Cano Petroleum, Inc. provides the results of a mid-year Fiscal 2010 Reserves review as prepared by Haas Petroleum Engineering Services, Inc. (Haas), its new independent petroleum engineer. Haas prepared 100% of the reserves for the properties. The Company replaced approximately 300% of estimated mid-year 2010 fiscal year production of 197.5 MBOE at an estimated reserve replacement cost of $15.84/BOE (including extensions and discoveries, excluding asset sales and production, and capital expenditures of $9.4 million). Over a two-and-one-half-year period, Cano had an estimated reserve replacement cost of $16.30/BOE.

Haas estimates Cano's proved oil and gas reserves at December 31, 2009 to be 43.0 MMBOE, of which Proved Developed reserves were 8.8 MMBOE, down 6.3% as compared to 10.1 MMBOE at June 30, 2009, including property sales (510.6 MBOE) and production (197.5 MBOE).

Proved reserves declined 10.9%, net of asset sales and production, to 43.0 MMBOE. The majority of the reduction was due to a reduction in the PUD waterflood secondary to primary ratio at 15 of our 33 leases in the Panhandle Properties. All reserves associated with the Panhandle PUD reduction were reclassified into the probable reserve category. A divestiture at our Panhandle properties (containing 18 gas wells and one oil well) accounted for a reduction in PDP reserves of 510.6 MBOE. The sale was closed in January 2010, with an effective date of December 31, 2009. Net of the PUD reclassification and asset sales at the Panhandle Properties, all other Proved reserves declined 2.1%.

The estimates above do not include the effects of the SEC's final rule, 'Modernization of Oil and Gas Reporting,' issued in December 2008. This final rule is effective for annual reports on Forms 10-K for years ending on or after December 31, 2009. Haas utilized pricing at December 31, 2009 of $79.39 per barrel of oil and $5.82 per mcf of gas. Since early adoption of the final rule is prohibited, the final rule will be fully applied in the Company's annual report on Form 10-K for the year ending June 30.

Oil reserves account for 77% (versus 79% at June 30, 2009) of Proved reserves and Proved Developed reserves account for 20% (versus 21% at June 30, 2009) of Proved reserves. Pre-tax PV-10 of our Proved reserves as of December 31, 2009 is $513.4 million (versus $471.3 million at June 30, 2009), of which $99.7 million is associated with Proved Developed reserves (versus $78.4 million at June 30, 2009).

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