm. The Board recommended that management explore a potential merger with Company "D."

        On May 15, 2009, Mr. Schoonmaker, Mr. Barnes, and J.L. Griffin, Production Supervisor for Pinnacle, and Company "D" met in Pinnacle's office to review their respective asset valuations and discuss the terms of a potential merger.

        On May 28, 2009, Mr. Schoonmaker and Mr. McGonagle met with Mr. Tombar, Mr. Brown and Mr. Hansen in Denver to discuss Scotia's interest in a potential transaction with Pinnacle and to provide additional clarification on Scotia's objectives and historical diligence process.

        On May 29, 2009, Pinnacle signed a confidentiality agreement with Scotia and sent data for Scotia's review and evaluation.

        In June 2009, Company "D" advised Pinnacle that some internal requirements needed to be handled before a potential merger involving Pinnacle could move forward, effectively deferring our discussions with Company "D" until 2010. Pinnacle resumed discussions concerning a potential proposal with Company "D" on February 12, 2010 when such discussions were terminated as a result of Company "D's" inability to move forward with a proposal.

        During June and July 2009, Mr. Schoonmaker and Mr. Barnes and Mr. Farn and Mr. Tombar of Scotia had numerous calls on the evaluation of Pinnacle's current operations and current financial status.

        In July, August and September 2009, additional and updated data regarding Pinnacle was requested by and sent to the financial advisor for Company "C."

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        On July 1, 2009, Mr. Schoonmaker and Mr. Barnes met with Company "A" to review valuation data for the Recluse field.

        On August 6, 2009, Company "A" presented Pinnacle with the terms of a proposal to acquire Pinnacle's interests in the Recluse field. The offer was discussed with Board members on August 13, 2009. The Board recommended to counter Company "A's" offer at a higher price that would equate to current market value.

        On August 7, 2009, Pinnacle entered into a confidentiality agreement with Company "E" to consider a potential buyout or merger. Company "E" solicited Pinnacle as they had properties in the same area.

        On August 11, 2009, Company "E" visited Pinnacle's office and toured Pinnacle's field operations and reviewed financial and operating data.

        On August 11, 2009, Pinnacle received a letter from Scotia indicating, on a non-binding basis, that it would primarily be interested in sponsoring management in partnership with several investors through a board-approved tender offer for the publicly traded shares of Pinnacle but that it was also considering providing equity financing to Pinnacle. This letter from Scotia was discussed at the August 13, 2009 Board meeting.

        On August 13, 2009, Mr. Barnes and Mr. Schoonmaker met with the financial advisors for Company "E" for further evaluation of a possible combination of the two companies.

        On August 13, 2009, the Board met to review our operating plan, budget, liquidity and cash flow. The Board determined that it was likely that our lender would reduce the borrowing base at the next redetermination in October 2009. The Board discussed the significant restrictions that the lender's reduction was likely to place on our liquidity and the ramifications on our operations. At that time, our trade payables greater than 90 days exceeded $5.0 million and vendor liens in place exceeded $1.5 million, while our working capital deficiency was widening to approximately $14.0 million. The Board also discussed alternative measures we might take to address our liquidity needs, including asset divestitures, equity offerings, a new debt facility and merger combinations, and the August 11, 2009 letter from Scotia, directing management to follow through with a number of alternatives.

        On August 17, 2009, Company "A" rejected the counter offer from Pinnacle and commenced to reevaluate the terms of their offer to acquire Pinnacle's interests in the Recluse field.

        On September 2, 10, 17, and 23, 2009, Mr. McGonagle, Mr. Cabes, and Ms. Schnabel, Pinnacle board members, and Mr. Schoonmaker and Mr. Barnes held meetings and conference calls with Scotia regarding a possible equity investment transaction as contained in their August 11, 2009 proposal.

        On September 8, 2009, Mr. Schoonmaker and Mr. McGonagle met with Company "E" and were advised that Company "E" would not move forward with a possible transaction. Company "E" did discuss moving forward with a proposal to purchase specific Pinnacle assets or a merger with us at a valuation below the then current market price of Pinnacle's Common Stock.

        On September 10, 2009, Pinnacle entered into a confidentiality agreement with Company "F" who had expressed interest in a possible purchase of our assets or stock. Company "F" has assets in the same area as Pinnacle and has inquired about asset divestitures in prior years. Mr. Schoonmaker met with Company "F" to discuss a possible transaction.

        On September 14, 2009, Pinnacle and Company "F" held a conference call to go over Pinnacle's data with Mr. Schoonmaker and Mr. Barnes.

        On September 15, 2009, Pinnacle received notification from NASDAQ that it had fallen below certain continued listing criteria that require a minimum bid price of $1.00 over 30 consecutive days.

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        On September 17, 2009, Company "E" made a verbal offer for Pinnacle's interest in the Recluse field which was rejected by us because the purchase price was too low. Company "E" declined to raise their offer. To date, Pinnacle has had no further discussions with Company "E".

        On September 28, 2009, Company "F" indicated it was not interested in pursuing an acquisition of Pinnacle because it did not want to be involved in a public company acquisition process. Company "F," however, did indicate that it would make an offer to purchase certain Pinnacle assets.

        On October 2, 2009, Pinnacle received a letter from Scotia in which Scotia expressed interest in providing financing for a going-private transaction in which Scotia would sponsor the management team in partnership with other third party investors, potentially including other current investors in Pinnacle. The letter indicated that the transaction would be consummated through a cash tender offer for the shares at a price per share in a range of $.34 to $.37. The letter did not constitute an offer for any transaction nor did it identify any members of the Pinnacle management team or investors contemplated to be involved with such proposed transaction. Instead, it solely provided a brief overview of a potential transaction that Scotia was interested in pursuing with us, provided Scotia received management participation.

        In the period between October 2, 2009 and October 12, 2009, Mr. McGonagle, had several discussions with Mr. Tombar of Scotia in order to clarify the terms and conditions of the Scotia proposal.

        On October 6, 2009, Pinnacle received a letter of intent containing a new offer to purchase Pinnacle's interest in the Recluse field from Company "A." The letter of intent was reviewed by the Board at its October 13, 2010 meeting and was determined to be insufficient. Pinnacle contacted Company "A" regarding additional terms that would be required for the Board to reconsider the offer.

        On October 12, 2009, DLJ's investment committee determined to support a going private transaction that would be sponsored by Scotia and management and would include a "rollover" of DLJ's investment in Pinnacle. DLJ's investment committee did not approve any investment of additional funds, or other role for DLJ, in connection with the proposed Scotia transaction. Later that day, Ms. Schnabel contacted Mr. Tombar to advise him of the investment committee's decision.

        On October 13, 2009, the Board held a meeting to discuss Scotia's proposal, including the interest of significant stockholders and management in potentially participating in the transaction. After discussing the Scotia proposal, the Board discussed the advisability of forming a Special Committee to evaluate the proposal. The Board unanimously resolved to establish a Special Committee of three of the Board's independent directors and delegated to the Special Committee the exclusive power and authority to, among other things, (a) negotiate the Scotia proposal or any other alternative proposals or strategic alternatives with the applicable parties on our behalf and on behalf of our stockholders unaffiliated with DLJ, our chief executive officer and chief financial officer, (b) accept or reject any proposals or the terms of any proposed transaction, and (c) conduct its own investigation and due diligence with respect to any proposed transaction and to provide a recommendation to the Board and our stockholders as to the Scotia proposal or any other alternative proposal or strategic alternative. The resolutions also empowered the Special Committee to retain independent legal and financial advisors to assist the Special Committee in the fulfillment of its duties. After discussion, the Board appointed Thomas McGonagle, Robert Cabes, and Jeffrey Gunst to serve on the Special Committee, with Mr. McGonagle to serve as Chairman. The Special Committee has sole responsibility for negotiating the Scotia proposal or any other alternative proposals and Pinnacle's management has no role with respect to such negotiations other than preparing and providing certain due diligence materials regarding Pinnacle as requested by the Special Committee.

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        On November 4, 2009, Mr. Farn, Mr. Tombar, Mr. Brown, and Mr. Hansen and DLJ representatives William Bishop and Ann Kim attended a due diligence session with Mr. Schoonmaker and Mr. Barnes in Denver.

        On November 5, 2009, Mr. Tombar and Ms. Schnabel discussed the observations of Scotia and DLJ, respectively, from the November 4^th due diligence session and Mr. Tombar explained the process he expected for Scotia to provide a proposal to the Board and DLJ. Ms. Schnabel and Mr. Tombar did not exchange or discuss any material information regarding Pinnacle other than that presented by Pinnacle during the November 4 due diligence session.

        On November 11, 2009, the Board held a meeting to discuss, among other things, certain potential defaults under our credit facility and our ability to receive a waiver under, and extend the terms and conditions of, our credit facility by November 16, 2009. The Board reviewed our liquidity, trade payables greater than 90 days which then exceeded $5.5 million, vendor liens of approximately $1.0 million and a working capital deficiency of approximately $15.0 million. The Board further discussed possible strategic transactions and the possibility of obtaining short term financing from a number of alternative sources.

        On November 16, 2009, Pinnacle received a revised letter of intent from Company "A" to purchase Pinnacle's interest in the Recluse field, at a purchase price below the then current market valuation, resulting in net proceeds that would not be sufficient to resolve Pinnacle's liquidity issues going forward.

        On November 19, 2009, we received a letter from Scotia that confirmed Scotia's intent to provide financial support to the management buyout as described in the October 2, 2009 letter from Scotia. An initial draft of a merger agreement was also provided by Scotia, with the transaction constructed as a two-step tender offer followed by a merger.

        On November 19, 2009, the Special Committee retained Locke Lord Bissell & Liddell LLP ("Locke Lord") as its independent counsel.

        On November 20, 2009, the Board held a meeting to discuss: (i) the current status of discussions with our lender under the credit facility, (ii) the November 19, 2009 letter from Scotia, (iii) the letter of intent from Company "A" to purchase Pinnacle's interest in the Recluse field, (iv) capital raising and other potential transactions, and (v) other potential strategic alternatives.

        On November 20, 2009, Pinnacle received a preliminary term sheet from DLJ for a $2 million senior secured mezzanine loan facility.

        On November 20, 2009, the Special Committee held a telephonic meeting to review certain strategic proposals, including the proposals from Company "A" and DLJ, and the Scotia proposal. Upon discussion and review, the Special Committee agreed to move forward with the Scotia proposal, to review the DLJ proposal, to decline the Company "A" proposal due to the size of the transaction, and to discuss obtaining additional waivers under the credit facility with our lender. To date, Pinnacle has had no further discussions with Company "A".

        On November 23, 2009, the Special Committee held a telephonic meeting to discuss our then existing alternatives. The Special Committee also discussed several options for an independent financial advisor and then reviewed a summary of the material terms contained in the initial draft of the Scotia merger agreement. The Special Committee engaged in extensive discussions regarding the material terms of the merger agreement, including the $0.34 price per share, the top-up option, the conditions to closing, the material adverse effect definition, the no solicitation provisions, termination rights, the termination fee and directors and officers insurance issues. The Special Committee discussed, among other things, negotiating an increase in the price per share, reducing the amount of the termination fee, requiring a vote of a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive

24

officer and chief financial officer and eliminating certain items that would be considered a material adverse effect, including net production requirements and a violation of Pinnacle's existing credit agreement. The meeting concluded with the Special Committee instructing Locke Lord to revise the draft merger agreement based on such discussions.

        On November 24, 2009, Locke Lord sent a revised draft of the merger agreement to the Special Committee, Scotia, and Scotia's outside counsel, Vinson & Elkins, LLP ("V&E"), based on the prior day's discussions.

        On November 28, 2009, the Special Committee participated in a teleconference with representatives of Scotia, V&E and Locke Lord. During the teleconference, the parties engaged in discussions and negotiations regarding the material open issues from Locke Lord's revised draft of the merger agreement provided on November 24, 2009. The key issues discussed were the merger consideration, the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger, the material adverse effect definition, the acquisition proposal definition, waivers under Pinnacle's credit agreement, conditions to closing and right to terminate provisions, the termination fee and expense reimbursement provisions, and specific performance in the event of breach. At the conclusion of the negotiation, the Special Committee instructed Locke Lord to further negotiate the draft merger agreement based on such discussions.

        On November 30, 2009, Mr. McGonagle updated Scotia on the discussions with our lender. Scotia indicated that it might not proceed with the proposed transaction without a longer extension of the waiver.

        On December 1, 2009, Mr. Tombar of Scotia informed Mr. McGonagle that it was discontinuing negotiations pending a longer extension of the waiver period by our lender than that provided under the November 16, 2009 Waiver and Agreement, discussed below.

        On December 1, 2009, Pinnacle received a letter from Company "F" expressing interest in buying certain properties of Pinnacle located in the Powder River Basin of Wyoming and Montana.

        On December 2, 2009, the Special Committee held a telephonic meeting to discuss hiring an independent financial advisor and the material open items in the latest draft of the Scotia merger agreement. The Special Committee determined that, after discussing various candidates, it intended to hire FBR as its independent financial advisor for purposes of reviewing strategic alternatives and determining whether the financial consideration to be received in the Scotia proposal is fair, from a financial point of view, to our stockholders. Thereafter, the Special Committee engaged in discussions regarding the list of remaining open items in the Scotia merger agreement based on the November 28, 2009, teleconference with representatives of Scotia and V&E. The meeting concluded with the Special Committee instructing Locke Lord to begin revising the draft merger agreement based on such discussions but to not send the revised draft to V&E pending an extension of the waiver period by our lender. The Special Committee subsequently retained FBR as its independent financial advisor.

        On December 2, 2009, Jay Wilkins of DLJ contacted Mr. Tombar to inquire about Scotia's decision to discontinue discussions. Mr. Tombar confirmed that Scotia would be willing to continue discussions if a longer extension could be obtained from Pinnacle's lender. Mr. Tombar also indicated that any such transaction would require DLJ to "rollover" its investment in Pinnacle, although Scotia would not require other Pinnacle shareholders to "rollover" their investment in Pinnacle.

        On December 3, 2009, the Special Committee provided DLJ with comments to its term sheet indicating that the proposal was insufficient to address Pinnacle's ongoing liquidity issues and coordinated a response to Company "F." DLJ responded by confirming the terms of their offer and stating they would not negotiate on terms.

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        On December 8, 2009, Mr. Schoonmaker and Mr. Barnes engaged in discussions regarding the sale of our low pressure gas gathering assets with Company "H." Company "H" was introduced to Pinnacle by Mr. Cabes.

        On December 10, 2009, the Special Committee held a telephonic meeting with representatives of Locke Lord and FBR during which FBR provided an update to the Special Committee on the status of its analysis as to whether the financial consideration to be received in the Scotia proposal is fair, from a financial point of view, to our stockholders. FBR explained the valuation methodologies it would employ for determining if the financial consideration is fair. The Special Committee and FBR also discussed the timetable for FBR's delivery of drafts of a fairness opinion.

        On December 15, 2009, Mr. Schoonmaker contacted Company "F" to review and counter the offer it had made for certain or our properties. Company "F's" offer terminated on this date.

        On January 12, 2010, Pinnacle entered into a confidentiality agreement with Company "H" which wanted to evaluate a potential acquisition of our low pressure gas gathering assets.

        On January 13, 2010, Ms. Schnabel met with Mr. Tombar in Houston to encourage him to resume discussions with the Special Committee regarding a potential acquisition of Pinnacle by Scotia, and advised Mr. Tombar that Pinnacle had obtained a waiver from its lender. Ms. Schnabel did not provide any additional material information to Mr. Tombar regarding Pinnacle.

        On January 14, 2010, Mr. Schoonmaker and Mr. McGonagle met with Company "F" to discuss a possible transaction and discuss the then current operational and financial status of Pinnacle, including alternative structures and valuations. Company "F" declined to move forward. To date, Pinnacle has had no further discussions with Company "F".

        On January 14, 2010, Mr. Schoonmaker and Mr. Barnes and Company "H" conducted a conference call to discuss timing and terms of a potential transaction.

        On January 15, 2010, Mr. Tombar contacted Mr. McGonagle to resume negotiations on the proposed transaction.

        On January 15, 2010, the Special Committee held a telephonic meeting to discuss the waiver of the credit facility with our lender and material open items in the most recent draft of the merger agreement, which included the merger consideration offered, the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger, the top-up option, the material adverse effect definition, conditions to closing and right to terminate provisions, the termination fee and expense reimbursement provisions, and specific performance in the event of breach. The Special Committee engaged in extensive discussions regarding the material open items, including agreeing to the top-up option, capping the amount of expenses that Pinnacle would reimburse Powder in the event a termination fee was required to be paid at $250,000, and limiting the events requiring Pinnacle to pay a termination fee. The meeting concluded with the Special Committee instructing Locke Lord to revise the draft merger agreement based on such discussions.

        On January 20, 2010, Locke Lord sent an updated draft of the merger agreement to the Special Committee, Scotia, and V&E based on the January 15, 2010 meeting.

        On January 27, 2010, Scotia provided the Special Committee with a list of remaining open issues on the draft of the merger agreement provided by Locke Lord on January 20, 2010, which included the merger consideration offered, the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger, the material adverse effect definition, the acquisition proposal definition, waivers of Pinnacle's credit agreement, conditions to closing and right to terminate provisions, the termination fee and expense reimbursement provisions, and specific performance in the event of breach.

        On January 28, 2010, the Special Committee and representatives of Scotia negotiated the open issues on the merger agreement identified by Scotia on January 27, 2010.

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        On February 5, 2010, V&E provided an updated draft of the merger agreement to the Special Committee, which included Scotia's rejection of the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger, the inclusion of specific material adverse effect items related to production, reserves and reduction in net mineral acres, a proposed increase in the amount of Powder's reimbursable expenses in the event of termination to $600,000, and additional events requiring Pinnacle to pay a termination fee.

        On February 8, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord to discuss material open items in the draft merger agreement provided by Scotia on February 5, 2010, which included the merger consideration offered, the material adverse effect definition, the right to terminate provisions, and the termination fee and expense reimbursement provisions. The chairman of the Special Committee stated that, in the negotiation process, Scotia indicated it was contemplating reducing the proposed merger consideration to between $0.30 to $0.32 per share of Common Stock based on, among other things, increased liabilities to be assumed and updated reserve reports of Pinnacle. The Special Committee determined it would reject any lowering of the merger consideration and would accept no less than $0.34 per share. The Special Committee then reviewed the remaining material open items of the draft merger agreement and engaged in extensive discussions regarding the open items, including lowering the benchmark of proved reserves of natural gas from 27.3 BcF to 23.0 BcF in, and excluding a borrowing base redetermination under Pinnacle's existing credit agreement from, the material adverse effect definition, and reducing the termination fee from $1 million to $500,000 if the merger agreement is terminated due to a material adverse effect on Pinnacle or a breach of Pinnacle's representations and warranties that remains uncured prior to the closing. The Special Committee instructed Locke Lord to revise the draft merger agreement and the chairman of the Special Committee to continue negotiating the merger agreement with Scotia based on such discussions.

        On February 8, 2010, Locke Lord provided an updated draft of the merger agreement to Scotia's counsel reflecting the discussions of the February 8, 2010 meeting of the Special Committee.

        On February 9, 2010, V&E sent an updated draft of the merger agreement to the Special Committee and Locke Lord, which included Scotia's agreement to the revised termination fee provisions and material adverse effect definition.

        On February 9, 2010, Company "D" provided a presentation to Pinnacle's management regarding a possible merger transaction.

        On or about February 9, 2010, Jay Wilkins of DLJ contacted Mr. Tombar of Scotia to explain that DLJ would prefer to structure the transaction so that DLJ would receive the same cash per share that the Pinnacle public stockholders would receive, rather than "rolling over" its investment by contributing shares to Powder. Mr. Tombar, however, advised Mr. Wilkins that it would be unwilling to proceed with the transaction unless DLJ agreed to contribute its shares of Common Stock to Powder prior to the merger.

        On February 9, 2010, based on discussions between Locke Lord, V&E, and DLJ's outside legal counsel, Davis Polk & Wardwell LLP ("Davis Polk"), it was determined that the transaction would be constructed as a one-step merger (the "Merger") instead of a two-step tender offer followed by a Merger.

        On February 10, 2010, Mr. Schoonmaker and Ryan Gregory, Pinnacle's Procurement Manager, met with executive officers from Company "H" to discuss the next step in the process. A meeting and field tour was scheduled for a later date. Due to the pending merger with Scotia, Company "H" informed Pinnacle that it was no longer interested in purchasing certain Pinnacle assets. To date, Pinnacle has had no further discussions with Company "H".

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        On February 10, 2010, Locke Lord sent an updated draft of the merger agreement to the Special Committee, Scotia, V&E, and Davis Polk reflecting the revised one-step merger structure.

        On February 11, 2010, Mr. Schoonmaker and Mr. Gregory met with the executive officers of Company "I" and their equity provider in Houston. Company "I" was introduced to Pinnacle through Company "I's" equity provider who had ongoing business relationships with certain directors of Pinnacle.

        On February 12, 2010, Pinnacle provided additional data to Company "D" for further evaluation of a merger transaction. To date, Pinnacle has had no further discussions with Company "D".

        On February 12, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord and FBR during which FBR provided an update to the Special Committee on the status of its analysis of the Scotia proposal based upon the current terms of the draft merger agreement. The Special Committee and FBR also discussed the timetable for FBR's delivery of the fairness opinion letter and the timing of a Board meeting to discuss and possibly approve the Merger.

        On February 12, 2010, V&E sent an updated draft of the merger agreement to the Special Committee, Locke Lord, Scotia and Davis Polk. In this draft, Powder agreed to the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger.

        On February 12, 2010, Scotia indicated to the Special Committee that it needed an additional week to obtain the internal approvals required to execute the transaction documents.

        On February 16, 2010, V&E sent an updated draft of the merger agreement to the Special Committee, Locke Lord, Scotia, and Davis Polk, which included Powder's acceptance of the requirement that a majority of the stockholders unaffiliated with DLJ, Pinnacle's chief executive officer and chief financial officer approve the merger, as a non-waivable condition to the Merger.

        On February 17 and 18, 2010, Mr. Schoonmaker and Mr. Barnes met with Company "I" at our Sheridan office and provided a field tour. Discussions of a potential merger ensued.

        On February 19, 2010, Pinnacle entered into a mutual confidentiality agreement with Company "I" to further discuss and exchange information regarding a potential merger transaction. Confidentiality agreements with Company "I's" equity provider and affiliated lender had been entered into on July 23, 2009 and September 10, 2009, respectively.

        On February 22 and 23, 2010, Mr. Barnes and Mr. Schoonmaker and Company "I" held several calls, including a conference call with Pinnacle's third party reserve engineers to discuss valuation of Pinnacle's assets.

        On February 22, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord and FBR during which FBR provided its preliminary opinion to the Special Committee as to whether the financial consideration to be received in the Merger is fair, from a financial point of view, to Pinnacle's stockholders and the Special Committee discussed and approved resolutions to recommend the Board approve the Merger. FBR confirmed its finding that the proposed financial consideration of $0.34 per share to be received in the Merger is fair to the stockholders of Pinnacle. However, since the $0.34 per share consideration was still bracketed in the latest draft of the merger agreement as of the time of the special meeting, the Special Committee requested that FBR delay providing its signed fairness opinion until the merger agreement was final. The Special Committee determined that the merger was fair and in the best interests of Pinnacle and its stockholders and unanimously approved the resolutions recommending that the Board approve the Merger conditioned upon (i) receipt of the final draft of the merger agreement in substantially the same form as provided to the Special Committee, with no change to the $0.34 per share consideration, and (ii) receipt of the signed fairness opinion from FBR.

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        On February 22, 2010, the Board held a telephonic meeting with all members of the Board and representatives of Locke Lord to discuss the documents related to the Merger and to discuss and approve resolutions of the Board to approve the Merger Agreement, declare the advisability of the Merger, and recommend that Pinnacle's stockholders adopt the Merger Agreement. The chairman of the Special Committee then provided the Board with an overview of the timing issues of the proposed transaction. The chairman explained that the Special Committee met prior to the meeting of the Board with representatives of FBR. The chairman then explained that Scotia would not be able to approve the proposed transaction until February 23, 2010, though all relevant documents were generally in final form and had been agreed upon by all relevant parties. The chairman then informed the Board that FBR was prepared to deliver its fairness opinion provided Scotia confirms the $0.34 price per share. The chairman also informed the Board that pending (i) the delivery of the final draft of the merger agreement in substantially the same form as provided to the Special Committee, with no change to the $0.34 per share consideration and (ii) receipt of the fairness opinion of FBR, the Special Committee unanimously recommended that the Board approve the resolutions. The Board discussed the terms and conditions of the proposed transaction and voted to approve the resolutions pending (i) the delivery of the final draft of the merger agreement in substantially the same form as provided to the Special Committee, with no change to the $0.34 per share consideration, and (ii) the receipt of the signed fairness opinion of FBR. All members of the Board also determined that the Merger was fair and in the best interests of Pinnacle and its stockholders and voted in favor of the resolutions, except for Messrs. Johnson and Parker who abstained pending consultation with CCBM, Inc.'s counsel regarding their counsel's final review of the documents. Subsequent to the Board meeting, Messrs. Johnson and Parker approved the resolutions, as they had also determined the Merger was fair and in the best interests of Pinnacle and its stockholders. Ultimately, there was no change to the $0.34 per share consideration and the final merger agreement was identical to that approved by the Board.

        On February 23, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord to discuss the receipt of a non-binding letter of interest from Company "I" regarding a potential merger transaction with Pinnacle (the "Company "I" Proposal"). The chairman of the Special Committee and certain members of management received the Company "I" Proposal and forwarded it to the remaining members of the Special Committee and Locke Lord prior to the execution of the Merger Agreement. Notwithstanding the fact that the Merger Agreement and related transaction documents were in essentially final form, the Special Committee reviewed the Company "I" Proposal and discussed its terms. Since the form of consideration contemplated by the Company "I" Proposal was not all cash and would result in significant dilution to Pinnacle's stockholders, the Special Committee's evaluation and negotiation of the Company "I" Proposal would require additional time, including extensive consultation with its advisors. The chairman advised the Special Committee that the waiver of certain provisions of Pinnacle's credit facility would expire as of February 23, 2010. The chairman further stated that the lender had already granted significant extensions of the waiver and the lender previously indicated that they were not obligated and were very reluctant to provide any additional extensions, in particular for the extended period required for (i) Pinnacle to complete its due diligence of Company "I," (ii) Company "I" to complete its due diligence of Pinnacle, and (iii) Pinnacle and Company "I" to negotiate the terms of a definitive agreement. The chairman further explained that if the current waiver of the credit facility expired, Pinnacle would be at risk of the lender declaring Pinnacle in default of certain provisions of the credit facility. After a review and full discussion of the foregoing facts and circumstances, the Special Committee decided it would be in the best interests of Pinnacle and its stockholders to proceed with the execution of the Merger Agreement and related transaction documents.

        Shortly after the Special Committee meeting to discuss the Company "I" Proposal, we entered into the Merger Agreement with Powder and Merger Sub.

        On February 24, 2010, we issued a press release announcing the Merger.

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        On March 5, 2010, the chairman of the Special Committee and Pinnacle's management received a revised acquisition proposal from Company "I" (the "New Company "I" Proposal"). The chairman forwarded the New Company "I" Proposal to the remaining members of the Special Committee, Locke Lord and FBR. Locke Lord provided oral and written notice of the acquisition proposal to Powder and its counsel in accordance with the terms of the Merger Agreement.

        The Special Committee then engaged FBR to assist the Special Committee in its analysis of the New Company "I" Proposal as well as any other proposals received subsequent to the execution of the Merger Agreement

        Between March 5 and March 11, 2010, the Special Committee, FBR and Locke Lord evaluated the New Company "I" Proposal in order to determine if it constituted a "superior proposal" or was reasonably expected to lead to a "superior proposal." Upon the completion of the evaluation, the Special Committee (with consultation from FBR and Locke Lord) determined, based on its analysis of the limited information received to date on Company "I" and its assets, that the implied Company "I" valuation was overstated, the Pinnacle valuation was not done on a comparable basis, and that the exchange ratio was not at an appropriate premium to enable Pinnacle to move forward. As such, the New Company "I" Proposal was determined to not be a "superior proposal."

        On March 5, 2010, Pinnacle discussed the Merger with NASDAQ.

        On March 12, 2010, the Special Committee notified Company "I" that the New Company "I" Proposal was rejected as it was determined to not be a "superior proposal."

        On March 16, 2010, Pinnacle received an additional delisting notice from NASDAQ. Pinnacle appealed this delisting notice.

        On March 24, 2010, the chairman of the Special Committee received a revised acquisition proposal from Company "I" (the "Revised Company "I" Proposal"). The chairman forwarded the Revised Company "I" Proposal to the remaining members of the Special Committee, Locke Lord and FBR. Locke Lord provided oral and written notice of the Revised Company "I" Proposal to Powder and its counsel in accordance with the terms of the Merger Agreement.

        The Special Committee then engaged FBR to assist the Special Committee in determining whether the Revised Company "I" Proposal constituted a "superior proposal" or was reasonably expected to lead to a "superior proposal," as such term is defined in the Merger Agreement.

        On March 25, 2010, the Special Committee received an acquisition proposal from Company "J" (the "Company "J" Proposal"). The Special Committee forwarded the Company "J" Proposal to Locke Lord. Locke Lord provided oral and written notice of the Company "J" Proposal to Powder and its counsel in accordance with the terms of the Merger Agreement.

        Between March 26 and March 29, 2010, the Special Committee (with consultation from Locke Lord) evaluated the Company "J" Proposal in order to determine if it constituted a "superior proposal" or was reasonably expected to lead to a "superior proposal." Upon the completion of the evaluation, the Special Committee determined that, as presented, the Company "J" Proposal was not a "superior proposal." The reasons for this determination included: (i) the indicated price of $0.41 per share of Common Stock, in cash, was subject to a detailed and definitive due diligence review of Pinnacle and the negotiation and approval of a definitive agreement, either of which could, in the sole discretion of Company "J," lead to price erosion prior to the execution of a definitive agreement, and (ii) the proposal was conditional on a significant number of events, consents, and agreements outside the control of Pinnacle, resulting in significant risk that the transaction might never close. The Special Committee's view was that, notwithstanding the fact that the Company "J" Proposal referred to a higher potential price for Pinnacle's stockholders, the value of the potential consideration must be significantly discounted to reflect the uncertainty and closing risks associated with the Company "J"

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Proposal. In the Special Committee's view, the risk and uncertainty more than offset the indicated increase in the face value of the offer price.

        On March 29, 2010, the Special Committee notified Company "J" that the Company "J" Proposal was rejected as it was determined not to be a "superior proposal" as a result of it being conditioned on a significant number of events that made consummation of the transaction highly unlikely.

        Between March 24 and April 1, 2010, the Special Committee, FBR and Locke Lord evaluated the Revised Company "I" Proposal in order to determine if it constituted a "superior proposal" or was reasonably expected to lead to a "superior proposal." Upon the completion of the evaluation, the Special Committee (with consultation from FBR and Locke Lord) determined, based on its analysis of the Revised Company "I" Proposal and related information received to date on Company "I" and its assets, that the Revised Company "I" Proposal was reasonably likely to lead to a "superior proposal." Consequently, the Special Committee determined it in the best interests of the stockholders, from a financial point of view, to further investigate the Revised Company "I" Proposal. In accordance with the terms of the Merger Agreement, the Special Committee provided Powder and its counsel written notice of its intention to enter into an approved confidentiality agreement and further investigate the Revised Company "I" Proposal on April 1, 2010.

        In accordance with the terms of the Merger Agreement, Pinnacle and Company "I" entered into an approved confidentiality agreement effective as of April 2, 2010. Since April 2, 2010, Pinnacle and Company "I" have engaged in due diligence with respect to the other party.

        Between April 2, 2010 and April 5, 2010 Pinnacle received due diligence materials from Company "I" regarding Company I's financial condition, reserves, properties, and corporate documents.

        On April 5, 2010, the Special Committee received an acquisition proposal from Company "K" (the "Company "K" Proposal"). The Special Committee forwarded the Company "K" Proposal to Locke Lord and FBR. Locke Lord provided oral and written notice of the Company "K" Proposal to Powder and its counsel in accordance with the terms of the Merger Agreement.

        Between April 5 and April 6, 2010, the Special Committee (with consultation from Locke Lord) evaluated the Company "K" Proposal in order to determine if it constituted a "superior proposal" or was reasonably expected to lead to a "superior proposal." Upon the completion of the evaluation, the Special Committee determined that, as presented, the Company "K" Proposal was not a "superior proposal." The reason for this determination was, in part, that the proposed consideration was based on intellectual property rights, which were speculative.

        On April 6, 2010, the Special Committee notified Company "K" that the Company "K" Proposal was rejected as it was determined not to be a "superior proposal."

        On April 7, 2010 and April 8, 2010, Mr. Schoonmaker, Mr. Barnes and financial advisors from FBR met with Company "I" to go over due diligence data received from Company "I".

        On April 12, 2010, Locke Lord sent updated drafts of the merger agreement and related transaction documents that were included in the Revised Company "I" Proposal to the Special Committee and Company "I's" outside counsel, Thompson & Knight LLP ("T&K").

        On April 13, 2010, T&K sent updated drafts of the Company "I" merger agreement and related transactional documents to the Special Committee and Locke Lord.

        On April 14, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord to discuss open items in the most recent drafts of the merger agreement and related transactional documents, which included the material adverse effect definition, Company "I's" condition to closing that Pinnacle not be delisted from the Nasdaq Global Market or that Company "I" have no reasonable basis to believe that Pinnacle will be delisted within twelve months following the merger, timing of

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payment and amount of fees under the bridge loan and the preferred stock investment contemplated to be part of the Company "I" transaction, the conversion price of the preferred stock, and the condition under the bridge loan that Pinnacle enter into hedging contracts. The Special Committee instructed Mr. McGonagle to continue negotiating with Company "I" and for Locke Lord to revise the various agreements.

        On April 14, 2010, Locke Lord sent updated drafts of the Revised Company "I" Proposal's merger agreement and related transaction documents to the Special Committee and T&K, which reflected the April 14, 2010 meeting of the Special Committee.

        On April 15, 2010, the parties negotiated the terms of the Revised Company "I" Proposal's merger agreement and related transaction documents. The negotiation topics included the inclusion of specific material adverse effect items related to production, reserves and reduction in net mineral acres, the delisting closing condition, timing of payment and amount of fees under the bridge loan and preferred stock investment and the conversion price of the preferred stock. The parties agreed to continue negotiations and due diligence pending the results of the Company's April 29, 2010 listing hearing with Nasdaq.

        On April 20, 2010, Company "I" representatives visited Pinnacle's office in Sheridan, Wyoming to review due diligence pertaining to Pinnacle's acreage and properties.

        On April 29, 2010, Pinnacle presented a compliance plan to regain compliance with the minimum bid requirement to the NASDAQ Hearings Panel.

        On April 29, 2010, T&K sent updated drafts of the merger agreement and related transactional documents to the Special Committee and Locke Lord. The updated merger agreement included provisions requiring Pinnacle to register the equity consideration issued as part of the transaction, modified the material adverse effect item related to daily production, and added covenants regarding amending Pinnacle's charter and Pinnacle's continued listing on Nasdaq.

        On May 4, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord and FBR to discuss the Revised Company "I" Proposal. After discussing the revised items, the Special Committee instructed Mr. McGonagle to continue negotiating with Company "I" and for Locke Lord to revise the various agreements.

        On May 6, 2010, Company "I" representatives attended and observed a work session with NSAI in Pinnacle's office. The meeting with NSAI was to review reserve data and organize data inputs for Pinnacle properties.

        On May 10, 2010, the NASDAQ Hearings Panel issued its determination, granting our request for continued listing subject to the following agreed upon conditions: (i) filing of a preliminary proxy for an annual meeting including a proposal for a reverse stock split on or before the earlier of (a) the termination of the Merger, or (b) July 1, 2010; and (ii) on or before September 13, 2010, evidencing a closing bid price of $1.00 or more for ten consecutive trading days.

        On May 11, 2010, Locke Lord sent updated drafts of the Revised Company "I" Proposal's merger agreement and related transaction documents to the Special Committee and T&K, which reflected Mr. McGonangle's further negotiations with Company "I" regarding the terms of the Revised Company "I" Proposal, including a reduction in the aggregate amount of shares to be issued by Pinnacle, the inclusion of a warrant as part of the merger consideration, an increase in the amount of the bridge loan and a warrant to be issued to the lenders to purchase a portion of the shares of Common Stock of Pinnacle as part of the bridge loan.

        From May 11, 2010, to May 14, 2010, the Special Committee and Company "I" continued to negotiate the remaining material open issues.

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        On May 14, 2010, T&K sent updated drafts of the Revised Company "I" Proposal's merger agreement and related transaction documents to the Special Committee and Locke Lord. The documents reflected further negotiated terms, including additional covenants in the agreement related to the preferred stock investment.

        On May 17, 2010, the Special Committee held a telephonic meeting with representatives of Locke Lord to discuss the revised drafts, specifically the voting rights and adjustments to the conversion price of the preferred stock. The Special Committee instructed Locke Lord to continue negotiating with Company "I."

        On May 19, 2010, representatives of Company "I," T&K, Messrs. Schoonmaker and Barnes, and Pinnacle's legal counsel, Moye White LLP, held a telephonic discussion with Nasdaq representatives regarding the proposed voting rights, board designation rights and conversion terms of the preferred stock investment.

        On May 19, 2010, T&K sent updated drafts of the Revised Company "I" Proposal's bridge loan agreement and related transaction documents to the Special Committee and Locke Lord. The documents reflected further negotiated terms, including an increase in the amount of the bridge loan.

        On May 20, 2010, the Board held a telephonic meeting with all members of the Board and representatives of Locke Lord and FBR to discuss the current status of the Merger and the Revised Company "I" proposal. FBR reviewed the status of its analysis of the Revised Company "I" proposal based upon the current terms of the Revised Company "I" Proposal's merger agreement and related transaction documents.

        On May 25, 2010, Company "I" terminated negotiations with Pinnacle. Pinnacle has had no further discussions with Company "I" since this date.

Waivers and Amendments to Credit Facility

        With the significant decline in gas prices and resulting lack of liquidity, in 2008 we began to experience difficulties in complying with certain covenants within our credit facility. These difficulties caused our lender to reduce our borrowing base, thereby requiring significant monthly principal repayments and also to place additional conditions on our ability to borrow additional amounts. We also ceased to be in compliance with certain covenants contained in our credit agreement and thus required waivers from our lender to protect against the risk that the lender would seek to enforce its rights and liens in response to the resulting defaults. Our efforts to obtain such waivers are summarized below:

        Commencing in July 2008, we began drawing on availability under our credit facility, borrowing an aggregate of $12.5 million by October 2008.

        On August 4, 2008, Pinnacle and its lender entered into the Second Amendment to Credit Agreement which relaxed certain covenants for the quarter ended September 30, 2008 and thereafter, including an increase to 3.0x of the Total Senior Debt to Annualized EBITDA covenant, and increased our borrowing base interest by 25 basis points.

        On September 30, 2008, Pinnacle and its lender entered into the Third Amendment to Credit Agreement which waived the non compliance of certain covenants for the quarter ended September 30, 2008, including the current ratio covenant, and increased our borrowing base interest by 50 basis points.

        On November 12, 2008, our lender lowered our borrowing base from $16.5 million to $14.5 million, effective October 2008. The lender also required us to reduce our borrowing base to $10.5 million by April 2009 through monthly principal reductions of $670,000.

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        On April 14, 2009, Pinnacle and its lender entered into the Fourth Amendment to Credit Agreement to waive the non compliance with certain covenants for quarters ended December 31, 2008 and March 31, 2009 (including the current ratio covenant), limit as of September 30, 2009 vendor payables greater than ninety days past due to less than $6.0 million and to limit liens to less than $2.5 million, as our actual vendor trade payables greater than 90 days past due exceeded $5.0 million and vendor liens exceeded $1.5 million. The amendment also consented to the sale of our high-pressure gas gathering assets, provided we use a portion of the proceeds to reduce the amount borrowed under the credit facility. This amendment set our borrowing base at $9.0 million, reducing to $6.5 million by October 1, 2009, our next borrowing base redetermination. The $500,000 required monthly principal reductions to comply with the reduced borrowing base put further pressure on our resources and severely limited cash flow to support operations and development.

        On August 19, 2009, Pinnacle and its lender entered into a Waiver and Agreement to waive the noncompliance of certain covenants under our credit facility through August 26, 2009, including the current ratio covenant for the quarter ended June 30, 2009.

        On August 26, 2009, Pinnacle and its lender entered into the Fifth Amendment to Credit Agreement providing for the waiver of the noncompliance of certain covenants for the quarter ended June 30, 2009 (including the current ratio covenant), amend the consent provisions by the lender for divestiture of properties and equity transactions and to impose a $150,000 fee if we did not have a commitment for additional equity financing by October 26, 2009. The lender required this commitment of equity financing to provide for payment of the monthly amortization.

        On October 8, 2009, our lender advised us of its redetermination of borrowing base effective October 20, 2009, reducing our borrowing base from $6.5 million to $6.3 million. In addition, we were advised by our lender that the day-to-day management of our credit facility would now be handled by representatives of the lender's workout group.

        On October 20, 2009, Pinnacle and its lender entered into the Sixth Amendment to Credit Agreement which revised the borrowing base under the credit facility to $6.3 million effective December 1, 2009, along with ongoing monthly principal reductions of $200,000 until another borrowing base redetermination.

        On October 26, 2009, Pinnacle and its lender entered into a Waiver and Agreement waiving our obligation to comply with certain provisions of the credit facility through November 16, 2009, including the waiver of the current ratio covenant for the quarter ended June 30, 2009, and modifying certain references in the Fifth Amendment to the Credit Agreement.

        On November 16, 2009, Pinnacle and its lender entered into a Waiver and Agreement waiving our obligation to comply with certain provisions of the credit facility through November 23, 2009, including the waiver of the current ratio covenant for the quarter ended June 30, 2009, and modifying declined consent without certain references in the Fifth Amendment to Credit Agreement and the October 26, 2009 Waiver and Agreement.

        On November 23, 2009, Pinnacle and its lender entered into a Waiver and Agreement waiving our obligation to comply with certain provisions of the credit facility through December 1, 2009, including the waiver of the current ratio covenant for the quarters ended June 30, 2009 and September 30, 2009, and modifying certain references in the Fifth Amendment to the Credit Agreement and the October 26, 2009 and November 16, 2009 Waiver and Agreement. The lender indicated that Pinnacle must make "significant progress" with respect to a transaction with Scotia by December 1, 2009 in order for the lender to consider extending the waivers further.

        On November 30, 2009, the Special Committee participated in a telephonic meeting with representatives of the lender under the credit facility to review the status of the negotiations with Scotia and to discuss a further extension of the existing waiver. The lender's representatives verbally

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indicated they could agree to an extension of our bank covenant waivers through January 4, 2010. The lender's representatives also informed the Special Committee that they would hire a financial advisor, at our expense, to review the Scotia proposal and to evaluate the probability of the transaction being completed.

        On December 1, 2009, Pinnacle and its lender entered into a Waiver and Agreement waiving our obligation to comply with certain provisions of the credit facility through January 5, 2010, including the waiver of the current ratio covenant for the quarters ended June 30, 2009 and September 30, 2009, and modifying certain references in the Fifth Amendment and the October 26, 2009, November 16, 2009 and November 23, 2009 Waiver and Agreement.

        On December 4, 2009, the Special Committee convened to discuss the lender's reticence to extend additional waivers of the credit agreement and grant time for a potential merger to take place, based upon the lender's stated disbelief of the validity of the Scotia proposal. The Special Committee discussed prior and new proposals, and alternative courses of action in light of the lender's stated position.

        On December 14, 2009, our lender retained a financial advisor (at our cost) to do an on site visit for valuation of assets to get comfort with further extension of the waivers and amended terms in our credit agreement, taking into account our current credit facility balance of $6.3 million, along with a working capital deficiency of approximately $15.0 million.

        On December 22, 2009 we were informed by our lender that they had received an unsolicited offer to purchase our credit facility with an anticipated closing date of year end of 2009. Our lender requested our consent to the sale as required under the terms of credit facility. Pinnacle declined to consent without additional information on the potential purchaser and its financial capabilities.

        On December 23, 2009, a meeting of the Board members was held to determine our rights under the credit facility, possible alternatives if the facility was sold and our response to our lender. A letter was sent to the lender to address our concerns in light of the potential Scotia transaction and further extensions needed to accomplish this transaction.

        On January 5, 2010, Pinnacle and its lender entered into a Waiver and Agreement waiving our obligation to comply with certain provisions of the credit facility through January 12, 2010, including the waiver of the current ratio covenant for the quarters ended June 30, 2009, September 30, 2009 and December 31, 2009, and modifying certain references in the Fifth Amendment, and the October 26, 2009, November 16, 2009, November 23, 2009 and December 1, 2009 Waiver and Agreement.

        Effective January 13, 2010, Pinnacle and its lender entered into the Seventh Amendment and Waiver to the credit agreement which: (i) extended the waiver period under the prior waiver and agreements to June 15, 2010; and (ii) defined the "Final Maturity Date" in the Credit Agreement to mean the earlier of (A) June 15, 2010; or (B) the date that is thirty (30) days following the date which is the earliest of: (x) unless the Merger shall have commenced on or before February 15, 2010, (y) the date when the Merger is withdrawn or terminated in whole or in part or (z) the date the lender have been advised that the Scotia transaction will not proceed. The amendment also provided for a continued reduction in the borrowing base by making principal payments of $200,000 per month through maturity.

        On February 12, 2010, the Special Committee initiated discussions with the lender to extend the Final Maturity Date beyond February 15, 2010 with respect to commencement of the Merger.

        On February 15, 2010, Scotia provided the lender with a letter confirming that Scotia had completed its initial due diligence on Pinnacle and providing a qualified funding commitment, subject to the execution of certain transaction documents and confirmation of Scotia investment committee approval which was anticipated on or prior to February 23, 2010.

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        On February 17, 2010, the lender agreed to extend the first trigger for final maturity from February 15, 2010 to February 23, 2010.

        As of June 15, 2010, the Merger was not completed. The waiver of certain conditions and covenants of the credit agreement expired on June 15, 2010; however, our lender has not accelerated the payment of amounts due. Pinnacle will endeavor to seek additional waivers from its lender to allow completion of the Merger. If no waivers are obtained, all amounts owing will be due and payable July 15, 2010. As a result of the breach caused by expiration of the waiver, Pinnacle has also breached its representation and warranty set forth in Section 3.30 of the Merger Agreement. As a result, Powder has the right to terminate the Merger Agreement pursuant to Section 7.1(c)(ii) and upon such termination, Powder would be entitled to a termination fee of $500,000 plus up to $600,000 in reimbursement of expenses. Powder has indicated that is is unwilling to waive its rights to terminate pursuant to this provision.

Terminated Transaction with Quest Resource Corporation

        On October 15, 2007, we entered into an agreement and plan of merger with Quest Resource Corporation ("Quest") pursuant to which Quest would have acquired all of our issued and outstanding Common Stock in exchange for 19.1 million shares of Quest common stock, having an aggregate valuation at that time of approximately $207.0 million. The merger agreement was amended on February 6, 2008 to, among other items, reduce the number of shares of Quest common stock to be issued to 15.5 million shares, having an aggregate market value at that time of approximately $127.4 million. Quest terminated the Merger Agreement on May 16, 2008. On August 23, 2008, Quest announced the resignation of its chairman, president and chief executive officer. The resignation followed the discovery, in connection with an inquiry from the Oklahoma Department of Securities, of questionable transfers of company funds to an entity controlled by the chairman, president and chief executive officer.

Purpose of the Merger

        For Pinnacle, the purpose of the Merger is to enable our unaffiliated stockholders to immediately realize the value of their investment in our Common Stock through their receipt of the Merger Consideration of $0.34 in cash, without interest, representing a premium of approximately 28% over the market price of our Common Stock on the date immediately preceding announcement of the Merger. The Merger Consideration represents a greater amount for our stockholders than they could be expected to realize from a bankruptcy filing, which was the most likely alternative to the Merger available to us.

        For DLJ, it has understood that Pinnacle has been operating under severe liquidity constraints, and that without a strategic transaction that offers some prospects for Pinnacle to refinance its debt and trade payables, a bankruptcy filing for Pinnacle may become necessary. Pinnacle management informed DLJ from time to time of its efforts to obtain alternative financing, sell assets and pursue other merger and sale transactions, and DLJ delivered a preliminary term sheet to Pinnacle on November 20, 2009 for a $2 million senior secured mezzanine loan facility. However, DLJ's term sheet was declined by the Board as insufficient to address Pinnacle's ongoing liquidity issues because it did not provide enough funds to satisfy obligations to Pinnacle's secured creditor and vendors, nor would it provide sufficient operating capital. During the negotiation of the terms of the Merger and related transactions, DLJ was informed that Scotia would require DLJ to "roll over" its investment by contributing all of its shares of Common Stock to Powder. Because DLJ preferred to receive the same cash consideration per share of Common Stock that the other Pinnacle shareholders would receive, DLJ contacted Scotia to request the same treatment. However, Scotia advised DLJ that it would be unwilling to proceed on this basis. Accordingly, DLJ has agreed, pursuant to the Contribution Agreement, to contribute its shares of Common Stock to Powder in exchange for ownership interests in Powder, after which Powder is

36

expected to be primarily owned by Scotia and DLJ. Pinnacle's Chief Executive Officer and Chief Financial Officer are anticipated to retain their executive positions with Pinnacle and will be issued profits interests with limited voting rights in Powder. The purpose for DLJ to engage in the transactions relating to the Merger, therefore, is to retain an indirect equity interest in Pinnacle as required by Scotia.

Recommendation of the Special Committee and Pinnacle's Board of Directors

        Based on the factors discussed below under "—Fairness of the Merger; Reasons for Recommendation of the Special Committee and our Board of Directors," both the Special Committee and our Board of Directors determined that the Merger and the Merger Agreement are fair to and in the best interest of Pinnacle and our unaffiliated stockholders.

        The Special Committee unanimously recommended that our Board of Directors:

•

approve the Merger and Merger Agreement; and

•

recommend that our stockholders vote for the adoption of the Merger Agreement.

        After considering the recommendation of the Special Committee, our Board of Directors unanimously approved the Merger Agreement, declared the Merger Agreement was fair, advisable and in the best interests of Pinnacle and its unaffiliated stockholders and resolved to recommend to Pinnacle's stockholders that they adopt the Merger Agreement.

        The Merger Agreement, including Merger and other transactions contemplated by the Merger Agreement, was unanimously approved by our full Board of Directors at a meeting called for that purpose. As a result, the Merger and Merger Agreement were unanimously approved by the independent directors of Pinnacle, which excludes Mr. Peter G. Schoonmaker, our chief executive officer and Susan C. Schnabel, who serves on our Board of Directors as the designee of DLJ.

Our Board of Directors unanimously recommends that you vote "FOR" the adoption of the
Merger Agreement, as it may be amended from time to time.

Fairness of the Merger; Reasons for the Recommendation of the Special Committee and our Board of Directors

        The Special Committee and our Board of Directors consulted with financial and legal advisors, reviewed a significant amount of information and considered the following material factors in support of their determinations regarding the fairness of the Merger Agreement to our unaffiliated stockholders and the decision of the Special Committee to recommend that our Board of Directors approve the Merger Agreement, and the Board of Directors' decision to approve the Merger Agreement and to recommend that our stockholders vote to adopt the Merger Agreement. These factors are not listed in order of importance:

•

the belief of our Board that we would be unable to continue operations as an independent, stand-alone company because of our lack of liquidity and our inability to obtain additional financing from other sources. We have experienced sustained decreases in cash flow during the past five quarters due in part to the volatility of natural gas prices and declining gas production volumes. Such volatility has also resulted in significant reductions in our borrowing base under our current credit facility and our current lender has indicated it is not willing to provide any further extensions of credit or waivers of defaults which would allow our lender to exercise certain remedies. As a result, in the absence of a transaction, such as the Merger, we would likely have to seek protection under the federal bankruptcy laws;

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•

management reported that our independent auditors were most likely going to issue their audit report on our 2009 financial statements with a going concern modification, which would constitute an additional covenant default under our credit facility. The going concern modification was expected to provide that the financial covenant defaults under our credit facility and other debt agreements raised substantial doubt about our ability to continue as a going concern;

•

the fact that Pinnacle had explored a significant number of strategic and financial alternatives over an extended period of time and the thoroughness of the process for exploring and reviewing these alternatives, including consideration of alternative transactions with other third parties;

•

the current and historical prices of our Common Stock and the fact that the Merger Consideration of $0.34 in cash per share of our Common Stock represented a premium of approximately 28% over the market price of our Common Stock on February 23, 2010, the date immediately prior to the announcement of the Merger Agreement;

•

the financial analysis and opinion of FBR dated February 23, 2010 delivered to the Special Committee as to the fairness, from a financial point of view as of the date of the opinion, of the $0.34 per share cash Merger Consideration to be received by holders of our Common Stock pursuant to the Merger. The Special Committee and Board of Directors have specifically adopted the analysis of FBR set forth in its opinion. See Exhibit C to this proxy statement and "—Opinion of the Financial Advisor to the Special Committee" for more information on the analyses and opinion, including the assumptions made, matters considered and limits of review;

•

the fact that Pinnacle's operations have been constrained by a severe lack of liquidity, which has been exacerbated by the significant amortization payments required from our lender;

•

the substantial increase in the amount of our trade payables outstanding for over 90 days and vendor liens, and the resulting pressure from trade vendors, including the risk that key vendors would cease providing services to us or seek to enforce the vendor liens, any of which would significantly impair our operations;

•

the continuing weakness in natural gas prices and market conditions which limited our ability to generate positive cash flow from operations;

•

the risk that we may not be able to comply with the conditions and covenants set forth in the seventh amendment to our credit facility. If we are unable to comply with the terms of the seventh amendment or if our lender is unwilling to grant further modifications or extensions, we would be subject to the exercise of remedies by the lender. The exercise of such remedies would likely result in us seeking protection under federal bankruptcy laws;

•

the risk that we may not be able to comply with the listing standards of The NASDAQ Global Market ("NASDAQ") due to the fact that the price of our Common Stock has fallen below the minimum bid price of $1.00 per share for a period greater than 30 consecutive trading days. On April 29, 2010 a hearing before the NASDAQ was held at which we presented a compliance plan to regain compliance with the minimum bid price requirement. On May 10, 2010, the NASDAQ Hearings Panel issued its determination, granting our request for continued listing subject to the following agreed upon conditions: (i) filing a preliminary proxy for an annual meeting including a proposal for a reverse split on or before the earlier of (a) the termination of the Scotia transaction, or (b) July 1, 2010; and (ii) on or before September 13, 2010, evidencing a closing bid price of $1.00 or more for ten consecutive trading days;

•

the efforts made by our senior management and its advisors to obtain greater value than the $0.34 per share Merger Consideration provided for in the Merger, and the recognition that the

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$0.34 per share in value for stockholders was likely a greater amount for the stockholders than they could be expected to realize from a bankruptcy filing, which was the most likely alternative available to us;

•

subject to certain conditions, including the payment of a termination fee under certain circumstances, the terms of the Merger Agreement allow our Board to exercise its fiduciary duties to consider potential alternative transactions and to withdraw its recommendation to our stockholders to adopt the Merger Agreement and to terminate the Merger Agreement to accept a superior proposal;

•

the proposed Merger is for all cash, which provides a specific value to our stockholders compared to a transaction pursuant to which stockholders receive stock or other non-cash consideration that could fluctuate in value, or the alternative of trying to continue to operate as a stand-alone company, which might result in a bankruptcy filing and likely destruction of value for our stockholders; and

•

under Delaware law, stockholders who do not vote in favor of the Merger and satisfy certain conditions have the right to demand appraisal of their shares, which rights are described below under "Rights of Dissent and Appraisal" and Exhibit D.

        The Special Committee and our Board also considered a number of countervailing risks and factors concerning the proposed Merger. These countervailing risks and factors included the following:

•

the fact that we will no longer exist as an independent company and our unaffiliated stockholders will be unable to participate in any future earnings, if any, or receive any benefit from any future increase in value of Pinnacle;

•

the fact that an all cash transaction would be taxable to stockholders of Pinnacle for U.S. federal income tax purposes;

•

the low price per share of Common Stock reflected by the Merger Consideration compared to the historical prices of our Common Stock;

•

the risks and costs to Pinnacle if the Merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential effect on business and customer relationships.

•

the risk that Scotia may not be able to obtain sufficient financing to make the necessary cash contribution to Powder to consummate the Merger;

•

the lack of recourse against Powder if it should breach its obligations under the Merger.

•

the fact that our officers and employees will have to focus extensively on actions required to complete the Merger, as well as the substantial transaction costs that we will incur for the Merger, even if it is not consummated;

•

the fact that, pursuant to the Merger Agreement, we must generally conduct our business in the ordinary course and are subject to certain restrictions on the conduct of our business prior to the closing of the Merger or termination of the Merger Agreement, which may delay or prevent us from pursuing business opportunities that may arise or preclude actions that would be advisable if we were to remain an independent company;

•

the restrictions on Pinnacle's ability to solicit or engage in discussions or negotiations with a third party regarding specific transactions involving Pinnacle, and the up to $1,000,000 termination fee and up to $600,000 in expenses payable to Powder upon the occurrence of certain events, and the possible deterrent effect that paying such fee might have on the desire of

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other potential acquirors to propose an alternative transaction that may be more advantageous to our stockholders; and

•

the potential effects of our limitations on soliciting alternative proposals for the acquisition of Pinnacle or our assets, including prohibitions on soliciting alternative transactions and a requirement to hold a stockholder meeting on the Merger whether or not the Board continues to believe at the time of the stockholder meeting that the Merger is fair to, and in the best interests of, Pinnacle's stockholders.

        In addition, the Special Committee and the Board believed that sufficient procedural safeguards were and are present to ensure the fairness of the Merger to our unaffiliated stockholders and to permit the Special Committee to represent effectively the interests of our unaffiliated stockholders. These procedural safeguards include the following, which are not listed in any relative order of importance:

•

the fact that the Special Committee is comprised of three directors who are not affiliated with Powder or DLJ and who are not employees of Pinnacle or any of its subsidiaries and the fact that the Special Committee represented solely the interests of our unaffiliated stockholders and negotiated with Powder on behalf of such stockholders;

•

the fact that no member of the Special Committee has an interest in the proposed Merger different from that of our unaffiliated stockholders, other than unvested restricted stock held by members of the Special Committee that will become vested in connection with the Merger and the customary indemnification and director and officer liability insurance coverage to which the members of the Special Committee will be entitled under the terms of the Merger Agreement;

•

the process undertaken by the Special Committee and our advisors in connection with evaluating third party interest in acquiring Pinnacle, as described above in "—Background of the Merger," including the fact that the Special Committee was free to explore a transaction with any other bidder, until the execution of the Merger Agreement on February 23, 2010;

•

the fact that the Special Committee consulted with FBR, with respect to financial issues and received legal advice from independent legal counsel, each of which has extensive experience in transactions similar to the proposed Merger;

•

the fact that the Special Committee, with the assistance of its independent legal and financial advisors, conducted extensive negotiations with Powder over several months and had the authority to reject the terms of the Merger Agreement;

•

the fact that the terms and conditions of the Merger Agreement enable the Special Committee to consider and recommend a superior proposal and terminate the Merger Agreement upon the payment of a $1.0 million termination fee and expenses of Powder;

•

the fact that the Merger requires the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the issued and outstanding shares of Pinnacle common stock entitled to vote at a meeting of stockholders and a majority of the outstanding shares of Pinnacle common stock held by persons other that DLJ, Pinnacle's chief executive officer and Pinnacle's chief financial officer; and

•

the availability of appraisal rights to the holders of our Common Stock who comply with all of the required procedures under Delaware law.

        The board considered the net book value of Pinnacle, but determined that book value is an inappropriate measure for valuing Pinnacle, because it is unable to sell its assets for book value as a result of depressed prices in the coal bed methane industry. Pinnacle further considered the going concern value, but determined that it is an inappropriate measure of Pinnacle's value due to Pinnacle's

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current capital and liquidity needs because it will be unable to continue as a going concern without an immediate capital infusion. Likewise, in considering the liquidation value, the board determined that in the event Pinnacle does not receive an immediate infusion of capital, it will liquidate through bankruptcy and it is unlikely that its shareholders will receive any value. Pinnacle currently has certain net operating loss carryforwards; however, since the availability of such carryforwards will likely be significantly restricted pursuant to Internal Revenue Code Section 382, this was not a significant factor in the board's consideration of the Merger and Merger structure.

        The discussion of the information, risks and factors that the Special Committee and our Board considered in arriving at its decision to approve the Merger Agreement and recommend that our stockholders vote to adopt the Merger Agreement is not intended to be exhaustive, but includes all material factors considered by the Special Committee and Board. In view of the wide variety of factors and risks considered in connection with its evaluation of the Merger, neither the Special Committee nor the Board believed it necessary to, and did not attempt to, rank or quantify the risks and factors although individual members of the Special Committee and Board may have assigned different weights to the factors and risks in their individual assessments of the Merger. The overall analysis of the factors described above included multiple discussions with and questioning of our Special Committee, management, financial advisors and legal counsel. Our Board carefully considered the risks and uncertainties associated with our remaining an independent publicly-traded company. Many of those risks and uncertainties are described in our Annual Report on Form 10-K, any updates to those risks and uncertainties set forth in our subsequent Quarterly Reports on Form 10-Q and the factors described below under "—Effects on Pinnacle if the Merger is Not Completed."

Position of DLJ as to the Fairness of the Merger

        Under applicable SEC rules, DLJ is engaged in a "going private" transaction and therefore is required to express its belief as to the fairness of the Merger to Pinnacle's unaffiliated stockholders. DLJ is making the statements included in this section solely for the purposes of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act. DLJ's view as to the fairness of the proposed Merger should not be construed as a recommendation to any stockholder of Pinnacle as to how such stockholder should vote on the proposal to adopt the Merger Agreement.

        DLJ believes that the Merger is both substantively and procedurally fair to Pinnacle's unaffiliated stockholders. However, DLJ has not undertaken any formal evaluation of the fairness of the Merger to Pinnacle's unaffiliated stockholders or engaged a financial advisor for such purpose. DLJ did not consider Pinnacle's historic market prices, net book value, going concern value or liquidation value in determining the fairness of the transaction to Pinnacle's unaffiliated stockholders. DLJ did not consider historic market prices because DLJ believes that these prices are not indicative of the current value of the Common Stock due to adverse developments to Pinnacle's business as a result of the depressed prices in the coal bed methane industry and the downturn in the overall economy. DLJ did not consider net book value because DLJ considers book value to be an accounting concept that is indicative of historical costs expended by Pinnacle but not a material indicator of the value of the Common Stock. DLJ did not consider going concern value due to Pinnacle's current capital and liquidity needs, as DLJ expects that Pinnacle will be unable to continue as a going concern without an immediate capital infusion. Likewise, if Pinnacle does not receive an immediate infusion of capital, DLJ believes that Pinnacle may be required to liquidate and/or file bankruptcy, in which case it is unlikely that its shareholders will receive any value.

        Moreover, DLJ did not participate in the deliberations of the Special Committee or receive advice from Pinnacle's legal or financial advisors in connection with the Merger and was not involved in any negotiations regarding the per share Merger Consideration. DLJ has not been given access to any of the analyses undertaken by Powder, the Special Committee or the Pinnacle Board of Directors in valuing Pinnacle. Ms. Schnabel currently serves as DLJ's designee to Pinnacle's Board of Directors.

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Ms. Schnabel, in her capacity as a member of Pinnacle's Board of Directors, participated in the deliberations of the Board of Directors in approving the Merger Agreement and the Merger, although she was not a member of, and did not participate in the deliberations of, the Special Committee. Following the unanimous approval of the Merger Agreement by all of Pinnacle's independent directors, the Merger Agreement was unanimously approved by Pinnacle's full Board of Directors.

        The belief of DLJ that the Merger is substantively and procedurally fair to the unaffiliated stockholders of Pinnacle is based on the following factors, among others:

•

the fact that the $0.34 per share Merger consideration and other terms and conditions of the Merger Agreement resulted from extensive negotiations between the Special Committee and its advisors, on the one hand, and Powder and its advisors, on the other hand, and represents a premium of 28% over the market price of our Common Stock on the date immediately preceding announcement of the Merger, and was not reduced as a result of the deterioration of Pinnacle's financial condition during the negotiation of the Merger Agreement;

•

the fact that the Special Committee unanimously determined that the Merger is fair to and in the best interest of Pinnacle and its stockholders;

•

the fact that the Merger Agreement, including the Merger and other transactions contemplated by the Merger Agreement, was unanimously approved by Pinnacle's full Board of Directors, including each of Pinnacle's independent directors, present at the meeting called for that purpose;

•

the fact that neither the Special Committee nor Pinnacle's Board of Directors had any obligation to recommend approval of the Merger or adoption of the Merger Agreement or any other transaction;

•

the fact that the Merger requires the adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of the issued and outstanding shares of Common Stock entitled to vote at a meeting of stockholders and a majority of the outstanding shares of Common Stock held by persons other that DLJ, Pinnacle's chief executive officer and Pinnacle's chief financial officer;

•

the fact that, although DLJ is not entitled to rely on it, Pinnacle's Special Committee received an opinion from FBR as to the fairness, from a financial point of view, as of the date of the Merger Agreement, of the Merger Consideration to be received by Pinnacle's stockholders;

•

the fact that the Special Committee consulted with its own independent legal and financial advisors, who are experienced in transactions similar to the proposed Merger;

•

the fact that the Merger will provide consideration to the unaffiliated stockholders of Pinnacle entirely in cash, which provides certainty of value;

•

the fact that the Merger will provide liquidity, without the brokerage and other costs typically associated with market sales, for Pinnacle's public stockholders, whose ability, absent the Merger, to sell their shares of Common Stock is adversely affected by the low trading volume of the shares;

•

the fact that because DLJ has agreed to contribute its shares of Common Stock to Powder in exchange for equity interests in Powder, subject to the satisfaction of certain conditions, immediately prior to the effective time of the Merger, Powder was able to pay a higher price per share to Pinnacle's unaffiliated stockholders under the Merger Agreement or to satisfy Pinnacle's debt or trade payable as necessary to allow Pinnacle to continue to conduct its business;

•

the fact that any Pinnacle stockholders who do not vote in favor of the Merger will have the opportunity to seek appraisal of the fair value of their shares under Delaware law;

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•

DLJ's understanding that the Special Committee believes that Pinnacle's efforts to market itself to potentially interested parties constituted a thorough, fair and full process to ensure that the $0.34 per share consideration was the highest offer that could be obtained for Pinnacle;

•

the fact that the Pinnacle director designated by DLJ did not participate in the Special Committee's deliberative process or conclusions; and

•

the fact that Pinnacle may terminate the Merger Agreement prior to the adoption of the Merger Agreement by Pinnacle's stockholders in order to accept a superior third party proposal, subject to certain conditions, including payment of a termination fee.

        DLJ considered each of the foregoing factors in determining the fairness of the Merger to Pinnacle's unaffiliated stockholders. In light of the factors described above, the fact that the use of a Special Committee of independent directors is a mechanism well recognized to ensure fairness in transactions of this type, and the requirement that a majority of the shares of Common Stock held by persons other than DLJ, Pinnacle's chief executive officer and Pinnacle's chief financial officer is required to approve the adoption of the Merger Agreement. DLJ believes that the Merger is procedurally fair to Pinnacle's unaffiliated stockholders despite the fact that Ms. Schnabel, in her capacity as a member of Pinnacle's Board of Directors, participated in the deliberations of the Board of Directors in approving the Merger Agreement and the Merger. In this regard, DLJ notes that all of the members of the Board of Directors voted on the transaction based on the unanimous recommendation of the Special Committee approved the Merger Agreement.

        In making its determination as to the fairness of the proposed Merger to Pinnacle's unaffiliated stockholders, other than the terminated transaction with Quest Resource Corporation, DLJ was not aware of any firm offers during the prior two years by any person for the merger or consolidation of Pinnacle with another company, the sale or transfer of all or substantially all of Pinnacle's assets or a purchase of Pinnacle's common stock that would enable the purchaser to exercise control of Pinnacle.

        DLJ's view as to the fairness of the Merger to Pinnacle's unaffiliated stockholders is not a recommendation as to how any such stockholder should vote on the Merger. The foregoing discussion of the information and factors considered by DLJ, while not exhaustive, includes all material factors considered by DLJ. DLJ did not find it practicable to assign, nor did it assign, relative weights to the individual factors considered in reaching its conclusion as to the fairness of the Merger to Pinnacle's unaffiliated stockholders. Rather, the fairness determinations were made after consideration of the totality of the information presented to it.

Opinion of Financial Advisor to the Special Committee

        On February 22, 2010, FBR rendered its oral opinion (which was subsequently confirmed in writing by delivery of FBR's written opinion) to the Special Committee, to the effect that, as of February 23, 2010, the Merger Consideration to be received by the holders of Common Stock in the Merger pursuant to the Merger Agreement was fair to such holders from a financial point of view.

FBR's opinion was for the information of the Special Committee in connection with its consideration of the Merger. FBR's opinion does not constitute a recommendation to the Special Committee, the Board or any other person with respect to the Merger. FBR's opinion does not constitute advice or a recommendation to any investor or security holder of Pinnacle or any other person as to how such security holder should vote or act on any matter relating to the Merger or otherwise. FBR's opinion was only one of many factors considered by the Special Committee in its evaluation of the Merger and should not be viewed as determinative of the views of the Special Committee, the Board or management of Pinnacle with respect to the Merger or the Merger Consideration. The terms of the Merger, including the Merger Consideration, were determined through negotiations between Pinnacle and Powder and were not determined or recommended by FBR. FBR's

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opinion did not address the merits of the underlying decision of Pinnacle to engage in the Merger. Additionally, FBR expressed no opinion as to the prices at which the shares of Common Stock will trade following the announcement of the Merger. FBR's opinion only addressed the fairness, from a financial point of view, to the holders of Common Stock of the Merger Consideration to be received by such holders in the Merger and did not address any other aspect or implication of the Merger or any agreement, arrangement or understanding entered into in connection with the Merger or otherwise. The summary of FBR's opinion in this proxy statement is qualified in its entirety by reference to the full text of its written opinion, which is included as Exhibit C to this proxy statement, and which sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by FBR in preparing its opinion.

        In arriving at its opinion, FBR, among other things:

•

reviewed a draft, dated February 23, 2010, of the Merger Agreement;

•

reviewed certain publicly available business and financial information relating to Pinnacle, including Pinnacle's Annual Reports on Form 10-K for each of the years in the two year period ended December 31, 2008 and Pinnacle's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009;

•

reviewed certain financial statements of Pinnacle and other business, financial and operating information relating to Pinnacle provided to FBR by management of Pinnacle, including draft financial information for the quarter ended December 31, 2009;

•

reviewed certain economic, reserve and production reports provided to FBR by NSAI, Pinnacle's third party reservoir engineering consultants, including a draft reserve report for the year ended 2009 (see Exhibit G);

•

reviewed certain publicly available business and financial information relating to the industry in which Pinnacle operates;

•

reviewed the stock price and trading history of the Common Stock;

•

discussed the business and prospects of Pinnacle with certain members of Pinnacle's management;

•

reviewed certain business, financial and other information relating to Pinnacle, including financial and engineering forecasts, estimates and projections for Pinnacle provided to or discussed with FBR by the management of Pinnacle (Exhibit G),⁽¹⁾ which we refer to as the "management case," and NSAI;

(1)

The amount per mcf shown in the management projections is based on the NSAI reserve report, and takes the Nymex strip on February 2, 2010 less the price differential in place between the Nymex strip on February 2, 2010 and the Colorado Interstate Gas (CIG) Rocky Mountain Index price. After deducting the price differential from the Nymex strip on February 2, 2010, the price is adjusted for the BTU content of the gas, the fuel, loss and unaccounted for gas prior to the sale of the gas, the compression, gathering, and transportation fees charged by third-party service providers, and the premium paid above the CIG Rocky Mountain gas price by third-party gas purchasers.

•

reviewed certain financial and stock trading data and information for Pinnacle and compared that data and information with corresponding data and information, including estimates, for companies with publicly traded securities that FBR deemed relevant;

•

reviewed certain financial terms of the proposed Merger and compared those terms with the financial terms of certain other business combinations and other transactions which have recently been effected or announced;

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•

performed a discounted cash flow analysis, which relied on the management case and reserve and production reports provided to FBR by NSAI;

•

performed a net asset value analysis, based upon reserve report forecasts provided by NSAI; and

•

considered such other information, financial studies, analyses and investigations and financial, economic and market criteria that FBR deemed relevant.

        In connection with its review, FBR did not independently verify any of the engineering, financial, accounting, legal, tax and other information FBR reviewed and FBR assumed and relied upon such information being complete and accurate in all material respects. With respect to the financial and engineering forecasts, estimates and projections provided to or discussed with FBR by Pinnacle and Pinnacle's independent reservoir engineers that FBR used in its analyses, management of Pinnacle and Pinnacle's independent reservoir engineers advised FBR, and FBR assumed, that such forecasts, estimates and projections were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of the management of Pinnacle and Pinnacle's independent reservoir engineers (or, with respect to the forecasts, estimates and projections obtained from public sources, represent reasonable estimates) as to the future financial performance of Pinnacle and FBR expressed no view and assumed no responsibility for the assumptions, estimates and judgments on which such forecasts, estimates and projections were based. Further, without limiting the foregoing, FBR assumed, with the Special Committee's consent and without independent verification, that the historical and projected financial information provided to FBR by Pinnacle accurately reflected the historical and projected operations of Pinnacle, and that there had been no material change in the assets, financial condition, business or prospects of Pinnacle since the respective dates of the most recent financial statements made available to FBR. FBR also assumed that the Merger Agreement, when executed by the parties thereto, conformed to the draft reviewed by FBR in all respects material to its analyses. In addition, the Special Committee advised FBR, and for purposes of FBR's analyses and its opinion, FBR assumed, that (i) Pinnacle was in violation of the current ratio covenant of its revolving credit facility, (ii) Pinnacle was delinquent with respect to amounts owed on accounts payable, revenue distribution payable and ad valorem taxes and (iii) if the Merger was not consummated, Pinnacle's ability to function as a going concern would be severely impaired which might lead to a voluntary or involuntary bankruptcy, restructuring or liquidation of Pinnacle, in which holders of Common Stock would likely receive little or no value. FBR did not evaluate the solvency or fair value of any party to the Merger Agreement under any state or federal laws relating to bankruptcy, insolvency or similar matters and did not express an opinion as to the value of any assets of Pinnacle, whether at current market prices or in the future. As part of FBR's analysis, the firm treated the delinquent amounts owed on accounts payable, revenue distribution payable and ad valorem taxes as funded debt obligations.

        FBR's opinion addressed only the fairness, from a financial point of view, to the holders of Common Stock of the Merger Consideration to be received by such holders in the Merger pursuant to the Merger Agreement and did not address any other aspect or implication of the Merger or any agreement, arrangement or understanding entered into in connection with the Merger or otherwise, including, without limitation, any tax implications of the Merger or the fairness of the amount or nature of, or any other aspect relating to, any compensation to any officers, directors or employees of any party to the Merger, or class of such persons, relative to the consideration to be received in the Merger by the holders of Common Stock or otherwise. The issuance of FBR's opinion was approved by an authorized internal committee of FBR.

        FBR made no independent investigation of any legal matters involving Pinnacle, Merger Sub or Powder, and FBR assumed the correctness of all statements with respect to legal matters made or otherwise provided to Pinnacle and FBR by Pinnacle's counsel.

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        FBR's opinion was necessarily based upon information made available to FBR as of the date of its opinion and financial, economic, market and other conditions as they existed and could be evaluated on the date of the opinion. FBR assumed no responsibility to update or revise its opinion based upon events or circumstances occurring after the date of the opinion. FBR's opinion did not address the relative merits of the Merger as compared to alternative transactions or strategies that might be available to Pinnacle or any other party to the Merger, nor did it address the underlying business decision of the Board, the Special Committee, Pinnacle or any other party to the Merger to proceed with the Merger.

        Furthermore, in connection with its opinion, FBR was not requested to make, and did not make, any physical inspection or independent appraisal or evaluation of any of the assets, properties or liabilities (contingent or otherwise) of Pinnacle or any other party, nor was FBR provided with any such appraisal or evaluation. FBR did not estimate, and expressed no opinion regarding, the liquidation value of any entity.

        The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses are readily susceptible to partial analysis or summary description.

        The following is a summary of the material financial analyses used by FBR in connection with its presentation to the Special Committee, and the preparation of its opinion delivered to the Special Committee. The following summary, however, does not purport to be a complete description of the financial analyses performed by FBR, nor does the order of presentation of the analyses described represent relative importance or weight given to those analyses by FBR. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of FBR's financial analyses. Considering the data set forth in the tables below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses performed by FBR. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before February 23, 2010, and is not necessarily indicative of current market conditions. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Each of the analyses conducted by FBR was carried out in order to provide a different perspective on the Merger and add to the total mix of information supporting the opinion. FBR did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support its opinion. Rather, in reaching its conclusions and delivering its opinion, FBR considered the results of the analyses in light of each other and did not place particular reliance or weight on any individual analysis, but instead concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, FBR believes that its analyses must be considered as a whole and that selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, could create an incomplete or misleading view of the evaluation process underlying its opinion. In performing its analyses, FBR made numerous assumptions with respect to industry performance, business and economic conditions and other matters. The analyses performed by FBR are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses.

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        Key Valuation Assumptions.    In conducting its analyses, FBR utilized the following assumptions based on guidance from Pinnacle management and the NSAI report:

•

Three gas pricing scenarios were selected for the purposes of this presentation (see Exhibit G):

•

Management case with assumed Colorado Interstate Gas ("CIG") prices of $5.41/MMBtu in 2010, $5.93/MMBtu in 2011, $6.03/MMBtu in 2012, $6.12/MMBtu in 2013, and $6.24/ MMBtu in 2014 and thereafter

•

NSAI year-end 2009 reserve report at a CIG price of $5.00/MMBtu held constant ("CIG $5.00 Case")

•

NSAI year-end 2009 reserve report at a CIG price of $4.00/MMBtu held constant ("CIG $4.00 Case")

•

Pinnacle's current hedge position was incorporated into all projections

•

A fundamental assumption was that Pinnacle must address payables and working capital deficiency to maintain going concern value and the ability to deploy capital to maintain and develop its assets; these items were treated as debt for the purposes of the analyses

•

As of December 31, 2009, Pinnacle had $5.4 million of accounts payable greater than 120 days past due, $2.3 million of ad valorem taxes due at year-end 2009 and $1.3 million of revenue distribution payable on or before June 30, 2010

•

Analysis assumed that Pinnacle had $5.9 million outstanding on its revolving credit facility on February 1, 2010 and total debt of $6.7 million (excluding accounts receivable, ad valorem taxes and revenue distribution payable)

•

Discounted Cash Flow and EBITDA projections assumed no additional capital expenditures and the following reserve riskings by category:

•

Proved developed producing ("PDP"): 95%

•

Proved developed non-producing ("PDNP"): 85%

•

No contribution from proved undeveloped ("PUD"), probable ("PROB") or possible ("POSS") reserves

        Selected Publicly Traded Companies Analysis.    FBR analyzed certain publicly traded companies in the oil and natural gas exploration and production industry that were deemed comparable to Pinnacle with respect to asset profiles, geographic dispersion of reserves and firm size (the "Peer Group"). FBR compared Pinnacle's financial performance with the performance of the Peer Group for the latest publicly available data and certain Bloomberg consensus projections. FBR derived base valuation multiples as detailed below by analyzing the specific Peer Group's financial information. FBR used the management case and NSAI estimates for Pinnacle and publicly available analyst estimates for the Peer Group in conducting the analysis. The Peer Group consisted of:

•

Admiral Bay Resources, Inc.

•

Double Eagle Petroleum Co.

•

Ember Resources Inc.

•

Geomet, Inc.

•

Petroleum Development Corporation

        For each of the companies identified above, FBR calculated various valuation multiples, including:

•

the ratio of enterprise value to proved reserves, current daily production and the present value of future cash flows attributable to proved reserves discounted at 10% as calculated in accordance with FASB guidance ("SEC PV-10"); and

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•

the ratio of enterprise value to estimated earnings before interest, taxes, depreciation and amortization ("EBITDA") for the calendar years 2010 (referred to below as "CY 2010P") and 2011 (referred to below as "CY 2011P").

        The following table summarizes the derived relevant ranges of multiples for the companies identified above:

				Multiples
Ratio of Enterprise Value to:	Pinnacle			High		Mean		Median		Low
Year-end 2009 Proved Reserves ($ / Mcfe)		25.0	Bcf	$	1.31	$	0.95	$	0.80	$	0.76
Current Daily Production ($ / Mcfe/d)		7.5	Mmcf/d	$	12,310	$	7,208	$	7,173	$	3,161
Year-End 2009 SEC PV10 ratio	$	17.6	million		1.1x		0.7x		0.6x		0.5x
CY 2010P	$	2.4	million		4.9x		3.8x		4.5x		2.0x
CY 2011P	$	1.3	million		4.1x		4.0x		4.0x		3.9x

        Based upon the peer valuation multiples and various gas price scenarios, FBR then applied these valuation multiples to Pinnacle's year-end 2009 proved reserves, current daily production and year-end 2009 SEC PV-10 ratio and to its estimated EBITDA for CY 2010P and CY 2011P. This analysis indicated an implied per share equity value reference range for Pinnacle between $0.00 and $2.52 as compared to the $0.34 per share cash consideration that would be paid in the proposed Merger.

        No company analyzed in the Peer Group has operations or reserves that are identical to those of Pinnacle. Trading multiples for the Peer Group as a whole were deemed more meaningful than multiples of any particular company. Mathematical analysis, such as determining the mean and median, is not in itself a meaningful method of using comparable company data. A complete analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect the public trading values of the companies to which Pinnacle was compared.

        Precedent Transactions Analysis.    Using publicly available information, including SEC filings and press releases, FBR compared various valuation metrics from recent corporate and asset sale transactions with available reserve and production information that FBR deemed to be relevant (herein referred to in the aggregate as "Precedent Transactions"). FBR selected Precedent Transactions with primary operations in the Rocky Mountains region in which Pinnacle operates that were announced on or after September 2008 (to reflect changes in market conditions following the Lehman Brothers Holdings, Inc. bankruptcy). The comparable corporate transactions that FBR deemed to be relevant were:

Announcement Date	Buyer	Seller	Total Transaction Value ($MM)
12/18/09	J.M Huber	St. Mary Land & Exploration	$	40
11/09/09	Rise Energy Ltd.	Teton Energy	$	19
08/10/09	Williams Companies	Undisclosed	$	258
06/12/09	Bill Barrett Corporation	Undisclosed	$	60
04/02/09	Noble Energy	Teton Energy	$	4
03/03/09	Undisclosed	Berry Petroleum	$	154

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        FBR focused on reserve and production multiples sourced from I.H.S. Herolds.

        The following table summarizes the purchase price multiples paid for the selected Precedent Transactions, including:

•

the ratio of the purchase price to proved reserves; and

•

the ratio of purchase price to current daily production.

				Multiples
Ratio of Purchase Price to:	Pinnacle			High		Mean		Median		Low
Proved Reserves ($ / Mcfe)		25.0	Bcf	$	1.11	$	0.82	$	0.71	$	0.65
Current Daily Production ($ / Mcfe/d)		7.5	Mmcf/d	$	7,778	$	4,014	$	4,000	$	1,326

        Based upon the precedent transaction valuation multiples and various gas price scenarios, FBR then applied these purchase price multiples to Pinnacle's results of operations for the latest available reserve and production data. This analysis indicated an implied per share equity value reference range for Pinnacle between $0.00 and $1.40 as compared to the $0.34 per share cash consideration that would be paid in the proposed Merger.

        Precedent Transactions metrics vary for many reasons, including, but not limited to: (i) differences in pre-transaction operating performance; (ii) other hidden or intangible assets not apparent in historical operating performance; (iii) non-disclosed pro forma adjustments and other deal-specific factors; and (iv) differences in asset and geographical mix. Multiples of the selected Precedent Transactions as a whole were deemed more meaningful than the multiples of any particular transaction. No selected transaction analyzed in the Precedent Transactions analysis was identical to the Merger. Mathematical analysis, such as determining the mean and median, is not by itself a meaningful method of using the Precedent Transactions data. A complete analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies, as well as differences in geographies and development and production costs, involved in the Precedent Transactions and other factors that could affect the valuation multiples in the Precedent Transactions to which the Merger was compared.

        Net Asset Value Analysis.    FBR performed a Net Asset Value analysis, including calculating the present value of the field-level before-tax future cash flows that an operator with access to capital could expect to generate from Pinnacle's existing base of proved, probable, and possible reserves as provided by NSAI. The Net Asset Value analysis is dependent upon a number of factors, including but not limited to (i) the validity of the NSAI engineering and reserve report; (ii) the discount rate/weighting; and (iii) gas price deck assumptions. It is important to consider that Pinnacle is (i) currently in violation of its current ratio covenant on its existing credit facility and (ii) delinquent with respect to amounts owed under accounts payable, revenue distribution payable and ad valorem taxes, which inhibits Pinnacle's ability to develop and explore its reserve base on the scale and time horizon set forth by the reserve reports provided by NSAI.

        Key assumptions used in the Net Asset Value analysis include:

•

Price deck:  CIG $4.00/MMbtu, CIG $5.00/MMbtu and management pricing (NYMEX strip on February 2, 2010) (see Exhibit G);

•

Risk weighting:  85% to 100% for proven developed and producing reserves, 80% to 85% for proven developed non-producing reserves, 60% to 70% for proven undeveloped reserves, 0% to 50% for probable reserves, 0% to 10% for possible reserves;

•

Discount rate:  10% for proved reserves, 15% for probable reserves and 20% for possible reserves (which represent customary industry discount rates that reflect the relative risks associated with achieving drilling success in each reserve category);

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•

All NSAI estimates for capital expenditures are deployed on schedule to develop reserve base;

•

NSAI reserve reports provide production, cost and capex estimates through 2024 with a remainder thereafter; and

•

Mid-period discounting.

Reference Range ($MM)	Net Asset Value
CIG $4.00 Case
Low	$	15.1
High	$	21.4
CIG $5.00 Case
Low	$	22.0
High	$	38.0
Management Case (NYMEX Strip on February 2, 2010)
Low	$	30.9
High	$	62.0

        Based upon the valuation and various gas price scenarios, this analysis indicated an implied per share equity value reference range for Pinnacle between $0.00 and $1.53 as compared to the $0.34 per share cash consideration that would be paid in the proposed Merger.

        The Net Asset Value analysis is dependent upon a number of factors, including but not limited to:

•

The validity of the NSAI report;

•

Reserve category risking;

•

Gas price deck assumptions; and

•

Discount rate/multiple.

        Discounted Cash Flow Analysis    FBR performed a Discounted Cash Flow Analysis that calculated the net present value of Pinnacle's unlevered, after-tax free cash flows to present value based on estimates with respect to the management case and projections provided by NSAI. For the purposes of FBR's analysis, cash flow was defined as EBITDA less capital expenditures less cash income taxes.

        Key assumptions used in the Discounted Cash Flow Analysis include:

•

Price deck:  CIG $4.00/MMbtu, CIG $5.00/MMbtu and management pricing (NYMEX strip on February 2, 2010) (see Exhibit G);

•

Gas Price differential adjustment:  Per management guidance;

•

Lease operating and production taxes:  Per management guidance and independent reservoir engineer estimate;

•

General and administrative expense:  Per management guidance;

•

Capital expenditures:  No additional expenditures for development of reserves;

•

Income taxes:  Pinnacle has significant deferred tax assets and does not anticipate paying cash income taxes during the forecast period;

•

Discount method:  Mid-period discounting applied;

•

Terminal multiple range:  2.0x - 6.0x ; and

•

Terminal year:  2014.

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        The unlevered, after-tax free cash flows were discounted to present value (as of December 31, 2009) using a discount rate range of 15% to 17%, which was chosen based upon the analysis of the weighted average cost of capital of Pinnacle and its publicly traded comparable companies. The unlevered, after-tax free cash flows were then adjusted for outstanding indebtedness, overdue accounts payables, revenue distribution payables and ad valorem taxes based on certain financial data provided by Pinnacle's management (as summarized in Key Valuation Assumptions above) and in public filings.

        Based upon the valuation and various gas price scenarios, this analysis indicated an implied per share equity value reference range for Pinnacle below $0.00 as compared to the $0.34 per share cash consideration that would be paid in the proposed Merger.

        Conclusion.    The $0.34 per share cash consideration to be paid in the proposed Merger falls within the lower end of the implied per share reference ranges for most of the financial analyses described above. FBR's determination of fairness, however, also took into account a series of factors outside of an implied share price that FBR believed were relevant to Pinnacle's financial situation. The most significant of these factors are as follows:

•

Pinnacle's lack of available capital and liquidity to fund development activities;

•

The fact that Pinnacle is in technical default with its lender; and

•

Pinnacle's small market capitalization relative to that of the selected publicly traded peers.

FBR did not attribute any particular weight to its analysis of any of these factors, but rather made qualitative judgments as to their effect on the implied share prices derived from its financial analysis of Pinnacle. FBR believes that the implied share prices from its financial analysis and these outside factors must be considered as a whole in a determination of fairness and that in Pinnacle's case consideration of implied share prices without consideration of these factors would create an incomplete view of the process underlying FBR's opinion. Based upon and subject to the foregoing analysis, FBR's experience as investment bankers, FBR's work as described above and other factors FBR deemed relevant, FBR was of the opinion, as of the date of its opinion, that the merger was fair, from a financial point of view, to Pinnacle's stockholders.

Other Matters

        The Special Committee engaged FBR pursuant to a letter agreement dated as of December 3, 2009 to act as the Special Committee's financial advisor in connection with its review of strategic alternatives, including the potential sale of all or a portion of the assets and/or liabilities or capital stock of Pinnacle, including any liquidation, regardless of how the transaction was structured. These alternative transactions are described herein under the heading Background of the Merger. The Special Committee engaged FBR based on FBR's reputation as a nationally recognized investment banking and advisory firm with substantial experience in transactions similar to the Merger. FBR, as part of its investment banking business, is regularly engaged in the valuation of businesses and securities in connection with mergers, acquisitions, underwritings, sales and distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. FBR has acted as financial advisor to the Special Committee in connection with the Merger and will receive a fee of $350,000 for rendering its opinion, which is not contingent upon the successful consummation of the Merger, but which fee will not be paid until the consummation or termination of the Merger. In addition, Pinnacle has agreed to indemnify FBR and certain related parties for certain liabilities arising out of or related to FBR's engagement and to reimburse FBR for reasonable out-of-pocket expenses incurred in connection with FBR's engagement. On March 22, 2010, FBR and the Special Committee entered into an amendment to the letter agreement, pursuant to which the Special Committee engaged FBR to assist the Special Committee in its analysis of any proposals received subsequent to the execution of the Merger Agreement. Neither Pinnacle nor Powder has retained FBR for any other services relating to the Merger or for after the Merger.

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        FBR and its affiliates have in the past provided and are currently providing investment banking and other financial services to Pinnacle and its affiliates, for which FBR and its affiliates have received and would expect to receive compensation, including having acted as placement agent in a private placement of equity securities of Pinnacle in April 2006 and as lead underwriter in Pinnacle's initial public offering in June 2007. FBR and its affiliates may in the future provide financial advice and services to Pinnacle or Powder and their respective affiliates for which FBR and its affiliates would also expect to receive compensation. FBR is a full service securities firm engaged in securities trading and brokerage activities as well as providing investment banking and other financial services. In the ordinary course of business, FBR and its affiliates may acquire, hold or sell, for FBR's and its affiliates own accounts and the accounts of customers, equity, debt and other securities and financial instruments (including bank loans and other obligations) of Pinnacle and Powder and any other company that may be involved in the Merger, as well as provide investment banking and other financial services to such companies.

Effects of the Merger

        If the Merger is approved by our stockholders and the other conditions to the closing of the Merger are either satisfied or waived, Merger Sub will be merged with and into Pinnacle, and Pinnacle will be the surviving corporation. After the Merger, Pinnacle will be a direct, wholly-owned subsidiary of Powder.

        Upon completion of the Merger, each share of our Common Stock issued and outstanding to our affiliated and unaffiliated shareholders immediately prior to the effective time of the Merger (other than shares owned by Powder, Merger Sub or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the right to receive $0.34 in cash, without interest. Each outstanding and unexercised option to purchase our Common Stock or stock appreciation right will be cancelled in exchange for an amount in cash equal to (A) the difference between $0.34 and the applicable exercise price or base price, as applicable, of such option or stock appreciation right, multiplied by (B) the aggregate number of shares of Common Stock subject to the option or stock appreciation right, as applicable. Additionally, each restricted stock award, whether performance-based, time-based or otherwise, that is outstanding immediately prior to the effective time of the Merger, whether or not then vested, automatically shall be cancelled and converted into the right to receive an amount equal to the product of (X) $0.34 multiplied by (Y) the total number of shares of Common Stock subject to such restricted stock award.

        The primary detriment of the transaction is that, at the effective time of the Merger, our stockholders, both affiliated and non-affiliated (other than Powder, DLJ, our chief executive officer and chief financial officer who will retain indirect interests) will cease to have ownership interests in us or rights as our stockholders. Therefore, you will not participate in any of our future earnings and will not benefit from any appreciation in Pinnacle's value.

        As an affiliate, DLJ's ownership in Pinnacle's net book value will be reduced from 32.5% to 26.5% in the post-transaction entity. Unaffiliated shareholders will have no net book value in the post-transaction entity.

        See "Material United States Federal Income Tax Consequences" below for a description of the tax effects of the merger.

        Our Common Stock is currently registered under the Exchange Act and is quoted on the NASDAQ Global Market under the symbol "PINN." As a result of the Merger, we will be a privately-held corporation, and there will be no public market for our Common Stock. After the Merger, our Common Stock will cease to be listed on the NASDAQ Global Market. In addition, registration of our Common Stock under the Exchange Act will be terminated.

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        If any condition to the Merger is not satisfied or waived or if the Merger Agreement is terminated, the Merger will not be consummated. In that event, you will not receive any cash or other consideration as a result of these transactions. Powder and Pinnacle have certain termination rights. See "The Merger Agreement- Termination of the Merger Agreement."

Effects on Pinnacle if the Merger is Not Completed

        If the Merger is not consummated for any reason, our stockholders will not receive the Merger Consideration, our current management, under the direction of our Board, will continue to manage us as a stand-alone, independent business, and the value of shares of our Common Stock will continue to be subject to the risks and uncertainties identified in our Annual Report on Form 10-K for the year ended December 31, 2009 and any updates to those risks and uncertainties set forth in our subsequent Quarterly Reports on Form 10-Q and this Proxy Statement, including the acceleration of the maturity of our credit facility as described below. The waiver of certain covenants pursuant to the seventh amendment to our credit facility expired on June 15, 2010 and as a result, we have an event of default and payment of all amounts is due July 15, 2010. To date, our lender has not accelerated the credit facility.

        Default under the credit agreement is also an event of default under the Merger Agreement. As of the date of this proxy statement, Powder has not terminated the Merger Agreement or waived the default. Because substantially all of our assets are pledged as collateral under our credit facility, if our lender declares an event of default, it will be entitled to foreclose on and take possession of our assets, including our cash balances. In such an event, we may be forced to liquidate or to otherwise seek protection under federal bankruptcy laws, and we can give you no assurance that in a bankruptcy proceeding you would receive any value for your shares.

        Credit Facility Amendment.    On January 13, 2010, Pinnacle entered into a Seventh Amendment and Waiver to Credit Agreement ("Waiver Agreement") with the lender party thereto. The Waiver Agreement provided that the lender would waive (i) Pinnacle's compliance with certain restrictions based on debt to equity ratios in the Credit Agreement, (ii) certain requirements of Pinnacle to pay certain accounts payable, and (iii) certain restrictions regarding liens on Pinnacle's assets. Default remedies available to the lender under the Credit Agreement include acceleration of all principal and interest amounts due under the Credit Agreement. The Waiver Agreement extends the waiver period for these items until the earlier of June 15, 2010 and the date of any default arising out of a breach or non-compliance with the Credit Agreement not expressly waived in the Waiver Agreement or a breach of the Waiver Agreement.

        In addition, the Waiver Agreement amends the definition of "Final Maturity Date" under the Credit Agreement to the earlier of (i) June 15, 2010 or (ii) the date that is thirty days following the earlier of (A) the date the Merger is withdrawn or terminated in whole or in part or (B) the date when the lender has been advised that the Merger will not proceed.

        NASDAQ.    On September 15, 2009, we received notification from The NASDAQ Stock Market ("NASDAQ") that we had fallen below certain continued listing criteria that require a minimum bid price of $1.00 per share over 30 consecutive trading days. NASDAQ temporarily suspended the minimum bid price requirement until March 15, 2010. We received notification from NASDAQ that our Common Stock would potentially be delisted if we were not in compliance with that requirement by March 15, 2010. On March 5, 2010, we discussed the Merger with NASDAQ. On March 16, 2010 we received an additional delisting notice from NASDAQ. On April 29, 2010, a hearing before the NASDAQ Hearings Panel was held at which we presented a compliance plan to regain compliance with the minimum bid price requirement. On May 10, 2010, the NASDAQ Hearings Panel issued its determination, granting our request for continued listing subject to the following agreed upon conditions: (i) filing a preliminary proxy for an annual meeting including a proposal for a reverse split on or before the earlier of (a) the termination of the Scotia transaction, or (b) July 1, 2010; and (ii) on

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or before September 13, 2010, evidencing a closing bid price of $1.00 or more for ten consecutive trading days;

        There can be no assurance that our Common Stock will continue to be listed on the NASDAQ Global Market. Also, there can be no assurance that we will obtain listing on an alternate stock exchange or automated quotation service in the event we are delisted from NASDAQ. A delisting of our Common Stock could materially and adversely affect, among other things, the liquidity and market price of our Common Stock, the number of investors willing to hold or acquire our Common Stock, and our access to capital markets to raise capital in the future.

Financing of the Merger

        Powder's obligation to complete the Merger is not contingent on its obtaining financing. The amount of funds necessary to pay the aggregate merger consideration to our stockholders and holders of Restricted Stock Awards is anticipated to be approximately $6,993,549, assuming:

•

a purchase price of $0.34 per share; and

•

none of our stockholders validly exercises and perfects its appraisal rights.

        In addition, if the merger is completed, Powder intends to contribute funds to Pinnacle to pay down our past due trade payables, which are approximately $6.1 million as of December 31, 2009 and to pay off or refinance our existing indebtedness. Powder has informed us that it intends to pay for the acquisition through a cash contribution from the SW Fund. Scotia is currently in the process of raising the "SW Fund". Pursuant to the terms of the Contribution Agreement, if and when the SW Fund is formed, Scotia will cause the SW Fund to agree that, upon the satisfaction or waiver of the conditions in the Merger Agreement and the Contribution Agreement, the SW Fund will contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. The SW Fund may not be formed prior to the shareholder meeting. If the SW Fund is not formed, Scotia will have the right but not the obligation to contribute cash to Powder in an amount sufficient to enable Merger Sub to complete the Merger. If the SW Fund is not formed and Scotia does not elect to contribute such cash to Powder, then Powder plans to seek alternative financing arrangements; however, no alternative funding arrangements have been made to date. If financing is unsuccessful and Powder does not have available funds in an amount sufficient to enable Merger Sub to consummate the Merger at the Closing Date and Pinnacle is not in breach of any of its obligations under the Merger Agreement, then Pinnacle may terminate the Merger Agreement pursuant to Section 7.1(d)(i) thereof. No termination fee would be payable by Pinnacle in connection with such a termination.

Material US Federal Income Tax Consequences

General

        The following discussion summarizes the material U.S. federal income tax consequences of the Merger that may be relevant to our stockholders who own shares of our Common Stock as a capital asset for U.S. federal income tax purposes (generally, assets held for investment) and who, or that, are for U.S. federal income tax purposes:

•

an individual who is a citizen or resident of the United States (including certain former citizens and former long-term residents);

•

a corporation, or other entity taxable as a corporation for U.S. federal tax purposes, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

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•

an estate the income of which is subject to U.S. federal income taxation regardless of its source; or

•

a trust (i) that is subject to the primary supervision of a court within the United States and the control of one or more United States persons as defined in section 7701(a)(30) of the Internal Revenue Code of 1986, as amended, or the Code, or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a United States person.

        This discussion is based on the Code, Treasury regulations promulgated thereunder, court decisions, published rulings of the Internal Revenue Service, or the IRS, and other applicable authorities, all as in effect on the date of this proxy statement and all of which are subject to change or differing interpretations, possibly with retroactive effect.

        This discussion does not address all of the U.S. federal income tax consequences that may be relevant to our stockholders in light of their particular circumstances or to our stockholders who may be subject to special treatment under U.S. federal income tax laws, such as tax-exempt organizations, foreign persons or entities, S corporations or other pass-through entities, financial institutions, insurance companies, broker-dealers, persons who hold Pinnacle shares as part of a hedge, straddle, wash sale, synthetic security, conversion transaction, or other integrated investment comprised of Pinnacle shares and one or more investments, persons whose "functional currency" (as defined in the Code) is not the U.S. dollar, and persons who acquired Pinnacle shares in compensatory transactions. Further, this discussion does not address any aspect of state, local, or foreign taxation.

        If a partnership (or other entity classified as a partnership for U.S. federal tax purposes) is a beneficial owner of Pinnacle shares, the tax treatment of a partner in that partnership will generally depend on the status of the partner and the activities of the partnership. Pinnacle stockholders that are partnerships and partners in these partnerships are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the Merger to them.

THIS SUMMARY IS NOT A SUBSTITUTE FOR AN INDIVIDUAL ANALYSIS OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. WE URGE YOU TO CONSULT YOUR TAX ADVISOR REGARDING THE PARTICULAR FEDERAL, STATE, LOCAL, AND FOREIGN TAX CONSEQUENCES OF THE MERGER IN LIGHT OF YOUR OWN SITUATION.

Tax Consequences of the Merger to Pinnacle Stockholders

        The Merger.    The exchange of Pinnacle shares for cash in the Merger will be a taxable transaction for United States federal income tax purposes, and possibly for state, local and foreign tax purposes as well.

        A holder of our stock generally will recognize capital gain or capital loss equal to the difference, if any, between the amount of cash received by the stockholder pursuant to the Merger and the stockholder's adjusted tax basis in the shares of our stock surrendered. Gain or loss will be calculated separately for each block of shares (that is, shares acquired at the same cost in a single transaction) exchanged in the Merger. Holders of separate blocks of our stock should consult their tax advisors with respect to these rules.

        If at the time of the Merger a non-corporate stockholder's holding period for the shares of our stock is more than one year, any gain recognized will be long term capital gain. If the non-corporate stockholder's holding period for the shares of our stock is one year or less at the time of the Merger, any gain will be subject to United States federal income tax at the same graduated rates as ordinary income. The use of capital losses is generally subject to limitations.

        For corporations, capital gain is taxed at the same rates as ordinary income, and the use of capital losses is subject to limitations.

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        Appraisal Rights.    Holders of our common shares are entitled to appraisal rights under Delaware law in connection with the Merger. If a United States holder receives cash pursuant to the exercise of appraisal rights, that United States holder generally will recognize gain or loss equal to the difference between the amount of cash received and the adjusted tax basis in their shares of our Common Stock. This gain should be long-term capital gain or loss if the United States holder held our Common Stock for more than one year. Any holder of our Common Stock that plans to exercise appraisal rights in connection with the Merger is urged to consult a tax advisor to determine the related tax consequences.

        Information Reporting and Backup Withholding.    Under U.S. federal income tax laws, the Paying Agent will generally be required to report to a Pinnacle stockholder and to the IRS any reportable payments made to such Pinnacle stockholder in the Merger. Additionally, a Pinnacle stockholder may be subject to a backup withholding tax with respect to the cash received in the Merger, unless the Pinnacle stockholder provides the Paying Agent with his correct taxpayer identification number, which in the case of an individual is his or her social security number, or, in the alternative, establishes a basis for exemption from backup withholding. If the correct taxpayer identification number or an adequate basis for exemption is not provided, a Pinnacle stockholder will be subject to backup withholding on any reportable payment.

        To prevent backup withholding, each Pinnacle stockholder must complete the IRS Form W-9 or a substitute Form W-9 that will be provided by the Paying Agent with the transmittal letter. Any amounts withheld under the backup withholding rules from a payment to a Pinnacle stockholder will be allowed as a credit against his U.S. federal income tax liability and may entitle him to a refund, if the required information is furnished to the IRS.

The foregoing discussion is for general information only and not intended to be legal or tax advice to any particular Pinnacle stockholder. Tax matters regarding the Merger are very complicated, and the tax consequences of the Merger to any particular Pinnacle stockholder will depend on that stockholder's particular situation. Pinnacle stockholders should consult their own tax advisor to determine the specific tax consequences of the Merger, including tax return reporting requirements, the applicability of U.S. federal, state, local, and foreign tax laws, and the effect of any proposed change in the tax laws to them.

Interests of Pinnacle's Directors and Executive Officers in the Merger

        In considering the recommendation of our Board with respect to the Merger Agreement, you should be aware that our directors and executive officers have interests in the Merger that are different from, or in addition to, your interests as a stockholder. These interests include:

•

indemnification provisions in the Merger Agreement in favor of our directors and officers;

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maintenance of a six-year "tail" directors' and officers' liability insurance policy to cover directors and officers currently covered by our directors' and officers' liability insurance policy;

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that our director, Susan Schnabel, is employed by an affiliate of DLJ and that DLJ will be contributing its shares of Pinnacle common stock to Powder prior to the effective time of the Merger;

•

the issuance of profits interests with limited voting rights in Powder to our Chief Executive Officer and Chief Financial Officer if they retain their executive positions with Pinnacle after completion of the Merger. These profits interests would be eligible for distributions only after the investors, the SW Fund and DLJ, have received distributions equal to the amount of their capital contributed to Powder. Thereafter, distributions will be allocated as follows: (i) 98% to SW Fund and DLJ and 2% to the profits interests until the aggregate distributions to SW Fund and DLJ result in an 8% internal rate of return on the capital contributions of SW Fund and DLJ; (ii) 90% to SW Fund and DLJ and 10% to the profits interests until the aggregate

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distributions to SW Fund and DLJ results in the greater of a 25% internal rate of return on the capital contributions of SW Fund and DLJ or three times the amount of the capital contributions made by SW Fund and DLJ; and, then (iii) 87.5% to SW Fund and DLJ and 12.5% to the profits interests. The holders of the profits interests will have voting rights limited to (a) the right to designate one of the seven board members of Powder and (b) consent rights regarding (1) changes to the rights of the profits interests, (2) changes to the business of Powder and (3) Powder entering into material contracts with members or affiliates. The profits interests are anticipated to be allocated 52% to our Chief Executive Officer and 48% to our Chief Financial Officer. The terms and conditions of the profits interests are set forth in the Form of Amended and Restated Limited Liability Company Agreement of Powder Holdings, LLC (LLC Agreement) set forth as Exhibit H. It is expected that the LLC Agreement will be executed immediately prior to the closing of the merger transaction;

•

the existing change of control arrangements between us and our Chief Executive Officer and Chief Financial Officer providing for, among other things, severance benefits if their employment is terminated under certain circumstances following a change in control of Pinnacle, such as the Merger, including: (i) a lump sum payment equal to 1.5 times the executive's annual base salary, plus payment of a pro-rated bonus; and (ii) immediate vesting of certain options, restricted stock or other compensation; and

•

potential employment arrangements between Powder or any of its affiliates, on the one hand, and one or more executive officers of Pinnacle, on the other hand, although there are no such arrangements as of the date of this proxy statement. If these arrangements are executed, the severance benefits noted above will not be paid.

        Our Board was aware of, and considered, the interests of our directors and executive officers in approving the Merger Agreement and the Merger. For the reasons, among others, described below, these additional interests did not affect the ability of our Board to exercise its judgment solely for the benefit of us and our stockholders:

•

our Board was aware of these additional interests and the Board's decision to approve the Merger Agreement and the Merger was made with full knowledge of the existence of these additional interests and their terms;

•

the change of control arrangements in Messrs. Schoonmaker and Barnes' employment agreement were recommended by non-employee directors more than 12 months prior to the execution of the Merger Agreement and were recommended for the purpose of ensuring that each individual would devote his services for the best interests of us and our stockholders and not be distracted by any potential change in control;

•

our directors believed the executive officers' severance agreements to be prudent and in the best interests of us and our stockholders; and

•

these additional interests were not implemented for the purpose of creating a deterrent to any takeover proposal.

        Compensation of Special Committee.    The members of the Special Committee received their ordinary compensation for the attendance at meetings of our Board of Directors and its committees with respect to each meeting of the Special Committee. Mr. McGonagle received a one-time cash payment of $50,000 for his services as chairman of the Special Committee.

        Directors and Officers.    There may be potential employment arrangements between Powder or any of its affiliates, on the one hand, and one or more executive officers of Pinnacle, on the other hand, although there are no such arrangements as of the date of this proxy statement and no material terms with respect to such employment agreements have been agreed. In addition, Pinnacle's Chief Executive

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Officer and Chief Financial Officer, if they continue their employment with Pinnacle, will be issued profits interests with limited voting rights in Powder. These profits interests would be eligible for distributions only after the SW Fund and DLJ have received distributions equal to the amount of their capital contributed to Powder and will be limited until the SW Fund and DLJ have received a specified return on such contributed capital.

        Total Consideration for Our Common Stock.    Our directors and executive officers will receive the same per share consideration for their shares of our Common Stock in the Merger as all of our other stockholders. The estimated aggregate amount of consideration that will be received in the Merger by our directors and executive officers on account of their ownership of our Common Stock, and Restricted Stock Awards as of March 31, 2010 is $333,230.

        Stock Option Awards.    The Merger Agreement provides that immediately prior to the effective time of the Merger, each outstanding and unexercised Stock Option Award, granted under any equity based compensation plan of Pinnacle will be automatically cancelled. Each holder of such Stock Option Award that has an exercise price or base price, as applicable, per share of our Common Stock that is less than $0.34 will receive an amount in cash equal to (i) the difference between $0.34 and the applicable exercise price or base price, as applicable, of such Stock Option Award, multiplied by (ii) the aggregate number of shares of our Common Stock subject to such Stock Option Award. There are no Stock Option Awards with an exercise price less than $0.34 per share. Accordingly, no holder of Stock Option Awards will receive any payments for such awards as a result of the Merger.

        Restricted Stock Awards.    Under the Merger Agreement, Restricted Stock Awards granted under any equity based compensation plan of Pinnacle will, immediately prior to the effective time of the Merger, be automatically cancelled. Under the Merger Agreement, the holder of any such Restricted Stock Award will receive an amount in cash equal to (i) $0.34, multiplied by (ii) the total number of shares of our Common Stock subject to such Restricted Stock Award.

        Directors' and Officers' Indemnification and Insurance.    The Merger Agreements contains indemnification provisions in favor of our directors and officers and provides for the maintenance of a six-year "tail" directors' and officers' liability insurance policy to cover directors and officers currently covered by our directors' and officers' liability insurance policy, see "The Merger Agreement—Covenants—Directors' and Officers' Indemnification and Insurance."

Litigation Related to the Merger

        Two putative stockholder class action lawsuits related to the Merger have been filed in the Delaware Court of Chancery since the announcement of the execution of the Merger Agreement. On March 24, 2010, the Delaware Court of Chancery entered an order consolidating the two actions under the caption In re Pinnacle Gas Resources Shareholder Litigation, C.A. No. 5313-CC (Del. Ch.) and appointing co-lead counsel.

        The consolidated complaint generally alleges that our directors breached their fiduciary duties by, among other things, taking actions designed to deter higher offers from other potential acquirers and failing to maximize the value of Pinnacle to its stockholders. In addition, the lawsuit alleges that DLJ, as a controlling stockholder of Pinnacle, violated fiduciary duties to Pinnacle stock holders and that Powder and Merger Sub aided and abetted the alleged breaches of fiduciary duties by the other defendants.

        The lawsuit seeks, among other relief, injunctive relief prohibiting the Merger, and costs of the action including reasonable attorneys' fees.

        Under the terms of the Merger Agreement, we have agreed to give Powder the opportunity to participate in the defense of the litigation. We may not agree to a settlement with respect to any such

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litigation without Powder's prior written consent. In addition, no settlement requiring a payment or an admission of wrongdoing by a director may be agreed to without the applicable director's consent. These provisions may restrict our ability to settle this or future stockholder lawsuits relating to the Merger.

        The obligations of Pinnacle, Powder and Merger Sub to effect the Merger are subject to the satisfaction or waiver of the condition that, at the effective time of the Merger, no provision of any applicable law or governmental order makes the Merger illegal or temporarily, preliminarily or permanently prohibits the consummation of the Merger. In addition, Pinnacle or Powder may terminate the Merger Agreement if any order is issued that makes the Merger illegal or permanently restrains, prohibits or enjoins the consummation of the Merger. If the lead plaintiff is successful in obtaining an injunction prohibiting the consummation of the Merger, then such injunction may prevent the Merger from becoming effective or delay the Merger from becoming effective within the expected timeframe.

        On May 24, 2010, Pinnacle and its directors entered into a Memorandum of Understanding in anticipation of settling the shareholder lawsuit. Under the terms of the Memorandum of Understanding, we agreed to make additional proxy disclosures regarding the interests of our executive officers in the surviving entity and furnish additional information regarding FBR's analysis and fairness opinion. In return the shareholders will provide a release of their claims against us, our directors, Powder and DLJ. Pinnacle and its directors, Powder and DLJ do not admit any wrongdoing and will enter into the proposed settlement solely because it would eliminate the distraction, burden and expense of further litigation. The settlement is subject to confirmatory discovery, negotiation of a definitive settlement agreement, and approval by the Delaware Chancery Court. Powder and DLJ have agreed to the terms of the Memorandum of Understanding.

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FORWARD-LOOKING STATEMENTS

        This proxy statement contains statement are not historical facts and are considered "forward-looking". You can identify these statements by the fact that they do not relate strictly to historical or current facts. We have based these forward-looking statements on our current expectations about future events. Further, statements that include words such as "may," "will," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue" or "pursue," or the negative or other words or expressions of similar meaning, may identify forward-looking statements. These forward-looking statements are found at various places throughout this proxy statement. These forward-looking statements, including without limitation, those relating to future actions, effects on us if the Merger is not completed, strategies, future performance, the outcome of contingencies such as legal proceedings and future financial results, wherever they occur in this proxy statement, are necessarily estimates reflecting the best judgment of our management and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. These forward-looking statements should, therefore, be considered in light of various important factors set forth from time to time in our filings with the SEC. In addition to other factors and matters contained in this document, these statements are subject to risks, uncertainties and other factors, including, among others:

•

we may be unable to obtain the required stockholder approval for the Merger at the special meeting;

•

the conditions to the closing of the Merger may not be satisfied, or the Merger Agreement may be terminated prior to closing, which would, in some cases, require payment of a $1.0 million termination fee, plus expenses;

•

disruptions and uncertainty, including diversion of management attention, resulting from our proposed Merger may make it more difficult for us to maintain relationships with other customers, employees or suppliers, and as a result our business may suffer;

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the effects of litigation filed in connection with the proposed Merger;

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the restrictions on our conduct prior to closing contained in the Merger Agreement may have a negative effect on our flexibility and our business operations;

•

we have and will continue to incur significant expenses related to the Merger prior to its closing and the Merger may involve unexpected costs or unexpected liabilities;

•

we may not have sufficient cash to continue our operations and to conduct our business until the conditions to the Merger can be satisfied and the Merger can be completed; and

•

additional factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, under the headings "Risk Factors" and "Quantitative and Qualitative Disclosures About Market Risk," and as such factors were updated in our subsequent Quarterly Reports on Form 10-Q.

        See "Where You Can Find More Information." You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement.

        THE FORWARD-LOOKING STATEMENTS IN THIS PROXY STATEMENT SPEAK ONLY AS OF THE DATE HEREOF. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE.

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THE SPECIAL MEETING

Date, Time and Place

        This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by our Board for use at the special meeting to be held on        , 2010, starting at 10:00 a.m. Mountain Time, at the offices of Moye White LLP, 1400 16^th Street, Sixth Floor, Denver, Colorado 80202, or at any postponement or adjournment thereof.

Purpose

        The purpose of the special meeting is for our stockholders to consider and vote upon the adoption of the Merger Agreement (and to approve any proposal to adjourn the special meeting to a later date to solicit additional proxies in favor of the adoption of the Merger Agreement if there are not sufficient votes for adoption of the Merger Agreement at the special meeting) and to consider and vote upon any other matter that may properly come before the special meeting or any postponement or adjournment thereof. A copy of the Merger Agreement is attached as Exhibit A to this proxy statement. This proxy statement and the enclosed form of proxy are first being mailed to our stockholders on or about         , 2010.

Record Date and Quorum

        We have fixed the close of business on        , 2010 as the record date for the special meeting, and only holders of record of Common Stock on the record date are entitled to vote at the special meeting. On March         , 2010, there were 29,980,032 shares of Common Stock entitled to be voted. Each share of Common Stock entitles its holder to one vote on all matters properly coming before the special meeting.

        A majority of the outstanding shares of our Common Stock entitled to vote, represented in person or by proxy, will constitute a quorum for purposes of the special meeting. Shares of Common Stock represented at the special meeting but not voted, including "broker non-votes" and shares of Common Stock for which we have received proxies indicating that the submitting stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned to solicit additional proxies.

Vote Required to Adopt the Merger Agreement

        The adoption of the Merger Agreement requires the affirmative vote of the holders of (i) at least a majority of the outstanding shares of Common Stock entitled to vote; and, (ii) at least a majority of the outstanding shares of Common Stock held by persons who are unaffiliated with DLJ, our chief executive officer and chief financial officer. A failure to vote your shares of Common Stock, an abstention or a broker non-vote will have the same effect as voting "AGAINST" the adoption of the Merger Agreement.

        Under the terms of the Voting Agreement, discussed below the holders of: (i) 43.8% of the outstanding shares of Common Stock entitled to vote have agreed to vote in favor of the Merger and to adopt the Merger Agreement; and, (ii) 16.4% of the shares of Common Stock held by persons who are unaffiliated with DLJ, our chief executive officer and chief financial officer have agreed to vote in favor of the Merger and to adopt the Merger Agreement.

Voting Agreement

        Concurrently with the execution of the Merger Agreement, Pinnacle and certain of Pinnacle's directors and executive officers who own shares of Common Stock and our stockholders DLJ and

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CCBM, Inc. entered into a Voting Agreement with Powder pursuant to which they have agreed to vote all shares of Common Stock held by them in favor of the adoption of the Merger Agreement. A copy of the Voting Agreement is attached Exhibit B.

        The following table summarizes our outstanding shares eligible to vote at the special meeting and the shares subject to the Voting Agreement:

	Shares		Percentage
Approval by Majority of Outstanding Shares
Total Shares outstanding and eligible to vote at special meeting		29,980,032		100.0%
Number of shares required to vote in favor of Merger Agreement for its adoption (majority)		14,990,017		50.0% +1
Number of shares subject to the voting agreement that have agreed to vote in favor of the adoption of the Merger Agreement		13,131,680		43.8%

	Shares		Percentage
Approval by Majority of Shares Held by Persons Other Than DLJ, Our Chief Executive Officer and Chief Financial Officer
Number of outstanding shares that are held by persons other than DLJ, our chief executive officer and chief financial officer		20,149,366		100.0%
Number of outstanding shares that are held by persons other than DLJ, our chief executive officer and chief financial officer required to vote in favor of Merger Agreement for its adoption (majority)		10,074,683		50.0% +1
Number of outstanding shares subject to the Voting Agreement that are held by persons other than DLJ, our chief executive officer and chief financial that have agreed to vote in favor of the adoption of the Merger Agreement		3,301,014		16.4%

Voting and Proxies

        If you submit your proxy by returning a signed proxy card by mail, your shares will be voted at the special meeting as you indicate on your proxy card. If you sign your proxy card without indicating your vote, your shares will be voted "FOR" the adoption of the Merger Agreement and "FOR" the approval of any adjournment of the special meeting referred to above, and in accordance with the recommendations of our Board on any other matters properly brought before the special meeting for a vote.

        If you abstain, your shares of Common Stock will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of business; however, your shares will not be counted as votes cast or shares voting on the proposal to adopt the Merger Agreement, as it may be amended from time to time. If you abstain, it will have the same effect as a vote "AGAINST" the adoption of the Merger Agreement.

        If your shares of Common Stock are held in street name, you will receive instructions from your broker, bank or other nominee that you must follow in order to have your shares voted. If you do not instruct your broker, bank or other nominee to vote your shares, it has the same effect as a vote "AGAINST" adoption of the Merger Agreement.

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Revocability of Proxy

        Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. You have the right to change or revoke your proxy at any time before the vote taken at the special meeting:

•

by delivering to our Corporate Secretary, Ronald T. Barnes, at Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming, 82801 a signed written notice of revocation, bearing a date later than the date of your proxy, stating that your proxy is revoked;

•

by attending the special meeting and voting in person (your attendance at the meeting will not, by itself, revoke your proxy—you must vote in person at the meeting to revoke a prior proxy);

•

by submitting a later-dated proxy card; or

•

if you have instructed a broker, bank or other nominee to vote your shares, by following the directions received from your broker, bank or other nominee to change those instructions.

        Please do not send in your stock certificates with your proxy card. If the Merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the Merger Consideration in exchange for your Pinnacle stock certificates, assuming you do not elect to exercise your appraisal rights.

Adjournments and Postponements

        If the requisite stockholder vote approving the adoption of the Merger Agreement has not been received at the time of the special meeting, holders of our Common Stock may be asked to vote on a proposal to adjourn the special meeting, if necessary, to solicit additional proxies in favor of the merger proposal. The affirmative vote of the holders of the majority of the shares entitled to vote on, and who voted for, against, or expressly abstained with respect to, the adjournment proposal at the special meeting is required to approve the adjournment proposal. Our Board recommends that you vote "FOR" the approval of any such adjournment of the meeting, if necessary.

Rights of Dissent and Appraisal

        Under Delaware law, holders of Common Stock who do not vote in favor of the proposal to adopt the Merger Agreement, as it may be amended from time to time, will have the right to seek appraisal of the fair value of their shares of Common Stock as determined by the Delaware Court of Chancery if the Merger is completed, but only if they comply with all requirements of Delaware law, which are summarized in this proxy statement. The judicially determined appraisal amount could be more than, the same as or less than the Merger Consideration. Any holder of Common Stock intending to exercise appraisal rights, among other things, must submit a written demand for an appraisal to us prior to the vote on the proposal to adopt the Merger Agreement and must not vote or otherwise submit a proxy in favor of adoption of the Merger Agreement and must otherwise strictly comply with all of the procedures required by Delaware law. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights.

        See "Rights of Dissent and Appraisal" and the text of Section 262 of the Delaware General Corporation Law (the "DGCL") reproduced in its entirety as Exhibit D to this proxy statement, which relates to your rights of dissent and appraisal. We encourage you to read these provisions carefully and in their entirety.

Solicitation of Proxies

        This proxy solicitation is being made and paid for by us on behalf of our Board. In addition, we have retained Georgeson Inc. to assist in the solicitation. We will pay Georgeson Inc. up to $8,500 plus

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reasonable out-of-pocket expenses for their assistance. Our directors, officers and employees may also solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid any additional compensation for their efforts. We will also request brokers and other fiduciaries to forward proxy solicitation material to the beneficial owners of shares of Common Stock that the brokers and fiduciaries hold of record. Upon request, we will reimburse them for their reasonable out-of-pocket expenses. In addition, we will indemnify Georgeson Inc. against any losses arising out of that firm's proxy soliciting services on our behalf.

Other Matters

        Our Board does not know of any other business that will be presented at the meeting. If any other proposal properly comes up for a vote at the meeting in which your proxy has provided discretionary authority, the proxy holders will vote your shares in accordance with their best judgment.

Questions and Additional Information

        If you have any questions about the Merger, the special meeting or this proxy statement, or if you need additional copies of this proxy statement or the enclosed proxy, you should contact our Corporate Secretary at Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801, Attention: Corporate Secretary, (307) 673-9710 or Georgeson Inc., 199 Water Street, 26th Floor, New York, NY 10038, (212) 440-9800 (banks and brokers), (866) 821-2550 (stockholders) (toll free).

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THE MERGER AND MERGER AGREEMENT

        The following summary of the terms of the Merger Agreement is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached to this proxy statement as Exhibit A. This summary may not contain all of the information about the Merger that is important to you. We encourage you to read carefully the Merger Agreement in its entirety.

        The descriptions of the Merger Agreement in this proxy statement have been included to provide you with information regarding its terms. Except for its status as the contractual document between the parties with respect to the Merger, it is not intended to provide factual information about Powder, Merger Sub or us. The Merger Agreement contains representations and warranties made by and to Powder, Merger Sub and us as of specific dates. The representations and warranties were made for purposes of the Merger Agreement and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Merger Agreement, including qualifications in disclosures exchanged between the parties. In addition, some representations and warranties were made as of a specified date, may be subject to contractual standards of materiality different from those generally applicable to stockholders, and have been made solely for purposes of risk allocation and to provide contractual rights and other remedies to Powder, Merger Sub and us. You should not rely upon the representations and warranties set forth in the Merger Agreement as statements of factual information.

The Merger and Effective Time

        If the Merger Agreement is adopted by our stockholders, the other conditions to closing are satisfied or waived and the Merger Agreement is not terminated prior to the effective time of the Merger, Merger Sub will merge with and into Pinnacle and Pinnacle will continue as the surviving corporation as a direct, wholly-owned subsidiary of Powder (the "Merger").

        The Merger is a "going-private" transaction. If the Merger is completed, we will no longer be a publicly traded company, we will not be required to file reports with the Securities and Exchange Commission, or the "SEC," our stock will not be quoted on the NASDAQ Global Market and you will not participate in our future earnings or growth.

        The Merger Agreement provides that Merger Sub, a wholly owned subsidiary of Powder, will merge with and into Pinnacle. Pinnacle will be the surviving corporation in the Merger, which we sometimes refer to as the surviving corporation, and will continue to exist after the Merger as a wholly owned subsidiary of Powder.

        The closing date for the Merger will be on the second business day following the day on which all conditions to closing in the Merger Agreement have been satisfied or waived or on another date as agreed between Powder, Merger Sub and us. We currently expect to complete the Merger during the third quarter of 2010. However, we cannot assure you when, or if, all the conditions to completion of the Merger will be satisfied or waived or whether the Merger Agreement will terminate prior to closing. See "—Conditions to the Merger" and "—Termination of the Merger Agreement" below.

        The Merger will be effective on the date of filing of a properly executed certificate of merger with the Secretary of State of the State of Delaware (or at such later time as agreed to by the parties and specified in such certificate of merger).

Merger Consideration

        Upon completion of the Merger, each share of our Common Stock issued and outstanding immediately prior to the effective time of the Merger (other than shares owned by Powder, Merger Sub or any other subsidiary of Powder or held in treasury by us and other than shares held by stockholders, if any, who have properly exercised and perfected statutory appraisal rights) will be converted into the

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right to receive $0.34 in cash, without interest and less any applicable withholding tax. In this proxy statement, we refer to the consideration to be paid per share of Common Stock in the Merger as the "Merger Consideration." Because DLJ will contribute its shares of Common Stock to Powder immediately prior to the effective time of the Merger, DLJ will not receive any Merger Consideration.

        The stockholders of Pinnacle have appraisal rights as a result of the Merger in accordance with the provisions of Section 262 of the Delaware General Corporation Law. See "Rights of Dissent and Appraisal."

Payment Procedures

        Prior to the effective time of the Merger, Powder or Merger Sub will designate a bank, trust company or transfer agent to act as paying agent to facilitate the payment of the Merger Consideration to the Stockholders in connection with the Merger (the "Paying Agent"). Promptly after the effective time of the Merger, Powder shall cause the Merger Consideration, other than any portion allocable to any shares of Common Stock for which the holders have properly exercised appraisal rights under Delaware law, to be delivered to the Paying Agent. The Paying Agent will deliver the Merger Consideration in exchange for surrendered stock certificates or book entry shares.

        Promptly after the effective time of the Merger, the surviving corporation will cause the Paying Agent to send to each holder of record of the Common Stock a letter of transmittal and instructions disclosing the procedure for exchanging shares of our Common Stock for the Merger Consideration. After the effective time of the Merger, each holder of shares of our Common Stock which have been converted into the right to receive the Merger Consideration shall, upon either surrender to the Paying Agent of a certificate together with a properly completed letter of transmittal or receipt of an agent's message by the Paying Agent, be entitled to receive the Merger Consideration for each share of Common Stock held (less any applicable withholding of taxes). No interest will be paid or accrued on the Merger Consideration.

        Any cash remaining in the possession of the Paying Agent one year after the effective time of the Merger will be returned to Powder, upon demand, and any holder who has not exchanged such holder's Common Stock prior to that time may look only to Powder to exchange such shares of Common Stock or to pay the Merger Consideration, subject to abandoned property, escheat or similar laws.

You should not return your stock certificates representing shares of our Common Stock with the enclosed proxy card, and you should not forward your stock certificates to the Paying Agent without a transmittal letter. In all cases, the Merger Consideration will be paid only in accordance with the procedures set forth in the Merger Agreement and the transmittal letter.

        If payment of the Merger Consideration is to be made to a person other than the registered holder of our Common Stock, it will be a condition of payment that the person requesting such payment either pay any applicable taxes required or establish, to the reasonable satisfaction of the Paying Agent, that the tax has been paid or is not applicable.

        If any share certificate is lost, stolen or destroyed, the Paying Agent will pay the Merger Consideration for the number of shares represented by such certificate upon delivery by the person seeking payment of an affidavit in lieu of the certificate, and if required by Powder, an indemnity bond in form and substance and with surety satisfactory to Powder.

Treatment of Stock Options and Stock-Based Awards

        The Merger Agreement provides that as of the effective time of the Merger, each outstanding and unexercised Stock Option Award, granted under any equity based compensation plan of Pinnacle will be automatically cancelled. Each holder of such Stock Option Award that has an exercise price or base price, as applicable per share of our Common Stock that is less than $0.34 will receive an amount in

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cash equal to (i) the difference between $0.34 and the applicable exercise price or base price, as applicable, of such Stock Option Award, multiplied by (ii) the aggregate number of shares of our Common Stock subject to such Stock Option Award. There are no Stock Option Awards with an exercise price less than $0.34 per share. Accordingly, no holder of Stock Option Awards will receive any payment for such Stock Option Awards as a result of the Merger.

        Each Restricted Stock Award that is outstanding will immediately, prior to the effective time of the Merger, be automatically cancelled. Under the Merger Agreement, the holder of any such Restricted Stock Award will receive an amount in cash equal to (i) $0.34, multiplied by (ii) the total number of shares of our Common Stock subject to such Restricted Stock Award. There are an aggregate of 155,496 unvested Restricted Stock Awards outstanding and held by our directors and executive officers. As a result, they will receive approximately $52,868.64 upon consummation of the Merger in exchange for such Restricted Stock Awards.

Certificate of Incorporation; Directors and Officers of the Surviving Corporation

        When the Merger becomes effective, the certificate of incorporation of Pinnacle, as in effect immediately before the effective time of the Merger, shall be amended in its entirety and, as so amended, will be the certificate of incorporation of the surviving corporation.

        The directors and officers of Merger Sub immediately prior to the effective time of the Merger will be the directors and officers of the surviving corporation following the Merger until their respective successors are duly elected or appointed and qualified.

Representations and Warranties

        We have made various representations and warranties in the Merger Agreement with respect to us that are subject, in some cases, to disclosures and specified exceptions and qualifications. Our representations and warranties relate to, among other things:

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our corporate organization and similar matters with respect to Pinnacle;

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our capital structure;

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the authorization, execution, delivery, performance and enforceability of the Merger Agreement, the Voting Agreement and all other related agreements;

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the required consents, approvals, orders and authorizations of governmental authorities and third parties relating to the Merger Agreement and related matters with respect to us;

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our compliance with applicable laws, material contracts and permit requirements;

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outstanding and pending litigation material to us;

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documents we have filed with the Securities and Exchange Commission and the fair presentation and accuracy of the financial statements and other information contained in such documents;

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the absence of undisclosed liabilities;

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the absence of changes in Pinnacle;

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tax matters with respect to Pinnacle;

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rights to our property and assets;

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intellectual property of Pinnacle;

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certain contracts of Pinnacle;

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employment matters of Pinnacle;

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•

environmental matters of Pinnacle;

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matters relating to our employee benefit plans;

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matters relating to the real property owned or leased by Pinnacle;

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the absence of interested party transactions;

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accuracy of information to be supplied by Pinnacle in connection with this proxy statement;

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the inapplicability to the Merger of state and federal antitakeover statutes or regulations;

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receipt by the Special Committee of our Board of the fairness opinion from FBR;

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the preparation and delivery by Pinnacle of a reserve report;

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derivative transactions and hedging;

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matters relating to the Natural Gas Act and the Federal Energy Regulatory Commission;

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our engagement of, and payments to, brokers, finders, investment bankers or similar parties;

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matters relating to our credit agreement; and

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matters relating to bankruptcy.

        The representations and warranties in the Merger Agreement are complicated and are not easily summarized. You are urged to read carefully and in its entirety Article 3 of the Merger Agreement entitled "Representations and Warranties of the Company."

        You should be aware that these representations and warranties made by Pinnacle to Powder and Merger Sub may be subject to important limitations, disclosures and qualifications set forth in the Merger Agreement and the disclosure letter related thereto, and do not purport to be accurate as of the date of this proxy statement or provide factual information about us to our stockholders. Certain of our representations and warranties are qualified by a material adverse effect standard, which is defined in the section labeled "—Company Material Adverse Effect Definition" below.

        In addition, Powder and Merger Sub made certain representations and warranties to us, including representations and warranties relating to:

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the corporate organization and similar matters with respect to Powder and Merger Sub;

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the authorization, execution, delivery, performance and enforceability of the Merger Agreement and related matters with respect to Powder and Merger Sub;

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the required consents, approvals, orders and authorizations of governmental authorities and third parties relating to the Merger Agreement;

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the accuracy of information to be supplied by Powder or Merger Sub in connection with this proxy statement; and

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Powder's availability of funds which will be sufficient to pay the Merger Consideration.

        The representations and warranties in the Merger Agreement are complicated and are not easily summarized. You are urged to read carefully and in its entirety Article 4 of the Merger Agreement entitled "Representations and Warranties of Parent and Merger Sub."

        All of the representations and warranties contained in the Merger Agreement will expire at the effective time of the Merger.

        The waiver of certain conditions and covenants of the credit agreement expired on June 15, 2010. As a result of the breach caused by expiration of the waiver, Pinnacle has also breached its

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representation and warranty set forth in Section 3.30 of the Merger Agreement. As a result, Powder has the right to terminate the Merger Agreement pursuant to Section 7.1(c)(ii) and upon such termination, Powder would be entitled to a termination fee of $500,000 plus up to $600,000 in reimbursement of expenses. Powder has indicated that is is unwilling to waive its rights to terminate pursuant to this provision. Pinnacle will endeavor to work with its lender to obtain the necessary waivers to allow the Merger to proceed; however, there can be no assurance that such waivers will be obtained. If no waivers are obtained all amounts owing will be due and payable July 15, 2010.

Company Material Adverse Effect Definition

        A material adverse effect means any circumstance, event, change or effect (whether or not foreseeable or known as of the date of the Merger Agreement) that individually or in the aggregate with all other circumstances, events, changes and effects: (a) would prevent the ability of Pinnacle to perform its obligations under the Merger Agreement or consummate the transactions contemplated thereby; or (b) is or would reasonably be expected to be, materially adverse to the assets, business, condition (financial or otherwise) or results of operations of Pinnacle, including any circumstance, event, change or effect that would result in:

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our net production of natural gas to be less than 6.75 MMcf, based on the average daily production for any rolling five day period, on any day after February 23, 2010;

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our proved reserves of natural gas as of (x) December 31, 2009, or (y) the last day of any fiscal quarter occurring after February 23, 2010 to be less than 23.0 Bcf based on a constant price of CIG Rocky Mountain Index of $4.00 per Mcf and the reserve report prepared by NSAI; or

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an aggregate net reduction in the net mineral acres owned by Pinnacle within the Powder River Basin play in excess of 30,000 net mineral acres.

        No circumstance, event, change or effect to the extent arising out of, resulting from or attributable to the following will be deemed to constitute a material adverse effect on us or will be taken into account when determining whether a material adverse effect on us has occurred or is reasonably expected to occur:

(i)

general industry, economic, market or political conditions;



(ii)

acts of war, sabotage or terrorism;



(iii)

the announcement or pendency of the transactions contemplated by the Merger Agreement;



(iv)

any changes in GAAP, applicable law or the interpretation thereof;



(v)

the taking of any specific action at the express written direction of Powder; or



(vi)

a decline in the market price, or a change in the trading volume, of the shares of Common Stock, (however, any cause of any such decline or change may be taken into consideration when determining whether a material adverse effect on us has occurred or is reasonably expected to occur).

        Any circumstance, event, change and effect referred to in clauses (i), (ii) or (iv) immediately above will be taken into account in determining whether a material adverse effect on us has occurred or is reasonably expected to occur to the extent that such event, change or effect has a disproportionate effect on us, compared to other participants in the industries in which we conduct business.

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Conduct of Business Pending the Merger.

        Pinnacle has agreed that until the earlier of the completion of the Merger or the termination of the Merger Agreement, except as otherwise consented to by Powder or expressly contemplated by the Merger Agreement, it will, among other things:

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conduct its business in the ordinary course and in compliance with applicable law and the requirements of material contracts;

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pay debts, taxes and other obligations when due; and

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preserve intact its business organizations and material assets, current relationships with customers, suppliers and other persons with which Pinnacle has business relations.

        In addition, we have agreed that, among other things and subject to certain exceptions, we shall not, without Powder's written consent:

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amend or propose to amend our certificate of incorporation or bylaws;

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make, declare, set aside or pay any dividend or other distribution; split, combine, or reclassify any capital stock or equity interests of Pinnacle; issue or authorize any other securities; or purchase, redeem or acquire any capital stock or equity interests of Pinnacle;

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issue, sell, pledge, dispose of, grant, encumber or otherwise subject to any lien, any shares of capital stock or any options, warrants, convertible securities or other rights to purchase any such capital stock, or other ownership interest of Pinnacle;

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sell, lease, exchange, transfer, or assign any of our assets, with specified exceptions;

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enter into any collective bargaining agreement;

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enter into or amend or modify in any material respect, or consent to the termination of any material contract, other than in the ordinary course of business;

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make any material change in any method of financial accounting principles or practices;

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make, enter into or assume any derivative transaction;

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reduce the amount of any insurance coverage provided by existing insurance policies;

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terminate or waive any right or rights that individually or in the aggregate would reasonably be expected to be material in value to Pinnacle;

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increase the compensation payable or to become payable or the benefits provided to our past or present officers, employees or other service providers; enter into any new or amend in any material respect any existing employment, severance, retention or change in control agreement with any of our past or present officers, employees or other service providers; or promote any officers, employees or service providers;

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commence, settle or compromise any legal action threatened against, relating to or involving us, with specified exceptions;

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acquire any corporation, partnership, other business organization or any material asset;

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repurchase, prepay or incur any indebtedness for borrowed money, with specified exceptions;

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amend, modify, or change any term of indebtedness;

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make or change any material election in respect of taxes or adopt or change any material accounting method in respect of taxes;

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•

fail to give all notices and other information required to be given to our employees in connection with the transactions contemplated by the Merger Agreement;

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enter into any material agreement, agreement in principle, letter of intent, memorandum of understanding or similar contract with respect to any joint venture, strategic partnership or alliance, which in each case, is material to us;

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create any new business division or otherwise enter into any new line of business;

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adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of Pinnacle;

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enter into any contract with any officer or director of us or any of their immediate family members, with specified exceptions;

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enter into any contract, agreement or arrangement that would provide for the making of a payment, result in a material adverse change in the rights or obligations of us or result in a material change in the rights or obligations of the counterparty thereto as a result of the transactions contemplated by the Merger Agreement;

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amend, modify, cancel, terminate, breach, repudiate or waive compliance with any term of the Voting Agreement;

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take any action that will, or would reasonably be expected to, have a material adverse effect on us; or

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take any action that would cause a breach of our representations and warranties in the Merger Agreement or prevent us from performing our covenants in the Merger Agreement.

        The covenants in the Merger Agreement relating to the conduct of our business are complicated and not easily summarized. You are urged to read carefully and in its entirety Sections 5.7 and 5.8 of the Merger Agreement entitled "Conduct of the Business of the Company" and "Actions Requiring Parent's Consent," respectively.

No Solicitation of Transactions

        In addition to the restrictions outlined above, and except as set forth below or in the Merger Agreement, until the earlier of the completion of the Merger or the termination of the Merger Agreement we have agreed:

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we will not, directly or indirectly, (a) solicit, initiate, endorse or take any action to encourage or facilitate (including by way of furnishing information) the submission of any inquiries, proposals or offers or afford access to our employees, business, properties, assets, books or records with respect to the making or completion of any acquisition proposal, (b) engage in any discussions or negotiations with respect to, or furnish any information or data with respect to, any acquisition proposal, or (c) resolve, propose or agree to do any of the foregoing;

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we will immediately cease and cause to be terminated any discussion or negotiation with any person with respect to any acquisition proposal; and

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our Board will not (i) fail to recommend to our stockholders to adopt the Merger Agreement or withdraw, modify or adversely qualify its recommendation; (ii) adopt, approve, recommend, endorse or otherwise declare advisable the adoption of any acquisition proposal or (iii) resolve, agree or publicly propose to take any such actions (each such action being referred to herein as an "Adverse Recommendation Change"); and

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•

our Board will not cause or permit us to enter into any agreement constituting or directly related to, or which is intended to or would be reasonably likely to lead to, any acquisition proposal.

        Consideration of an Alternative Proposal.    Notwithstanding the general restrictions set forth above, at any time prior to obtaining approval of the adoption of the Merger Agreement by the holders of at least a majority of the outstanding shares of our Common Stock (excluding the shares of our Common Stock owned by DLJ or any of their affiliates, or by our chief executive officer or our chief financial officer) ("Company Stockholder Approval"), we may furnish information and data to and enter into, maintain and participate in (or otherwise cooperate with, assist or facilitate) discussions or negotiations with any person in connection with a written, bona fide, unsolicited acquisition proposal by such person if we have not breached the non-solicitation provision and the Board (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of disinterested directors):

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determines in good faith (after receiving the advice of its financial advisor) that such acquisition proposal constitutes or is reasonably expected to lead to a superior proposal (as defined below);

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determines in good faith (after consulting with and receiving the advice of outside counsel) that taking such action is necessary in order to comply with its fiduciary duties to the stockholders of Pinnacle under applicable law; and

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obtains from such person a confidentiality agreement with terms no less favorable in any material respect to Pinnacle than the confidentiality agreement between Powder and Pinnacle.

        We shall provide Powder with at least 24 hours prior written notice of our intention to enter into any such confidentiality agreement and shall deliver a copy of such agreement within 24 hours following the execution thereof. We shall also advise Powder of any information provided to any person concurrently with its delivery to such person and shall provide to Powder any information provided to such person which was not previously provided to Powder.

        Acquisition Proposal.    An "acquisition proposal" means any inquiry, proposal, indication of interest or offer from any third party relating to, or that could be reasonably expected to lead to, (a) the direct or indirect acquisition or purchase of assets of Pinnacle equal to 15% or more of Pinnacle's consolidated assets or to which 15% or more of the Pinnacle's revenues or earnings on a consolidated basis are attributable, (b) the direct or indirect acquisition of 15% or more of any class of equity securities of Pinnacle, (c) a tender offer or exchange offer that if consummated would result in any person or group beneficially owning 15% or more of any class of equity securities of Pinnacle or (d) a merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving Pinnacle, in each case, other than the transactions contemplated by the Merger Agreement.

        Superior Proposal.    A "superior proposal" is a bona fide written acquisition proposal (with all references to "15% or more" used in the definition of acquisition proposal deemed to be reference to "more than 50%") that the Board determines in good faith (after consulting with and receiving the advice of outside legal counsel and after receiving the advice of its financial advisor), taking into account all legal, financial, regulatory, estimated time of completion and other aspects of the acquisition proposal and the person making the acquisition proposal, including the financing terms thereof, (a) would result in a transaction that is more favorable to the stockholders from a financial point of view than the transactions contemplated by the Merger Agreement (taking into account (i) any adjustment to the terms and conditions proposed by Powder and (ii) any termination fees and expense reimbursement provisions); and (b) is reasonably likely to be consummated.

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        We must notify Powder within 24 hours of the receipt by us, or any of our representatives, of any acquisition proposal, together with the material terms and conditions and a copy of any written documentation. We must keep Powder informed of the status and details of any such discussions or negotiations.

        If prior to obtaining Pinnacle Stockholder Approval at the Special Meeting, the Board receives an acquisition proposal that did not result from a breach of any of our non-solicitation obligations, and the Board determines that the acquisition proposal is a superior proposal and the Board determines in good faith (after consulting with and receiving the advice of outside legal counsel) that the failure to enter into the superior proposal would violate its fiduciary duties to our stockholders under applicable law, taking into account all adjustments to the terms of the Merger Agreement that may be offered by Parent, then the Board may (i) make an Adverse Recommendation Change in response to the superior proposal or (ii) cause us to terminate the Merger Agreement in order to concurrently enter into a definitive agreement providing for the implementation of the superior proposal (subject to the payment of a termination fee to Power as described below under "—Termination of the Merger Agreement—Termination Fee"). The Board, however, may not take these actions unless: (a) we have provided prior written notice to Powder, at least five business days in advance, of the Board's intention to take such action, which notice shall specify the material terms and conditions of any such superior proposal and include a copy of the proposed definitive agreement and relevant transaction documents to be entered into concurrently with such termination, (b) prior to taking such action, we shall, and shall direct our financial and legal advisors to, during such notice period (and any extensions thereof), negotiate with Powder in good faith to make such adjustments in the terms and conditions of the Merger Agreement so that such acquisition proposal ceases to constitute a superior proposal, and (c) following any such negotiation, the Board determines in good faith, after consultation with our financial advisors and outside counsel, that such acquisition proposal continues to constitute a superior proposal.

Additional Agreements

        Each of Pinnacle, Powder and Merger Sub has agreed to cooperate with each other and use reasonable best efforts to take all actions and do all things necessary under the Merger Agreement to complete the Merger. Pinnacle, Powder and Merger Sub have, as applicable, agreed, among other things, as follows:

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we have agreed to hold a special meeting of our stockholders as soon as practicable after the Securities and Exchange Commission indicates that it has no further comments on this proxy statement or the Pinnacle Schedule 13E-3 for the purposes of adopting the Merger Agreement and approving the Merger;

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we have agreed to provide full and complete access to Powder and its representatives, to our officers, employees, agents and properties and related books and records;

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we have agreed take such actions as are necessary to maintain in all respects the effectiveness of our credit agreement waiver, on terms no less favorable to Pinnacle than those set forth in the existing credit agreement waiver, until a date not earlier than June 15, 2010;

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Powder has agreed to keep confidential information furnished by us in connection with the transactions contemplated in the Merger Agreement;

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Powder and Merger Sub have agreed to vote all shares of Common Stock owned by Powder or Merger Sub, if any, in favor or approval of the Merger;

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•

Powder and we have agreed to give prompt notice to the other party under the following circumstances:

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of any event or circumstance that would be likely to cause any condition to the Merger Agreement not to be satisfied; and

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of any failure by Pinnacle, Powder or Merger Sub to comply with or satisfy any covenant, condition or agreement required to be complied with or satisfied pursuant to the Merger Agreement which would reasonably be expected to result in any condition to the obligations by any party to the Merger not to be satisfied;

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Powder and we have agreed to use reasonable best efforts to take all actions necessary in obtaining all necessary governmental consents;

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Powder and we have agreed to consult with and provide each other the reasonable opportunity to review and comment upon any press release concerning the Merger Agreement;

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prior to the effective time of the Merger, we have agreed to take all steps as may be reasonably necessary to cause the transactions contemplated by the Merger Agreement to be exempt under Rule 16b-3 of the Exchange Act;

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we have agreed to give Powder the opportunity to participate in the defense of any stockholder litigation against Pinnacle or its officers or directors relating to the transactions contemplated by the Merger Agreement, and have agreed to not settle any litigation without the prior written consent of Powder;

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Powder has agreed to either (a) purchase at the effective time of the Merger a director and officer tail insurance policy with a claims period of at least 6 years at least as favorable in amount and scope as our current policy or (b) maintain in effect for 6 years our current director and officer insurance policy at current coverage levels, provided that the surviving corporation will not be required to pay annual premiums in excess of 250% of the current annual premiums.

Conditions to the Completion of the Merger

        The obligations of Pinnacle, Powder and Merger Sub to consummate the Merger are dependent on the satisfaction or waiver of the following conditions:

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Company Stockholder Approval, which cannot be waived by any party; and

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no governmental authority having enacted, promulgated, issued, enforced or entered any law, regulation, order or injunction, that make illegal, enjoin, restrain or otherwise prohibit consummation of the Merger or the other material transactions contemplated by the Merger Agreement.

        In addition, the obligations of Powder and Merger Sub to consummate the Merger are further subject to the satisfaction or waiver of each of the following additional conditions:

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the representations and warranties of Pinnacle shall be true and correct as of the effective time of the Merger, except where the failure of any such representations and warranties to be true and correct has not had and would not have a material adverse effect on us;

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we shall have performed or complied with in all material respects our obligations, covenants and agreements in the Merger Agreement at or prior to the effective time of the Merger;

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no material adverse effect on us, as defined above, shall have occurred since the date of the Merger Agreement;

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•

we shall deliver to Powder a certificate, signed on behalf of Pinnacle by the chief executive officer and chief financial officer of Pinnacle (solely in his capacity as an officer of Pinnacle without personal liability), to the effect that the conditions listed above with respect to our representations and warranties, our performance or compliance of obligations, covenants and agreements and no material adverse effect have been satisfied;

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we shall have received, on or prior to the effective time of the Merger, an agreement acceptable to Powder which waives, for a period of not less than sixty days from the effective time of the Merger, any rights the lender under the credit agreement may have (whether of acceleration or otherwise) as a result of a Change of Control Event (as defined in the credit agreement) being deemed to have occurred as a result of the transactions contemplated by the Merger Agreement; and

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DLJ shall have contributed their shares to Powder and shall have otherwise complied with each of its obligations under the Contribution Agreement.

        Our obligations to consummate the Merger and the other transactions contemplated by the Merger Agreement are further subject to the satisfaction or waiver of each of the following additional conditions:

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the representations and warranties of Powder and Merger Sub shall be true and correct as of the effective time of the Merger, except where the failure of any such representations and warranties to be true and correct has not had and would not have a material adverse effect on Powder's ability to consummate the transactions;

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each of Powder and Merger Sub shall have performed or complied with in all material respects its obligations, covenants and agreements in the Merger Agreement at or prior to the effective time of the Merger; and

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Powder shall have delivered to us a certificate, signed on behalf of Powder by the chief executive officer and chief financial officer of Powder (solely in his or her capacity as an officer of Powder without personal liability), to the effect that the conditions listed above with respect to Powder's and Merger Sub's representations and warranties and Powder's and Merger Sub's performance or compliance of obligations, covenants and agreements have been satisfied.

        We can provide no assurance as to when or if all of the conditions to the Merger can or will be satisfied or waived by the party permitted to do so. If the Merger is not consummated on or before August 23, 2010 (the "Outside Date"), either Powder or we may terminate the Merger Agreement, unless it is not consummated because of the breach of the Merger Agreement by the party seeking termination.

Termination of the Merger Agreement

        The Merger Agreement may be terminated at any time prior to the completion of the Merger, whether before or after Pinnacle Stockholder Approval:

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by mutual written consent of us, Merger Sub and Powder.

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by either us or Powder under the following circumstances:

•

if the Merger has not closed on or before the Outside Date or a special meeting of Pinnacle's stockholders was held but Company Stockholder Approval was not obtained on or before the Outside Date; or

•

if any Governmental Authority has issued any order, decree or ruling which has become final and nonappealable enjoining or otherwise prohibiting the Merger.

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        Termination by Powder.    The Merger Agreement may be terminated by Powder under the following circumstances:

•

(A) an Adverse Recommendation Change shall have occurred, or (B) the Board shall not have (1) unconditionally rejected any tender or exchange offer that is commenced or an acquisition proposal that is made in writing to us and publicly disseminated within ten business days of the commencement or public dissemination thereof, and unconditionally recommended that the stockholders of Pinnacle reject any tender or exchange offer and not tender any shares of Common Stock into such tender or exchange offer, or (2) in the event of any tender or exchange offer that is commenced or an acquisition proposal that is made in writing to us and publicly disseminated, within five business days after a written request from Powder, we shall not have made or sent to our stockholders, a statement unconditionally reaffirming the recommendation to our stockholders to adopt the Merger Agreement and unconditionally recommending that the stockholders reject any tender or exchange offer, or (C) we shall have violated or breached in any material respect any of our non-solicitation obligations;

•

(A) there shall have occurred any material adverse effect on us or (B) we shall have breached any of our representations or warranties (other than representations and warranties with respect to the credit agreement and bankruptcy matters) or failed to perform in any material respect any of the obligations to be performed by us under the Merger Agreement, and such breach or failure (1) would give rise to a failure of a closing condition in Section 6.2(a) or 6.2(b) of the Merger Agreement, and (2) is incapable of being cured or is not cured on or before the later of (x) the Outside Date and (y) the 15^th day following written notice to us; or

•

we have breached our representations and warranties with respect to our credit agreement or bankruptcy matters.

        Termination by Pinnacle.    The Merger Agreement may be terminated by us under the following circumstances:

•

Powder or Merger Sub has (A) failed to materially perform its obligations under the Merger Agreement or (B) breached its representations or warranties which would reasonably be expected to materially adversely affect Powder's or Merger Sub's ability to consummate the Merger and in each case, such breach is not cured on or before the earlier of the Outside Date and the 15^th day following written notice to Powder; or

•

prior to obtaining Pinnacle Stockholder Approval, in connection with entering into a written definitive agreement for a superior proposal in full compliance with the Merger Agreement.

        Termination Fee.    We will be obligated to pay Powder the "Company Termination Fee," as defined below, under the following events:

•

(i) an acquisition proposal shall have been made to us or directly to the stockholders, (b) thereafter the Merger Agreement is terminated by Powder or us because the Outside Date has passed, and (c) on or before the date that is twelve months after the date of such termination, we enter into a definitive agreement with respect to, or consummate, any acquisition proposal;

•

(ii) Powder terminates the Merger Agreement pursuant to: (a) our Board making an Adverse Recommendation Change; (b) our Board not unconditionally rejecting any tender or exchange offer or an acquisition proposal or not unconditionally reaffirming its recommendation to our stockholders to adopt the Merger Agreement and unconditionally recommending that the stockholders reject any tender or exchange offer, as required under the Merger Agreement, or (c) our violation or breach in any material respect of any of our non-solicitation obligations, or (ii) following any time at which Powder was entitled to terminate the Merger Agreement

76

pursuant to (a), (b) or (c), the Merger Agreement is terminated by Powder or us if the Outside Date has passed; or

•

in connection with Pinnacle entering into a written definitive agreement for a Superior Proposal.

        We will be obligated to pay Powder the "Reduced Termination Fee," as defined below under the following events:

•

Powder terminates the Merger Agreement due to our breach of any of our representations and warranties (other than with respect to its credit agreement and bankruptcy matters), or failure to perform our covenants, and such breach or failure: (1) would give rise to a failure of a closing condition; and (2) is incapable of being cured or is not cured on or before the later of (x) the Outside Date and (y) the 15^th day following written notice to us;

•

Powder terminates the Merger Agreement due to our breach of our representations and warranties with respect to our credit agreement or bankruptcy matters;

•

Powder terminates the Merger Agreement due to any material adverse effect on us; or

•

following any time at which Powder was entitled to terminate the Merger Agreement pursuant to the aforementioned items under the Reduced Termination Fee, the Merger Agreement is terminated by the Powder or us in the event the Outside Date passes.

        A "Company Termination Fee" means $1,000,000 plus all of Powder's out-of-pocket fees and expenses (capped at $600,000). A "Reduced Termination Fee" means $500,000 plus all of Powder's out-of-pocket fees and expenses (capped at $600,000).

•

We will be obligated to pay only Powder's out-of-pocket fees and expenses (capped at $600,000) if the Merger Agreement is terminated by Powder or us because the Outside Date has passed or because Company Stockholder Approval was not obtained at the special meeting of the stockholders on or before the Outside Date and no termination fee is payable (or yet payable) under the preceding paragraphs; provided that if a termination fee becomes payable after such date, we will be obligated to pay such termination fee.

        As previously disclosed herein, our current event of default under the term of our credit agreement is a breach of our representations and warranties under the Merger Agreement. As of the date of this proxy statement, Powder has not terminated the Merger Agreement or waived the default. If we do not: (i) cure the existing breach under out credit agreement and the resulting breach under the Merger Agreement, and (ii) Powder terminates the Merger because of such breach, we will be obligated to pay Powder a $500,000 termination fee and reimburse Powder for its expenses.

Expenses and Fees

        Subject to the exceptions described above under "—Termination of the Merger Agreement," whether or not the Merger is consummated, all fees and expenses incurred in connection with the Merger Agreement will be paid by the party incurring such expenses.

Amendment

        The parties may agree in writing to amend the Merger Agreement before our stockholders have approved the Merger Agreement; provided, however, that after such approval by the stockholders no amendments may be made that require further stockholder approval under any applicable law without receiving such stockholder approval.

        Any party may extend the time for the performance of any obligation or other act of any party to the Merger Agreement, waive in writing any inaccuracy in the representations and warranties of any other party contained in the Merger Agreement, or waive in writing compliance with any agreement of any other party or any condition to its own obligations contained in the Merger Agreement; provided, however, that Company Stockholder Approval cannot be waived by any party.

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RIGHTS OF DISSENT AND APPRAISAL

        Under the General Corporation Law of the State of Delaware (the "DGCL"), you have the right to dissent from the Merger and to receive payment in cash for the fair value of your Common Stock as determined by the Delaware Court of Chancery, together with a fair rate of interest, if any, as determined by the court, in lieu of the consideration you would otherwise be entitled to pursuant to the Merger Agreement. These rights are known as appraisal rights. Pinnacle stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. Pinnacle will require strict compliance with the statutory procedures.

        The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the Merger and perfect appraisal rights.

        This summary, however, is not a complete statement of all applicable requirements and is qualified in its entirety by reference to Section 262 of the DGCL, the full text of which appears in Exhibit D to this proxy statement. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL may result in a termination or waiver of your appraisal rights.

        Section 262 requires that stockholders be notified that appraisal rights will be available not less than twenty (20) days before the stockholders' meeting to vote on the Merger. A copy of Section 262 must be included with such notice. This proxy statement constitutes Pinnacle's notice to its stockholders of the availability of appraisal rights in connection with the Merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Exhibit D since failure to timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under the DGCL.

        If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:

•

You must deliver to Pinnacle a written demand for appraisal of your shares before the vote with respect to the Merger is taken. This written demand for appraisal must be in addition to and separate from any proxy or vote abstaining from or voting against the adoption of the Merger Agreement. Voting against or failing to vote for the adoption of the Merger Agreement by itself does not constitute a demand for appraisal within the meaning of Section 262; and

•

You must not vote in favor of or consent to the adoption of the Merger Agreement. A vote in favor of the adoption of the Merger Agreement, by proxy, over the Internet, by telephone or in person, will constitute a waiver of your appraisal rights and will nullify any previously filed written demands for appraisal. If you fail to comply with either of these conditions and the Merger is completed, you will be entitled to receive the cash payment for your shares of Common Stock as provided for in the Merger Agreement, but you will have no appraisal rights with respect to your shares of Common Stock.

        All demands for appraisal should be addressed to Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801, Attention: Ronald T. Barnes. Demands for appraisal must be delivered before the vote on the Merger Agreement is taken at the special meeting and should be executed by, or on behalf of, the record holder of the shares of Common Stock. The demand must reasonably inform Pinnacle of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

        To be effective, a demand for appraisal by a holder of Common Stock must be made by, or in the name of, such registered stockholder, fully and correctly, as the stockholder's name appears on his or her stock certificate(s). Beneficial owners who do not also hold the shares of record may not directly make appraisal demands to Pinnacle. The beneficial holder must, in such cases, have the registered

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owner, such as a broker or other nominee, submit the required demand in respect of those shares. If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may exercise his or her rights of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner.

If you hold your shares of Common Stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

        Within ten (10) days after the effective time of the Merger, the surviving corporation must give written notice that the Merger has become effective to each Pinnacle stockholder who has properly filed a written demand for appraisal and who did not vote in favor of or consent to the Merger Agreement. At any time within sixty (60) days after the effective time of the Merger, any stockholder who has demanded an appraisal but has not commenced an appraisal proceeding or joined an appraisal proceeding as a named party has the right to withdraw the demand and to accept the cash payment specified by the Merger Agreement for his or her shares of Common Stock. Within one hundred twenty (120) days after the effective date of the Merger, any stockholder who has complied with Section 262 will, upon written request to the surviving corporation, be entitled to receive a written statement setting forth the aggregate number of shares not voted in favor of the Merger Agreement and with respect to which demands for appraisal rights have been received and the aggregate number of holders of such shares. A person who is the beneficial owner of shares stock held in a voting trust or by a nominee on behalf of such person may, in such person's own name, request from the corporation the statement described in the previous sentences. Such written statement will be mailed to the requesting stockholder within ten (10) days after such written request is received by the surviving corporation or within ten (10) days after expiration of the period for delivery of demands for appraisal, whichever is later. Within one hundred twenty (120) days after the effective time of the Merger, either the surviving corporation or any stockholder who has complied with the requirements of Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. A person who is the beneficial owner of shares stock held in a voting trust or by a nominee on behalf of such person may, in such persons own name, file such a petition. Upon the filing of the petition by a stockholder, service of a copy of such petition must be made upon the surviving corporation. There is no present intent on the part of Pinnacle or Powder to file an appraisal petition and stockholders seeking to exercise appraisal rights should not assume that the surviving corporation will file such a petition or that the surviving corporation will initiate any negotiations with respect to the fair value of such shares. Accordingly, holders of Common Stock who desire to have their shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262.

        If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving corporation, the surviving corporation will then be obligated, within twenty (20) days after receiving service of a copy of the petition, to provide the Chancery Court with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached by the surviving

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corporation. After notice, if so ordered by the Chancery Court, to dissenting stockholders who demanded appraisal of their shares, the Chancery Court is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Chancery Court may require the stockholders who have demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Chancery Court may dismiss the proceedings as to that stockholder.

        After determination of the stockholders entitled to appraisal of their shares of Common Stock, the Chancery Court will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, from the effective date of the Merger through the date of payment of the judgment, which will be compounded quarterly and will accrue at a default rate 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the Merger and the date of payment of the judgment. When the value is determined, the Chancery Court will direct the payment of such value, with interest, if any, to the stockholders entitled to receive the same, upon surrender by such holders of the certificates representing those shares.

You should be aware that the fair value of your shares as determined under Section 262 could be more than, the same as, or less than the value that you are entitled to receive under the terms of the Merger Agreement. Although Pinnacle believes that the Merger Consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Court. Moreover, neither Pinnacle nor Powder anticipates offering more than the Merger Consideration to any stockholder exercising appraisal rights and reserve the right to assert, in any appraisal proceeding, that, for purposes of Section 262, the "fair value" of a share of Common Stock is less than the Merger Consideration. In determining the "fair value," the Chancery Court is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining the fair value in an appraisal proceeding, stating that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered and that "[f]lair price obviously requires consideration of all relevant factors involving the value of a company." The Delaware Supreme Court has stated that in making this determination of fair value the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any merged corporation. Section 262 provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." In Cede & Co. v. Technicolor, Inc., The Delaware Supreme Court stated that such exclusion is a "narrow exclusion [that] does not encompass known elements of value," but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 to mean that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered."

        Costs of the appraisal proceeding may be imposed upon the surviving corporation and the stockholders participating in the appraisal proceeding by the Chancery Court as the Chancery Court deems equitable in the circumstances. Upon the application of a stockholder, the Chancery Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective time of the Merger, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior

80

to the effective time of the Merger; however, if no petition for appraisal is filed within one hundred twenty (120) days after the effective time of the Merger, or if the stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the terms of the Merger within sixty (60) days after the effective time of the Merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the cash payment for shares of his, her or its Common Stock pursuant to the Merger Agreement. Any withdrawal of a demand for appraisal made more than sixty (60) days after the effective time of the Merger may only be made with the written approval of the surviving corporation. In addition, no appraisal proceeding may be dismissed as to any stockholder without the approval of the Chancery Court, and such approval may be conditioned upon such terms as the Chancery Court deems just.

In view of the complexity of Section 262, Pinnacle stockholders who may wish to dissent from the Merger and pursue appraisal rights should consult their legal advisors.

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INFORMATION REGARDING PINNACLE GAS RESOURCES, INC.

Description of Business

        For a description of our business, see our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 31, 2010, which is attached as Exhibit F to this proxy statement. We refer to this report as the "Form 10-K." The Form 10-K attached to this proxy statement does not include the exhibits originally filed with such report.

Description of Property

        For a description of our properties, see the Form 10-K at page 1.

Legal Proceedings

        For a description of our legal proceedings, other than the litigation related to the Merger, see the Form 10-K at page 39. For a description of litigation related to the Merger, See "The Merger—Litigation Related to the Merger."

Financial Statements and Supplementary Financial Information

        Our audited financial statements for the years ended December 31, 2009 and 2008, along with supplementary financial information, are included in the Form 10-K beginning at page 68.

Management's Discussion and Analysis of Financial Condition and Results of Operations

        Our management's discussion and analysis of financial condition and results of operations are included in the Form 10-K beginning at page 46.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        None.

Historical Selected Financial Data

        Our historical selected financial data is included in the Form 10-K beginning at page 44.

Book Value Per Share

        Our book value per share of Common Stock is $1.24. as of December 31, 2009.

Quantitative and Qualitative Disclosures about Market Risk

        Our quantitative and qualitative disclosures about market risk are included in the Form 10-K beginning at page 66.

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MARKET PRICE AND DIVIDEND DATA

        Shares of our common stock are traded on the NASDAQ Global Market under the symbol "PINN." As of March 30, 2010, we had 30,320,525 shares of common stock outstanding held of record by approximately 22 record holders.

        The following table sets forth, for the periods indicated, the high and low sales prices for our common stock. The last reported sales price of our common stock on March 29, 2010 was $0.32 per share.

		Sales Price Range per Share of Common Stock
		High		Low
Year ended December 31, 2009
	Fourth quarter	$	0.45	$	0.30
	Third quarter		0.44		0.29
	Second quarter		0.53		0.20
	First quarter		0.43		0.13
Year ended December 31, 2008
	Fourth quarter	$	1.22	$	0.24
	Third quarter		3.40		1.19
	Second quarter		4.01		2.22
	First quarter		5.10		2.55

        We have not paid any dividends on our common stock to date and we do not expect to pay any dividends in the foreseeable future. Our credit facility prohibits the payment of dividends to stockholders without the prior written consent of the lenders.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth information as of March 26, 2010 concerning the shares of our Common Stock beneficially owned by:

•

each person known by us to be the beneficial owner of 5% or more of our outstanding common stock;

•

each of our directors;

•

each of our named executive officers; and

•

all directors and executive officers as a group.

        Except as indicated by footnote, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of capital stock shown as beneficially owned by them, and their address is c/o Pinnacle Gas Resources, Inc., 1 East Alger, Sheridan, Wyoming 82801.

Name and Address of Beneficial Owner	Number of Shares of Common Stock Beneficially Owned(9)		Percent of Class
DLJ Merchant Banking Partners III, L.P. and affiliated entities(1)		9,751,262		32.3	%
CCBM, Inc.(2)		2,555,825		8.4
Highview Capital Management, LLC(3)		1,875,503		6.2
Peter G. Schoonmaker(4)		405,900		1.3
Ronald T. Barnes(5)		326,500		1.1
Robert L. Cabes, Jr.		157,442		*
Thomas G. McGonagle(6)		284,281		*
Jeffrey P. Gunst		109,629		*
Sylvester P. Johnson, IV(7)		—		*
F. Gardner Parker		195,337		*
Susan C. Schnabel(8)		—		*
All directors and executive officers as a group (8 persons)		1,479,089		4.9	%

*

Less than 1%.

(1)

The reported shares are held by the following: (i) DLJ Merchant Banking Partners III, L.P.; (ii) DLJ Offshore Partners III, C.V.; (iii) DLJ Offshore Partners III-1, C.V.; (iv) DLJ Offshore Partners III-2, C.V.; (v) DLJ MB Partners III GmbH & Co. KG; (vi) Millennium Partners II, L.P.; (vii) MBP III Plan Investors, L.P.; and (viii) DLJ Merchant Banking III, Inc. The reported shares include 151,760 shares of restricted common stock granted to Susan C. Schnabel in her capacity as a director of Pinnacle, which shares were assigned to DLJ Merchant Banking III, Inc. for no consideration on March 4, 2010.

Investment and disposition decisions with regard to the shares of Common Stock held by DLJ Merchant Banking Partners III, L.P. and its affiliated entities are made by an investment committee that is currently comprised of Susan Schnabel and six other senior investment professionals who are affiliated or otherwise associated with Credit Suisse. The members of this investment committee are appointed by the general partner of the associate general partner of each of DLJ Merchant Banking Partners III, L.P. and its affiliated funds. The composition of the investment committee changes from time to time.

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No member of this investment committee individually has the authority to dispose of or vote the shares of Common Stock held by DLJ Merchant Banking Partners III, L.P. and its affiliated entities or the ability to block any disposition or voting of these shares. Accordingly, each member of the investment committee disclaims beneficial ownership of the shares of Common Stock held by DLJ Merchant Banking Partners III, L.P., except to the extent of his or her pecuniary interest therein.

Credit Suisse AG, a Swiss bank (the "Bank"), owns a majority of the voting stock of Credit Suisse Holdings (USA) Inc., a Delaware corporation, which in turn owns all of the voting stock of Credit Suisse (USA) Inc., a Delaware corporation ("CS-USA"). The entities discussed in the previous paragraph, other than DLJ Merchant Banking III, Inc., are private equity investment funds managed by indirect subsidiaries of CS-USA (including DLJ Merchant Banking III, Inc.) and form part of the Bank's asset management business. DLJ Merchant Banking III, Inc. is the general partner of these private equity investment funds. The ultimate parent company of the Bank is Credit Suisse Group AG ("CSG"). CSG disclaims beneficial ownership of the Common Stock that is beneficially owned by its direct and indirect subsidiaries.

(2)

CCBM, Inc. is a wholly owned subsidiary of Carrizo Oil & Gas, Inc. The address of each of Carrizo Oil & Gas Inc. and CCBM, Inc. is 1000 Louisiana Street, Suite 1500, Houston, Texas 77002. The reported shares include the 138,617 shares of restricted common stock granted to Sylvester P. Johnson, IV, all of which have vested.

(3)

Highview Capital Management, LLC has shared voting and dispositive power over the reported shares. Jeffrey Scott Wallace also has shared voting and dispositive power over the reported shares.

(4)

The reported shares include 82,500 and 150,000 shares issuable within 60 days upon exercise of options granted under our 2003 Stock Option Plan and Stock Incentive Plan, respectively. The reported shares also include 35,000 shares issuable within 60 days upon exercise of stock appreciation rights granted under our Stock Incentive Plan along with 100,000 shares of restricted common stock of which 88,331 shares are unvested and will vest between June 1, 2010 and July 20, 2012 or upon a change in control of the ownership of Pinnacle.

(5)

The reported shares include 202,500 shares of common stock issuable within 60 days upon exercise of options granted under our Stock Incentive Plan. The reported shares also include 29,000 shares issuable within 60 days upon exercise of stock appreciation rights granted under our Stock Incentive Plan along with 74,000 shares of restricted common stock of which 65,665 shares are unvested and will vest between June 1, 2010 and July 20, 2012 or upon a change in control of the ownership of Pinnacle.

(6)

The reported shares include 1,500 shares of restricted common stock that were granted effective August 22, 2007 and will vest on August 22, 2010 or upon a change in control of the ownership of Pinnacle.

(7)

Shares granted to Mr. Johnson in his capacity as a director of Pinnacle are held for the benefit of, and upon lapse of the restrictions have been transferred to, CCBM, Inc.

(8)

Shares granted to Ms. Schnabel in her capacity as a director of Pinnacle are held for the benefit of and, upon lapse of the restrictions, have been transferred to DLJ Merchant Banking III L.P.

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(9)

The number of shares beneficially owned is determined under rules promulgated by the SEC and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the stockholder has sole or shared voting power or investment power and also any shares that the stockholder has the right to acquire within 60 days through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity.

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DIRECTORS AND EXECUTIVE OFFICERS AND
CONTROLLING PERSONS OF PINNACLE AND DLJ

        Set forth below are lists of the directors and executive officers and certain other controlling persons of Pinnacle and DLJ

Pinnacle

        Neither Pinnacle nor any of its directors or officers has been convicted in a criminal proceeding during the past five years (excluding traffic violations or similar misdemeanors), and neither Pinnacle nor any of its directors or officers has been a party to any judicial or administrative proceeding during the past five years (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws or a finding of any violation of federal or state securities laws.

        Each director and executive officer listed below is a citizen of the United States and can be reached c/o Pinnacle Gas Resources, Inc., 1East Alger Street, Sheridan, Wyoming 82801 or at telephone number (307) 673-9710.

Name	Age		Position
Peter G. Schoonmaker		51	Chief Executive Officer, President and Director
Ronald T. Barnes		50	Chief Financial Officer, Senior Vice President and Secretary
Jeffrey P. Gunst		33	Director
Thomas G. McGonagle		50	Director
Robert L. Cabes, Jr.		40	Director
Sylvester P. Johnson, IV		54	Director
F. Gardner Parker		68	Director
Susan C. Schnabel		48	Director

        Peter G. Schoonmaker.    Mr. Schoonmaker has served as Pinnacle's Chief Executive Officer since Pinnacle's inception in June 2003, and as President and a director since February 2006. Mr. Schoonmaker has over 20 years of experience in the acquisition, exploration and development of coalbed methane properties as well as conventional oil and gas properties. From 1980 to 1985 Mr. Schoonmaker was an independent landman for various oil and gas companies and operated a land management company in Denver, Colorado. From 1985 to 1995 he served as President, owner and operator of a land and agricultural company based in Colorado and Wyoming. In 1995, Mr. Schoonmaker joined U.S. Energy, a publicly held mining and energy company, as a land manager and also became Executive Vice President and a director of Yellowstone Fuels Corporation, a subsidiary of U.S. Energy. In November 1999, U.S. Energy formed Rocky Mountain Gas, a coal bed natural gas company. He served as President, Chief Operating Officer and was a director of Rocky Mountain Gas from its inception until June 23, 2003.

        Ronald T. Barnes.    Mr. Barnes has served as our Chief Financial Officer and Senior Vice President since December 2005 and our Secretary since February 2006 and since joining Pinnacle in January 2004, has also served as our Vice President—Finance and our Controller. Mr. Barnes has 28 years of experience in public accounting and industry related to all aspects of the upstream sector of oil and gas acquisition, exploration, development and production. Prior to joining Pinnacle, Mr. Barnes worked for EnCana Oil and Gas (USA), Inc. from 2002 through January, 2004 as lead controller and was

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responsible for all accounting aspects of U.S. operations. From 1988 through 2002, Mr. Barnes held various positions with JN Exploration and Production LP, including most recently serving as Controller and Vice President of Marketing of JN Exploration and Production where he managed the accounting and marketing for the acquisition, drilling and production of properties in 17 states and the Outer Continental Shelf of the Gulf of Mexico. From 1983 through 1988, Mr. Barnes held various positions with Raymond T. Duncan Oil Properties and from 1981 through 1983, he worked for a major public accounting firm. Mr. Barnes is a member of the Council of Petroleum Accountants Societies, the Independent Petroleum Association of Mountain States, the Petroleum Association of Wyoming and the Montana Petroleum Association. Mr. Barnes earned a B.S. in accounting from the University of Wyoming and an M.B.A. from the University of Colorado.

        Jeffrey P. Gunst.    Mr. Gunst has served as a director since our inception in June 2003. Mr. Gunst serves as a Principal at Avista Capital Holdings, L.P., a private equity firm focused on investments in the energy, media and healthcare sectors, where he has worked since its inception in July 2005. Mr. Gunst previously worked with Global Energy Partners, or GEP, a specialty group within Credit Suisse's asset management business that made investments in energy companies, beginning in 2001. Mr. Gunst currently serves as a director of Celtique Energie Limited, Peregrine Oil and Gas II, Spartan Offshore Holdings, Hansa Hydrocarbons, Royal Offshore, and ACP II Marcellus. From 1999 until joining GEP, Mr. Gunst was an investment banker for Credit Suisse and Donaldson, Lufkin and Jenrette where he worked primarily on energy transactions. Mr. Gunst received a B.B.A. and B.S. from Southern Methodist University.

        Thomas G. McGonagle.    Mr. McGonagle became a director in August 2007 and was elected Chairman of our Board of Directors in March 2009. From April 2007 to December 2008, Mr. McGonagle was Senior Vice President—Corporate Development at MacDermid, Incorporated, a specialty chemical company (formerly listed on NYSE: MRD). From 2003 until joining MacDermid, Mr. McGonagle was Senior Vice President and Chief Financial Officer at Vistar Corporation, a national food distribution company. From 2001 to 2003, Mr. McGonagle was Managing Director and Co-Head of the US Merchant Banking Group at Babcock & Brown LP in New York. From 1987 until joining Babcock & Brown, Mr. McGonagle was Managing Director of the Financial Sponsors Group of Donaldson, Lufkin & Jenrette / Credit Suisse. In this role, Mr. McGonagle was involved in numerous principal investment transactions, debt and equity securities offerings, and mergers and acquisitions across many different industries. Mr. McGonagle is also a director of Consolidated Container Company LLC, located in Atlanta, Georgia. Mr. McGonagle received a B.A. in Economics from Dartmouth College and a M.B.A. from the Amos Tuck School of Business Administration at Dartmouth College.

        Robert L. Cabes, Jr.    Mr. Cabes has served as a director since Pinnacle's inception in June 2003. Mr. Cabes is a Partner of Avista Capital Holdings, L.P., a private equity firm focused on investments in the energy, healthcare and media sectors. From April 2001 to June 2005, Mr. Cabes served as a Principal of Global Energy Partners, or GEP, a specialty group within Credit Suisse's asset management business that made investments in energy companies Mr. Cabes is based in Houston, Texas and currently serves as a director of ACP II Marcellus, Hansa Hydrocarbons, Royal Offshore, Celtique Energie, Geokinetics, Laramie Energy, Manti Exploration and Spartan Offshore Drilling. He previously served as a Director of Copano Energy, Medicine Bow Energy and MedServe. Prior to joining GEP, Mr. Cabes was with Credit Suisse's and Donaldson, Lufkin and Jenrette's Investment Banking Division (prior to its acquisition by Credit Suisse in 2000) where he worked on debt and equity securities underwriting and mergers and acquisitions for energy companies. Before joining Donaldson, Lufkin and Jenrette, Mr. Cabes spent six years with Prudential Securities in its energy corporate finance group in Houston and New York. Mr. Cabes holds a B.B.A. from Southern Methodist University and is a CFA charterholder.

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        Sylvester P. Johnson, IV.    Mr. Johnson has served as a director since Pinnacle's inception in June 2003. Mr. Johnson has served as President, Chief Executive Officer and a director of Carrizo since December 1993. Prior to December 1993, he worked for Shell Oil Company for 15 years. His managerial positions included Operations Superintendent, Manager of Planning and Finance and Manager of Development Engineering. Mr. Johnson serves as a director of Basic Energy Services, Inc. Mr. Johnson is a Registered Petroleum Engineer and has a B.S. in Mechanical Engineering from the University of Colorado.

        F. Gardner Parker.    Mr. Parker has served as a director since our inception in June 2003. Mr. Parker has served as a Trust Manager with Camden Property Trust, a real estate investment trust, since 1998 and a director since 1993. Mr. Parker also serves on the Board of Directors of Carrizo, Sharps Compliance Corp. and Hercules Offshore, Inc. Mr. Parker serves on the Board of Directors of the following private companies: Gillman Automobile Dealerships, Net Near U Communications, Camp Longhorn, Inc. and Sherwood Healthcare Inc. In addition, Mr. Parker serves as Chairman of Norton Ditto Inc. Mr. Parker also worked with Ernst & Ernst (now Ernst &Young LLP) for 14 years, for seven of which he served as a partner. Mr. Parker received a B.B.A. from The University of Texas. Mr. Parker is also Chairman of the Board of Triangle Petroleum and is Board certified by the National Association of Corporate Directors.

        Susan C. Schnabel.    Ms. Schnabel has served as a director since July 2005. Ms. Schnabel has served as a Managing Director with and partner in DLJ Merchant Banking Partners, the leveraged corporate private equity platform of Credit Suisse's asset management business, since 1998. She joined Donaldson, Lufkin and Jenrette's Investment Banking Division in 1990. In 1997, she left Donaldson, Lufkin and Jenrette's Investment Banking Division to serve as Chief Financial Officer of PETsMART, a high growth specialty retailer of pet products and supplies, and joined DLJ Merchant Banking in her present capacity in 1998. Ms. Schnabel is also a director of DeCrane Aircraft Holdings, Inc., Target Media Partners, STR Holdings, Inc., Total Safety, U.S. Inc., Luxury Optical Holdings, Inc., Frontier Drilling, Inc., Enduring Resources, LLC, and Laramie Energy II, LLC. Ms. Schnabel received a B.S. from Cornell University and an M.B.A. from Harvard Business School.

DLJ

        DLJ is comprised of DLJ Merchant Banking Partners III, L.P., a Delaware limited partnership, DLJ Offshore Partners III, C.V., a Netherlands Antilles limited partnership, DLJ Offshore Partners III-1, C.V., a Netherlands limited partnership, DLJ Offshore Partners III-2, C.V., a Netherlands limited partnership, DLJ MB Partners GmbH & Co. KG, a German limited partnership, Millennium Partners II, L.P., a Delaware limited partnership, MBP III Plan Investors, L.P., a Delaware limited partnership, and MB III Inc. MB III Inc. is also the managing general partner of each of the partnerships, which constitute a group of affiliated private equity investment funds.

        MB III Inc. is affiliated with Credit Suisse AG, a Swiss bank as follows: Credit Suisse AG owns directly a majority of the voting stock, and all of the non-voting stock, of Credit Suisse Holdings (USA), Inc. ("CS Hldgs USA Inc"), a Delaware corporation. The ultimate parent company of Credit Suisse AG and CS Hldgs USA Inc, and the direct owner of the remainder of the voting stock of CS Hldgs USA Inc, is Credit Suisse Group AG ("CSG"), a corporation formed under the laws of Switzerland. CS Hldgs USA Inc owns all of the voting stock of Credit Suisse (USA), Inc. ("CS USA Inc"), a Delaware corporation and holding company. CS USA Inc is the sole stockholder of Credit Suisse Private Equity, Inc., a Delaware corporation ("CSPE"), and CSPE is the sole stockholder MB III Inc. The business address and business telephone number of each of the foregoing other than Credit Suisse AG and CSG is Eleven Madison Avenue, New York, New York 10010 and (212) 325-2000. The business address and business telephone number of Credit Suisse AG is Uetlibergstrasse 231, P.O. Box 900, CH 8070 Zurich, Switzerland and +41 44 332 64 00. The business

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address and business telephone number of CSG is Paradeplatz 8, P.O. Box 1, CH 8070 Zurich, Switzerland and +41 44 333 99 11.

        CSG is a global financial services company, active in all major financial centers and providing a comprehensive range of banking products. The Bank is comprised of the Investment Banking division, the Asset Management division and the Private Banking division. The Investment Banking division provides financial advisory and capital raising services and sales and trading to institutional, corporate and government clients worldwide. The Asset Management division provides asset management and investment advisory services to institutional, mutual fund and private investors worldwide and offers products across a broad range of investment classes, including alternative investments. The Private Banking division offers global private banking and corporate and retail banking services in Switzerland.

        Except as described in this paragraph, neither DLJ nor any of its affiliated entities listed above has been (i) convicted in a criminal proceeding during the past five years or (ii) party to any judicial or administrative proceeding during the past five years (except for matters that were dismissed without sanction or settlement) that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. On December 16, 2009, the Board of Governors of the Federal Reserve System ordered Credit Suisse AG to submit and adopt an enhanced global regulatory compliance program and to submit written progress reports on compliance with the order in connection with deferred prosecution agreements and a settlement agreement that Credit Suisse AG entered into with the U.S. Department of Justice, the District Attorney for the County of New York and the Office of Foreign Asset Control ("OFAC") of the U.S. Department of the Treasury, respectively, concerning alleged violations of the International Emergency Economic Powers Act (50 U.S.C. § 1705) and related regulations (31 C.F.R. §§ 560.03-4), the Trading with the Enemy Act (50 U.S.C. §§ 1-44) and certain executive orders.

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FUTURE STOCKHOLDER PROPOSALS

        If the Merger is completed, we will have no public stockholders and no public participation in any of our future stockholder meetings. We intend to hold an annual meeting of stockholders in 2010 only if the Merger is not completed. Stockholder proposals for consideration at the 2010 Annual Meeting of Stockholders ("2010 Annual Meeting") must be received by us a reasonable time before we begin to print and send our proxy materials for the 2010 Annual Meeting in order to be eligible for inclusion in our proxy statement and proxy used in connection with the 2010 Annual Meeting. Stockholder proposals as to which we receive notice that are proposed to be brought before the 2010 Annual Meeting (outside the process of the SEC's rule on stockholder proposals) will be considered not properly brought before the meeting, and will be out of order, unless we receive the notice as to that matter not later than the close of business on the tenth day following the day on which notice of the date of the 2010 Annual Meeting is mailed or public disclosure of the 2010 Annual Meeting date is made.

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HOUSEHOLDING OF SPECIAL MEETING MATERIALS

        Some banks, brokers and other nominee record holders may be participating in the practice of "householding" proxy statements. This means that only one copy of our proxy statement may have been sent to multiple stockholders in your household. We will promptly deliver a separate copy of the proxy statement to you upon written or oral request to Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801, Attention: Corporate Secretary, (307) 673-9710. If you want to receive separate copies of the proxy statement in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address and telephone number.

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WHERE YOU CAN FIND MORE INFORMATION

        We are subject to the informational requirements of the Exchange Act. We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC's website at www.sec.gov. You also may obtain free copies of the documents we file with the SEC by going to the "SEC Filings" section of our website at www.pinnaclegas.com. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference.

        Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of proxy statements and any of the documents incorporated by reference in this document or other information concerning us, without charge, by written or telephonic request directed to Pinnacle Gas Resources, Inc., 1 East Alger Street, Sheridan, Wyoming 82801, Attn: Ronald T. Barnes, Secretary, on our website at www.pinnaclegas.com or from the SEC through the SEC's website at http://www.sec.gov.

        Powder has supplied all information pertaining to Powder and Merger Sub, and we have supplied all information pertaining to us.

        THIS PROXY STATEMENT DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE SUCH PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT TO VOTE YOUR SHARES AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT.

        THIS PROXY STATEMENT IS DATED                    , 2010. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.

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Exhibit A

Execution Copy

AGREEMENT AND PLAN OF MERGER

by and between

POWDER HOLDINGS, LLC,

POWDER ACQUISITION CO.

and

PINNACLE GAS RESOURCES,  INC.

February 23, 2010

TABLE OF CONTENTS

ARTICLE 1 THE MERGER
Section 1.1	The Merger	A-2
Section 1.2	Closing	A-2
Section 1.3	Effective Time	A-2
Section 1.4	Effect of the Merger	A-2
Section 1.5	Certificate of Incorporation; Bylaws	A-2
Section 1.6	Directors and Officers	A-2
ARTICLE 2 EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES
Section 2.1	Conversion of Securities	A-3
Section 2.2	Surrender of Shares; Stock Transfer Books	A-4
Section 2.3	No Further Ownership Rights in Company Capital Stock	A-5
Section 2.4	Lost, Stolen or Destroyed Certificates	A-5
Section 2.5	Termination of Payment Account, Escheat, etc.	A-5
Section 2.6	Company Equity Plans	A-5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1	Organization and Standing; Subsidiaries	A-6
Section 3.2	Capitalization	A-7
Section 3.3	Authorization	A-8
Section 3.4	Non-Contravention; Governmental Authorities and Consents	A-8
Section 3.5	Compliance	A-9
Section 3.6	Litigation	A-9
Section 3.7	SEC Filings; Company Financial Statements	A-10
Section 3.8	No Undisclosed Liabilities	A-12
Section 3.9	Absence of Certain Changes or Events	A-12
Section 3.10	Taxes	A-13
Section 3.11	Title to Property and Assets	A-15
Section 3.12	Intellectual Property	A-15
Section 3.13	Insurance	A-16
Section 3.14	Contracts	A-16
Section 3.15	Permits; Compliance	A-17
Section 3.16	Employment Matters	A-18
Section 3.17	Environmental Matters	A-19
Section 3.18	Employee Benefits	A-20
Section 3.19	Real Property	A-24
Section 3.20	Interested Party Transactions	A-24
Section 3.21	Certain Agreements Affected by the Transactions	A-24
Section 3.22	Proxy Statement; Other Information	A-24
Section 3.23	Section 203	A-25
Section 3.24	Takeover Laws	A-25
Section 3.25	Opinion of Financial Advisor	A-25
Section 3.26	Reserve Information	A-25
Section 3.27	Derivative Transactions and Hedging	A-27
Section 3.28	Natural Gas Act	A-27

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Section 3.29	Brokers' and Finders' Fees	A-28
Section 3.30	Credit Agreement	A-28
Section 3.31	Bankruptcy Matters	A-28
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Section 4.1	Organization and Standing	A-28
Section 4.2	Authorization	A-28
Section 4.3	Governmental Authorities and Consents	A-29
Section 4.4	Proxy Statement; Other Information	A-29
Section 4.5	Sufficient Funds	A-29
ARTICLE 5 ADDITIONAL AGREEMENTS
Section 5.1	Proxy Statement; Stockholders Meeting	A-29
Section 5.2	Access to Information; Confidentiality; Financial Statements	A-30
Section 5.3	No Solicitation of Transactions	A-30
Section 5.4	Governmental Filings; Efforts	A-33
Section 5.5	Certain Notices	A-35
Section 5.6	Public Announcements	A-35
Section 5.7	Conduct of Business of the Company	A-35
Section 5.8	Actions Requiring Parent's Consent	A-36
Section 5.9	Indemnification of Directors and Officers	A-38
Section 5.10	Takeover Laws	A-39
Section 5.11	Section 16 Matters	A-39
Section 5.12	Stockholder Litigation	A-39
Section 5.13	Termination of Stockholders Agreement	A-40
Section 5.14	Credit Agreement Waivers	A-40
Section 5.15	Closing Conditions	A-40
Section 5.16	Adoption of Merger Agreement	A-40
ARTICLE 6 CONDITIONS TO THE MERGER
Section 6.1	Conditions to Each Party's Obligation to Effect the Merger	A-40
Section 6.2	Conditions to the Obligations of Parent and Merger Sub	A-40
Section 6.3	Conditions to the Obligations of the Company	A-41
ARTICLE 7 TERMINATION, AMENDMENT AND WAIVER
Section 7.1	Termination	A-42
Section 7.2	Effect of Termination	A-43
Section 7.3	Fees and Expenses	A-43
Section 7.4	Extension; Waiver	A-45
Section 7.5	Amendment	A-45
ARTICLE 8 GENERAL PROVISIONS
Section 8.1	Non-Survival of Representations and Warranties	A-45
Section 8.2	Notices	A-45
Section 8.3	Severability	A-46
Section 8.4	Entire Agreement	A-46

A-ii

Section 8.5	Assignment	A-46
Section 8.6	Mutual Drafting	A-47
Section 8.7	Parties in Interest	A-47
Section 8.8	Specific Performance	A-47
Section 8.9	Governing Law	A-47
Section 8.10	Jurisdiction	A-47
Section 8.11	Waiver of Jury Trial	A-47
Section 8.12	Headings	A-47
Section 8.13	Interpretation	A-48
Section 8.14	Counterparts	A-48
Annex and Exhibit
Annex A	Index of Defined Terms
Exhibit A	Certificate of Incorporation

A-iii

AGREEMENT AND PLAN OF MERGER

        THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is entered into as of February 23, 2010 by and among Powder Holdings, LLC, a Delaware limited liability company ("Parent"), Powder Acquisition Co., a Delaware corporation and a direct, wholly owned subsidiary of Parent ("Merger Sub"), and Pinnacle Gas Resources, Inc., a Delaware corporation (the "Company"). Each of Parent, Merger Sub and the Company are sometimes referred to herein as a "Party" and collectively as the "Parties." An index of terms defined in this Agreement is set forth on Annex A attached hereto.

        WHEREAS, DLJ Merchant Banking Partners III, L.P. and affiliated investment funds (collectively, "DLJ") own approximately 32% of the outstanding Common Stock as of the date hereof;

        WHEREAS, pursuant to the Contribution Agreement dated as of the date hereof (the "Contribution Agreement"), DLJ, has agreed to contribute its shares of Common Stock to Parent immediately prior to the Effective Time in exchange for interests in Parent (the "Contribution");

        WHEREAS, certain stockholders of the Company are party to the Amended and Restated Securityholders Agreement of the Company, dated February 16, 2006 (as amended from time to time, the "Stockholders Agreement");

        WHEREAS, the Parties intend that Merger Sub be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a direct, wholly owned subsidiary of Parent pursuant to the provisions of the General Corporation Law of the State of Delaware (the "DGCL") and upon the terms and subject to the conditions set forth herein;

        WHEREAS, Merger Sub shall merge with and into the Company in the Merger and each share of the Company's common stock, par value $0.01 per share (the "Common Stock"), that is issued and outstanding immediately prior to the Effective Time (other than shares of Common Stock held in treasury of the Company and shares of Common Stock owned, directly or indirectly, by Parent or Merger Sub or held by the Company, which will be canceled with no consideration issued in exchange therefor, and shares of Common Stock as to which appraisal rights have been perfected pursuant to the DGCL) will be canceled and converted into the right to receive an amount equal to $0.34 per share in cash, all upon the terms and conditions set forth herein;

        WHEREAS, concurrently with the execution of this Agreement, and as a condition and material inducement to Parent's and Merger Sub's willingness to enter into this Agreement, Parent, Merger Sub, the Company and certain officers, directors and principal stockholders of the Company have entered into a Voting Agreement (the "Voting Agreement");

        WHEREAS, the board of directors of the Company (the "Board of Directors"), acting upon the unanimous recommendation of a special committee (the "Special Committee") of the Company's Board of Directors, the members of which are not affiliated with DLJ and are not members of the Company's management, formed on October 13, 2009 for the reasons set forth in the resolution establishing the Special Committee, has (a) determined that the Merger and the other transactions contemplated by this Agreement are fair and in the best interests of the Company and its stockholders, (b) approved and declared this Agreement advisable in accordance with the DGCL, (c) approved the execution, delivery and performance of the Voting Agreement and (d) resolved to recommend that the Company's stockholders adopt this Agreement (the "Recommendation") and directed that such matter be submitted for consideration of the stockholders of the Company at the Company Stockholder Meeting (the actions described in this paragraph are referred to as the "Board Actions");

        WHEREAS, the board of directors of each of Parent and Merger Sub have approved this Agreement and declared it advisable for Parent and Merger Sub, respectively, to enter into this Agreement.

A-1

        NOW, THEREFORE, in consideration of the premises and of representations, warranties, covenants and agreements contained herein, and intending to be legally bound hereby, the Parties agree as follows:

ARTICLE 1
THE MERGER

        Section 1.1    The Merger.     Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, Merger Sub shall merge with and into the Company at the Effective Time. As a result of the Merger, the separate corporate existence of Merger Sub shall cease, and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation").

        Section 1.2    Closing.     Unless this Agreement shall have been terminated in accordance with Section 7.1, and subject to the provisions of ARTICLE 6, the closing of the Merger (the "Closing") shall take place at the offices of Vinson & Elkins L.L.P., 1001 Fannin Street, Suite 2500, Houston, Texas 77002, at 10:00 a.m., local time, on the date (the "Closing Date") that is the second Business Day after the satisfaction or waiver (to the extent permitted by applicable Law and other than the condition specified in Section 6.1(a), which no Party may waive) of the conditions set forth in ARTICLE 6 (other than those conditions that by their nature are to be satisfied by actions to be taken at the Closing, but subject to the satisfaction or waiver of such conditions), or at such other place, date and time as the Company and Parent may agree in writing.

        Section 1.3    Effective Time.     Subject to the provisions of this Agreement, at the Closing, the Parties will cause a certificate of merger (the "Certificate of Merger") to be filed with the Secretary of State of the State of Delaware in accordance with Section 251 of the DGCL. The Merger will become effective at such time as the Certificate of Merger has been duly filed with the Secretary of State of the State of Delaware or at such later date or time as may be agreed by the Company and Merger Sub in writing and specified in the Certificate of Merger in accordance with the DGCL (the effective time of the Merger being hereinafter referred to as the "Effective Time").

        Section 1.4    Effect of the Merger.     At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL.

        Section 1.5    Certificate of Incorporation; Bylaws.

        (a)   The certificate of incorporation of the Company as in effect immediately prior to the Effective Time shall be amended in its entirety in the Merger to read as set forth in Exhibit A hereto, and as so amended, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable Law.

        (b)   At the Effective Time, the bylaws of the Company shall be amended and restated in its entirety to read as the bylaws of Merger Sub in effect immediately prior to the Effective Time, except that the name of the Surviving Corporation shall be "Summit Gas Resources, Inc."

        Section 1.6    Directors and Officers.     Each of the Parties shall take all necessary action to cause the directors of Merger Sub immediately prior to the Effective Time to be the initial directors of the Surviving Corporation, each to hold office in accordance with the certificate of incorporation and bylaws of the Surviving Corporation, and the officers of Merger Sub immediately prior to the Effective Time to be the initial officers of the Surviving Corporation, in each case retaining their respective positions, and until the earlier of their death, resignation or removal or until their respective successors are duly elected or appointed and qualified.

A-2

ARTICLE 2
EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE OF CERTIFICATES

        Section 2.1    Conversion of Securities.     At and as of the Effective Time, by virtue of the Merger and without any action on the part of Parent, Merger Sub, the Company or its stockholders:

        (a)   Each share of Common Stock issued and outstanding immediately prior to the Effective Time (except as provided in Section 2.1(b) or Section 2.1(c) below) shall be converted automatically into the right to receive an amount per share equal to $0.34 in cash (the "Merger Consideration") payable to the holder thereof, without interest, in the manner provided in Section 2.2, less any required withholding Taxes; provided, that it shall be a condition to the receipt by a stockholder of the Company of any Merger Consideration with respect to any share of Common Stock that the certificate representing such share immediately prior to the Effective Time (the "Certificates") shall have first been delivered to the Paying Agent pursuant to Section 2.2(c), duly endorsed in blank or accompanied by a duly executed stock power. Except as otherwise provided in Section 2.1(b), all shares of Common Stock outstanding immediately prior to the Effective Time shall no longer be outstanding upon the Effective Time and shall automatically be cancelled and shall cease to exist, and each such certificate which immediately prior to the Effective Time represented any shares of Common Stock shall thereafter only represent the right to receive the Merger Consideration therefor.

        (b)   Notwithstanding anything in this Agreement to the contrary, shares of Common Stock that are outstanding immediately prior to the Effective Time and that are held by any Person who is entitled to demand and properly demands appraisal of such shares of Common Stock ("Appraisal Shares") pursuant to, and who complies in all respects with, Section 262 of the DGCL ("Section 262") shall not be converted into the right to receive the Merger Consideration as provided in Section 2.1(a), but rather the holders of such Appraisal Shares shall be entitled to payment of the fair value of such Appraisal Shares in accordance with Section 262 (and at the Effective Time such Appraisal Shares shall no longer be outstanding and shall automatically be cancelled and shall cease to exist, and such holders shall cease to have any right with respect thereto, except the right to receive the fair value of such Appraisal Shares in accordance with Section 262); provided, however, that if any such holder shall fail to perfect or otherwise shall waive, withdraw or lose the right to appraisal under Section 262, then the right of such holder to be paid the fair value of such holder's Appraisal Shares shall cease and such Appraisal Shares shall be deemed to have been converted as of the Effective Time into, and to have become exchangeable solely for the right to receive, Merger Consideration as provided in Section 2.1(a). The Company shall give Parent (i) prompt notice of any demands for appraisal received by the Company, withdrawals of such demands, and any other instruments served pursuant to the DGCL and received by the Company and (ii) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal under DGCL.

        (c)   Each share of Common Stock held in the treasury of or reserved for issuance by the Company and each share of Common Stock owned by Parent, Merger Sub or any direct or indirect wholly owned subsidiary of Parent or the Company immediately prior to the Effective Time shall be cancelled and extinguished without any conversion thereof and no portion of the Merger Consideration shall be allocated or paid thereto.

        (d)   Each share of Merger Sub's common stock, par value $0.01 per share, issued and outstanding immediately prior to the Effective Time shall be converted into one validly issued, fully paid and nonassessable share of the Surviving Corporation's common stock, par value $0.01 per share.

        (e)   The Merger Consideration shall be adjusted to reflect any change in the number of shares of Common Stock issued and outstanding as of the Effective Time by reason of any stock dividend, stock split, recapitalization, combination, exchange of shares, merger, consolidation, reorganization or the like or any other change in the corporate or capital structure; provided, however, that nothing in this

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Section 2.1(e) shall be construed as permitting the Company to take any action or enter into any transaction otherwise prohibited by this Agreement.

        Section 2.2    Surrender of Shares; Stock Transfer Books.

        (a)   Prior to the Effective Time, Parent or Merger Sub will designate a bank, trust company or transfer agent to act as paying agent (the "Paying Agent") to facilitate the receipt by the Company's stockholders of the Merger Consideration in connection with the Merger.

        (b)   Promptly after the Effective Time, Parent shall cause the Merger Consideration to be delivered (other than any portion thereof allocable to any Appraisal Shares, which shall be withheld by Parent or the Surviving Corporation to satisfy related appraisal or dissenters rights matters and the costs thereof) by wire transfer of immediately available funds to an account designated in writing by the Paying Agent (the "Payment Account"). Upon the delivery of the appropriate funds to the Payment Account, Parent and the Surviving Corporation shall have no further liability or obligation with respect to the payment of the Merger Consideration. The Paying Agent shall, pursuant to irrevocable instructions, deliver the Merger Consideration contemplated to be paid pursuant to Section 2.1(a) out of the Payment Account. The Payment Account shall be invested by the Paying Agent as directed by Parent; provided, however, that such investments shall be in obligations of or guaranteed by the United States of America or any agency or instrumentality thereof and backed by the full faith and credit of the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker's acceptances of commercial banks with capital exceeding $1 billion (based on the most recent financial statements of such bank that are then publicly available). Any net profit resulting from, or interest or income produced by, such investments shall be payable to Parent or an affiliate of Parent as Parent directs. The Payment Account shall not be used for any purpose other than as set forth in this Section 2.2(b).

        (c)   Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each holder of record of a Certificate whose shares of Common Stock were converted into the right to receive the Merger Consideration pursuant to Section 2.1(a) a letter of transmittal, which shall (i) specify that delivery of the Certificates shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent and (ii) provide instructions for the holders of the Certificates to use in effecting the surrender of the Certificates pursuant to such letter of transmittal. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions contained therein, and along with such other documents as may be required pursuant to such instructions, including those documents set forth in Section 2.1(a), (or, if such shares of Common Stock are held in book-entry or other uncertificated form, upon the entry through a book-entry transfer agent of the surrender of such shares on a book-entry account statement (it being understood that any references herein to "Certificates" shall be deemed to include references to book-entry account statements relating to the ownership of shares of Common Stock)), the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration which such holder has the right to receive in respect of the shares of Common Stock formerly represented by such Certificate, and the Certificate so surrendered shall forthwith be canceled. No interest will be paid or accrued on any Merger Consideration payable to holders of Certificates. In the event of a transfer of ownership of shares of Common Stock which is not registered in the transfer records of the Company, the Merger Consideration may be issued to a transferee if the Certificate representing such shares is presented to the Paying Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. Until surrendered as contemplated by this Section 2.2(c), each Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the Merger Consideration.

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        (d)   Each of the Paying Agent, Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of Common Stock such amounts as may be required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign tax Law or under any other applicable Law. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid. As used in this Agreement, "Code" means the Internal Revenue Code of 1986, as amended.

        Section 2.3    No Further Ownership Rights in Company Capital Stock.     All amounts paid upon the surrender or exchange of shares of Common Stock in accordance with the terms hereof shall be deemed to have been paid in full satisfaction of all rights pertaining to such shares, and there shall be no further registration of transfers on the records of the Surviving Corporation of shares of Common Stock that were outstanding immediately prior to the Effective Time. If, after the Effective Time, Certificates are presented to the Surviving Corporation for any reason, they shall be forwarded to the Paying Agent where they shall be cancelled and exchanged as provided in Section 2.2.

        Section 2.4    Lost, Stolen or Destroyed Certificates.     In the event any Certificate shall have been lost, stolen or destroyed, the Paying Agent shall issue in exchange for such lost, stolen or destroyed Certificate, upon the making of an affidavit of that fact by the holder thereof, such amounts as may be required pursuant to Section 2.2 with respect to the number of shares of Common Stock represented by such Certificate; provided, however, that Parent may, in its discretion and as a condition precedent to the payment thereof, require the owner of such lost, stolen or destroyed Certificate to deliver a bond in such sum as Parent may direct as indemnity against any claim that may be made against Parent, the Surviving Corporation or the Paying Agent with respect to the Certificate alleged to have been lost, stolen or destroyed.

        Section 2.5    Termination of Payment Account, Escheat, etc.     Any portion of the Payment Account which remains undistributed to the holders of Common Stock for one year after the Effective Time shall be delivered to Parent upon demand, and any holders of certificates formerly representing shares of Common Stock who have not theretofore complied with the exchange procedures set forth above shall thereafter look only to Parent (subject to abandoned property, escheat or similar Laws, as general creditors thereof) for the Merger Consideration, without any interest thereon. None of Parent, the Paying Agent, the Surviving Corporation or any party hereto shall be liable to any Person for any amount properly paid to a public official pursuant to any applicable abandoned property, escheat, or similar Law.

        Section 2.6    Company Equity Plans.

        (a)   As of the Effective Time, each option to purchase Common Stock or stock appreciation right regardless of whether settleable in Common Stock, cash or both (collectively, the "Company Stock Option Awards") granted under any equity based compensation plan of the Company (the "Company Stock Plans"), that is outstanding under a Company Stock Plan immediately prior to the Effective Time, whether or not then vested or exercisable, shall be, by virtue of the Merger and, except as otherwise provided below, without any action on the part of Parent, Merger Sub or the holders of the Company Stock Option Awards, be cancelled and the holder of such Company Stock Option Awards will, in full settlement of such Company Stock Option Awards, receive from or on behalf of Merger Sub a single lump sum cash payment in an amount (subject to any applicable withholding Tax) equal to the product of (x) the excess, if any, of the Merger Consideration over the exercise price or base price, as applicable, per share subject to such Company Stock Option Award, multiplied by (y) the total number of shares of Common Stock subject to such Company Stock Option Award (the aggregate amount of such cash payments hereinafter referred to as the "Option Award Consideration"). Merger Sub shall pay or cause to be paid to holders of the Company Stock Option Awards the Option Award Consideration as soon as practicable, and in any event within 30 business days (as such term is defined

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in Rule 14d-1(g)(3) promulgated under the Exchange Act, "Business Days"), following the Effective Time. In the event that the exercise price or base price, as applicable, of any Company Stock Option Award is equal to or greater than the Merger Consideration, such Company Stock Option Award shall be cancelled without payment therefor and have no further force or effect.

        (b)   As of the Effective Time, each restricted stock award, whether performance-based, time-based or otherwise (the "Company Restricted Stock Awards") that is outstanding under any Company Stock Plan immediately prior to the Effective Time, whether or not then vested, shall, by virtue of the Merger and without any action on the part of the holder thereof, be cancelled and converted into the right to receive a single lump sum cash payment in an amount (subject to any applicable withholding Tax) equal to the product of (x) the Merger Consideration multiplied by (y) the total number of shares of Common Stock subject to such Company Restricted Stock Award (the aggregate amount of such cash payments hereinafter referred to as the "Restricted Stock Award Consideration"). Merger Sub shall pay or cause to be paid to holders of the Company Restricted Stock Awards the Restricted Stock Award Consideration as soon as practicable, and in any event within 30 Business Days, following the Effective Time.

        (c)   Prior to the Effective Time, the Company will adopt such resolutions and will take such other actions as may be reasonably required to effectuate the actions contemplated by this Section 2.6, without paying any consideration or incurring any debts or obligations on behalf of the Company or the Surviving Corporation.

        (d)   Each of the Paying Agent, Parent and the Surviving Corporation shall be entitled to deduct and withhold from any consideration payable or otherwise deliverable pursuant to this Agreement to any holder or former holder of Company Stock Option Awards or Company Restricted Stock Awards such amounts as may be required to be deducted or withheld therefrom under the Code or under any provision of state, local or foreign Tax Law or under any other applicable Law. To the extent such amounts are so deducted or withheld, such amounts shall be treated for all purposes under this Agreement as having been paid to the Person to whom such amounts would otherwise have been paid.

ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY

        Except as described with particularity in the disclosure letter delivered by the Company to Merger Sub and Parent concurrently with the execution and delivery of this Agreement (the "Company Disclosure Letter") with respect to specific numbered and lettered sections and subsections of this ARTICLE 3, the Company hereby represents and warrants to Merger Sub and Parent as follows:

        Section 3.1    Organization and Standing; Subsidiaries.     The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. The Company has no Subsidiaries. The Company is duly qualified to conduct business and is in good standing to do business in each jurisdiction where such qualification or good standing is required, except where the failure to be so qualified or to be in good standing would not have a Company Material Adverse Effect. The Company has all requisite power and authority and all authorizations, licenses and permits necessary to own, lease and operate its properties and other assets, to conduct its businesses as presently conducted and as proposed to be conducted, to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. The copies of the Company's certificate of incorporation (the "Certificate of Incorporation") and bylaws (the "Bylaws") that are filed as exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 2008 (the "Company Form 10-K") are complete and correct copies thereof as in effect on the date hereof. The Company is not in default under or in violation of any provision of the Certificate of Incorporation or the Bylaws. For purposes of this agreement, the term "Subsidiary" means, with respect to a Party, any corporation, more than 50% of the outstanding voting securities of which are owned or controlled, directly or

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indirectly, by such Party or any Subsidiary of such Party, or a partnership, limited liability company, trust, association or other business entity in which such Party or any Subsidiary of such Party is a general partner, manager or trustee or owns or controls, directly or indirectly, interests entitling it to receive more than 50% of the profits or losses of such entity. As used in this Agreement, "Law" shall mean any foreign or domestic law, statute, code, ordinance, rule, regulation, or Order.

        Section 3.2    Capitalization.

        (a)   The authorized capital stock of the Company consists of: (i) 100,000,000 shares of Common Stock; and (ii) 25,000,000 shares of preferred stock, par value $0.01 ("Preferred Stock"). As of the close of business on February 8, 2010, (x) 30,320,525 shares of Common Stock were issued (and not held in the treasury of the Company) and outstanding, (y) no shares of Common Stock were issued and held in the treasury of the Company and (z) no shares of Preferred Stock were issued and outstanding or held in the treasury of the Company. Since February 2, 2010 through the date hereof, no shares of Common Stock or Preferred Stock have been issued. As of the close of business on February 8, 2010, (x) an aggregate of 391,226 shares of Common Stock were subject to and reserved for issuance pursuant to Company Stock Option Awards or lapse of restrictions of Company Restricted Stock Awards granted under the Company Stock Plans, and (y) an aggregate of zero (0) shares of Common Stock were subject to and reserved for issuance under the Company Stock Plans, and since February 8, 2010 and through the date hereof, no additional shares of Common Stock have become subject to issuance under the Company Stock Plans. Section 3.2(a) of the Company Disclosure Letter sets forth as of the close of business on February 8, 2010 a list of each outstanding Company Stock Option Awards and Company Restricted Stock Awards (the "Company Equity Awards") granted under the Company Stock Plans and (i) the name of the holder of such Company Equity Award, (ii) the number of shares of Common Stock subject to such outstanding Company Equity Award, (iii) the exercise price or base price of such Company Equity Award, if applicable, (iv) the date on which such Company Equity Award was granted or issued, (v) the applicable vesting schedule, and the extent to which such Company Equity Award is vested and exercisable as of the date hereof, and (vi) with respect to Company Stock Options, the date on which such Company Stock Option expires. All shares of Common Stock subject to issuance under the Company Stock Plans, upon issuance in accordance with the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable.

        (b)   All of the issued and outstanding shares of Common Stock have been duly authorized, validly issued and are fully paid and nonassessable, are free and clear of all Encumbrances created by or imposed upon the holders thereof, and are not subject to any preemptive rights or rights of first refusal created by statute, the Certificate of Incorporation or Bylaws or any Contract to which the Company is a party or by which it is bound. Except as set forth in the Certificate of Incorporation, (i) no subscription, warrant, option, conversion, exchange or other right (contingent or otherwise) to purchase or otherwise acquire any shares of capital stock of the Company is authorized or outstanding, (ii) the Company has no obligation, contract or commitment (contingent or otherwise) to issue any subscription, warrant, option, conversion, exchange or other such right or to issue, transfer, deliver, sell or cause to be outstanding, directly or indirectly, any shares of its capital stock or any evidences of indebtedness of the Company and (iii) the Company has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. All of the issued and outstanding shares of Common Stock and all outstanding subscription, warrant, option, conversion, exchange or other rights to purchase or otherwise acquire such Common Stock, directly or indirectly, have been offered, issued, granted or sold by the Company in compliance with applicable federal and state securities Laws or pursuant to valid exemptions therefrom. No debt securities of the Company are issued and outstanding.

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        (c)   The Company does not own or control, directly or indirectly, any shares of capital stock of any other corporation or any interest in any partnership, joint venture, limited liability company or other business enterprise or Person, nor does the Company have the right to acquire, directly or indirectly, any outstanding capital stock of, or other equity interests in, any other entity or Person.

        (d)   The Board or a committee administering the Company Stock Plans has the power and authority to adjust the terms of all outstanding Company Equity Awards granted under the Company Stock Plans, by resolution or other action, to provide that (i) each Company Stock Option Award outstanding immediately prior to the Effective Time shall be canceled in accordance with Section 2.6(a) , with the holder thereof becoming entitled to receive the amount of cash referred to in Section 2.6(a) and (ii) each Company Restricted Stock Award outstanding immediately prior to the Effective Time shall be canceled in accordance with Section 2.6(b), with the holder thereof becoming entitled to receive the cash payment referred to in Section 2.6(b). Such cancellation of a Company Stock Option Award or Company Restricted Stock Award in exchange for the cash payment described in Section 2.6(a) or Section 2.6(b) , as applicable, will constitute a release of any and all rights the holder of such Company Stock Option Award or Company Restricted Stock Award had or may have had in respect thereof. No consents of the holders of the Company Equity Awards are necessary to effectuate the foregoing. The Board or a committee administering the Company Stock Plans has the power and authority to cause the Company Stock Plans to terminate as of the Effective Time. Following the Effective Time, no holder of a Company Equity Award or any participant in the Company Stock Plans will have any right thereunder to acquire any capital stock of the Company or the Surviving Corporation.

        Section 3.3    Authorization.     The execution, delivery and performance by the Company of this Agreement, the Voting Agreement, and all other agreements executed by the Company in connection with the transactions contemplated by this Agreement, and the consummation by the Company of the transactions contemplated hereby and thereby, have been duly and validly authorized by all necessary corporate action (other than, in the case of the Merger, (a) the adoption of this Agreement by the holders of at least a majority of the outstanding shares of Common Stock (excluding shares of Common Stock beneficially owned by DLJ or any of their affiliates or by the Chief Executive Officer or the Chief Financial Officer of the Company) (the "Company Stockholder Approval") and (b) the filing with the Secretary of State of the State of Delaware the Certificate of Merger as required by the DGCL). This Agreement, the Voting Agreement, and each other agreement contemplated hereby and thereby to be executed by the Company in connection with the transactions contemplated by this Agreement have been duly and validly executed and delivered by the Company and constitute legal, valid and binding obligations of the Company, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization and other Laws relating to creditors' rights and to general principles of equity. The Board of Directors, acting upon the unanimous recommendation of the Special Committee, at a duly called and held meeting, has unanimously adopted the Board Actions. The only vote of the stockholders required to adopt this Agreement and approve the transactions contemplated hereby is the Company Stockholder Approval.

        Section 3.4    Non-Contravention; Governmental Authorities and Consents.

        (a)   The execution, delivery and performance by the Company of this Agreement, the Voting Agreement, and the other agreements executed by the Company in connection with the transactions contemplated by this Agreement, and the consummation of the transactions contemplated hereby and thereby, will not violate in any material respect any provision of Law (subject to compliance with the requirements set forth in clauses (i) through (iii) of Section 3.4(b) and, in the case of the consummation of the Merger, obtaining the Company Stockholder Approval) and will not violate or conflict with, result in the breach of any of the terms, conditions or provisions of, constitute a default under, create in any party the right to terminate, enforce or modify, accelerate payment or create or impose a lien pursuant to, or require a filing, consent or waiver, except as set forth in Section 3.4 of the Company

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Disclosure Letter, under, (i) the Certificate of Incorporation or Bylaws (each as amended to date), (ii) any written or oral contract, subcontract, understanding, bond, option, warranty, purchase order, sublicense, insurance policy, mortgage, indenture, lease, license, note, agreement, right of Intellectual Property or other legally binding instrument or arrangement to which the Company is a party or by which it or any of its properties or assets is bound (each, a "Contract") or (iii) any permit, decree, judgment, Order, injunction, statute, rule, regulation or other restriction applicable to the Company or its properties, in the case of clauses (ii) and (iii) other than any such violation, conflict, breach, default or right to terminate, enforce, modify, accelerate payment or create or impose a lien, or requirement of a filing, consent or waiver that would not have a Company Material Adverse Effect. The consummation of the transactions contemplated by this Agreement (either alone or together with any other event) shall not give rise to the right of any such person to receive any severance, retention or change in control payments. As used in this Agreement, "Order" shall mean any order, judgment, writ, stipulation, award, injunction, decree, arbitration award or finding of any Governmental Authority, arbitrator or mediator.

        (b)   No consent, approval, Order, or authorization of, or registration, qualification, designation, declaration, or filing with, any Governmental Authority is required on the part of the Company in connection with the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby, except for applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (including the filing of the Rule 13e-3 Transaction Statement on Schedule 13E-3 relating to the Merger and the other transactions contemplated hereby (the "Company Schedule 13E-3") and the Proxy Statement in connection with the Company Stockholder Approval), applicable requirements of Antitrust Laws, competition or merger control consents, and state securities, takeover and "blue sky" Laws, the applicable requirements of the Nasdaq Stock Market ("Nasdaq") and the filing with the Secretary of State of the State of Delaware of the Certificate of Merger as required by the DGCL. As used in this Agreement, "Antitrust Laws" means (i) the Sherman Act of 1890, as amended, (ii) the Clayton Antitrust Act of 1914, as amended, (iii) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") or (iv) any other Laws that are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization or restraint of trade or significant impediments or lessening of competition or creation or strengthening of a dominant position through merger or acquisition and any other Law requiring parties to submit a filing to a Governmental Authority and observe a waiting period under any of the foregoing Laws. As used in this Agreement, "Governmental Authority" means any governmental or quasi-governmental body of the United States, or any other country, including any state, province, county, city or other political subdivision thereof, or any authority, agency, court, instrumentality or statutory or regulatory body of any of the foregoing.

        Section 3.5    Compliance.     The Company is and, since January 1, 2009, has been in compliance with all Laws or Orders applicable to the Company or by which the Company or any of its businesses or properties is bound, except for such non-compliance that would not have a Company Material Adverse Effect. To the Company's knowledge, no Governmental Authority has issued any notice or notification stating that the Company is not in compliance with any Law, except where such non-compliance would not have a Company Material Adverse Effect.

        Section 3.6    Litigation.     Except for matters that would not have a Company Material Adverse Effect, there is no action, suit, mediation, arbitration, claim, charge, grievance, complaint or proceeding, or any governmental action, proceeding, inquiry or investigation (collectively, "Proceeding") pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its properties or assets in or before any Governmental Authority or before any mediator or arbitrator. Section 3.6 of the Company Disclosure Letter lists all Proceedings that the Company has pending against other parties and all Proceedings that are pending against the Company. The Company is not subject to or bound by any Order. As used in this Agreement, the term "Company Material Adverse

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Effect" means any circumstance, event, change or effect (whether or not foreseeable or known as of the date of this Agreement) that, individually or in the aggregate with all other circumstances, events, changes and effects, (a) is, or would reasonably be expected to be, materially adverse to the assets, business, condition (financial or otherwise), or results of operations of the Company (whether or not such circumstance, event, change or effect has, during the period or at any time in question, manifested itself in the historical financial statements or results of the Company), including any circumstance, event, change or effect that would result in (1) the Company's net production of natural gas to be less than 6.75 MMcf, based on the average daily production for any rolling five day period, on any day after the date hereof; (2) the Company's proved reserves of natural gas as of (x) December 31, 2009, or (y) the last day of any fiscal quarter occurring after the date hereof to be less than 23.0 Bcf based on a constant price of CIG Rocky Mountain Index of $4.00 per Mcf and the reserve report prepared by Netherland, Sewell & Associates, Inc.; or (3) an aggregate net reduction in the net mineral acres owned by the Company within the Powder River Basin play in excess of 30,000 net mineral acres with initial net acreage indicated on Section 3.11 ("Summary of Acreage") of the Company Disclosure Letter or (b) would prevent the ability of the Company to perform its obligations under this Agreement or consummate the transactions contemplated hereby; provided, however, that, for the purposes of clause (a), no event, change or effect to the extent arising out of, resulting from or attributable to the following shall be deemed to constitute a Company Material Adverse Effect or shall be taken into account when determining whether a Company Material Adverse Effect has occurred or is reasonably expected to occur: (i) general industry, economic, market or political conditions; (ii) acts of war, sabotage or terrorism; (iii) the announcement or pendency of the transactions contemplated by this Agreement; (iv) any changes in GAAP, applicable Law or the interpretation thereof; (v) the taking of any specific action at the express written direction of Parent; or (vi) a decline in the market price, or a change in the trading volume, of the shares of Common Stock (it being understood that any cause of any such decline or change may be taken into consideration when determining whether a Company Material Adverse Effect has occurred or is reasonably expected to occur); provided, further, however, that any circumstance, event, change and effect referred to in clauses (i), (ii) or (iv) immediately above shall be taken into account in determining whether a Company Material Adverse Effect has occurred or is reasonably expected to occur to the extent that such event, change or effect has a disproportionate effect on the Company, compared to other participants in the industries in which the Company conducts its business.

        Section 3.7    SEC Filings; Company Financial Statements.

        (a)   The Company has filed or furnished, and will file or furnish until the Effective Time, each form, report, statement, schedule, document, certification, registration statement, prospectus and definitive proxy statement (including all exhibits, amendments and supplements thereto and all information incorporated by reference) required to be filed or furnished by the Company with the Securities and Exchange Commission (the "SEC") under the Securities Act or the Exchange Act (the "Company SEC Filings") since January 1, 2007. The Company SEC Filings (i) were filed or furnished on a timely basis, (ii) were prepared in accordance and complied with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be and (iii) did not at the time they were filed (and if amended or superseded by a filing prior to the date of this Agreement then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. There is no Proceeding pending or, to the knowledge of the Company, threatened against or affecting the Company at or before the SEC. The Company has made available to Parent copies of all comment letters received by the SEC since January 1, 2007 and relating to the Company SEC Filings, together with all written responses of the Company thereto provided or made available to the SEC. As of the date of this Agreement, the Company has not received any notice from the SEC that any Company SEC Filing is the subject of any ongoing review by the SEC.

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        (b)   Each set of financial statements (including, in each case, any related notes thereto) contained in the Company SEC Filings (the "Company Financial Statements"): (i) complied (and will comply) as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto in effect at the time of such filing; (ii) was prepared (and will be prepared) in accordance with United States generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto or, in the case of unaudited statements, may not contain footnotes or as otherwise permitted by the rules and regulations of the SEC) and (iii) fairly presented (and will fairly present) in all material respects the financial position of the Company at the respective dates thereof and the consolidated results of the Company's operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal year-end adjustments which were not or will not be material in amount or significance. Except as reflected in the Company Financial Statements, the Company is not a party to any material off-balance sheet arrangement (as defined in Item 303 of Regulation S-K promulgated under the Securities Act ("Regulation S-K")). The Company has not had any dispute with any of its auditors regarding accounting matters or policies requiring public reporting, a report to the audit committee or which is otherwise material. The books and records of the Company have been, and are being maintained in all material respects in accordance with applicable Law and all accounting requirements and reflect only active transactions.

        (c)   The Company has established and maintains "disclosure controls and procedures" (as such term is defined in Rule 13a-15(e) or 15d-15(e) promulgated under the Exchange Act); such disclosure controls and procedures are reasonably designed to ensure that all information (both financial and non-financial) relating to the Company required to be disclosed in the Company's reports required to be filed with or submitted to the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that all such information is accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure and to make the certifications of the principal executive officer and principal financial officer of the Company required under the Exchange Act with respect to such reports.

        (d)   The Company maintains a system of "internal control over financial reporting" (as defined in Rules 13a-15(f) and 15(d)-15(f) of the Exchange Act) as required under Rules 13a-15(a) and 15d-15(a) under the Exchange Act, and such system is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements in accordance with GAAP and that transactions of the Company are being made only in accordance with authorizations of management and the Board of Directors.

        (e)   Each of the "principal executive officer" of the Company (as defined in the Sarbanes-Oxley Act of 2002 ("SOX")) and the "principal financial officer" of the Company (as defined in SOX) has made all certifications required by Sections 302 and 906 of SOX and any related rules and regulations promulgated by the SEC and the Nasdaq and the rules and regulations promulgated thereunder with respect to the Company SEC Filings and the statements contained in any such certifications were true and accurate as of the date such certifications were made and have not been modified or withdrawn. Neither the Company nor any of its executive officers has received notice from any Governmental Authority challenging or questioning the accuracy, completeness, form or manner of filing of the certifications required by SOX and made by its principal executive officer and principal financial officer.

        (f)    To the knowledge of the Company, there is no fraud, whether or not material, that involves any employee who has a significant role in the Company's internal controls and procedures.

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        (g)   The Company is in compliance in all material respects with all applicable provisions of SOX and the applicable listing and governance rules of the Nasdaq, except as set forth on Section 3.7(g) of the Company Disclosure Letter.

        (h)   To the knowledge of the Company, Ehrhardt Keefe Steiner & Hottman PC, which has expressed its opinion with respect to the Company Financial Statements, is "independent" (under applicable rules then in effect) with respect to the Company within the meaning of Regulation S-X since the appointment of Ehrhardt Keefe Steiner & Hottman PC in that capacity.

        Section 3.8    No Undisclosed Liabilities.     The Company does not have any undisclosed liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet or in notes thereto prepared in accordance with GAAP, except for liabilities or obligations (i) disclosed in the Company Financial Statements (including any related notes), (ii) incurred in the ordinary course of business and consistent with practices since the date of the Latest Balance Sheet and (iii) that are not material in the aggregate to the Company. For purposes of this Agreement, "Latest Balance Sheet" means the consolidated balance sheet of the Company as of December 31, 2008, which is included in the Company Form 10-K.

        Section 3.9    Absence of Certain Changes or Events.     Except as set forth in Section 3.9 of the Company Disclosure Letter, since the date of the Latest Balance Sheet there has not been, occurred or arisen: (a) a Company Material Adverse Effect or any event, change, effect or condition of any character that is reasonably expected to have a Company Material Adverse Effect; (b) any making, declaration, setting aside or payment of any dividend on, or other distribution (whether in cash, stock or property) in respect of, any of the Company's capital stock, or any purchase, redemption or other acquisition by the Company of the Company's capital stock or any other securities of the Company, except for the acquisition of shares of Common Stock by the Company in satisfaction by holders of any options or rights granted under the Company Stock Plans or the applicable exercise price or withholding taxes; (c) any split, combination or reclassification of any of the Company's capital stock; (d) any granting by the Company of any increase in compensation or fringe benefits to any employee or director or any payment by the Company of any bonus, or any entry by the Company into any contract (or amendment of an existing contract) to grant or provide severance, acceleration of vesting, termination pay or other similar benefits; (e) any change by the Company in its accounting methods, principles or practices (including any change in depreciation or amortization policies or rates or revenue recognition policies), except as required by concurrent changes in GAAP or by the SEC; (f) any revaluation by the Company of any of its assets, including writing off notes or accounts receivable or any sale of assets of the Company; (g) entry by the Company into any material licensing or other material Contract with regard to the acquisition or disposition by the Company of any material Intellectual Property other than non-exclusive licenses or other Contracts with regard to the acquisition or disposition by the Company of any Intellectual Property; (h) any change by the Company in its material Tax elections or accounting methods, or any closing agreement, settlement or compromise of any claim or assessment, in each case in respect of material Taxes, or consent to any extension or waiver of any limitation period with respect to any claim or assessment for material Taxes; (i) any damage, destruction or loss (whether or not covered by insurance) with respect to the assets of the Company that individually or in the aggregate could reasonably be expected to adversely affect the Company's business in any material respect; (j) any sale, transfer or other disposition of any material property or material assets (whether real, personal or mixed, tangible or intangible) by the Company; and (k) any announcement of any negotiation by or any Contract by the Company or any employee on behalf of the Company, to do any of the things described in the preceding clauses (a) through (j) (other than negotiations or Contracts with Parent and Merger Sub regarding this Agreement). Since the date of the Latest Balance Sheet, the Company has conducted its business in the ordinary course of business as consistent with past practices. As used in this Agreement, the term "Encumbrance" means, with respect to any asset of the Company, any mortgage, deed of trust, lien, pledge, charge, security

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interest, title retention device, conditional sale or other security arrangement, collateral assignment, claim, charge, adverse claim of title, ownership or right to use, restriction or other encumbrance of any kind in respect of such asset (including any restriction on (i) the voting of any security or the transfer of any security or other asset, (ii) the receipt of any income derived from any asset, (iii) the use of any asset and (iv) the possession, exercise or transfer of any other attribute of ownership of any asset), in each case except for such restrictions of general application under the Securities Act and applicable "blue sky" Laws. The terms "encumber" and "encumbering" (whether or not capitalized) have meanings correlative to the foregoing.

        Section 3.10    Taxes.

        (a)   Except as set forth on Section 3.10(a) of the Company Disclosure Letter, (i) all material Tax Returns which were required to be filed by or with respect to the Company have been duly and timely filed, (ii) all material items of income, gain, loss, deduction and credit or other items ("Tax Items") required to be included in each such Tax Return have been so included and all such Tax Items and any other information provided in each such Tax Return is true, correct and complete in all material respects, (iii) all material Taxes owed by the Company which are or have become due have been timely paid in full, (iv) all Tax withholding and deposit requirements imposed on or with respect to the Company have been satisfied in full in all material respects, and (v) there are no material Encumbrances on any of the assets of the Company that arose in connection with any failure (or alleged failure) to pay any Tax.

        (b)   Except as set forth on Section 3.10(b) of the Company Disclosure Letter, there is no written, or to the knowledge of the Company, unwritten claim against the Company for any material Taxes, and no assessment, deficiency or adjustment that would result in a material amount of Tax being due has been asserted, proposed, or threatened, in each case in writing, with respect to any Tax Return of or with respect to the Company. No material Tax audits or administrative or judicial proceedings are being conducted, pending or threatened with respect to the Company. No claim has been made in writing during the past six years by an authority in a jurisdiction where the Company does not file Tax Returns that it is or may be subject to taxation in that jurisdiction.

        (c)   There is not in force any waiver or agreement for any extension of time for the assessment or payment of any material Tax of or with respect to the Company.

        (d)   The Company is not party to, bound by, or otherwise affected by any Tax allocation, sharing or indemnity agreements or arrangements. No payments are due or will become due by the Company pursuant to any such agreement or arrangement.

        (e)   The Company will not be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: (i) change in method of accounting for a taxable period ending on or prior to the Closing Date; (ii) "closing agreement" as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign Law) executed on or prior to the Closing Date; (iii) intercompany transaction or any excess loss account described in Treasury Regulations under Code Section 1502 (or any corresponding or similar provision of state, local or foreign Law) entered into or created on or prior to the Closing Date; (iv) installment sale or open transaction disposition made on or prior to the Closing Date; (v) cash method of accounting or long-term contract method of accounting utilized prior to the Closing Date; (vi) election to defer any cancelation of indebtedness income under Code Section 108(i); or (vii) prepaid amount received on or prior to the Closing Date.

        (f)    The Company has no liability for the Taxes of any Person (other than the Company) for which the statute of limitations has not yet expired under Treasury Regulations Section 1.1502-6 (or any corresponding provisions of state, local or foreign Tax Law), or as a transferee or successor, or by contract or otherwise.

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        (g)   To the extent applicable, the Company has properly and in a timely manner documented its transfer pricing methodology in compliance with Section 6662(e) (and any related sections) of the Code, the Treasury regulations promulgated thereunder and any comparable provisions of state, local, domestic or foreign Tax Law.

        (h)   The Company has not (i) participated (within the meaning of Treasury Regulations § 1.6011-4(c)(3)) in any "reportable transaction" within the meaning of Treasury Regulations § 1.6011-4(b) (and all predecessor regulations); (ii) claimed any deduction, credit, or other tax benefit by reason of any "tax shelter" within the meaning of former Section 6111(c) of the Code and the Treasury Regulations thereunder or any "confidential corporate tax shelter" within the meaning of former Section 6111(d) of the Code and the Treasury Regulations thereunder; or (iii) purchased or otherwise acquired an interest in any "potentially abusive tax shelter" within the meaning of Treasury Regulations § 301.6112-1. The Company has disclosed on its Tax Returns all positions taken therein that could give rise to a substantial understatement of Tax within the meaning of Section 6662 of the Code (or any similar provision of state, local or foreign Law).

        (i)    The Company has not made any payments, is not obligated to make any payments, and is not a party to any plan or agreement that under certain circumstances could obligate it to make any payments that would not be deductible under Sections 162(m) of the Code.

        (j)    The Company does not have any material liability for any unpaid Taxes (whether or not shown to be due on any Tax Return) that has not been accrued for or reserved on the Company Financial Statements in accordance with GAAP, whether asserted or unasserted, contingent or otherwise, other than any liability for unpaid Taxes that may have accrued since the date of the Company Financial Statements in connection with the operation of the business of the Company in the ordinary course of business. The Company has established on its books and records reserves or accrued liabilities or expenses that are adequate for the payment of all Taxes for which the Company is liable but which are not yet due and payable.

        (k)   The Company has not constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution that could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the transactions contemplated by this Agreement.

        (l)    The Company is not subject to Tax in any jurisdiction, other than the country in which it is organized, by virtue of having, or being deemed to have, a permanent establishment, fixed place of business or similar presence.

        (m)  The Company is not party to any gain recognition agreement under Section 367 of the Code and the Treasury Regulations thereunder.

        (n)   For purposes of this Agreement (i) "IRS" means the United States Internal Revenue Service, (ii) "Person" means an individual, corporation, partnership, limited liability company, association, trust, unincorporated organization or other entity, (iii) "Tax" or "Taxes" means any taxes, assessments, fees and other governmental charges imposed by any Governmental Authority, including, without limitation, income, profits, gross receipts, net proceeds, alternative or add-on minimum, ad valorem, value added, turnover, sales, use, property, personal property (tangible and intangible), environmental, stamp, leasing, lease, user, excise, duty, franchise, capital stock, transfer, registration, license, withholding, social security (or similar), unemployment, disability, payroll, employment, fuel, excess profits, occupational, premium, windfall profit, severance, estimated, or other charge of any kind whatsoever, including any interest, penalty, or addition thereto, whether disputed or not, (iv) "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof, and (v) "Taxing

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Authority" means, with respect to any Tax, the Governmental Authority or political subdivision thereof that imposes such Tax, and the agency (if any) charged with the collection of such Tax for such entity or subdivision, including any Governmental Authority or quasi-Governmental Authority or agency that imposes, or is charged with collecting, social security or similar charges or premiums.

        Section 3.11    Title to Property and Assets.     The Company has good, valid and marketable title to, or a valid leasehold interest in, all of the material properties and assets owned or leased by it, including the properties and assets set forth on Section 3.11 of the Company Disclosure Letter, in each case, free and clear of all Encumbrances other than (a) liens for Taxes not yet due and payable, (b) such imperfections of title or liens as do not and will not materially detract from or interfere with the use of the properties subject thereto or affected thereby, (c) liens securing debt reflected in the Company Financial Statements and (d) mechanic's, workman's or repairman's liens arising in the ordinary course of business (clauses (a)-(d) collectively referred to as "Permitted Encumbrances").

        Section 3.12    Intellectual Property.

        (a)   For purposes of this Agreement, the term "Intellectual Property" means any and all (i) seismic data, trademarks, service marks, brand names, Internet domain names, logos, symbols, trade dress, trade names, trade secrets, know-how, and other proprietary rights and information, including, but not limited to, all geologic and geographical data and interpretations thereof, including geologic maps, isopachs, structure maps and any other maps, and other indicia of source of origin, all applications and registrations for the foregoing, and all goodwill associated therewith and symbolized thereby, including all renewals of the same; (ii) inventions and discoveries, whether patentable or not, and all patents, registrations, invention disclosures and applications therefor, including divisions, continuations, continuations-in-part and renewal applications, and including renewals, extensions and reissues; and (iii) copyrights in and to published and unpublished works of authorship, whether copyrightable or not (including software), and registrations and applications therefor, and all renewals, extensions, restorations and reversions thereof; and in each of cases (i) to (iii) inclusive, whether registered, unregistered or capable of registration.

        (b)   Except as individually or in the aggregate would not be reasonably likely to have or result in, a Company Material Adverse Effect:

          (i)  the Company is the sole and exclusive owner of, or possesses adequate licenses or other rights to use, all Intellectual Property used in the present conduct of the businesses of the Company ("Company IP Rights"), free and clear of all security interests (except Permitted Liens) including but not limited to liens, charges, mortgages, title retention agreements or title defects;

         (ii)  to the Company's knowledge, no consent, co-existence or settlement agreements, judgments, or court orders limit or restrict the Company's ownership rights in and to any Intellectual Property owned by them;

        (iii)  the conduct of the business of the Company as presently conducted does not, to the knowledge of the Company, infringe or misappropriate any third Person's Intellectual Property; or

        (iv)  to the knowledge of the Company, no third Person is infringing or misappropriating any Intellectual Property owned by the Company, and to the knowledge of the Company there is no litigation pending or threatened in writing by or against the Company, nor, to the knowledge of the Company, has the Company received any written charge, claim, complaint, demand, letter or notice, that asserts a claim (A) alleging that any or all of the Company IP Rights infringe or misappropriate any third party's Intellectual Property, or (B) challenging the ownership, use, validity, or enforceability of any Company IP Right.

        (c)   All Intellectual Property owned by the Company that is the subject of an application for registration or a registration ("Registered Company IP") is to the knowledge of the Company, in force,

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and all application, renewal and maintenance fees in relation to all Registered Company IP have been paid to date, except for any Registered Company IP that the Company has abandoned, not renewed or allowed to expire.

        (d)   Except for such matters as individually or in the aggregate have not had and would not be reasonably likely to have or result in a Company Material Adverse Effect, to the Company's knowledge, (i) there does not exist, nor has the Company received written notice of, any breach of or violation or default under any of the terms, conditions or provisions of any material contracts related to Company IP Rights, and (ii) the Company has not received written notice of the desire of the other party or parties to any such material contracts relating to Company IP Rights to exercise any rights such party or parties have to cancel, terminate or repudiate such material contract relating to Company IP Rights or exercise remedies thereunder.

        Section 3.13    Insurance.     The Company maintains valid bonds or policies of insurance with financially responsible insurance companies with respect to its assets, properties and business of the kinds and in the amounts not less than that which is customarily obtained by corporations engaged in the same or similar business and similarly situated. As of the date of this Agreement, to the knowledge of the Company, with respect to each such insurance policy, the policy is in full force and effect.

        Section 3.14    Contracts.

        (a)   For purposes of this Agreement, "Material Contract" means the following to which the Company is a party or any of its assets or properties are bound (excluding any Contract that has expired or terminated in accordance with its terms and under which no Party has any continuing rights or obligations):

          (i)  any "material contract" (as such term is defined in Item 601(b)(10) promulgated under Regulation S-K of the Securities Act), whether or not filed by the Company with the SEC;

         (ii)  any employment, independent contractor or consulting Contract (in each case with respect to which the Company has continuing obligations as of the date hereof) with any current or former (A) executive officer of the Company, (B) member of the Board of Directors or (C) employee, independent contractor or consultant of the Company;

        (iii)  any Contract providing for indemnification or any guaranty by the Company other than any Contract providing for indemnification of customers or other Persons pursuant to Contracts entered into in the ordinary course of business;

        (iv)  any Contract containing any covenant applicable to the Company (or, at any time after the consummation of the Merger or the other transactions contemplated by this Agreement, that would by its terms be applicable to Parent or any of its Subsidiaries) prohibiting or otherwise materially limiting the Company's right to engage or compete in any line of business or to operate in any geographic area or distribution channel;

         (v)  any Contract relating to the disposition or acquisition of assets by the Company after the date of this Agreement;

        (vi)  any acquisition Contract pursuant to which the Company has "earn-out" or other contingent purchase price payment obligations, in each case, that have not been paid prior to the date hereof and that would reasonably be expected to result in payments by the Company after the date hereof;

       (vii)  any Contract under which the Company has continuing minimum payment obligations or costs in excess of $500,000 per year that may not be canceled without material liability upon notice of 30 days or less;

      (viii)  any Contract in respect of a Derivative Transaction;

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        (ix)  any Contract that contains any provision that requires the purchase of all of the Company's requirements for a given product or service from a given third party, which product or service is material to the Company;

         (x)  any Contract that (A) contains most favored customer pricing provisions which are material to the Company or (B) grants any exclusive rights or rights of first refusal which are material to the Company;

        (xi)  any Contract that is a partnership, joint venture or similar Contract;

       (xii)  any mortgages, indentures, guarantees, loans or credit agreements, security agreements or other Contracts, in each case relating to indebtedness for borrowed money, whether as borrower or lender;

      (xiii)  any settlement agreement entered into since January 1, 2009 in respect of any action, suit, claim, charge, complaint or proceeding, any governmental action, inquiry or investigation;

      (xiv)  any other Contract that is not with a customer of the Company under which the Company is obligated to make payment or incur costs in excess of $500,000 in any year and which is not otherwise described in clauses (i)-(xiii) above;

       (xv)  any Contract with any investment banker, broker, advisor or similar party, or any accountant, legal counsel or other Person retained by the Company, in connection with this Agreement and the transactions contemplated hereby;

      (xvi)  all Contracts that require a consent to a change of control or to an assignment by operation of Law, as the case may be, prior to the Effective Time, which Contracts are material to the Company;

     (xvii)  the Contracts that are listed on Section 3.14(a)(xvii) of the Company Disclosure Letter;

    (xviii)  any Contract under which the consequences of a default could reasonably be expected to have a Company Material Adverse Effect; or

      (xix)  any Contract that is otherwise material to the Company or its business, operations, properties, assets, financial condition, results of operations or cash flows.

        (b)   Each Material Contract is listed on Section 3.14 of the Company Disclosure Letter. Except as would not have a Company Material Adverse Effect, as of the date hereof, neither the Company, nor to the knowledge of the Company any other party to a Material Contract, is in breach, violation or default under, and the Company has not received written notice that it has actually or potentially breached, violated or defaulted under, any of the material terms or conditions of any Material Contract in such a manner as would permit any other party to cancel or terminate any such Material Contract, or would permit any other party to seek damages or other remedies (for any or all of such breaches, violations or defaults, in the aggregate). The Company has performed in all material respects all of the obligations to be performed by it and is entitled to all benefits under, any Material Contract (other than any such defaults to the extent waived pursuant to the Credit Agreement Waiver). Each Material Contract is in full force and effect, and has not been amended in any material respect.

        Section 3.15    Permits; Compliance.

        (a)   The Company has all federal, state, local or foreign authorizations, licenses and permits and any similar authority necessary for the conduct of its business as presently conducted, except for any authorizations, licenses, permits or similar authorities for which the failure to obtain or hold would not have a Company Material Adverse Effect. Each authorization, license, permit and similar authority is valid and in full force and effect and the Company is not in violation of or in default under any of such

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authorization, license, permit or other similar authorities, except for such violation or defaults which would not have a Company Material Adverse Effect.

        (b)   To the knowledge of the Company, no officer, employee or director of the Company is obligated under any Contract (including any license, covenant, or commitment of any nature), or subject to any Order that would conflict or interfere with (i) the performance of such Person's duties as an officer, employee, or director of the Company, (ii) the use of such Person's reasonable best efforts to promote the interests of the Company or (iii) the Company's business as presently conducted or proposed to be conducted. To the knowledge of the Company, no officer, employee or director of the Company is in violation of any term of any Contract or covenant (either with the Company or with another Person) relating to employment, patents, proprietary information disclosure, noncompetition or nonsolicitation.

        Section 3.16    Employment Matters.

        (a)   The Company has not agreed to recognize any labor union or similar organization, nor has any labor union or similar organization been certified as the exclusive bargaining representative of any of its or their employees. The Company is not a party to or bound by a collective bargaining or similar agreement or understanding with a labor union or similar organization, and no such agreement or understanding is being negotiated. None of the employees of the Company is represented by any labor union or similar organization, and there has not been and there is not now pending a labor strike, slowdown, lockout, stoppage or other labor dispute or proceeding with respect to the Company (including any organizational campaign or representation petition) and to the knowledge of the Company no labor strike, slowdown, lockout, stoppage or other labor dispute or proceeding (including an organizational campaign or representation petition) has been threatened. Neither the Company, nor to the knowledge of the Company, any employee or representative of the Company, has committed or engaged in any unfair labor practice in connection with the conduct of the business of the Company, except as would not have a Company Material Adverse Effect.

        (b)   To the knowledge of the Company, no officer, director, or group of employees has any plans to terminate his, her or their employment with the Company and none of the foregoing has threatened to do so. No employees of the Company are in violation of any term of any employment contract, technology assignment agreement or any covenant any such employee has to a prior employer, except as would not have a Company Material Adverse Effect. The employment of each employee of the Company (other than the Chief Executive Officer and the Chief Financial Officer) is "at will."

        (c)   Except as would not have a Company Material Adverse Effect, there is no action, suit, claim, charge, complaint, grievance or proceeding, or any governmental action, inquiry or investigation against the Company, or settlement thereof, pending or, to the knowledge of the Company, threatened relating to any labor or employment matters, including those for (i) wages, salaries, commissions, bonuses, vacation pay, severance or termination pay, sick pay or other compensation; (ii) employee benefits; (iii) alleged unlawful, unfair, wrongful or discriminatory employment or labor practices; (iv) alleged breach of contract or other claim arising under a collective bargaining agreement, other labor contract or individual agreement, or any other employment covenant whether express or implied; (v) alleged violation of any statute, ordinance, contract or regulation relating to minimum wages or maximum hours of work; (vi) alleged violation of occupational safety and health standards; or (vii) alleged violation of plant closing and mass layoff, immigration, workers' compensation, disability, unemployment compensation, whistleblower Laws, or other labor or employment Laws; and the Company is in compliance with all applicable Laws, rules and regulations relating to labor and employment, including those Laws, rules and regulations relating to the above-listed matters, except as would not have a Company Material Adverse Effect. All employees of the Company are lawfully authorized to work in the jurisdiction in which they are employed according to applicable immigration Laws, and the Company is in compliance with all applicable Laws relating to the documentation and

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recordkeeping of their employees' work authorization status, except as would not have a Company Material Adverse Effect.

        (d)   The Company has not had any plant closings, mass layoffs or other terminations of employees which would create any obligations upon or liabilities under the Worker Adjustment and Retraining Notification Act (the "WARN Act") or similar Laws. The Company is not a party to any Contract or subject to any requirement that in any manner restricts it from relocating, consolidating, merging or closing, in whole or in part, any portion of its business, subject to applicable Law.

        (e)   All employees and former employees of the Company have been, or will have been on or before the Closing, paid in full all compensation (including any applicable severance and termination pay) owed and payable to them by the Company as of the Closing.

        Section 3.17    Environmental Matters.     With respect to environmental matters:

        (a)   The Company is and within the past three (3) years has been, in compliance with all applicable Environmental Laws, except where failure to be in compliance with such laws, individually or in the aggregate, could not reasonably be expected to have a Company Material Adverse Effect.

        (b)   There are no Environmental Claims pending or, to the knowledge of the Company, threatened against the Company or any Person whose liability for any Environmental Claim the Company has retained or assumed either contractually or by operation of Law, except for any such Environmental Claims that, individually or in the aggregate, could not be reasonably be anticipated to result in a Company Material Adverse Effect.

        (c)   There has been no actual or threatened Release of any Hazardous Material that could reasonably be expected to form the basis of any Environmental Claim against the Company.

        (d)   No Remedial Work is being conducted or anticipated at (i) any property currently owned or operated by the Company or (ii) any property for which the Company retained or assumed liability for any Remedial Work contractually or by operation of law, except for such Remedial Work that, individually or in the aggregate, could not reasonably be anticipated to result in a Company Material Adverse Effect.

        (e)   Except as could not reasonably be expected to result in a Company Material Adverse Effect, either individually or in the aggregate, none of the Company's assets have generated, used, treated, recycled, stored, transported, Released, deposited, or disposed of any Hazardous Material except in compliance with Environmental Laws.

        (f)    The Company has obtained and is in compliance with all material approvals, permits, licenses, registrations and similar authorizations required under Environmental Law for the operation of the businesses of the Company as presently conducted. There are no pending or, to the knowledge of the Company, threatened actions or proceedings seeking to modify, revoke or deny the renewal of any material approvals, permits, licenses, registrations and similar authorizations.

        (g)   The Company has made available to Parent and Merger Sub all significant investigations, reports, audits, correspondence, notices, and similar documents within its possession or control dated during the three (3) years prior to the Closing Date relating to the business or the assets and compliance with or liability under any Environmental Law or the Release of Hazardous Substances except for routine matters to which there is no current non-compliance.

        (h)   For purposes of this Agreement,

        (i)    "Environmental Claim" means any claim, demand, suit, action, cause of action, proceeding, investigation or written notice alleging any potential liability (including liability for investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damages, personal injuries, fines or penalties) arising out of, based on, or resulting from (i) the

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presence or Release into the environment of any Hazardous Material or (ii) circumstances forming the basis of any violation, or alleged violation, of any applicable Environmental Law;

         (ii)  "Environmental Laws" means all Laws, including any judicial or administrative interpretations thereof and applicable common law, relating to pollution, remediation, restoration or protection of the environment (including ambient air, surface water, groundwater, land surface or subsurface strata and natural resources), protection of flora or fauna or their habitat, or protection of human health (including workplace health or safety), including the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C. §§ 9601 et seq., the Resource Conservation and Recovery Act of 1976, as amended, 42 U.S.C. §§ 6901 et seq., the Clean Air Act, as amended, 42 U.S.C. §§ 7401 et seq., the Emergency Planning and Community Right-to-know Act, as amended, 42 U.S.C. §§ 11001 et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C. §§ 1251 et seq., the Oil Pollution Act of 1990, as amended, 33 U.S.C. §§ 2701 et seq., Hazardous Materials Transportation Act, as amended, 49 U.S.C. §§ 1801, et seq., Toxic Substances Control Act, as amended, 15 U.S.C. §§ 2601 et seq., and the Occupational Safety and Health Act of 1970, as amended, 29 U.S.C. §§ 651 et. seq. and all regulations promulgated pursuant to any of the foregoing, and any state or local counterparts.

        (iii)  "Hazardous Material" means any chemicals, materials, substances, or items in any form, whether solid, liquid, gaseous, semisolid, or any combination thereof, whether waste materials, raw materials, chemicals, finished products, by-products, or any other materials or articles, to the extent regulated by or for which liability could arise under Environmental Law, including asbestos, asbestos containing materials, urea formaldehyde foam insulation, polychlorinated biphenyls, lead-containing paints or coatings, naturally occurring radioactive materials, and Hydrocarbons, Hydrocarbon derivatives, or Hydrocarbon by-products Released into the environment; and

        (iv)  "Release" means any discharge, emission, migration, dispersal, transportation, disposal, dumping, injecting, spilling, leaking, pumping, pouring, burying, abandoning, discarding, emptying, leaching, or placing of Hazardous Materials, including the abandonment or discarding of barrels, containers, or other closed receptacles containing any Hazardous Materials.

         (v)  "Remedial Work" means all actions required under Environmental Law to address any non-compliance with Environmental Law or Environmental Claim, including all investigatory, corrective, or remedial actions such as cleanup, containment, handling, removal, treatment, storage, transportation and disposal of Hazardous Materials, site monitoring, pollution abatement, site restoration, or other ameliorative work.

        Section 3.18    Employee Benefits.

        (a)   Section 3.18(a) of the Company Disclosure Letter includes a list of each Current Employee Benefit Plan. No other Current Employee Benefit Plan exists.

        (b)   No awards other than Company Stock Option Awards and Company Restricted Stock Awards are outstanding under the Company Stock Plans as of the date of this Agreement.

        (c)   The following documents have been made available to Parent: (i) true, correct and complete copies of each Current Employee Benefit Plan and related trusts (including tax-exempt trusts, secular trusts, voluntary employees' beneficiary associations and "rabbi trusts"), if applicable, including all amendments thereto, and all associated contracts (including insurance contracts, HMO agreements, recordkeeping contracts, trustee contracts and third party administrator contracts), (ii) the three most recently filed Forms 5500 (and any associated financials, schedules and actuarial reports) and the summary plan description for each Current Employee Benefit Plan required to file such report or description, and (iii) the most recent favorable determination letter from the IRS, or filing to obtain such letter, with respect to each Current Employee Benefit Plan intended to be qualified within the meaning of Section 401(a) of the Code ("Qualified Employee Benefit Plan").

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        (d)   Neither the Company nor any Commonly Controlled Entity (defined below) sponsors, maintains, contributes to or has an obligation to contribute to, and has not at any time within six years prior to the date of this Agreement sponsored, maintained, contributed to, or had an obligation to contribute to (i) any employee benefit plan within the meaning of Section 3(3) of ERISA that is or was subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code or (ii) any multiemployer plan within the meaning of Section 3(37) of ERISA.

        (e)   With respect to the Employee Benefit Plans:

          (i)  All material obligations, whether arising by operation of Law or by contract, required to be performed with respect to the Employee Benefit Plans have been timely performed, and there have been no material defaults, omissions or violations by any party with respect to the Employee Benefit Plans, and each Employee Benefit Plan has been administered in compliance with its governing documents and all applicable Law;

         (ii)  All reports and disclosures relating to the Employee Benefit Plans required to be filed with or furnished to governmental authorities (including the IRS, PBGC and the Department of Labor), Employee Benefit Plan participants or beneficiaries have been filed or furnished in accordance with applicable Law in a timely manner;

        (iii)  Each Qualified Employee Benefit Plan (A) satisfies in form the qualification requirements of Section 401(a) of the Code except to the extent amendments are not required by Law to be made until a date after the Effective Time, (B) has received a favorable determination letter from the IRS regarding such qualified status or is maintained under a prototype document that has received a favorable opinion letter from the IRS regarding such qualified status or prototype document, as applicable, (C) has not, since receipt of the most recent favorable determination letter, been amended in a manner that would adversely affect such qualified status and (D) has not been operated in a manner that would adversely affect such qualified status;

        (iv)  There are no actions, suits, or claims pending (other than routine claims for benefits) or, to the knowledge of the Company threatened against, or with respect to, any Employee Benefit Plan or associated assets;

         (v)  All contributions required to be made to each Employee Benefit Plan pursuant to its terms, the Code or any other applicable Law have been timely made;

        (vi)  As to any Qualified Employee Benefit Plan, there has been no termination, partial termination or discontinuance of contributions within the meaning of Section 411(d)(3) of the Code in connection with which all affected participants have not been fully vested in their accrued benefits;

       (vii)  Any Qualified Employee Benefit Plan terminated prior to the date of this Agreement has received a favorable determination letter from the IRS with respect to its termination;

      (viii)  No act, omission or transaction has occurred that would result, directly or indirectly, through its or his own liability, indemnification or otherwise, in imposition on the Company or any fiduciary of any Employee Benefit Plan of (A) fiduciary duty liability damages under Section 409 of ERISA, (B) any liability under Section 502 of ERISA or (C) a Tax imposed pursuant to Chapter 43 of Subtitle D of the Code;

        (ix)  There is no matter pending (other than routine qualification determination filings) with respect to any Employee Benefit Plan before the IRS, the Department of Labor, the PBGC, or other Governmental Authority;

         (x)  Each trust funding an Employee Benefit Plan, which trust is intended to be exempt from federal income taxation pursuant to Section 501(c)(9) of the Code, satisfies the requirements of

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such section and has received a favorable determination letter from the IRS regarding such exempt status and has not, since receipt of the most recent favorable determination letter, been amended or operated in a way that would adversely affect such exempt status or cause any liability on the Company or any fiduciary of an associated Employee Benefit Plan;

        (xi)  Neither the execution, delivery or performance of this Agreement by the Company nor the consummation of the transactions contemplated hereby (either alone or in connection with any other event) will (A) require the Company to make a larger contribution to, or pay greater benefits or provide other rights under, any Employee Benefit Plan than it otherwise would, whether or not some other subsequent action or event would be required to cause such payment or provision to be triggered, (B) create or give rise to any additional vested rights or service credits under any Employee Benefit Plan, whether or not some other subsequent action or event would be required to cause such creation or acceleration to be triggered, or (C) conflict with the terms of any Employee Benefit Plan;

       (xii)  All obligations of the Company, each Commonly Controlled Entity and each fiduciary under each Employee Benefit Plan, whether arising by operation of Law or by contract, required to be performed under Section 4980B of the Code, as amended, and Sections 601 through 608 of ERISA, or similar state Law ("COBRA"), including such obligations that may arise by virtue of the transactions contemplated by this Agreement, have been or will be timely performed;

      (xiii)  No Current Employee Benefit Plan provides any severance benefits or retention benefits;

      (xiv)  Each Current Employee Benefit Plan, which is an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA, may by its terms, and the summary plan description for each plan provides that such plan may, be unilaterally amended, revised, or terminated in its entirety by the Company or a Commonly Controlled Entity, as applicable, without liability except as to benefits accrued thereunder prior to such amendment, revision, or termination, subject to contractual notice requirements;

        (xv)  No Current Employee Benefit Plan provides retiree medical or retiree life insurance benefits to any individual, and the Company is not contractually or otherwise obligated (whether or not in writing) to provide any individual with life insurance or medical benefits upon retirement or termination of employment, other than as required by COBRA;

      (xvi)  The Company and each Commonly Controlled Entity, as applicable, has maintained all employee data necessary to administer each Current Employee Benefit Plan, including all data required to be maintained under Sections 107 and 209 of ERISA, and such data are true and correct and are maintained in usable form;

     (xvii)  Each Current Employee Benefit Plan that is subject to the requirements of Section 409A of the Code satisfies in form the requirements of Section 409A of the Code and the regulations thereunder and has been operated in material compliance with the requirements of Section 409A of the Code and the regulations thereunder;

    (xviii)  No Employee Benefit Plan except the Company Stock Plans grants or purports to grant any subscription, option, warrant, conversion, exchange or right entitling the holder thereof to purchase or otherwise acquire any shares of stock of the Company, and no such subscription, option, warrant, conversion, exchange or right is outstanding as of the Effective Time;

      (xix)  The Company has not announced, proposed, or agreed to any changes to any Employee Benefit Plan that would cause an increase in benefits (or the creation of new benefits) under any such Employee Benefit Plan, which would result in an increase in the cost of maintaining such Employee Benefit Plan;

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        (xx)  (A) Each Company Stock Option Award intended to qualify as an "incentive stock option" under Section 422 of the Code so qualifies, (B) each grant of a Company Stock Option Award was duly authorized no later than the date on which the grant of such Company Stock Option Award was by its terms to be effective (the "Grant Date") by all necessary corporate action, including, as applicable, approval by the Board of Directors (or a duly constituted and authorized committee thereof), or a duly authorized delegate thereof, and any required Stockholder approval by the necessary number of votes or written consents, and the award agreement governing such grant (if any) was duly executed and delivered by each party thereto no later than the Grant Date, (C) each such grant was made in accordance with the terms of the applicable Employee Benefits Plan, the Exchange Act and all other applicable Laws, (D) the per share exercise price of each Company Stock Option Award was not less than the fair market value of a share of Common Stock on the applicable Grant Date and (E) each such grant was properly accounted for in all material respects in accordance with GAAP in the Company Financial Statements in accordance with the Exchange Act and all other applicable Laws. The Company has not granted, and there is no and has been no Company policy or practice to grant, Company Stock Option Awards prior to, or otherwise coordinate the grant of Company Stock Option Awards with, the release or other public announcement of material information regarding the Company or its financial results or prospects; and

      (xxi)  No Current Employee Benefit Plan provides for any gross-up payment associated with any Tax.

        (f)    In connection with the execution of this Agreement or the consummation of the transactions contemplated by this Agreement (either alone or in connection with any other event): (i) no payments of money or other property, acceleration of benefits, or provisions of other rights have or will be made hereunder, under any agreement contemplated herein, or under the Employee Benefit Plans that would result, individually or in the aggregate, in imposition of the sanctions imposed under Sections 280G and 4999 of the Code, whether or not some other subsequent action or event would be required to cause such payment, acceleration, or provision to be triggered and (ii) the Company is not a party to any Contract, nor has the Company established any policy or practice, requiring any payment or any other form of compensation or benefit to any Person performing services for the Company upon termination of such services that would not be payable or provided in the absence of the consummation of the transactions contemplated by this Agreement.

        (g)   For purposes of this Agreement (i) "Commonly Controlled Entity" shall mean any corporation, trade, business, or entity under common control with the Company within the meaning of Section 414(b), (c), (m), or (o) of the Code or Section 4001 of ERISA; (ii) "Current Employee Benefit Plan" shall mean each Employee Benefit Plan that is sponsored, maintained, or contributed to by the Company or any Commonly Controlled Entity, or has been so sponsored, maintained, or contributed to by the Company or any Commonly Controlled Entity at any time within six years prior to the date of this Agreement, or with respect to which the Company or any Commonly Controlled Entity has any obligations or liability (contingent, secondary or otherwise); (iii) "Employee Benefit Plan" shall mean (A) each employee benefit plan within the meaning of Section 3(3) of ERISA and each plan that would be an employee benefit plan if it were subject to ERISA, such as plans for directors and (B) each personnel policy; stock option plan; collective bargaining agreement; bonus plan or arrangement; incentive award plan or arrangement; workers' compensation program; vacation policy; voluntary employees' beneficiary association; retention or change in control agreement or arrangement; profit sharing, retirement, welfare, disability, death benefit, hospitalization or insurance plan or arrangement; severance pay plan, policy or agreement; deferred compensation agreement or arrangement; executive compensation or supplemental income arrangement; consulting agreement; employment agreement; and other employee benefit plan, agreement, arrangement, program, practice, or understanding (oral or written), which is sponsored, maintained, or contributed to by the Company

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or any Commonly Controlled Entity for the benefit of the employees, former employees, independent contractors, or agents of the Company or any Commonly Controlled Entity, or has been so sponsored, maintained, or contributed to at any time, or with respect to which the Company or any Commonly Controlled Entity has any obligations or liability (contingent, secondary or otherwise); (iv) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended; and (v) "PBGC" shall mean the Pension Benefit Guaranty Corporation.

        Section 3.19    Real Property.

        (a)   Section 3.19(a) of the Company Disclosure Letter contains a complete and correct list, as of the date hereof, of the real property owned by the Company (the "Owned Real Estate"), and sets forth for each such parcel of real property (i) the location and street address and (ii) the nature of the current use of such real property. Except as would not have a Company Material Adverse Effect, the Company has good and marketable fee simple title to the Owned Real Estate free and clear of any Encumbrances other than Permitted Encumbrances.

        (b)   Except as would not have a Company Material Adverse Effect, the Company has good leasehold title to the real property leased or subleased by it free and clear of any Encumbrances other than Permitted Encumbrances. Section 3.19(b) of the Company Disclosure Letter contains a complete and correct list, as of the date hereof, of the real property leased or subleased by the Company including with respect to each such lease or sublease the date of such lease or sublease and any material amendments thereto, the street address and the nature of the current use of such real property. Except as would not have a Company Material Adverse Effect, (i) all real property leases and subleases are valid and in full force and effect except to the extent they have previously expired or terminated in accordance with their terms, and (ii) neither the Company nor, to the knowledge of the Company, any third party, has violated any provision of, or committed or failed to perform any act which, with or without notice, lapse of time or both would constitute a default under the provisions of, any real property lease or sublease. The Company has not entered into with any other Person any sublease, license or other agreement that is material to the Company, and that relates to the use or occupancy of all or any portion of the real property material to the Company. The Company has made available to Parent correct and complete copies of all real property leases and subleases (including all material modifications, amendments, supplements, waivers and side letters thereto) pursuant to which the Company leases or licenses, as tenant, any real property material to the Company.

        (c)   As of the date hereof, the Company has not received written notice of any pending, and to the knowledge of the Company there is no threatened, condemnation proceeding with respect to any of the real property owned by the Company material to the Company.

        Section 3.20    Interested Party Transactions.     Exceptas disclosed in the Company's definitive proxy statements included in the Company SEC Filings, since January 1, 2007, no event has ever occurred and no relationship exists that would be required to be reported by the Company pursuant to Item 404 of Regulation S-K.

        Section 3.21    Certain Agreements Affected by the Transactions.     Except as set forth on Section 3.21 of the Company Disclosure Letter or as otherwise contemplated by this Agreement, neither the execution, delivery or performance of this Agreement by the Company nor the consummation of the transactions contemplated hereby will (a) result in any payment (including severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any officer, director or employee of the Company, (b) materially increase any benefits otherwise payable by the Company to any director, officer, stockholder, employee or consultant thereto or (c) result in the acceleration of the time of payment or vesting of any such benefits.

        Section 3.22    Proxy Statement; Other Information.     None of the information supplied or to be supplied by the Company for inclusion or incorporation by reference in the Company Schedule 13E-3

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and the proxy statement or information statement to be disseminated to the stockholders of the Company in connection with the Company Meeting (such proxy statement or information statement, as amended or supplemented, the "Proxy Statement") will, at the date it is first disseminated to the stockholders of the Company and at the time of the Company Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading. The Company Schedule 13E-3 and the Proxy Statement will, at the time of the Company Meeting, comply as to form in all material respects with the requirements of the Exchange Act. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent, Merger Sub or any affiliate or Representative of Parent or Merger Sub which is contained or incorporated by reference in the Company Schedule 13E-3 and the Proxy Statement.

        Section 3.23    Section 203.     The Board of Directors has taken all actions necessary under the DGCL, including approving the Voting Agreement and approving the transactions contemplated by this Agreement, to ensure that the restrictions on Business Combinations (as defined in Section 203 of the DGCL) do not, and will not, apply to the transactions contemplated hereby, if any such transactions are consummated in accordance with the terms of this Agreement. Neither the execution and delivery of the Voting Agreement nor this Agreement nor the consummation the Merger and any of the transactions contemplated hereby will prohibit for any period of time, or impose any stockholder approval requirement with respect to, the Merger (except the Company Stockholder Approval).

        Section 3.24    Takeover Laws.     No "moratorium," "control share acquisition," "business combination," "fair price" or other form of anti-takeover Laws of any jurisdiction (collectively, "Takeover Laws"), or other comparable takeover provision of the Certificate of Incorporation or Bylaws applies to the Voting Agreement, this Agreement, or the Merger, prohibits the consummation of the Merger or imposes any additional stockholder approvals or conditions with respect to the Merger.

        Section 3.25    Opinion of Financial Advisor.     The Special Committee has received the opinion of FBR Capital Markets & Co. (the "Company Financial Advisor") to the effect that, as of the date of such opinion and subject to various qualifications and assumptions, the Merger Consideration in cash proposed to be received by holders of shares of Common Stock in the Merger pursuant to this Agreement is fair from a financial point of view to such holders.

        Section 3.26    Reserve Information.

        (a)   The Company has furnished to Parent a reserve report prepared by Netherland, Sewell and Associates, Inc. containing estimates of the oil and gas reserves that are owned by the Company as of December 31, 2008 (the "Company Reserve Report"). The factual, non-interpretive data relating to the Oil and Gas Interests of the Company on which the Company Reserve Report was based for purposes of estimating the oil and gas reserves set forth therein was accurate in all material respects at the time such data was provided to the reserve engineers for the Company Reserve Report. The Company Reserve Report conforms to the guidelines with respect thereto of the SEC. Except for changes (including changes in Hydrocarbon commodity prices) generally affecting the oil and gas industry and normal depletion by production, there has been no change in respect of the matters addressed in the Company Reserve Report that would reasonably be expected to have a Company Material Adverse Effect. Since January 1, 2006, all of the Company's wells have been drilled and (if completed) completed, operated and produced in compliance in all respects with applicable oil and gas leases and applicable Laws, except where any noncompliance would not reasonably be expected to have a Company Material Adverse Effect. The Company is not in violation of any applicable Law or contract requiring the Company to plug and abandon any well because the well is not currently capable of producing in commercial quantities or for any other reasons.

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        (b)   For purposes of this Agreement, "Oil and Gas Interests" means direct and indirect interests in and rights with respect to oil, gas or minerals, including working, leasehold and mineral interests and operating rights and royalties, overriding royalties, production payments, net profit interests and other non-working interests and non-operating interests; all interests in rights with respect to oil, condensate, gas, casinghead gas and other liquid or gaseous hydrocarbons (collectively, "Hydrocarbons") and other minerals or revenues therefrom, all contracts in connection therewith and claims and rights thereto (including all oil and gas leases, operating agreements, unitization and pooling agreements and orders, division orders, transfer orders, mineral deeds, royalty deeds, oil and gas sales, exchange and processing contracts and agreements, and in each case, interests thereunder), surface interests, fee interests, reversionary interests, reservations, and concessions; all easements, rights of way, licenses, permits, leases, and other interests associated with, appurtenant to, or necessary for the operation of any of the foregoing; and all interests in equipment and machinery (including wells, well equipment and machinery), oil and gas production, gathering, transmission, treating, processing, and storage facilities (including tanks, tank batteries, pipelines, and gathering systems), pumps, water plants, electric plants, gasoline and gas processing plants, refineries, and other tangible personal property and fixtures associated with, appurtenant to, or necessary for the operation of any of the foregoing.

        (c)   Set forth in Section 3.26(c) of the Company Disclosure Letter is a list of all material Oil and Gas Interests that were included in the Company Reserve Report that have been disposed of prior to the date hereof.

        (d)   Proceeds from the sale of Hydrocarbons produced from the Company's Oil and Gas Interests are being received by the Company in a timely manner and are not being held in suspense for any reason (except in the ordinary course of business or which would not reasonably be expected to have a Company Material Adverse Effect).

        (e)   The Company has not received any material deficiency payment under any gas contract for which any Person has a right to take deficiency gas from the Company, nor has the Company received any material payment for production which is subject to refund or recoupment out of future production.

        (f)    The Company has previously provided or made available to Parent true and complete copies of all Company Oil and Gas Agreements, together with all amendments, extensions and other modifications thereof. To the knowledge of the Company, all Company Oil and Gas Agreements are in good standing, valid and effective and all royalties, rentals and other payment due by the Company to any lessor of any such oil and gas leases have been paid, except in each case, as has not had, and would not reasonably be expected to have, a Company Material Adverse Effect. For purposes of this Agreement, "Company Oil and Gas Agreements" means the following types of agreements or contracts to which the Company is a party, whether as an original party, by succession or assignment or otherwise: oil and gas leases, farm-in and farm-out agreements, agreements providing for an overriding royalty interest, agreements providing for a royalty interest, agreements providing for a net profits interest, crude oil or natural gas sales or purchase contracts, joint operating agreements, unit operating agreements, unit agreements, field equipment leases, and agreements restricting the Company's ability to operate, obtain, explore for or develop interests in a particular geographic area. Set forth in Section 3.26(f) of the Company Disclosure Letter is a list of all Company Oil and Gas Agreements that contain restrictions on the Company's ability to operate, obtain, explore for or develop interests in a particular geographic area.

        (g)   The Oil and Gas Interests of the Company are not subject to (i) any instrument or agreement evidencing or related to indebtedness for borrowed money, whether directly or indirectly, except for instruments or agreements constituting "Permitted Liens," as defined in the Credit Agreement dated February 12, 2007, by and among the Company, the Royal Bank of Scotland plc and the lenders party thereto (as amended from time, the "Credit Agreement"), or (ii) any agreement not entered into in the

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ordinary course of business in which the amount involved is in excess of $100,000. In addition, except as set forth in the Company SEC Filings filed and publicly available prior to the date hereof, no Material Contract contains any provision that prevents the Company from owning, managing and operating the Oil and Gas Interests of the Company in accordance with historical practices.

        (h)   Except as set forth in Section 3.26(h) of the Company Disclosure Letter, as of February 8, 2010, (i) there are no outstanding calls for payments in excess of $100,000 that are due or that the Company is committed to make that have not been made; (ii) there are no material operations with respect to which the Company has become a non-consenting party; and (iii) there are no commitments for the material expenditure of funds for drilling or other capital projects other than projects with respect to which the operator is not required under the applicable operating agreement to seek consent.

        (i)    There are no provisions applicable to the material Oil and Gas Interests reflected in the Company Reserve Report that increase the royalty percentage of the lessor thereunder in a manner that is not accounted for in such Company Reserve Report; and none of the Oil and Gas Interests of the Company are limited by terms fixed by a certain number of years (other than primary terms under oil and gas leases).

        (j)    There are no calls (exclusive of market calls) on the Company's oil or natural gas production, and the Company has no obligation to deliver oil or natural gas pursuant to any take-or-pay, prepayment or similar arrangement without receiving full payment therefor, excluding gas imbalances disclosed in Section 3.26(e) of the Company Disclosure Letter.

        Section 3.27    Derivative Transactions and Hedging.

        (a)   Section 3.27 of the Company Disclosure Letter contains a complete and correct list of all Derivative Transactions (including each outstanding commodity or financial hedging position) entered into by the Company or for the account of any of its customers as of the date of this Agreement. All such Derivative Transactions were, and any Derivative Transactions entered into after the date of this Agreement will be, entered into in accordance with applicable Laws, and in accordance with the investment, securities, commodities, risk management and other policies, practices and procedures employed by the Company. The Company has, and will have, duly performed all of its obligations under the Derivative Transactions to the extent that such obligations to perform have accrued, and, to the knowledge of the Company, there are and will be no breaches, violations, collateral deficiencies, requests for collateral or demands for payment, or defaults or allegations or assertions of such by any party thereunder.

        (b)   "Derivative Transaction" means any swap transaction, option, warrant, forward purchase or sale transaction (including volumetric production payments and similar transactions), futures transaction, cap transaction, floor transaction or collar transaction relating to one or more currencies, commodities, bonds, equity securities, loans, interest rates, catastrophe events, weather-related events, credit-related events or conditions or any indexes, or any other similar transaction (including any option with respect to any of these transactions) or combination of any of these transactions, including collateralized mortgage obligations or other similar instruments or any debt or equity instruments evidencing or embedding any such types of transactions, and any related credit support, collateral or other similar arrangements related to such transactions.

        Section 3.28    Natural Gas Act.     Any gas gathering system constituting a part of the properties of the Company has as its primary function the provision of natural gas gathering services, as the term "gathering" is interpreted under Section 1(b) of the Natural Gas Act (the "NGA"); none of the properties have been or are certificated by the Federal Energy Regulatory Commission (the "FERC") under Section 7(c) of the NGA or to the knowledge of the Company are providing natural gas transportation services, as the term "transportation" is interpreted under Section 1(b) of the NGA; and none of the properties have been or are providing service pursuant to Section 311 of the Natural Gas Policy Act.

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        Section 3.29    Brokers' and Finders' Fees.     The Company has not incurred, nor will it incur, directly or indirectly, any liability or obligation to pay brokerage or finders' fees or agents' commissions or investment bankers' fees (other than those payable to the Company Financial Advisor as set forth in the letter agreement between the Company and the Company Financial Advisor, a true and correct copy of which (including any amendments thereto) has been delivered to Parent prior to the date hereof) or any similar charges in connection with this Agreement or any transaction contemplated hereby.

        Section 3.30    Credit Agreement.     The Company is not in breach, violation or default under, and the Company has not received written notice that it has actually or potentially breached, violated or defaulted under, any of the material terms or conditions of the Credit Agreement in such a manner as would permit any other party to cancel or terminate the Credit Agreement, or would permit any other party to seek damages or other remedies (for any or all of such breaches, violations or defaults), except in each case for such breaches, violations and defaults that have been duly waived pursuant to the Seventh Amendment and Waiver to Credit Agreement dated as of January 13, 2010 (the "Credit Agreement Waiver"). The Company has performed in all material respects all of the obligations to be performed by it and is entitled to all benefits under, and is not alleged to be in default in any material respect of the Credit Agreement, except in each case for such breaches, violations and defaults that have been duly waived pursuant to the Credit Agreement Waiver. The Credit Agreement is in full force and effect, and, since January 13, 2010, has not been amended in any respect except as contemplated by Section 6.2(f).

        Section 3.31    Bankruptcy Matters.     The Company is not subject to any voluntary case under title 11 of the United States Code or similar statute under the law of any state, federal, foreign or other jurisdiction, nor has any Person commenced an involuntary case under title 11 of the United States Code or any similar statute under the law of any state, federal, foreign or other jurisdiction.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB

        Parent and Merger Sub hereby jointly and severally represent and warrant to the Company as follows:

        Section 4.1    Organization and Standing.     Parent is a limited liability company duly organized, validly existing and in good standing under the law of the State of Delaware and has full power and authority to conduct its business as presently conducted and as proposed to be conducted and to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby. Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full corporate power and authority to conduct its business as presently conducted and as proposed to be conducted and to execute, deliver and perform this Agreement and to carry out the transactions contemplated hereby.

        Section 4.2    Authorization.     The execution, delivery and performance by each of Parent and Merger Sub of this Agreement, and the consummation by each of Parent and Merger Sub of the transactions contemplated hereby, have been duly and validly authorized by all necessary corporate action (other than the adoption of this Agreement by the sole stockholder of Merger Sub). This Agreement has been duly and validly executed and delivered by each of Parent and Merger Sub and constitutes a legal, valid and binding obligation of each of Parent and Merger Sub enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and other Laws relating to creditors' rights and to general principles of equity. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby will not violate in any material respect any provision of Law and will not violate or conflict with, or result in the breach of any of the terms, conditions or provisions of, constitute a default under, or require a consent or

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waiver under, the certificate of incorporation or bylaws of Parent or Merger Sub (each as amended to date) or any indenture, lease, agreement, or other instrument to which either of Parent or Merger Sub is a party or by which either of them or any of their properties is bound, or any decree, judgment, order, statute, rule or regulation applicable to either of Parent or Merger Sub.

        Section 4.3    Governmental Authorities and Consents.     Except pursuant to the applicable requirements of the Exchange Act, applicable requirements of Antitrust Laws, and except for the filing of the Certificate of Merger, neither Parent nor Merger Sub is required to submit any notice, report or other filing to or with any Governmental Authority in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby. Except with respect to the expiration of the applicable waiting periods under applicable Antitrust Laws, no consent, approval or authorization of any Governmental Authority is required to be obtained by Parent or Merger Sub in connection with the execution, delivery or performance of this Agreement or the consummation of the transactions contemplated hereby.

        Section 4.4    Proxy Statement; Other Information.     None of the information supplied or to be supplied by Parent or Merger Sub for inclusion or incorporation by reference in the Company Schedule 13E-3 or the Proxy Statement will, at the date such document is first disseminated to the stockholders of the Company and at the time of the Company Meeting, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.

        Section 4.5    Sufficient Funds.     At the Closing Date, Parent shall have available funds in an amount sufficient to enable Merger Sub to consummate the Merger on the terms contemplated hereby and perform its other obligations under this Agreement.

ARTICLE 5
ADDITIONAL AGREEMENTS

        Section 5.1    Proxy Statement; Stockholders Meeting.

        (a)   As soon as reasonably practicable following the date of this Agreement, the Company shall, with the assistance of Parent, prepare and file with the SEC the preliminary Proxy Statement and the Company Schedule 13E-3, and shall respond to and resolve all SEC comments with respect to such filings as soon as practicable after receipt thereof. Subject to applicable Laws, the Company and Parent (with respect to itself and Merger Sub) each shall, upon request by the other, furnish the other with all information concerning itself, its Subsidiaries, directors, officers and stockholders and such other matters as may be reasonably necessary or advisable in connection with the Proxy Statement and the Company Schedule 13E-3. Each of Parent, Merger Sub and the Company agrees to correct any information provided by it for use in the Proxy Statement and the Company Schedule 13E-3 which shall have become false or misleading. The Company shall provide Parent and Merger Sub with (in writing, if written), and shall consult with Parent and Merger Sub regarding, any comments (written or oral) that may be received by the Company or its counsel from the SEC or its staff with respect to such filings promptly after receipt thereof. Parent and its counsel shall be given a reasonable opportunity to review any such written and oral comments and proposed responses before they are filed with the SEC. The Company shall give reasonable and good faith consideration to any comments made by Parent and its counsel.

        (b)   Subject to the other provisions of this Agreement, as soon as reasonably practicable after the SEC indicates that it has no further comments on the Proxy Statement or the Company Schedule 13E-3, the Company, acting through its Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors), shall (i) take all action necessary in accordance with the DGCL and its Certificate of

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Incorporation and Bylaws to duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of obtaining the Company Stockholder Approval (such meeting or any adjournment or postponement thereof, the "Company Meeting"), (ii) subject to Section 5.3, include in the Proxy Statement the Recommendation and (iii) use reasonable best efforts to solicit from its stockholders proxies in favor of the adoption of this Agreement. Once the Company Meeting has been called and noticed, the Company shall not postpone or adjourn the Company Meeting without the consent of Parent. Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be required to hold the Company Meeting if this Agreement is terminated.

        (c)   Parent and Merger Sub agree to cause all shares of Common Stock owned by Parent and Merger Sub or any subsidiary of Parent or Merger Sub to be voted in favor or approval of the Merger.

        Section 5.2    Access to Information; Confidentiality; Financial Statements.

        (a)   All information obtained by Parent pursuant to this Section 5.2 shall be kept confidential in accordance with the Confidentiality Agreement, dated May 29, 2009, between Scotia Waterous and the Company (the "Confidentiality Agreement").

        (b)   From the date hereof to the Effective Time or, if earlier, the Termination Date, the Company shall, and shall cause the Company's Representatives to, permit Parent and Parent's Representatives to have full and complete access to the Company's Representatives and the plants and other facilities, books, records, Contracts and documents of or pertaining to the Company and shall furnish Parent and Merger Sub with all financial, operating and other data and information as Parent or Merger Sub, through its Representatives, may reasonably request. Parent and Merger Sub shall hold in confidence and use such information only in connection with the Merger and, if this Agreement is terminated for any reason, shall deliver promptly to the Company all copies of such information then in their possession or control.

        (c)   In the event of the termination of this Agreement in accordance with ARTICLE 7, Parent and Merger Sub shall, and shall use reasonable best efforts to cause their respective Representatives to, return promptly every document furnished to them by the Company or any Representative of the Company in connection with the Merger and all copies thereof in their possession, and cause any other parties to whom such documents may have been furnished promptly to return such documents and all copies thereof.

        Section 5.3    No Solicitation of Transactions.

        (a)   Subject to Section 5.3(b), until the Effective Time or, if earlier, the Termination Date, the Company shall not, and shall not authorize or permit any of its directors, officers, employees, financial advisors, attorneys, accountants, agents and other representatives (collectively, "Representatives"), directly or indirectly, to (i) solicit, initiate, endorse or take any action to encourage or facilitate (including by way of furnishing information) any inquiry, proposal or offer or afford access to the employees, business, properties, assets, books or records of the Company with respect to, or the making or completion of, any Acquisition Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any Person any information or data with respect to, or otherwise cooperate in any way with, any Acquisition Proposal or (iii) resolve, propose or agree to do any of the foregoing. Subject to Section 5.3(b), the Company shall, and shall cause the Representatives of the Company to, immediately cease and cause to be terminated all existing discussions or negotiations with any Person (other than Parent and its affiliates) conducted heretofore with respect to any Acquisition Proposal.

        (b)   Notwithstanding anything to the contrary in Section 5.3(a), if at any time following the date of this Agreement and prior to obtaining the Company Stockholder Approval, (i) the Company receives a bona fide written Acquisition Proposal, (ii) such Acquisition Proposal was unsolicited and did not otherwise result from a breach of Section 5.3(a), (iii) the Board of Directors (acting through the Special

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Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) determines in good faith (after receiving the advice of the Company Financial Advisor) that such Acquisition Proposal constitutes or is reasonably expected to lead to a Superior Proposal and (iv) the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) determines in good faith (after consulting with and receiving the advice of outside legal counsel) that taking the actions referred to in clause (x) and (y) below is necessary in order to comply with its fiduciary duties to the stockholders of the Company under applicable Law, then the Company may at any time prior to obtaining Company Stockholder Approval (x) furnish information and data with respect to the Company to the Person making such Acquisition Proposal pursuant to (and only pursuant to) an Acceptable Confidentiality Agreement; provided, that the Company provides Parent with not less than 24 hours prior written notice of its intention to enter into such Acceptable Confidentiality Agreement and the Company advises Parent of any information provided to any Person concurrently with its delivery to such Person and concurrently with such delivery the Company delivers to Parent all such information not previously provided to Parent and (y) enter into, maintain and participate in discussions or negotiations with the Person making such Acquisition Proposal or otherwise cooperate with or assist or participate in, or facilitate, any such discussions or negotiations. The Company shall provide Parent with a correct and complete copy of any confidentiality agreement entered into pursuant to this paragraph within 24 hours of the execution thereof. The Company shall not terminate, waive, amend, release or modify any material provision of any confidentiality or standstill agreement to which it is a party with respect to any Acquisition Proposal, and shall enforce the material provisions of any such agreement.

        (c)   The Board of Directors shall not (A) fail to make the Recommendation to the stockholders of the Company or withdraw (or modify or qualify in any manner adverse to Parent or Merger Sub) the approval, Recommendation or declaration of advisability by the Board of Directors of this Agreement, the Merger or any of the other transactions contemplated hereby, (B) adopt, approve, recommend, endorse or otherwise declare advisable the adoption of any Acquisition Proposal or (C) resolve, agree or publicly propose to take any such actions (each such action set forth in this Section 5.3(c)(i) being referred to herein as an "Adverse Recommendation Change") or cause or permit the Company to enter into any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement, option agreement, joint venture agreement, partnership agreement or other agreement constituting or directly related to, or which is intended to or would be reasonably likely to lead to, any Acquisition Proposal (each, an "Alternative Acquisition Agreement"), other than any Acceptable Confidentiality Agreements, or resolve, agree or publicly propose to take any such actions. Notwithstanding the foregoing, at any time prior to obtaining Company Stockholder Approval, the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) may, if the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) determines in good faith (after consulting with and receiving the advice of outside legal counsel) that the failure to do so would violate its fiduciary duties to the stockholders of the Company under applicable Law, taking into account all adjustments to the terms of this Agreement that may be offered by Parent pursuant to this Section 5.3(c), (x) make an Adverse Recommendation Change in response to a Superior Proposal received after the date hereof and that does not otherwise result from a breach of Section 5.3(a) or (y) solely in response to either a Superior Proposal received after the date hereof and that did not otherwise result from a breach of Section 5.3(a), cause the Company to terminate this Agreement pursuant to Section 7.1(d)(ii); provided, however, that, in the case of a Superior Proposal, (A) (1) no Adverse Recommendation Change may be made and (2) no such termination of this Agreement may be made, in each case, until after the fifth Business Day following Parent's receipt of written notice from the Company advising Parent that the Board of Directors intends to make an Adverse Recommendation Change or cause the Company to terminate this Agreement pursuant to Section 7.1(d)(ii), as the case may be, and specifying the relevant

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terms and conditions of (including the identity of the Persons making the Superior Proposal) any Superior Proposal that is the basis of the proposed action by the Board of Directors, and contemporaneously furnishing to Parent a copy of the relevant Alternative Acquisition Agreement and any other relevant transaction documents (it being understood and agreed that any material amendment to the financial terms or any other material amendment to another material term of such Superior Proposal shall require a new written notice by the Company to Parent and an additional three Business Day period), (B) during such five Business Day period (or any additional three Business Day period), the Company shall, and shall cause its financial and legal advisors to, negotiate with Parent in good faith (to the extent Parent seeks to negotiate) to make such adjustments to the terms and conditions of this Agreement as would enable the Board of Directors to proceed with its recommendation of this Agreement and not make such an Adverse Recommendation Change or cause the Company to terminate this Agreement and (C) the Board of Directors shall not make such an Adverse Recommendation Change or cause the Company to terminate this Agreement if, prior to the expiration of such five Business Day period (or any additional three Business Day period), Parent agrees to adjust the terms and conditions of this Agreement such that the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) determines in good faith (after consultation with outside legal counsel and the Company Financial Advisor) to be at least as favorable as the Superior Proposal.

        (d)   From and after the date hereof, the Company shall promptly advise Parent, orally and in writing, and in any event no later than 24 hours after receipt, in the event the Company or its Representatives receives any Acquisition Proposal together with the material terms and conditions (including the identity of the Persons making such Acquisition Proposal) of such Acquisition Proposal and a copy of any written documentation delivered to the Company or its Representatives in connection therewith. The Company shall keep Parent informed on a timely basis of the status and details (including, within 24 hours after the occurrence of any material amendment or modification) of any such Acquisition Proposal, including of all material developments with respect to any such Acquisition Proposal and shall provide Parent with copies of any additional written documentation delivered to the Company or any of its Representatives in connection therewith. Following the date hereof, without limiting any of the foregoing, the Company shall promptly (and in any event within 24 hours) notify Parent orally and in writing if it determines to begin taking any of the actions referred to in clause (x) or (y) of Section 5.3(b).

        (e)   The Company shall promptly inform its Representatives of the obligations under this Section 5.3. Without limiting the foregoing, it is understood that any violation of the provisions of this Section 5.3 by the Company's Representatives shall be deemed to be a breach of this Section 5.3 by the Company.

        (f)    The Company shall not take any action to exempt any Person (other than Parent, Merger Sub and their respective affiliates) from the restrictions on "business combinations" contained in Section 203 of the DGCL (or any restrictive provision of any other Takeover Law) or otherwise cause such restrictions not to apply (except to the extent that the execution of this Agreement has such an effect or to the extent that the Contribution Agreement or Voting Agreement is deemed to have such an effect with respect to such other Person), or agree to do any of the foregoing, in each case, unless such actions are taken concurrently with a termination of this Agreement pursuant to Section 7.1(d)(ii).

        (g)   Nothing contained in this Agreement shall prohibit the Company from (i) taking and disclosing a position contemplated by Rules 14e-2(a) or 14d-9 promulgated under the Exchange Act or (ii) making any disclosure to the stockholders of the Company if, in the good faith judgment of the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors), after consulting with and receiving the advice of outside legal counsel, failure to do so would violate the disclosure requirements under applicable

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Law; provided, however, that in no event shall this Section 5.3(g) affect the obligations of the Company specified in Section 5.3(a), Section 5.3(b), and Section 5.3(c).

        (h)   For purposes of this Agreement:

          (i)  "Acceptable Confidentiality Agreement" means a customary confidentiality agreement containing confidentiality terms no less favorable in any material respect to the Company in the aggregate than those set forth in the Confidentiality Agreement; provided, that such confidentiality agreement shall not prohibit compliance with any of the provisions of this Section 5.3.

         (ii)  "Acquisition Proposal" means any inquiry (in writing or otherwise), proposal, indication of interest or offer from any Person (other than Parent, Merger Sub or any of their affiliates) or "group" (as defined in Section 13(d) of the Exchange Act) relating to, or that could be reasonably expected to lead to, (A) the direct or indirect acquisition or purchase (whether in a single transaction or a series of related transactions) of assets of the Company equal to 15% or more of the Company's consolidated assets or to which 15% or more of the Company's revenues or earnings on a consolidated basis are attributable, (B) the direct or indirect acquisition (whether in a single transaction or a series of related transactions) of 15% or more of any class of equity securities of the Company, (C) a tender offer or exchange offer that if consummated would result in any Person or "group" (as defined in Section 13(d) of the Exchange Act) beneficially owning 15% or more of any class of equity securities of the Company or (D) a merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, in each case, other than the transactions contemplated by this Agreement.

        (iii)  "Disinterested Director" means a member of the Board of Directors of the Company who (i) has no direct or indirect interest in Parent, whether as an investor or otherwise, (ii) is not a representative of any Person who has any such interest in Parent and (iii) is not otherwise affiliated with Parent.

        (iv)  "Superior Proposal" means any bona fide written Acquisition Proposal that the Board of Directors (acting through the Special Committee, if such committee still exists, or otherwise by resolution of a majority of its Disinterested Directors) determines in good faith (after consulting with and receiving the advice of outside legal counsel and after receiving the advice of the Company Financial Advisor), taking into account all legal, financial, regulatory, estimated time of completion and other aspects of the Acquisition Proposal and the Person making the Acquisition Proposal, including the financing terms thereof, (A) would result in a transaction that is more favorable to the stockholders from a financial point of view than the transactions contemplated by this Agreement (taking into account (1) any adjustment to the terms and conditions proposed by Parent in an offer that is in writing in response to such Acquisition Proposal pursuant to Section 5.3(c) or otherwise and (2) any termination fees and expense reimbursement provisions) and (B) is reasonably likely to be consummated; provided, that for purposes of this definition of "Superior Proposal," references in the term "Acquisition Proposal" to "15% or more" shall be deemed to be references to "more than 50%."

        Section 5.4    Governmental Filings; Efforts.

        (a)   Subject to the terms and conditions set forth in this Agreement, each of the Parties shall use its reasonable best efforts promptly to take, or cause to be taken, all actions, and do, or cause to be done, and to assist and cooperate with the other Parties in doing, all things necessary and appropriate to consummate and make effective, and to satisfy all conditions to, in the most expeditious manner practicable, the Merger and the other transactions contemplated by this Agreement, including (i) the obtaining of all necessary actions or nonactions, waivers, consents, clearances, approvals, and expirations or terminations of waiting periods from any Governmental Authorities and the making of

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all necessary registrations and filings and the taking of all steps as may be necessary and appropriate to effect the foregoing, or to avoid an action or proceeding by, any Governmental Authorities, (ii) the obtaining of all necessary consents, approvals or waivers from third parties to the extent that any such consent or waiver is necessary to permit the Parties to consummate the transactions contemplated by this Agreement and (iii) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by this Agreement. The Company and Parent and their respective counsel shall, subject to applicable Law, promptly (x) cooperate and coordinate with the other in the taking of the actions contemplated by clauses (i), (ii) and (iii) immediately above, and (y) supply the other with any information that may be reasonably required in order to effectuate the taking of such actions. Each Party shall inform the other Party or Parties, as the case may be, as promptly as practicable, of any communication from any Governmental Authority regarding any of the transactions contemplated by this Agreement. If the Company or Parent receives a request for additional information or documentary material from any Governmental Authority with respect to the transactions contemplated by this Agreement, then it shall use reasonable best efforts to make, or cause to be made, as soon as reasonably practicable, and after consultation with the other party, an appropriate response in compliance with such request, and, if permitted by applicable Law and by any applicable Governmental Authority, provide the other party's counsel with advance notice and the reasonable opportunity to participate in any meeting with any Governmental Authority in respect of any filing made thereto in connection with the transactions contemplated by this Agreement. Neither Parent nor the Company shall commit to or agree (or permit their respective Subsidiaries to commit to or agree) with any Governmental Authority to stay, toll or extend any applicable waiting period under the HSR Act or other applicable Antitrust Laws, without the prior written consent of the other (such consent not to be unreasonably withheld, conditioned or delayed). Notwithstanding anything to the contrary in this Section 5.4(a), materials provided to the other party or its counsel may be redacted (i) as necessary to comply with contractual arrangements and (ii) as necessary to address good faith legal privilege or confidentiality concerns; provided, however, that in the case of clause (ii) such materials shall be provided to outside counsel in unredacted form pursuant to a joint defense agreement ("Joint Defense Agreement") so long as the producing party has the legal right to provide such materials to outside counsel for the other party pursuant to such Joint Defense Agreement.

        (b)   Without limiting the generality of the undertakings pursuant to Section 5.4(a) hereof, the Parties shall (i) provide or cause to be provided as promptly as reasonably practicable to Governmental Authorities with jurisdiction over the Antitrust Laws (each such Governmental Authority, a "Governmental Antitrust Authority") information and documents requested by any Governmental Antitrust Authority as necessary and appropriate to permit consummation of the transactions contemplated by this Agreement, including preparing and filing any notification and report form and related material required under the HSR Act and any additional consents and filings under any other Antitrust Laws as promptly as practicable following the date of this Agreement (provided, that in the case of the filing under the HSR Act, such filing shall be made on or prior to the 10th Business Day following the date of this Agreement unless otherwise agreed to in writing by the Parties) and thereafter to respond as promptly as practicable to any request for additional information or documentary material that may be made under the HSR Act or any other applicable Antitrust Laws and (ii) use their reasonable best efforts to take such actions as are necessary and appropriate to obtain prompt approval of the consummation of the transactions contemplated by this Agreement by any Governmental Authority or expiration of applicable waiting periods. For the avoidance of doubt, each Party shall assist the other in gathering, preparing and submitting information or making any filing to any Governmental Antitrust Authority.

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        (c)   Notwithstanding anything to the contrary herein, nothing in this Agreement shall require Parent or any of its Subsidiaries to, nor shall the Company without the prior written consent of Parent agree or proffer to, divest, hold separate, or enter into any license or similar agreement with respect to, or agree to restrict the ownership or operation of, any business or assets of the Company, Parent or any of its Subsidiaries. Notwithstanding anything to the contrary contained herein, in no event shall Parent or any of its Subsidiaries be obligated to litigate or participate in any action, suit, claim, charge, complaint or proceeding, inquiry or investigation brought by any Governmental Authority or appeal any Order of a claim brought by a Governmental Authority (i) challenging or seeking to restrain or prohibit the consummation of the Merger or the other transactions contemplated by this Agreement, or seeking to obtain from Parent or any of its Subsidiaries any damages in relation therewith, (ii) seeking to prohibit or limit in any respect, or place any conditions on, the ownership or operation by the Company, Parent or any of its Subsidiaries of all or any portion of the business or assets or any product of the Company or Parent or its Subsidiaries or to require any such Person to dispose of, license (whether pursuant to an exclusive or nonexclusive license) or hold separate all or any portion of the business or assets or any product of the Company or Parent or its Subsidiaries, in each case as a result of or in connection with the Merger or any of the other transactions contemplated by this Agreement, (iii) seeking to directly or indirectly impose limitations on the ability of Parent or any of its Subsidiaries to acquire or hold, or exercise full rights of ownership of, any shares of Common Stock or any shares of common stock of the Surviving Corporation, including the right to vote the Common Stock or the shares of common stock of the Surviving Corporation on all matters properly presented to the stockholders of the Company or the Surviving Corporation, respectively or (iv) seeking to (A) directly or indirectly prohibit Parent or any of its affiliates from effectively controlling in any respect any of the business or operations of the Company or (B) directly or indirectly prevent the Company from operating any of their businesses in substantially the same manner as operated by the Company immediately prior to the date of this Agreement.

        (d)   The Parties acknowledge that the transactions contemplated by this Agreement do not meet the "Size of Transaction" test under the HSR Act and therefore no filing under the HSR Act is required in connection herewith.

        Section 5.5    Certain Notices.     From and after the date of this Agreement until the Effective Time, each Party hereto shall promptly notify the other Party of (i) the occurrence, or non-occurrence, of any event that would be likely to cause any condition to the obligations of any Party to effect the Merger and the other transactions provided for in this Agreement not to be satisfied or (ii) the failure of the Company, Merger Sub or Parent, as the case may be, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it pursuant to this Agreement which would reasonably be expected to result in any condition to the obligations of any Party to effect the Merger and the other transactions provided for in this Agreement not to be satisfied; provided, however, that the delivery of any notice pursuant to this Section 5.5 shall not cure any breach of any representation or warranty requiring disclosure of such matter at or prior to the execution of this Agreement or otherwise limit or affect the remedies available hereunder to the Party receiving such notice.

        Section 5.6    Public Announcements.     The Company and Parent will consult with and provide each other the reasonable opportunity to review and comment upon any press release or other public statement or comment prior to the issuance of such press release or other public statement or comment relating to this Agreement or the transactions contemplated herein and shall not issue any such press release or other public statement or comment prior to such consultation except as may be required by applicable Law or by obligations pursuant to any listing agreement with any national securities exchange. Parent and the Company agree that the press release announcing the execution and delivery of this Agreement shall be a joint release of Parent and the Company.

        Section 5.7    Conduct of Business of the Company.     During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with

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the terms set forth in ARTICLE 7 and the Effective Time, except to the extent expressly contemplated by this Agreement or with the prior written consent of Parent, the Company shall conduct its business in the ordinary course of business consistent with past practice, and the Company shall not engage in any conduct or practice, take any action or enter into any transaction other than in the ordinary course of business consistent with past practice. Without limiting the foregoing, (a) the Company shall (i) pay debts and Taxes when due, (ii) pay or perform all other obligations when due and (iii) use reasonable best efforts, consistent with past practice and policies, (A) to preserve intact its business organizations and material assets, (B) to keep available the services of its officers, directors and employees, (C) to comply in all material respects with all applicable Laws and the requirements of all of its Material Contracts and (D) maintain satisfactory relationships with customers, lenders, suppliers, distributors, licensors, licensees and others having business relationships with it, in each case, to the end that their goodwill and ongoing business shall be unimpaired at the Effective Time and (b) no matter included in the Company Disclosure Letter shall modify or be deemed to modify any of the provisions in this Section 5.7 or in Section 5.8 unless disclosed with particularity in Section 5.7 or Section 5.8 of the Company Disclosure Letter. The Company agrees to promptly notify Parent of any event or occurrence not in the ordinary course of its business and of any event that has or would reasonably be expected to have a Company Material Adverse Effect.

        Section 5.8    Actions Requiring Parent's Consent.     Without limiting the generality of Section 5.7, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement in accordance with the terms set forth in ARTICLE 7 and the Effective Time, without the prior written consent of Parent or except as otherwise expressly permitted by this Agreement, the Company shall not:

        (a)   amend or propose to amend the Certificate of Incorporation or Bylaws;

        (b)   (i) make, declare, set aside or pay any dividends on, or make any other distributions (whether in cash, stock, property or otherwise) in respect of any of, or enter into any agreement with respect to the voting of, any capital stock or equity interests of the Company, (ii) split, combine or reclassify any capital stock or equity interests of the Company, (iii) issue or authorize the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock or equity interests of the Company or (iv) purchase, redeem or otherwise acquire, directly or indirectly, any capital stock or equity interests of the Company, except for acquisitions of shares of Common Stock by the Company in satisfaction by holders of any options or rights granted under the Company's stock option or similar benefit plans or the applicable exercise price or withholding taxes;

        (c)   issue, deliver, sell, exchange, grant, pledge, encumber or transfer, or authorize or propose the issuance, delivery, sale, exchange, grant, pledge, encumbering or transfer of, or purchase or propose the purchase of, any shares of capital stock or other equity interests or securities convertible into, or subscriptions, rights, warrants or options to acquire any such shares or equity interests or other convertible securities of the Company, other than the issuance of shares of Common Stock pursuant to the exercise or settlement of stock options, warrants or other rights therefor outstanding as of the date of this Agreement.

        (d)   sell, lease, farmout, exchange, transfer, assign or otherwise dispose of, or agree or commit to sell, lease, farmout, exchange, transfer, assign, or otherwise dispose of, any assets, except for the sale of Hydrocarbons in the ordinary course of business consistent with past practice at market prices; provided that the payment and/or delivery terms with respect to any such sale of Hydrocarbons shall be no longer than 60 days from the date of sale;

        (e)   enter into any collective bargaining agreement;

        (f)    enter into or amend or modify in any material respect, or consent to the termination of (other than at its stated expiry date), any Material Contract or any material real property lease or any other

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Contract or lease that, if in effect as of the date hereof would constitute a Material Contract or a material real property lease hereunder; provided, however, that, except as set forth in Section 5.8(x), nothing herein will prevent the Company from entering into, amending or modifying Contracts or real property leases in the ordinary course of business consistent with past practice;

        (g)   make any material change in any method of financial accounting principles or practices, in each case except for any such changes required by a change in GAAP or applicable Law after the date of this Agreement;

        (h)   make, enter into or assume any Derivative Transaction;

        (i)    reduce the amount of any insurance coverage provided by existing insurance policies;

        (j)    terminate or waive any right or rights that individually or in the aggregate would reasonably be expected to be material in value to the Company;

        (k)   (i) increase in any manner (including by means of acceleration of payment) the compensation payable or to become payable to any of its past or present officers, employees or other service providers; (ii) enter into any new or amend in any material respect any existing employment, severance, retention or change in control agreement with any of its past or present officers, employees or other service providers, (iii) promote any officers, employees or service providers, (iv) except as contemplated by Section 2.6, establish, adopt or enter into any Employee Benefit Plan or amend (including by way of repricing of the exercise or base price of any Company Equity Award) or take any action to accelerate rights (including the waiver of performance criteria) under any Current Employee Benefit Plan (including Company Equity Awards outstanding under any Current Employee Benefit Plan) or under any plan, agreement, program, policy, trust, fund or other arrangement that would be a Current Employee Benefit Plan if it were in existence as of the date of this Agreement; or (v) make any contribution to any Current Employee Benefit Plan, other than contributions that are required by Law, or the contributions set forth on Section 5.8(k) of the Company Disclosure Letter.

        (l)    commence a Proceeding or settle or compromise any Proceeding, other than settlements or compromises of such Proceeding (i) for an amount less than or equal to the liability or reserve in respect thereof that has been reflected or accrued on the most recent balance sheet of the Company included in the Company SEC Filings or (ii) that are immaterial and in respect of which no liability or reserve in respect thereof has been reflected or accrued on the most recent balance sheet of the Company included in the Company SEC Filings; provided, that in the case of both clauses (i) and (ii), such settlement or compromise does not contain as a term thereof the imposition of equitable relief on, or any material restrictions on the business and operations of, the Company;

        (m)  acquire or agree to acquire (including, without limitation, by merging or consolidating with, by purchasing an equity interest in or a portion of the assets of, or by any other manner) any Person, any other business organization, division or business of such Person or any material assets;

        (n)   (i) redeem, repurchase, prepay, defease, incur or otherwise acquire any indebtedness for borrowed money (it being agreed that this covenant expressly does not apply to capital expenditures of any kind, including capital, synthetic or similar leases) or issue any debt securities or assume, guarantee or otherwise become responsible for, the obligations of any Person (other than the Company) for borrowed money; provided that the foregoing shall not limit or restrict the ability of the Company to enter into or arrange any customer supported financing transactions in the ordinary course of business consistent with past practice; (ii) voluntarily subject any of its material assets or material properties to any Encumbrances, other than Permitted Encumbrances; or (iii) take any action that would result in any amendment, modification or change of any term of any indebtedness of the Company;

        (o)   make or change any material election in respect of Taxes, adopt or change any material accounting method in respect of Taxes, file any material Tax Return or any amendment to a material

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Tax Return, enter into any closing agreement, settle any material claim or assessment in respect of Taxes or consent to any extension or waiver of the limitation period applicable to any such claim or assessment in respect of Taxes;

        (p)   fail to give all notices and other information required to be given to the employees of the Company, any collective bargaining unit representing any group of employees of the Company and any applicable Governmental Authority under the WARN Act, the National Labor Relations Act, the Code, the Consolidated Omnibus Budget Reconciliation Act and other applicable Law in connection with the transactions provided for in this Agreement;

        (q)   enter into any material agreement, agreement in principle, letter of intent, memorandum of understanding or similar Contract with respect to any joint venture, strategic partnership or alliance, which in each case, is material to the Company;

        (r)   create any new business division or otherwise enter into any new line of business;

        (s)   adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company (other than this Agreement and the Merger and other transactions contemplated hereby);

        (t)    except for (i) expense reimbursements and advances in the ordinary course of business consistent with past practice and (ii) transactions in the ordinary course of business consistent with past practice with affiliates of any non-employee member of the Board of Directors, enter into any Contract with any officer or director of the Company or any of their immediate family members (including their spouses);

        (u)   enter into any Contract having terms that (i) provide for the making of any payment as a result of the transactions contemplated by this Agreement, (ii) would result in the occurrence of a material and adverse change in the rights or obligations of the Company as a result of the transactions contemplated by this Agreement or (iii) would result in the occurrence of a material change in the rights or obligations of the counterparty thereto as a result of the transactions contemplated by this Agreement;

        (v)   except as expressly permitted in such agreement, amend, modify, cancel, terminate, breach, repudiate or waive compliance with any term of the Voting Agreement or any other agreement executed by the Company in connection with the transactions contemplated by this Agreement;

        (w)  take any action that will, or would reasonably be expected to, have a Company Material Adverse Effect; or

        (x)   take or agree to take any of the actions described in subsections (a) through (w) above or any other action that would make any of the representations or warranties contained in this Agreement untrue or incorrect or prevent the Company from performing or cause the Company not to perform its covenants hereunder.

        Section 5.9    Indemnification of Directors and Officers.

        (a)   During the period beginning at the Effective Time, the Surviving Corporation shall to the greatest extent permitted by Law indemnify and hold harmless and comply with all of the Company's obligations to indemnify and hold harmless (including any obligations to advance funds for expenses) (i) the present and former officers and directors thereof against any and all costs or expenses (including reasonable attorneys' fees and expenses), judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement in connection with any actual or threatened claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative ("Damages"), arising out of, relating to or in connection with any acts or omissions occurring or alleged to occur prior to or at the Effective Time to the extent provided under the Company's organizational and governing documents or

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agreements in effect on the date hereof; and (ii) such persons against any and all Damages arising out of acts or omissions in connection with such persons serving as an officer, director or other fiduciary in any entity if such service was at the request or for the benefit of the Company. For a period of six years after the Effective Time, the Company or Surviving Corporation shall cause to be maintained in effect the current policies of officers' and directors' liability insurance maintained as of the date hereof by the Company (the "Current Policies"); provided, however, that the Surviving Corporation may, and in the event of the cancellation or termination of such policies shall, substitute therefor policies with reputable and financially sound carriers providing at least the same coverage and amount and containing terms and conditions that are no less favorable to the covered persons (the "Replacement Policies") in respect of claims arising from facts or events that existed or occurred prior to or at the Effective Time under the Current Policies; provided, further, however, that in no event will the Surviving Corporation be required to expend annually in excess of 250% of the annual premium currently paid by the Company under the Current Policies (the "Insurance Amount") (in which event, the Surviving Corporation shall obtain as much comparable insurance as available for the Insurance Amount); provided, further, however, that in lieu of the foregoing insurance coverage, Parent may direct the Company to purchase "tail" insurance coverage that provides coverage no less favorable than the coverage described above, provided that the Company shall not be required to pay any amounts in respect of such coverage prior to the Effective Time.

        (b)   This Section 5.9 shall survive the consummation of the Merger and is intended to be for the benefit of, and shall be enforceable by, present or former directors or officers of the Company, their respective heirs and personal representatives and shall be binding on the Surviving Corporation and its successors and assigns. In the event that the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and is not the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers or conveys all or substantially all its properties and assets to any person (including by dissolution), then, and in each such case, Parent shall cause proper provision to be made so that the successors and assigns of the Surviving Corporation assume and honor the obligations set forth in this Section 5.9.

        (c)   The agreements and covenants contained herein shall not be deemed to be exclusive of any other rights to which any such present or former director or officer is entitled, whether pursuant to Law, contract or otherwise. Nothing in this Agreement is intended to, shall be construed to or shall release, waive or impair any rights to directors' and officers' insurance claims under any policy that is or has been in existence with respect to the Company or its officers, directors and employees, it being understood and agreed that the indemnification provided for in this Section 5.9 is not prior to or in substitution for any such claims under any such policies.

        Section 5.10    Takeover Laws.     If any Takeover Law shall become applicable to the Merger or the other transactions contemplated hereby, each of the Company and Parent and the members of their respective boards of directors shall grant such approvals and take such actions as are reasonably necessary so that the transactions contemplated hereby may be consummated as promptly as practicable on the terms contemplated hereby and otherwise act to eliminate or minimize the effects of such Takeover Law on the Merger and the other transactions contemplated hereby.

        Section 5.11    Section 16 Matters.     Prior to the Effective Time, the Company shall take all such steps as may reasonably be necessary and permitted to cause the transactions contemplated by this Agreement, including any dispositions of shares of Common Stock (including derivative securities with respect to such shares of Common Stock) by each individual who is or will be subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to the Company, to be exempt under Rule 16b-3 promulgated under the Exchange Act.

        Section 5.12    Stockholder Litigation.     The Company shall give Parent the opportunity to participate in the defense of any stockholder litigation against the Company or its officers or directors

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relating to the transactions contemplated by this Agreement and shall not compromise, settle, come to an arrangement regarding or agree to compromise, settle or come to an arrangement regarding any such litigation, or consent to the same without the prior written consent of Parent.

        Section 5.13    Termination of Stockholders Agreement.     After the date hereof and prior to the Effective Time, the Company shall take such actions, including the obtaining of any necessary written consents, as are necessary to cause the Stockholders Agreement to be terminated and of no further force and effect as of or prior to the Effective Time.

        Section 5.14    Credit Agreement Waivers.     After the date hereof and prior to the Effective Time, the Company shall take such actions as are necessary to maintain in all respects the effectiveness of the Credit Agreement Waiver, on terms no less favorable to the Company than those set forth in the Credit Agreement Waiver, until a date not earlier than June 15, 2010. Notwithstanding the foregoing, the aggregate amount of consent, waiver or similar fees payable to the lenders under the Credit Agreement after the date hereof in connection with obtaining the extensions, waivers and/or modifications described in this Section 5.14 shall not exceed $50,000.

        Section 5.15    Closing Conditions.     Each of the Parties shall use its reasonable best efforts to effectuate the transactions contemplated hereby and to fulfill and to cause to be fulfilled the conditions to closing under this Agreement. Each Party hereto, at the reasonable request of another Party hereto, shall execute and deliver such other instruments and do and perform such other acts and things as may be necessary or desirable for effecting completely the consummation of this Agreement and the transactions contemplated hereby.

        Section 5.16    Adoption of Merger Agreement.     Parent shall adopt this Agreement in its capacity as the sole stockholder of Merger Sub promptly following the date hereof.

ARTICLE 6
CONDITIONS TO THE MERGER

        Section 6.1    Conditions to Each Party's Obligation to Effect the Merger.     The respective obligations of each party to effect the Merger shall be subject to the fulfillment (or waiver by Parent and the Company, other than the condition specified in Section 6.1(a), which no Party may waive) at or prior to the Effective Time of only the following conditions:

        (a)   The Company Stockholder Approval shall have been obtained.

        (b)   No Governmental Authority having jurisdiction over any party shall have enacted, promulgated, issued, enforced or entered any Laws or Orders, whether temporary, preliminary or permanent, that make illegal, enjoin, restrain or otherwise prohibit consummation of the Merger or the other material transactions contemplated by this Agreement.

        Section 6.2    Conditions to the Obligations of Parent and Merger Sub.     The obligations of Parent and Merger Sub to consummate the Merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions:

        (a)   The representations and warranties of the Company contained in this Agreement shall be true and correct (disregarding all qualifications or limitations as to "materiality" or "Company Material Adverse Effect" or other similar qualifiers set forth therein) as of the Effective Time as though made on and as of such date (unless any such representation or warranty is made only as of a specific date, in which case as of such date), except where the failure of any such representations and warranties to be so true and correct has not had, and would not have, a Company Material Adverse Effect.

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        (b)   The Company shall have performed in all material respects the obligations, and complied in all material respects with the agreements and covenants, required to be performed by, or complied with by, it under this Agreement at or prior to the Effective Time.

        (c)   No Company Material Adverse Effect shall have occurred since the date of this Agreement.

        (d)   The Company shall have delivered to Parent a certificate, signed on behalf of the Company by the Chief Executive Officer and Chief Financial Officer of the Company (solely in his capacity as an officer of the Company without personal liability), certifying as to the satisfaction of the conditions specified in Sections 6.2(a), 6.2(b) , and 6.2(c).

        (e)   The Company shall have received, on or prior to the Effective Time, an agreement acceptable to Parent which shall waive, for a period of not less than sixty days from the Effective Time, any rights the lenders under the Credit Agreement may have (whether of acceleration or otherwise) as a result of a Change of Control Event (as defined in the Credit Agreement) being deemed to have occurred as a result of the transactions contemplated by this Agreement.

        (f)    The Contribution shall have been consummated and DLJ shall have otherwise complied with each of its obligations under the Contribution Agreement; provided, however, that Parent's obligation to consummate the Merger shall not be conditioned on the matters described in this clause (f) to the extent any breach by Parent under the Contribution Agreement or this Agreement has been the cause of, or resulted in, the failure of the consummation of the Contribution or DLJ's failure to comply with its obligations under the Contribution Agreement.

        Section 6.3    Conditions to the Obligations of the Company.     The obligations of the Company to consummate the Merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions:

        (a)   The representations and warranties of Parent and Merger Sub contained in this Agreement shall be true and correct (disregarding all qualifications or limitations as to "materiality" or other similar qualifiers set forth therein) as of the Effective Time as though made on and as of such date (unless any such representation or warranty is made only as of a specific date, in which case as of such date), except where the failure of any such representations and warranties to be so true and correct has not had, and would not have, a material adverse effect on Parent's ability to consummate the transactions contemplated hereby.

        (b)   Each of Parent and Merger Sub shall have performed in all material respects the obligations, and complied in all material respects with the agreements and covenants, required to be performed by, or complied with by, it under this Agreement at or prior to the Effective Time.

        (c)   Parent shall have delivered to the Company a certificate, signed on behalf of Parent by the Chief Executive Officer and Chief Financial Officer of Parent (solely in his or her capacity as an officer of Parent without personal liability), certifying as to the satisfaction of the conditions specified in Sections 6.3(a) and 6.3(b) .

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ARTICLE 7
TERMINATION, AMENDMENT AND WAIVER

        Section 7.1    Termination.     This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after the adoption of this Agreement by the stockholders of the Company:

        (a)   by mutual written consent of Parent, Merger Sub and the Company;

        (b)   by either the Company or Parent, if:

          (i)  (A) the Effective Time shall not have occurred on or before August 23, 2010 (the "Outside Date") or (B) the Company Meeting has been held and the Company Stockholder Approval has not been obtained on or before the Outside Date; provided, however, that the right to terminate this Agreement under Section 7.1(b)(i)(A) shall not be available to any Party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the consummation of the Merger to occur on or before the Outside Date;

         (ii)  if any Order issued by a court of competent jurisdiction or by a Governmental Authority, or Law or other legal restraint or prohibition in each case making the Merger illegal or permanently restraining, enjoining, or otherwise preventing the consummation thereof shall be in effect and shall have become final and nonappealable;

        (c)   by Parent, if:

          (i)  (A) an Adverse Recommendation Change shall have occurred, (B) the Board of Directors shall not have (1) unconditionally rejected any tender or exchange offer that is commenced or an Acquisition Proposal that is made in writing to the Company and publicly disseminated within 10 Business Days of the commencement or public dissemination thereof (including, for these purposes, by taking no position with respect to the acceptance by the stockholders of a tender offer or exchange offer within such period, which shall constitute a failure to reject such offer), and unconditionally recommended that the stockholders of the Company reject any tender or exchange offer and not tender any shares of Common Stock into such tender or exchange offer, or (2) in the event of any tender or exchange offer that is commenced or an Acquisition Proposal that is made in writing to the Company and publicly disseminated, within five Business Days after a written request from Parent the Company shall not have made or sent to the stockholders of the Company (in Parent's discretion), pursuant to Rule 14e-2 promulgated under the Exchange Act or otherwise, a statement unconditionally reaffirming the Recommendation and unconditionally recommending that the stockholders of the Company reject any tender or exchange offer, or (C) the Company shall have violated or breached in any material respect any of its obligations under Section 5.3;

         (ii)  there shall have occurred any Company Material Adverse Effect or the Company shall have breached any of its representations or warranties (other than the representations and warranties set forth in Section 3.30 and Section 3.31) or failed to perform in any material respect any of the obligations to be performed by it under this Agreement, which breach or failure to perform (1) would give rise to the failure of a closing condition set forth in Sections 6.2(a) or 6.2(b) and (2) is incapable of being cured or has not been cured by the Company within the later of (x) 15 Business Days after written notice has been given by Parent to the Company of such breach or failure to perform and (y) the Outside Date; or

        (iii)  the Company shall have breached any of its representations or warranties set forth in Section 3.30 or Section 3.31.

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        (d)   by the Company, if:

          (i)  Parent or Merger Sub shall have (A) failed to perform in any material respect any of its obligations to be performed by it under this Agreement or (B) breached any of Parent's or Merger Sub's representations and warranties, which breach or failure to perform, in the case of clause (B), would reasonably be expected to, individually or in the aggregate, materially adversely affect Parent's or Merger Sub's ability to consummate the transactions contemplated by this Agreement and, in the case of either clause (A) or (B) is either incurable, or if curable, is not cured by Parent or Merger Sub, as applicable, by the earlier of (x) 15 Business Days after written notice has been given by the Company to Parent of such breach or failure and (y) the Outside Date; provided, that at the time of the delivery or receipt of such written notice, the Company shall not be in breach of any of its obligations under this Agreement; or

         (ii)  prior to obtaining the Company Stockholder Approval, the Board of Directors authorizes the Company, in full compliance with the terms of this Agreement, including Section 5.3, to enter into a definitive agreement (not including an Acceptable Confidentiality Agreement) in respect of a Superior Proposal; provided, that the Company prior to, or concurrently with, such termination pays to Parent in immediately available funds the fee required to be paid pursuant to Section 7.3(a)(iii) and the Board of Directors concurrently approves, and the Company concurrently enters into, a definitive agreement providing for the implementation of such Superior Proposal.

The Party desiring to terminate this Agreement shall give written notice of such termination to the other Party. Where a Party may terminate this Agreement pursuant to one or more provisions of this Section 7.1, such Party may designate the provision pursuant to which such termination shall be treated for purposes of Section 7.3.

        Section 7.2    Effect of Termination.     Upon the termination of this Agreement pursuant to Section 7.1, this Agreement shall forthwith become null and void except for the provisions of (a) Section 7.3 and (b) ARTICLE 8, which shall survive such termination; provided, that nothing herein shall relieve any party from liability or damages for any knowing and intentional breach of this Agreement or fraud, in which case the aggrieved party shall be entitled to all rights and remedies (including damages) available at Law or equity and, in the case of Parent or Merger Sub, such rights and remedies (including damages) shall be in addition to any amounts payable or paid to Parent pursuant to Section 7.3(a).

        Section 7.3    Fees and Expenses.

        (a)   In the event that:

          (i)  (A) an Acquisition Proposal shall have been made to the Company or shall have been made directly to its stockholders generally following the date of this Agreement, and thereafter (B) this Agreement is terminated by the Company or Parent pursuant to Section 7.1(b)(i) and (C) the Company enters into a definitive agreement with respect to, or consummates a transaction contemplated by, any Acquisition Proposal within 12 months of the date this Agreement is terminated;

         (ii)  this Agreement is terminated by Parent pursuant to Section 7.1(c)(i) (or by Parent or the Company pursuant to Section 7.1(b)(i) following any time at which Parent was entitled to terminate this Agreement pursuant to Section 7.1(c)(i));

        (iii)  this Agreement is terminated by the Company pursuant to Section 7.1(d)(ii); or

        (iv)  this Agreement is terminated by Parent pursuant to Section 7.1(c)(ii) or Section 7.1(c)(iii) (or by Parent or the Company pursuant to Section 7.1(b)(i) following any time at which Parent was entitled to terminate this Agreement pursuant to Section 7.1(c)(ii) or Section 7.1(c)(iii))

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the Company shall pay to Parent (A) a termination fee (the "Termination Fee") of (x) $1,000,000 (in any such event under clause (i), (ii) or (iii) of this Section 7.3(a)) or (y) $500,000 (in any such event under clause (iv) of this Section 7.3(a)) and (B) to the extent not previously paid pursuant to the immediately following sentence, all of Parent's out-of-pocket fees and expenses (including legal and other advisors fees and expenses) actually incurred by Parent and its affiliates on or prior to the termination of this Agreement in connection with the transactions contemplated by this Agreement up to a maximum amount of $600,000 (the "Parent Expenses"). In the event that this Agreement is terminated by the Company or Parent pursuant to Section 7.1(b)(i) and no Termination Fee is payable (or yet payable) in respect thereof pursuant to the immediately preceding sentence, then the Company shall pay to Parent the Parent Expenses. Any payment of the Termination Fee required to be made pursuant to clause (i) of this Section 7.3(a) shall be made to Parent concurrently with the earlier to occur of (x) entry into a definitive agreement with respect to and (y) consummation of the transaction contemplated by the Acquisition Proposal referred to therein; any payment of the Termination Fee required to be made pursuant to clause (ii) or clause (iv) of this Section 7.3(a) shall be made to Parent promptly following termination of this Agreement by Parent as set forth in such clause (ii) or clause (iv), as applicable (and in any event not later than three Business Days after delivery to the Company of notice of demand for payment), and any payment of the Termination Fee required to be made pursuant to clause (iii) of this Section 7.3(a) shall be made to Parent at the time provided for in Section 7.1(d)(ii). If the Company is required to pay Parent Expenses hereunder, the Company shall pay to Parent the Parent Expenses as promptly as possible (but in any event within three Business Days) following receipt by the Company of an invoice therefore. The Termination Fee and the Parent Expenses shall be payable by wire transfer of immediately available funds in accordance with wire transfer instructions provided by Parent; provided, that in the event this Agreement is terminated by Parent pursuant to Section 7.1(c)(ii), payment of the Termination Fee (but not the Parent Expenses) may be satisfied, at the election of the Company, by issuance to Parent of a number of shares of Common Stock equal to the Termination Fee divided by the Merger Consideration in lieu of a payment of immediately available funds.

        (b)   All such payments shall be made by wire transfer of immediately available funds to an account to be designated by Parent or, if Parent fails to timely designate an account, by cashier's check payable to the order of Parent delivered to Parent at the address specified in Section 8.2.

        (c)   Except as set forth in Section 7.3(a), all fees and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement shall be paid by the Party incurring such expenses, whether or not the Merger is consummated. Other than any Taxes imposed upon a holder of shares of Common Stock or Company Equity Awards (which shall be paid by or withheld on behalf of such holder), the Company shall pay all Taxes incident to preparing for, entering into, and carrying out this Agreement and the consummation of the transactions contemplated by this Agreement, including (i) transfer, stamp, and documentary Taxes or fees and (ii) sales, use, gains, real property transfer, and other or similar Taxes or fees.

        (d)   In the event that the Company shall fail to pay the Termination Fee and/or Parent Expenses required pursuant to this Section 7.3 when due, such Termination Fee and/or Parent Expenses, as the case may be, shall accrue interest for the period commencing on the date such Termination Fee and/or Parent Expenses, as the case may be, became past due, at a rate equal to the rate set forth in the New York edition of The Wall Street Journal on such date under the "Treasury" section for "1-Year Note" plus 300 basis points. In addition, if the Company shall fail to pay such Termination Fee and/or Parent Expenses, as the case may be, when due, the Company shall also pay to Parent all of Parent's costs and expenses (including attorneys' fees) in connection with efforts to collect such Termination Fee and/or Parent Expenses, as the case may be.

        (e)   The Company acknowledges that the fees (including the Termination Fee), Parent Expenses reimbursement and the other provisions of this Section 7.3 are an integral part of this Agreement and

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the transactions contemplated hereby and that, without these agreements, Parent and Merger Sub would not enter into this Agreement. Each of the Parties acknowledges that the Termination Fee is not a penalty, but rather a reasonable amount that will compensate Parent and Merger Sub for the efforts and resources expended and opportunities foregone while negotiating this Agreement and in reliance on this Agreement and on the expectation of the consummation of the transactions contemplated hereby, which amount would otherwise be impossible to calculate with precision.

        Section 7.4    Extension; Waiver.     At any time prior to the Effective Time, the Parties may, to the extent permitted by applicable Law, subject to Section 7.5, (a) extend the time for the performance of any of the obligations or other acts of the other Parties, (b) waive any inaccuracies in the representations and warranties of the other Parties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements of the other Parties or conditions to such Party's obligations contained herein, other than the condition specified in Section 6.1(a), which no Party may waive; provided, however, that after the Company Stockholder Approval has been obtained, there may not be any extension or waiver of this Agreement which decreases the Merger Consideration or which adversely affects the rights of the Company's stockholders hereunder without the approval of such stockholders. Any agreement on the part of a Party to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Party. The failure of any Party to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights.

        Section 7.5    Amendment.     This Agreement may be amended by the Parties by action taken by or on behalf of their respective boards of directors or similar governing body at any time prior to the Effective Time; provided, however, that, after the Company Stockholder Approval has been obtained, no amendment may be made without further stockholder approval which, by Law or in accordance with the rules of any relevant stock exchange, requires further approval by such stockholders. This Agreement may not be amended except by an instrument in writing signed by the Parties.

ARTICLE 8
GENERAL PROVISIONS

        Section 8.1    Non-Survival of Representations and Warranties.     None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time. This ARTICLE 8, the agreements of Parent, Merger Sub and the Company contained in Section 5.9, Section 7.3 and those other covenants and agreements contained herein that by their terms apply, or that are to be performed in whole or in part, after the Effective Time shall survive the consummation of the Merger.

        Section 8.2    Notices.     All notices, requests, claims, demands, and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.2):

if to Parent, Merger Sub or the Surviving Corporation:

c/o Scotia Waterous
711 Louisiana Street, Suite 1400
Pennzoil Place, South Tower
Houston, TX 77002
Attn: Tym Tombar
Fax: (713) 759- 7431

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With a copy to:

Vinson & Elkins LLP
1001 Fannin Street, Suite 2500
Houston, TX 77002
Attn: Nicole E. Clark
Fax: (713) 615-5950

if to the Company:

Pinnacle Gas Resources, Inc.
1 East Alger
Sheridan, Wyoming, 82801
Attn: Tom McGonagle
Fax: (307) 673-9711

With a copy to:

Joe Perillo
Locke Lord Bissell & Liddell LLP
600 Travis Street
Suite 2800
Houston, Texas 77002
Fax: (713) 229-2610

        Section 8.3    Severability.     If any term or other provision of this Agreement is invalid, illegal, or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Merger is not affected in any manner materially adverse to Parent or the Surviving Corporation. Upon such determination that any term or other provision is invalid, illegal, or incapable of being enforced, the Parties shall negotiate in good faith to modify this Agreement in a mutually acceptable manner so as to effect the original intent of the Parties as closely as possible with respect to the consummation of the Merger.

        Section 8.4    Entire Agreement.     This Agreement (together with the Annexes, Exhibits, Company Disclosure Letter, the Contribution Agreement, Voting Agreement, and the other documents delivered pursuant hereto) constitute the entire agreement of the Parties and supersede all prior agreements and undertakings, both written and oral, between the Parties, or any of them, with respect to the subject matter hereof and thereof and, except as otherwise expressly provided herein, are not intended to confer upon any other Person any rights or remedies hereunder. EACH PARTY HERETO AGREES THAT, EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NONE OF PARENT, MERGER SUB AND THE COMPANY MAKES ANY OTHER REPRESENTATIONS OR WARRANTIES, AND EACH HEREBY DISCLAIMS ANY OTHER REPRESENTATIONS OR WARRANTIES MADE BY ITSELF OR ANY OF ITS RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, FINANCIAL AND LEGAL ADVISORS OR OTHER REPRESENTATIVES, WITH RESPECT TO THE EXECUTION AND DELIVERY OF THIS AGREEMENT OR THE MERGER, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE OTHER OR THE OTHER'S REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION WITH RESPECT TO ANY ONE OR MORE OF THE FOREGOING.

        Section 8.5    Assignment.     Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the Parties (whether by operation of Law or otherwise) without the prior written consent of the other Parties except either Parent or Merger Sub may assign all or any of its rights and obligations hereunder to any direct or indirect wholly owned Subsidiary of Parent. No

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assignment by any Party shall relieve such Party of any of its obligations hereunder. Subject to the foregoing, this Agreement will be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns.

        Section 8.6    Mutual Drafting.     Each Party has participated in the drafting of this Agreement, which each Party acknowledges is the result of extensive negotiations between the Parties. If an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if it is drafted by all the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of authorship of any of the provisions of this Agreement.

        Section 8.7    Parties in Interest.     This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and, except as specifically set forth in Section 5.9(b), nothing in this Agreement, express or implied, is intended to or shall confer upon any other Person any right, benefit, or remedy of any nature whatsoever under or by reason of this Agreement.

        Section 8.8    Specific Performance.     Each Party agrees that irreparable damage may occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or in equity.

        Section 8.9    Governing Law.     This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware.

        Section 8.10    Jurisdiction.     Each of the Parties irrevocably agrees that any legal action or proceeding with respect to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder brought by the other party hereto or its successors or assigns, shall be brought and determined exclusively in the Delaware Court of Chancery and any state appellate court therefrom within the State of Delaware (or, if the Delaware Court of Chancery declines to accept jurisdiction over a particular matter, any state or federal court within the State of Delaware). Each of the Parties hereby irrevocably submits with regard to any such action or proceeding for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the aforesaid courts and agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than the aforesaid courts. Each of the Parties hereby irrevocably waives, and agrees not to assert as a defense, counterclaim or otherwise, in any action or proceeding with respect to this Agreement, (a) any claim that it is not personally subject to the jurisdiction of the aforesaid courts for any reason other than the failure to serve in accordance with this Section 8.10, (b) any claim that it or its property is exempt or immune from jurisdiction of any such court or from any legal process commenced in such courts (whether through service of notice, attachment prior to judgment, attachment in aid of execution of judgment, execution of judgment or otherwise) and (c) to the fullest extent permitted by the applicable Law, any claim that (i) the suit, action or proceeding in such court is brought in an inconvenient forum, (ii) the venue of such suit, action or proceeding is improper or (iii) this Agreement, or the subject matter hereof, may not be enforced in or by such courts.

        Section 8.11    Waiver of Jury Trial.     EACH OF THE PARTIES IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

        Section 8.12    Headings.     The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.

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        Section 8.13    Interpretation.     When a reference is made in this Agreement to an Article or Section, such reference shall be to an Article or Section of this Agreement unless otherwise indicated. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant to this Agreement unless otherwise defined therein. The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms and to the masculine as well as to the feminine and neuter gender