##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the transition period from _________ to _________
 Commission file number: 001-14837
 Quicksilver Resources Inc.
  Delaware
    
    75-2756163(State or other jurisdiction of
    
    (I.R.S. Employer Identificationincorporation or organization)
    
    No.)
 777 West Rosedale, Suite 300, Fort Worth, Texas
    
    76104(Address of principal executive offices)
    
    (Zip Code)
 (817) 665-5000
 None
 þ o
  þ o o
 o þ
  Outstanding as of October 31,Title of Class
    
    
    
    2006Common Stock, $0.01 par value
    
    
    
    77,537,805




---



##### 



QUICKSILVER RESOURCES INC.
INDEX TO FORM 10-Q
For the Period Ending September 30, 2006
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Report of Independent Registered Public Accounting Firm
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2006 and December 31, 2005
    
    
    4Condensed Consolidated Statements of Income and Comprehensive Income for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
    6Notes to Condensed Consolidated Interim Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 6. Exhibits
    
    
    35Signatures
    
    
    36Third Supplemental IndentureAwareness LetterCertification Pursuant to Section 302Certification Pursuant to Section 302Certification Pursuant to Section 906
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements (Unaudited)
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Share-Based Payment.
  
 3




---



##### Table of Contents



QUICKSILVER RESOURCES INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 In thousands, except
for share data  Unaudited
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent assetsCash and cash equivalents
    
    $
    3,363
    
    
    $
    14,318Accounts receivable, net of allowance for doubtful accounts
    
    
    68,373
    
    
    
    76,121Current derivative assets
    
    
    49,472
    
    
    
    603Current deferred income taxes
    
    
    
    
    
    
    14,614Other current assets
    
    
    20,861
    
    
    
    7,928Total current assets
    
    
    142,069
    
    
    
    113,584Investments in and advances to equity affiliates
    
    
    8,657
    
    
    
    8,353Property, plant and equipment  net (full cost)
    
    
    1,500,705
    
    
    
    1,112,002Non-current derivative assets
    
    
    12,894
    
    
    
    Other assets
    
    
    20,782
    
    
    
    9,155$
    1,685,107
    
    
    $
    1,243,094LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    376
    
    
    $
    70,493Accounts payable
    
    
    78,661
    
    
    
    48,409Accrued liabilities
    
    
    58,106
    
    
    
    52,656Derivative obligations
    
    
    159
    
    
    
    40,632Current deferred income taxes
    
    
    17,058
    
    
    
    Total current liabilities
    
    
    154,360
    
    
    
    212,190Long-term liabilitiesLong-term debt
    
    
    797,287
    
    
    
    506,039Non-current derivative obligations
    
    
    
    
    
    
    4,631Asset retirement obligations
    
    
    21,811
    
    
    
    20,891Deferred income taxes
    
    
    151,990
    
    
    
    115,728Minority interest
    
    
    4,617
    
    
    
    Total other-long term liabilities
    
    
    975,705
    
    
    
    647,289Stockholders equityPreferred stock, $0.01 par value, 10,000,000 shares authorized,
0 and 1 share issued and outstanding
    
    
    
    
    
    
    Common stock, $0.01 par value, 200,000,000 and
100,000,000 shares authorized, respectively, and
80,113,675 and 78,650,110 shares issued, respectively
    
    
    801
    
    
    
    787Paid in capital in excess of par value
    
    
    235,084
    
    
    
    211,843Treasury stock of 2,579,441 and 2,571,069 shares, respectively
    
    
    (10,833
    )
    
    
    (10,353
    )Accumulated other comprehensive income (loss)
    
    
    62,266
    
    
    
    (12,382
    )Retained earnings
    
    
    267,724
    
    
    
    193,720Total stockholders equity
    
    
    555,042
    
    
    
    383,615$
    1,685,107
    
    
    $
    1,243,094
  4




---



##### Table of Contents



QUICKSILVER RESOURCES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 In thousands, except
for per share data  Unaudited
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenuesOil, gas and related product sales
    
    $
    98,150
    
    
    $
    82,204
    
    
    $
    285,375
    
    
    $
    204,887Other revenue
    
    
    1,063
    
    
    
    1,569
    
    
    
    2,953
    
    
    
    2,675Total revenues
    
    
    99,213
    
    
    
    83,773
    
    
    
    288,328
    
    
    
    207,562ExpensesOil and gas production costs
    
    
    24,602
    
    
    
    19,396
    
    
    
    70,232
    
    
    
    53,342Production and ad valorem taxes
    
    
    4,502
    
    
    
    3,876
    
    
    
    10,661
    
    
    
    9,866Other operating costs
    
    
    300
    
    
    
    249
    
    
    
    1,249
    
    
    
    1,364Depletion, depreciation and accretion
    
    
    19,933
    
    
    
    13,873
    
    
    
    55,560
    
    
    
    39,262General and administrative
    
    
    6,245
    
    
    
    5,381
    
    
    
    17,936
    
    
    
    13,200Total expenses
    
    
    55,582
    
    
    
    42,775
    
    
    
    155,638
    
    
    
    117,034Income from equity affiliates
    
    
    210
    
    
    
    230
    
    
    
    318
    
    
    
    669Operating income
    
    
    43,841
    
    
    
    41,228
    
    
    
    133,008
    
    
    
    91,197Other income-net
    
    
    (167
    )
    
    
    (253
    )
    
    
    (1,015
    )
    
    
    (457
    )Interest expense
    
    
    11,040
    
    
    
    5,589
    
    
    
    30,808
    
    
    
    15,022Income from continuing operations before income
taxes and minority interest
    
    
    32,968
    
    
    
    35,892
    
    
    
    103,215
    
    
    
    76,632Income tax expense
    
    
    10,046
    
    
    
    11,199
    
    
    
    29,139
    
    
    
    24,000Minority interest
    
    
    61
    
    
    
    
    
    
    
    72
    
    
    
    Income from continuing operations
    
    
    22,861
    
    
    
    24,693
    
    
    
    74,004
    
    
    
    52,632Gain from discontinued operations, net of income tax
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    62Net income
    
    $
    22,861
    
    
    $
    24,755
    
    
    $
    74,004
    
    
    $
    52,694Other comprehensive income, net of income taxesReclassification adjustments  hedge settlements
    
    
    (3,409
    )
    
    
    4,379
    
    
    
    (4,239
    )
    
    
    13,017Unrealized gain (loss) on derivative instruments
    
    
    33,717
    
    
    
    (63,433
    )
    
    
    73,282
    
    
    
    (69,363
    )Foreign currency translation adjustments
    
    
    694
    
    
    
    4,013
    
    
    
    5,605
    
    
    
    2,805Comprehensive income (loss)
    
    $
    53,863
    
    
    $
    (30,286
    )
    
    $
    148,652
    
    
    $
    (847
    )Basic net income per common shareContinuing operations
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.97
    
    
    $
    0.70Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.97
    
    
    $
    0.70Diluted net income per common shareContinuing operations
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.91
    
    
    $
    0.66Discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.91
    
    
    $
    0.66Weighted average common shares outstandingBasic
    
    
    77,007
    
    
    
    75,781
    
    
    
    76,593
    
    
    
    75,674Diluted
    
    
    83,306
    
    
    
    82,668
    
    
    
    83,056
    
    
    
    82,403
  5




---



##### Table of Contents



QUICKSILVER RESOURCES INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 In thousands  Unaudited
 For the Nine Months EndedSeptember 30,2006
    
    
    2005Operating activities:Net income
    
    $
    74,004
    
    
    $
    52,694Charges and credits to net income not affecting cash
Depletion, depreciation and accretion
    
    
    55,560
    
    
    
    39,262Deferred income taxes
    
    
    29,095
    
    
    
    23,620Non-cash compensation
    
    
    4,775
    
    
    
    932Amortization of deferred loan costs
    
    
    1,615
    
    
    
    1,061Income from equity affiliates
    
    
    (318
    )
    
    
    (669
    )Minority interest
    
    
    72
    
    
    
    Non-cash gain from hedging activities
    
    
    (114
    )
    
    
    (305
    )Other non-cash items
    
    
    232
    
    
    
    71Changes in assets and liabilitiesAccounts receivable
    
    
    7,748
    
    
    
    (32,834
    )Current and other assets
    
    
    (17,921
    )
    
    
    (2,498
    )Accounts payable
    
    
    14,844
    
    
    
    6,084Accrued and other liabilities
    
    
    18,114
    
    
    
    (1,528
    )Net cash provided by operating activities
    
    
    187,706
    
    
    
    85,890Investing activities:Purchases of property, plant and equipment
    
    
    (429,485
    )
    
    
    (226,376
    )Return of investment in equity affiliates
    
    
    558
    
    
    
    512Proceeds from sales of properties
    
    
    5,670
    
    
    
    9,301Net cash used for investing activities
    
    
    (423,257
    )
    
    
    (216,563
    )Financing activities:Issuance of debt
    
    
    483,148
    
    
    
    143,094Repayments of debt
    
    
    (271,808
    )
    
    
    (245
    )Debt issuance costs
    
    
    (9,213
    )
    
    
    (223
    )Proceeds from exercise of stock options
    
    
    18,480
    
    
    
    1,721Minority interest contributions
    
    
    4,506
    
    
    
    Purchase of treasury stock
    
    
    (480
    )
    
    
    Payment for fractional shares
    
    
    
    
    
    
    (18
    )Net cash provided by financing activities
    
    
    224,633
    
    
    
    144,329Effect of exchange rates on cash
    
    
    (37
    )
    
    
    139Net (decrease) increase in cash and cash equivalents
    
    
    (10,955
    )
    
    
    13,795Cash and cash equivalents at beginning of period
    
    
    14,318
    
    
    
    15,947Cash and cash equivalents at end of period
    
    $
    3,363
    
    
    $
    29,742
  6




---



##### Table of Contents



QUICKSILVER RESOURCES INC.
 
 NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
 UNAUDITED
 1. ACCOUNTING POLICIES AND DISCLOSURES
     Net Income per Common Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, expect per share amounts)Income from continuing operations
    
    $
    22,861
    
    
    $
    24,693
    
    
    $
    74,004
    
    
    $
    52,632Impact of
assumed conversions  interest on 1.875%
contingently convertible debentures, net of income taxes
    
    
    475
    
    
    
    475
    
    
    
    1,425
    
    
    
    1,425Income from continuing operations available to stockholders
assuming conversion of contingently convertible debentures
    
    $
    23,336
    
    
    $
    25,168
    
    
    $
    75,429
    
    
    $
    54,057Weighted average common shares-basic
    
    
    77,007
    
    
    
    75,781
    
    
    
    76,593
    
    
    
    75,674Effect of dilutive securities:Employee stock options
    
    
    901
    
    
    
    1,829
    
    
    
    1,178
    
    
    
    1,718Employee stock awards
    
    
    490
    
    
    
    150
    
    
    
    377
    
    
    
    103Contingently convertible debentures
    
    
    4,908
    
    
    
    4,908
    
    
    
    4,908
    
    
    
    4,908Weighted average common shares-diluted
    
    
    83,306
    
    
    
    82,668
    
    
    
    83,056
    
    
    
    82,403Basic net income per common share
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.97
    
    
    $
    0.70Diluted net income per common share
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.91
    
    
    $
    0.66
 7




---



##### Table of Contents



Recently Issued Accounting Standards
 Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109
 Fair Value Measurements
  2. STOCK-BASED COMPENSATION
 Share-Based Payment . Accounting for Stock Issued to Employees
    8




---



##### Table of Contents



Accounting for
Stock-based Compensation
 Three Months
    
    
    Nine MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2005(in thousands, except per share amounts)Net income
    
    $
    24,755
    
    
    $
    52,694Deduct:
Total stock  based compensation expense
determined under fair value based method for stock
option awards, net of related tax effect
    
    
    (1,709
    )
    
    
    (5,547
    )Pro forma
net income
    
    
    23,046
    
    
    
    47,147Impact of
assumed conversions  interest on 1.875%
contingently convertible debentures, net of income taxes
    
    
    475
    
    
    
    1,425Pro forma
net income assuming conversion of contingently convertible debentures
    
    $
    23,521
    
    
    $
    48,572As reportedBasic net income per common share
    
    $
    0.33
    
    
    $
    0.70Diluted net income per common share
    
    
    0.31
    
    
    
    0.66Pro formaBasic net income per common share
    
    $
    0.31
    
    
    $
    0.64Diluted net income per common share
    
    
    0.28
    
    
    
    0.59
 Employee Stock Plans
 1999 and 2004 Plans
    2006 Equity Plan
  9




---



##### Table of Contents



Stock Options
   Wtd AvgExerciseShares
    
    
    PriceOutstanding at beginning of year
    
    
    2,840,695
    
    
    $
    17.13Granted
    
    
    2,401
    
    
    
    44.39Exercised
    
    
    (1,036,735
    )
    
    
    17.83Forfeited
    
    
    (36,432
    )
    
    
    12.65Outstanding at period end
    
    
    1,769,929
    
    
    $
    16.84Exercisable at September 30, 2006
    
    
    1,324,099
    
    
    $
    18.29Weighted average fair value of options granted
    
    
    
    
    
    $
    24.99
   Nine Months Ended September 30,2006Grant date
    
    Jan 3, 2006Risk-free interest rate
    
    
    4.35
    %Expected life (in years)
    
    
    10.0Expected volatility
    
    
    37.3
    %Dividend yield
    
    
    
  Restricted Stock
    Wtd AvgGrant DateShares
    
    
    Fair ValueOutstanding at beginning of year
    
    
    133,858
    
    
    $
    33.73Granted
    
    
    465,012
    
    
    
    39.07Vested
    
    
    (47,015
    )
    
    
    33.81Forfeited
    
    
    (37,882
    )
    
    
    36.67Outstanding at period end
    
    
    513,973
    
    
    $
    38.34
  10




---



##### Table of Contents



3. PROPERTY
   4. HEDGING
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Derivative assets:Fixed price sale commitments
    
    $
    132
    
    
    $
    638Floating price natural gas basis swaps
    
    
    235
    
    
    
    Crude oil financial collars
    
    
    528Natural gas financial collars
    
    
    61,542
    
    
    
    $
    62,437
    
    
    $
    638Derivative liabilities:Natural gas financial collars
    
    $
    
    
    
    $
    44,480Crude oil financial collars
    
    
    71
    
    
    
    320Floating price natural gas financial swaps
    
    
    159
    
    
    
    463Fixed price sale commitments
    
    
    
    
    
    
    35$
    230
    
    
    $
    45,298
   11




---



##### Table of Contents



5. LONG-TERM DEBT
  September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Senior secured credit facility
    
    $
    299,210
    
    
    $
    357,788Senior subordinated notes
    
    
    350,000
    
    
    
    Contingently convertible debentures, net of
unamortized discount
    
    
    147,966
    
    
    
    147,881Second lien mortgage notes payable
    
    
    
    
    
    
    70,000Other loans
    
    
    487
    
    
    
    746Deferred
gain  fair value interest hedge
    
    
    
    
    
    
    117797,663
    
    
    
    576,532Less current maturities
    
    
    (376
    )
    
    
    (70,493
    )$
    797,287
    
    
    $
    506,039
    6. ASSET RETIREMENT OBLIGATIONS
  12




---



##### Table of Contents



Nine Months EndedSeptember 30,2006
    
    
    2005(in thousands)Beginning asset retirement obligation
    
    $
    20,965
    
    
    $
    18,471Additional liability incurred
    
    
    2,068
    
    
    
    1,066Accretion expense
    
    
    959
    
    
    
    847Change in estimates
    
    
    29
    
    
    
    Loss on settlement of liability
    
    
    115
    
    
    
    27Sale of properties
    
    
    (2,439
    )
    
    
    (41
    )Asset retirement costs incurred
    
    
    (200
    )
    
    
    (89
    )Currency translation adjustment
    
    
    387
    
    
    
    162Ending asset retirement obligation
    
    $
    21,884
    
    
    $
    20,443
 7. INCOME TAXES
 Accounting for Income Taxes
   8. MINORITY INTEREST
  9. COMMITMENTS AND CONTINGENCIES
  13




---



##### Table of Contents



(in thousands)2006
    
    $
    9,7712007
    
    
    70,6222008
    
    
    45,4562009
    
    
    33,236$
    159,085
   (in thousands)2007
    
    $
    7322008
    
    
    4,3922009
    
    
    4,3802010
    
    
    4,380Thereafter
    
    
    26,304$
    40,188
  10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
  14




---



##### Table of Contents



Condensed Consolidating Balance Sheets
 September 30, 2006Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets
    
    $
    147,396
    
    
    $
    243,217
    
    
    $
    58,917
    
    
    $
    (307,461
    )
    
    $
    142,069Investments in
subsidiaries (equity
method)
    
    
    479,596
    
    
    
    109,107
    
    
    
    
    
    
    
    (580,046
    )
    
    
    8,657Property and equipment, net
    
    
    889,402
    
    
    
    87,342
    
    
    
    523,961
    
    
    
    
    
    
    
    1,500,705Other assets
    
    
    30,224
    
    
    
    
    
    
    
    3,452
    
    
    
    
    
    
    
    33,676Total assets
    
    $
    1,546,618
    
    
    $
    439,666
    
    
    $
    586,330
    
    
    $
    (887,507
    )
    
    $
    1,685,107LIABILITIESCurrent liabilities
    
    $
    319,485
    
    
    $
    83,892
    
    
    $
    58,444
    
    
    $
    (307,461
    )
    
    $
    154,360Non-current liabilities
    
    
    672,091
    
    
    
    24,616
    
    
    
    278,998
    
    
    
    
    
    
    
    975,705Stockholders equity
    
    
    555,042
    
    
    
    331,158
    
    
    
    248,888
    
    
    
    (580,046
    )
    
    
    555,042Total liabilities and
stockholders equity
    
    $
    1,546,618
    
    
    $
    439,666
    
    
    $
    586,330
    
    
    $
    (887,507
    )
    
    $
    1,685,107
 December 31, 2005Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets
    
    $
    101,587
    
    
    $
    201,458
    
    
    $
    62,105
    
    
    $
    (251,566
    )
    
    $
    113,584Investments in subsidiaries (equity method)
    
    
    290,951
    
    
    
    8,932
    
    
    
    
    
    
    
    (291,530
    )
    
    
    8,353Property and equipment, net
    
    
    638,355
    
    
    
    141,193
    
    
    
    332,454
    
    
    
    
    
    
    
    1,112,002Other assets
    
    
    8,000
    
    
    
    
    
    
    
    1,155
    
    
    
    
    
    
    
    9,155Total assets
    
    $
    1,038,893
    
    
    $
    351,583
    
    
    $
    395,714
    
    
    $
    (543,096
    )
    
    $
    1,243,094LIABILITIESCurrent liabilities
    
    $
    247,065
    
    
    $
    124,780
    
    
    $
    91,911
    
    
    $
    (251,566
    )
    
    $
    212,190Non-current liabilities
    
    
    408,213
    
    
    
    24,542
    
    
    
    214,534
    
    
    
    
    
    
    
    647,289Stockholders equity
    
    
    383,615
    
    
    
    202,261
    
    
    
    89,269
    
    
    
    (291,530
    )
    
    
    383,615Total liabilities and stockholders equity
    
    $
    1,038,893
    
    
    $
    351,583
    
    
    $
    395,714
    
    
    $
    (543,096
    )
    
    $
    1,243,094
 15




---



##### Table of Contents



Condensed Consolidating Statement of Income
 For the Three Months Ended September 30, 2006Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues
    
    $
    64,106
    
    
    $
    9,078
    
    
    $
    30,048
    
    
    $
    (4,019
    )
    
    $
    99,213Operating expenses
    
    
    38,810
    
    
    
    3,819
    
    
    
    16,972
    
    
    
    (4,019
    )
    
    
    55,582Income from equity affiliates
    
    
    7
    
    
    
    203
    
    
    
    
    
    
    
    
    
    
    
    210Income from operations
    
    
    25,303
    
    
    
    5,462
    
    
    
    13,076
    
    
    
    
    
    
    
    43,841Equity in net earnings of subsidiaries
    
    
    10,843
    
    
    
    808
    
    
    
    
    
    
    
    (11,651
    )
    
    
    Interest expense and other
    
    
    7,446
    
    
    
    63
    
    
    
    3,425
    
    
    
    
    
    
    
    10,934Income tax provision
    
    
    5,839
    
    
    
    1,890
    
    
    
    2,317
    
    
    
    
    
    
    
    10,046Net income
    
    $
    22,861
    
    
    $
    4,317
    
    
    $
    7,334
    
    
    $
    (11,651
    )
    
    $
    22,861
 For the Three Months Ended September 30, 2005Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues
    
    $
    47,945
    
    
    $
    12,616
    
    
    $
    24,072
    
    
    $
    (860
    )
    
    $
    83,773Operating expenses
    
    
    29,041
    
    
    
    5,563
    
    
    
    9,031
    
    
    
    (860
    )
    
    
    42,775Income from equity affiliates
    
    
    20
    
    
    
    210
    
    
    
    
    
    
    
    
    
    
    
    230Income from operations
    
    
    18,924
    
    
    
    7,263
    
    
    
    15,041
    
    
    
    
    
    
    
    41,228Equity in net earnings of subsidiaries
    
    
    14,745
    
    
    
    
    
    
    
    
    
    
    
    (14,745
    )
    
    
    Interest expense and other
    
    
    3,502
    
    
    
    4
    
    
    
    1,830
    
    
    
    
    
    
    
    5,336Income tax provision
    
    
    5,474
    
    
    
    2,541
    
    
    
    3,184
    
    
    
    
    
    
    
    11,199Income from continuing operations
    
    
    24,693
    
    
    
    4,718
    
    
    
    10,027
    
    
    
    (14,745
    )
    
    
    24,693Gain from discontinued operations
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Net income
    
    $
    24,755
    
    
    $
    4,718
    
    
    $
    10,027
    
    
    $
    (14,745
    )
    
    $
    24,755
 For the Nine Months Ended September 30, 2006Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues
    
    $
    172,949
    
    
    $
    33,183
    
    
    $
    90,997
    
    
    $
    (8,801
    )
    
    $
    288,328Operating expenses
    
    
    106,766
    
    
    
    12,043
    
    
    
    45,630
    
    
    
    (8,801
    )
    
    
    155,638Income from equity affiliates
    
    
    9
    
    
    
    309
    
    
    
    
    
    
    
    
    
    
    
    318Income from operations
    
    
    66,192
    
    
    
    21,449
    
    
    
    45,367
    
    
    
    
    
    
    
    133,008Equity in net earnings of subsidiaries
    
    
    44,499
    
    
    
    956
    
    
    
    
    
    
    
    (45,455
    )
    
    
    Interest expense and other
    
    
    20,386
    
    
    
    72
    
    
    
    9,407
    
    
    
    
    
    
    
    29,865Income tax provision
    
    
    16,301
    
    
    
    7,482
    
    
    
    5,356
    
    
    
    
    
    
    
    29,139Net income
    
    $
    74,004
    
    
    $
    14,851
    
    
    $
    30,604
    
    
    $
    (45,455
    )
    
    $
    74,004
 For the Nine Months Ended September 30, 2005Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Revenues
    
    $
    112,727
    
    
    $
    32,926
    
    
    $
    64,041
    
    
    $
    (2,132
    )
    
    $
    207,562Operating expenses
    
    
    80,649
    
    
    
    13,638
    
    
    
    24,879
    
    
    
    (2,132
    )
    
    
    117,034Income from equity affiliates
    
    
    44
    
    
    
    625
    
    
    
    
    
    
    
    
    
    
    
    669Income from operations
    
    
    32,122
    
    
    
    19,913
    
    
    
    39,162
    
    
    
    
    
    
    
    91,197Equity in net earnings of subsidiaries
    
    
    38,304
    
    
    
    
    
    
    
    
    
    
    
    (38,304
    )
    
    
    Interest expense and other
    
    
    9,891
    
    
    
    (40
    )
    
    
    4,714
    
    
    
    
    
    
    
    14,565Income tax provision
    
    
    7,903
    
    
    
    6,984
    
    
    
    9,113
    
    
    
    
    
    
    
    24,000Income from continuing operations
    
    
    52,632
    
    
    
    12,969
    
    
    
    25,335
    
    
    
    (38,304
    )
    
    
    52,632Gain from discontinued operations
    
    
    62
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62Net income
    
    $
    52,694
    
    
    $
    12,969
    
    
    $
    25,335
    
    
    $
    (38,304
    )
    
    $
    52,694
 16




---



##### Table of Contents



Condensed Consolidating Statements of Cash Flows
 For the Nine Months Ended September 30, 2006Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flow provided by operations
    
    $
    96,708
    
    
    $
    32,822
    
    
    $
    58,176
    
    
    $
    
    
    
    $
    187,706Cash flow used for investing activities
    
    
    (288,096
    )
    
    
    (54,780
    )
    
    
    (133,117
    )
    
    
    52,736
    
    
    
    (423,257
    )Cash flow provided by financing activities
    
    
    183,529
    
    
    
    26,368
    
    
    
    67,472
    
    
    
    (52,736
    )
    
    
    224,633Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    ( 37
    )
    
    
    
    
    
    
    (37
    )Net increase (decrease) in cash &
equivalents
    
    
    (7,859
    )
    
    
    4,410
    
    
    
    (7,506
    )
    
    
    
    
    
    
    (10,955
    )Cash & equivalents at beginning of period
    
    
    8,990
    
    
    
    (4,410
    )
    
    
    9,738
    
    
    
    
    
    
    
    14,318Cash & equivalents at end of period
    
    $
    1,131
    
    
    $
    
    
    
    $
    2,232
    
    
    $
    
    
    
    $
    3,363
 For the Nine Months Ended September 30, 2005Non-
    
    
    
    
    
    
    QuicksilverQuicksilver
    
    
    Guarantor
    
    
    Guarantor
    
    
    
    
    
    
    Resources Inc.Resources Inc.
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flow provided by operations
    
    $
    38,977
    
    
    $
    21,659
    
    
    $
    25,254
    
    
    $
    
    
    
    $
    85,890Cash flow used for investing activities
    
    
    (113,693
    )
    
    
    (24,553
    )
    
    
    (78,317
    )
    
    
    
    
    
    
    (216,563
    )Cash flow provided by financing activities
    
    
    95,235
    
    
    
    
    
    
    
    49,094
    
    
    
    
    
    
    
    144,329Effect of exchange rates on cash
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    
    
    
    
    139Net decrease in cash & equivalents
    
    
    20,519
    
    
    
    (2,894
    )
    
    
    (3,830
    )
    
    
    
    
    
    
    13,795Cash & equivalents at beginning of period
    
    
    10,428
    
    
    
    1,080
    
    
    
    4,439
    
    
    
    
    
    
    
    15,947Cash & equivalents at end of period
    
    $
    30,947
    
    
    $
    (1,814
    )
    
    $
    609
    
    
    $
    
    
    
    $
    29,742
 11. SUPPLEMENTAL CASH FLOW INFORMATION
  Nine Months EndedSeptember 30,2006
    
    2005(in thousands)Interest
    
    $
    16,874
    
    
    $
    12,162Income taxes
    
    $
    3
    
    
    $
    875
  Nine Months EndedSeptember 30,2006
    
    2005(in thousands)Noncash
investing activities  changes in
working capital
associated with property and equipment
    
    $
    2,487
    
    
    $
    5,289
 12. RELATED PARTY TRANSACTIONS
   17




---



##### Table of Contents



13. GEOGRAPHIC INFORMATION
  UnitedStates
    
    Canada
    
    Corporate
    
    Consolidated(in thousands)For the Three Months EndedSeptember 30, 2006Revenues
    
    $
    73,012
    
    
    $
    26,201
    
    
    $
    
    
    
    $
    99,213Depletion, depreciation and accretion
    
    
    12,636
    
    
    
    7,042
    
    
    
    255
    
    
    
    19,933Operating income
    
    
    38,079
    
    
    
    12,262
    
    
    
    (6,500
    )
    
    
    43,841Property and equipment costs incurred
    
    
    144,145
    
    
    
    35,065
    
    
    
    
    
    
    
    179,210September 30, 2005Revenues
    
    $
    59,658
    
    
    $
    24,115
    
    
    $
    
    
    
    $
    83,773Depletion, depreciation and accretion
    
    
    8,944
    
    
    
    4,772
    
    
    
    157
    
    
    
    13,873Operating income
    
    
    31,737
    
    
    
    15,029
    
    
    
    (5,538
    )
    
    
    41,228Property and equipment costs incurred
    
    
    66,164
    
    
    
    30,910
    
    
    
    461
    
    
    
    97,535For the Nine Months EndedSeptember 30, 2006Revenues
    
    $
    203,618
    
    
    $
    84,710
    
    
    $
    
    
    
    $
    288,328Depletion, depreciation and accretion
    
    
    34,261
    
    
    
    20,725
    
    
    
    574
    
    
    
    55,560Operating income
    
    
    106,223
    
    
    
    45,295
    
    
    
    (18,510
    )
    
    
    133,008Property and equipment costs incurred
    
    
    344,632
    
    
    
    86,133
    
    
    
    1,207
    
    
    
    431,972September 30, 2005Revenues
    
    $
    143,283
    
    
    $
    64,279
    
    
    $
    
    
    
    $
    207,562Depletion, depreciation and accretion
    
    
    25,466
    
    
    
    13,344
    
    
    
    452
    
    
    
    39,262Operating income
    
    
    65,444
    
    
    
    39,317
    
    
    
    (13,564
    )
    
    
    91,197Property and equipment costs incurred
    
    
    150,232
    
    
    
    80,676
    
    
    
    757
    
    
    
    231,665Fixed
Assets  netSeptember 30, 2006
    
    $
    1,088,803
    
    
    $
    409,263
    
    
    $
    2,639
    
    
    $
    1,500,705December 31, 2005
    
    $
    777,330
    
    
    $
    332,580
    
    
    $
    2,092
    
    
    $
    1,112,002
 18




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Information
  
    
    changes in general economic conditions;
    
    fluctuations in natural gas and crude oil prices;
    
    failure or delays in achieving expected production from natural gas and crude oil
exploration and development projects;
    
    effects of hedging natural gas and crude oil prices;
    
    uncertainties inherent in estimates of natural gas and crude oil reserves and
predicting natural gas and crude oil reservoir performance;
    
    competitive conditions in our industry;
    
    actions taken by third-party operators, processors and transporters;
    
    changes in the availability and cost of capital;
    
    delays in obtaining oil field equipment and increases in drilling and other service costs;
    
    operating hazards, natural disasters, weather-related delays, casualty losses and other matters beyond our control;
    
    the effects of existing and future laws and governmental regulations;
    
    the effects of existing or future litigation; and
    
    factors discussed in our Form 10-K for the year ended December 31, 2005.
  19




---



##### Table of Contents



RESULTS OF OPERATIONS
 Summary Financial Data
Three Months Ended September 30, 2006 Compared with the Three Months Ended September 30, 2005
 Three Months EndedSeptember 30,2006
    
    
    2005(in thousands)Total operating revenues
    
    $
    99,213
    
    
    $
    83,773Total operating expenses
    
    
    55,582
    
    
    
    42,775Operating income
    
    
    43,841
    
    
    
    41,228Income from continuing operations
    
    
    22,861
    
    
    
    24,693Net income
    
    
    22,861
    
    
    
    24,755
  Operating Revenues
  Gas, Oil and Related Product Sales
  Three Months EndedSeptember 30,2006
    
    
    2005Natural gas, oil and NGL sales (in thousands)United States
    
    $
    71,955
    
    
    $
    58,101Canada
    
    
    26,195
    
    
    
    24,103Total
    
    $
    98,150
    
    
    $
    82,204Product sale revenues (in thousands)Natural gas sales
    
    $
    78,994
    
    
    $
    71,974Oil and condensate sales
    
    
    9,551
    
    
    
    7,943NGL sales
    
    
    9,605
    
    
    
    2,287Total
    
    $
    98,150
    
    
    $
    82,204Average daily sales volumeNatural gas
 McfdUnited States
    
    
    100,783
    
    
    
    87,114Canada
    
    
    49,156
    
    
    
    40,732Total
    
    
    149,939
    
    
    
    127,846Oil and
condensate  BbldUnited States
    
    
    1,603
    
    
    
    1,507Canada
    
    
    
    
    
    
    Total
    
    
    1,603
    
    
    
    1,507NGL  BbldUnited States
    
    
    2,483
    
    
    
    684Canada
    
    
    8
    
    
    
    7Total
    
    
    2,491
    
    
    
    691
 20




---



##### Table of Contents



Three Months EndedSeptember 30,2006
    
    
    2005Total sales
 McfedUnited States
    
    
    125,298
    
    
    
    100,255Canada
    
    
    49,208
    
    
    
    40,778Total
    
    
    174,506
    
    
    
    141,033Unit prices  including impact of hedgesNatural gas  per McfUnited States
    
    $
    5.70
    
    
    $
    5.98Canada
    
    
    5.78
    
    
    
    6.42Consolidated
    
    
    5.73
    
    
    
    6.12Oil and condensate  per BblUnited States
    
    $
    64.74
    
    
    $
    57.31Canada
    
    
    
    
    
    
    Consolidated
    
    
    64.74
    
    
    
    57.31NGL  per BblUnited States
    
    $
    41.80
    
    
    $
    35.75Canada
    
    
    78.66
    
    
    
    55.44Consolidated
    
    
    41.91
    
    
    
    35.96
    21




---



##### Table of Contents



Operating Expenses
  Oil and Gas Operations Expense
 Three Months EndedSeptember 30,2006
    
    
    2005(in thousands, except perunit amounts)Oil and gas operations expenseUnited States
    
    $
    18,036
    
    
    $
    15,559Canada
    
    
    6,566
    
    
    
    3,837Total
    
    $
    24,602
    
    
    $
    19,396Oil and gas
operations expense  per McfeUnited States
    
    $
    1.56
    
    
    $
    1.69Canada
    
    
    1.45
    
    
    
    1.02Consolidated
    
    
    1.53
    
    
    
    1.50
    Production and Ad Valorem Taxes
  22




---



##### Table of Contents



Depletion, Depreciation and Accretion
 Three Months EndedSeptember 30,2006
    
    
    2005(in thousands, except perunit amounts)Depletion
    
    $
    16,340
    
    
    $
    11,374Depreciation of other fixed assets
    
    
    3,283
    
    
    
    2,205Accretion
    
    
    310
    
    
    
    294Total depletion, depreciation and accretion
    
    $
    19,933
    
    
    $
    13,873Average depletion cost per Mcfe
    
    $
    1.02
    
    
    $
    0.88
  General and Administrative Expense
  Interest Expense
  Income Tax Expense
  23




---



##### Table of Contents



Summary Financial Data
Nine Months Ended September 30, 2006 Compared with the Nine Months Ended September 30, 2005
 Nine Months EndedSeptember 30,2006
    
    
    2005(in thousands)Total operating revenues
    
    $
    288,328
    
    
    $
    207,562Total operating expenses
    
    
    155,638
    
    
    
    117,034Operating income
    
    
    133,008
    
    
    
    91,197Income from continuing operations
    
    
    74,004
    
    
    
    52,632Net income
    
    
    74,004
    
    
    
    52,694
  Operating Revenues
  Gas, Oil and Related Product Sales
  Nine Months EndedSeptember 30,2006
    
    
    2005Natural gas, oil and NGL sales (in thousands)United States
    
    $
    201,248
    
    
    $
    141,036Canada
    
    
    84,127
    
    
    
    63,851Total
    
    $
    285,375
    
    
    $
    204,887Product sale revenues (in thousands)Natural gas sales
    
    $
    238,651
    
    
    $
    179,755Oil and condensate sales
    
    
    27,477
    
    
    
    20,284NGL sales
    
    
    19,247
    
    
    
    4,848Total
    
    $
    285,375
    
    
    $
    204,887Average daily sales volumeNatural gas
 McfdUnited States
    
    
    95,501
    
    
    
    86,229Canada
    
    
    48,930
    
    
    
    39,366Total
    
    
    144,431
    
    
    
    125,595Oil and
condensate  BbldUnited States
    
    
    1,627
    
    
    
    1,501Canada
    
    
    1
    
    
    
    Total
    
    
    1,628
    
    
    
    1,501NGL  BbldUnited States
    
    
    1,684
    
    
    
    509Canada
    
    
    14
    
    
    
    7Total
    
    
    1,698
    
    
    
    516Total sales
 McfedUnited States
    
    
    115,370
    
    
    
    98,284Canada
    
    
    49,017
    
    
    
    39,415Total
    
    
    164,387
    
    
    
    137,699
 24




---



##### Table of Contents



Nine Months EndedSeptember 302006
    
    2005Unit prices  including impact of hedgesNatural gas  per McfUnited States
    
    $
    5.94
    
    
    $
    4.93Canada
    
    
    6.28
    
    
    
    5.93Consolidated
    
    
    6.05
    
    
    
    5.24Oil and condensate  per BblUnited States
    
    $
    61.84
    
    
    $
    49.50Canada
    
    
    58.54
    
    
    
    Consolidated
    
    
    61.84
    
    
    
    49.50NGL  per BblUnited States
    
    $
    41.41
    
    
    $
    34.27Canada
    
    
    53.71
    
    
    
    44.36Consolidated
    
    
    41.51
    
    
    
    34.41
    Operating Expenses
  Oil and Gas Operations Expense
 Nine Months EndedSeptember 30,2006
    
    
    2005(in thousands, except per unit amounts)Oil and gas operations expenseUnited States
    
    $
    52,664
    
    
    $
    42,540Canada
    
    
    17,568
    
    
    
    10,802Total
    
    $
    70,232
    
    
    $
    53,342Oil and gas
operations expense  per McfeUnited States
    
    $
    1.67
    
    
    $
    1.59Canada
    
    
    1.31
    
    
    
    1.00Consolidated
    
    
    1.56
    
    
    
    1.42
 25




---



##### Table of Contents



Production and Ad Valorem Taxes
  Depletion, Depreciation and Accretion
 Nine Months EndedSeptember 30,2006
    
    
    2005(in thousands, except per unitamounts)Depletion
    
    $
    46,011
    
    
    $
    32,972Depreciation of other fixed assets
    
    
    8,590
    
    
    
    5,443Accretion
    
    
    959
    
    
    
    847Total depletion, depreciation and accretion
    
    $
    55,560
    
    
    $
    39,262Average depletion cost per Mcfe
    
    $
    1.03
    
    
    $
    0.88
  General and Administrative Expense
  26




---



##### Table of Contents



Interest Expense
  Income Tax Expense
  LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION
    27




---



##### Table of Contents



Nine MonthsEndedSeptember 30, 2006(in thousands)Exploration and developmentUnited States
    
    $
    276,384Canada
    
    
    76,956Total exploration and development
    
    
    353,340Gas processing and transportationUnited States
    
    
    67,285Canada
    
    
    8,624Total gas processing and transportation
    
    
    75,909Corporate and office
    
    
    2,723Total plant and equipment costs incurred
    
    $
    431,972
     September30,
    
    
    December 31,2006
    
    
    2005(in thousands)Senior secured credit facility
    
    $
    299,210
    
    
    $
    357,788Senior subordinated notes
    
    
    350,000
    
    
    
    Convertible subordinated debentures
    
    
    147,966
    
    
    
    147,881Second lien mortgage notes payable
    
    
    
    
    
    
    70,000Other loans
    
    
    487
    
    
    
    746Deferred
gain  fair interest hedge
    
    
    
    
    
    
    117Total debt
    
    
    797,663
    
    
    
    576,532Stockholders equity
    
    
    555,042
    
    
    
    383,615$
    1,352,705
    
    
    $
    960,147
 Financial Position
  
    
    A $48.9 million and $12.9 million increase in our current and deferred derivative
assets, respectively, reflecting the relative decrease in natural gas prices as
compared to the price collars that hedge a portion of our future natural gas and
crude oil production at September 30, 2006. The increase in our current derivative
assets and
 28




---



##### Table of Contents



decrease in our current derivative liabilities resulted in a $14.6 million
decrease in our current deferred tax asset and a $17.1 million increase in our
current deferred tax liability at September 30, 2006.
    
    A $388.7 million increase in our net property, plant and equipment assets includes
approximately $432.0 million in capital costs incurred for development, exploitation
and exploration of our oil and gas properties as well as additional pipeline and gas
processing assets in Texas.
    
    Our current portion of long-term debt decreased $70.0 million as a result of the
retirement of our second lien mortgage notes which were repaid with a portion of the
proceeds from the issuance of the senior subordinated notes in March 2006.
    
    A $40.5 million and $4.6 million decrease in our current and deferred derivative
obligations, respectively, reflecting the relative decrease in natural gas prices as
compared to the price floors and caps of our natural gas and crude oil collars at
September 30, 2006.
    
    Our long-term debt increased $291.2 million primarily as
a result of our capital expenditures of $429.5 million exceeding
our operating cash flow by $241.8 million. During 2006, we issued our
$350.0 million senior subordinated notes, and increased
borrowings outstanding under the
Canadian portion of our senior credit facility by $46.4 million.
We experienced a $105.0 million net decrease in the U.S. portion of our senior
credit facility. In the first four months of 2006 we repaid the $165.0 million of
debt outstanding on the U.S. portion of our senior credit facility at December 31,
2005, as well as an additional $27.5 million repayment of 2006 borrowings, with a
portion of the proceeds from the issuance of our senior subordinated notes. During
the third quarter we borrowed $60.0 million under the U.S. portion of the senior debt
facility.
 Contractual Obligations and Commercial Commitments
  Payments Due by YearAfterTotal
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2010(in thousands)Long-Term Debt
    
    $
    799,697
    
    
    $
    91
    
    
    $
    396
    
    
    $
    
    
    
    $
    299,210
    
    
    $
    
    
    
    $
    500,000Scheduled Interest Obligations
    
    
    269,780
    
    
    
    13,876
    
    
    
    27,751
    
    
    
    27,751
    
    
    
    27,751
    
    
    
    27,751
    
    
    
    144,900Drilling Contracts
    
    
    159,085
    
    
    
    9,771
    
    
    
    70,622
    
    
    
    45,456
    
    
    
    33,236
    
    
    
    
    
    
    
    Transportation Contract
    
    
    40,188
    
    
    
    
    
    
    
    732
    
    
    
    4,392
    
    
    
    4,380
    
    
    
    4,380
    
    
    
    26,304Asset Retirement Obligations
    
    
    21,884
    
    
    
    50
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    21,546Purchase Obligations
    
    
    15,142
    
    
    
    9,219
    
    
    
    5,923
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    7,992
    
    
    
    813
    
    
    
    3,138
    
    
    
    2,198
    
    
    
    1,841
    
    
    
    2
    
    
    
    Total Obligations
    
    $
    1,313,768
    
    
    $
    33,820
    
    
    $
    108,735
    
    
    $
    79,797
    
    
    $
    366,418
    
    
    $
    32,248
    
    
    $
    692,750
 
    
    Long-Term Debt.Our outstanding long-term debt as of September 30, 2006, was
$797.7 million, which includes $350 million in principal amount of Senior
Subordinated Notes due in 2016. The Notes were issued in March 2006 and accrue
interest at a rate of 7.125% per annum, which is paid semiannually. We used $70
million and $192 million of the proceeds from issuance of the Senior Subordinated
Notes to retire our second lien mortgage notes and reduce borrowings outstanding
under our credit facility, respectively. Based upon our borrowings outstanding and
interest rates in affect at September 30, 2006, we estimate our annual interest
payments to be $18.3 million based upon our debt outstanding and current interest
rates. If the borrowing base under our secured senior credit facility were to be
fully utilized at interest rates in effect at September 30, 2006, interest payments
would increase by approximately $19.1 million annually.
    
    Scheduled Interest Obligations.As of
September 30, 2006, we had annual scheduled interest payments in
place of $24.9 million and $2.8 million on our
$350 million Senior Subordinated Notes due April 1, 2016
and our $150 million contingently convertible debentures due
November 1, 2024, respectively.
    
    Drilling Contracts.We lease drilling rigs from third parties for use in our
development and exploration programs. Each of the contracts requires payment of the
specified day rate for the entire lease term regardless of our utilization of the
drilling rigs.
    
    Transportation Contract.We entered into a firm transportation contract with a
pipeline during the third quarter of 2006. Under the contract, we are obligated to
transport minimum daily gas volumes, as calculated on a monthly basis, or pay for any
deficiencies at a specified reservation fee rate. Our production committed to the
pipeline is expected to meet, or exceed, the daily volumes provided in the contract.
    
    Purchase Obligations.At September 30, 2006, we were contractually obligated to
purchase goods and services in connection with construction of two gas processing
plants in Texas. For the first gas processing plant, we have
 29




---



##### Table of Contents



$1.6 million remaining
in purchase obligations, including liabilities of $1.1 million recorded for goods
received and services performed at September 30, 2006. Our total remaining purchase
obligations for construction and completion of the second gas processing plant at
September 30, 2006 were $13.5 million including liabilities of $8.1 million for goods
received and services performed at September 30, 2006.
 Critical Accounting Policies
   Recently Issued Accounting Standards
 Share-Based Payment . Accounting for Stock
Issued to Employees
   Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS No. 109
 Fair Value Measurements,
  30




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   Commodity Price Risk
    31




---



##### Table of Contents



Remaining Contract
    
    
    
    Price perProduct
    
    Type
    
    Period
    
    Volume
    
    Mcf or Bbl
    
    Fair Value(in thousands)Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    $5.50 8.10
    (1)
    $
    201Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    5.50 8.25
    (1)
    
    201Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    6.50 8.25
    (1)
    
    356Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    7.00 8.35
    (1)
    
    434Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    7.00 8.35
    (1)
    
    434Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    7.00 8.35
    (1)
    
    434Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    8.00-10.10
    (1)
    
    589Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    8.00-10.10
    (1)
    
    589Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    8.00-10.20
    (1)
    
    589Gas
    
    Collar
    
    Oct 2006
    
    5,000 Mcfd
    
    8.00-10.20
    (1)
    
    589Gas
    
    Collar
    
    Oct 2006
    
    10,000 Mcfd
    
    6.50 8.25
    (1)
    
    712Gas
    
    Collar
    
    Oct 2006-Apr 2007
    
    10,000 Mcfd
    
    7.50-11.00
    
    
    2,612Gas
    
    Collar
    
    Oct 2006-Apr 2007
    
    10,000 Mcfd
    
    7.50-11.15
    
    
    2,659Gas
    
    Collar
    
    Nov 2006-Mar 2007
    
    10,000 Mcfd
    
    7.50 9.65
    
    
    1,105Gas
    
    Collar
    
    Nov 2006-Mar 2007
    
    10,000 Mcfd
    
    8.00-14.72
    
    
    2,135Gas
    
    Collar
    
    Nov 2006-Mar 2007
    
    10,000 Mcfd
    
    8.50-11.35
    
    
    2,410Gas
    
    Collar
    
    Nov 2006-Mar 2007
    
    10,000 Mcfd
    
    8.50-11.50
    
    
    2,462Gas
    
    Collar
    
    Nov 2006-Mar 2007
    
    20,000 Mcfd
    
    8.00-15.00
    
    
    4,177Gas
    
    Collar
    
    Jan 2007-Dec 2007
    
    10,000 Mcfd
    
    9.0012.10
    
    
    6,247Gas
    
    Collar
    
    Jan 2007-Dec 2007
    
    20,000 Mcfd
    
    9.0012.10
    
    
    12,494Gas
    
    Collar
    
    Apr 2007-Oct 2007
    
    10,000 Mcfd
    
    7.50-11.50
    
    
    1,773Gas
    
    Collar
    
    Apr 2007-Oct 2007
    
    10,000 Mcfd
    
    7.50-11.75
    
    
    1,721Gas
    
    Collar
    
    Apr 2007-Oct 2007
    
    5,000 Mcfd
    
    7.50-11.78
    
    
    936Gas
    
    Collar
    
    Apr 2007-Oct 2007
    
    5,000 Mcfd
    
    7.50-11.80
    
    
    938Gas
    
    Collar
    
    Apr 2007-Mar 2008
    
    10,000 Mcfd
    
    9.00-12.00
    
    
    5,243Gas
    
    Collar
    
    Apr 2007-Mar 2008
    
    10,000 Mcfd
    
    9.00-12.05
    
    
    5,311Gas
    
    Collar
    
    May 2007-Dec 2007
    
    10,000 Mcfd
    
    8.00-11.20
    
    
    2,355Gas
    
    Collar
    
    Nov 2007-Mar 2008
    
    10,000 Mcfd
    
    8.00-15.00
    
    
    879Gas
    
    Collar
    
    Nov 2007-Mar 2008
    
    10,000 Mcfd
    
    8.00-15.65
    
    
    956Oil
    
    Collar
    
    Oct 2006-Jun 2007
    
    1,000 Bbld
    
    50.00-85.85
    
    
    (35
    )Oil
    
    Collar
    
    Oct 2006-Jun 2007
    
    1,000 Bbld
    
    50.00-85.85
    
    
    (35
    )Oil
    
    Collar
    
    Jul 2007-Dec 2007
    
    500 Bbld
    
    70.00-91.10
    
    
    528Gas
    
    Basis
    
    Oct 2006-May 2007
    
    3,292 Mcfd
    
    
    
    
    207Gas
    
    Basis
    
    Dec 2006-Jan 2007
    
    968 Mcfd
    
    
    
    
    28Total
    
    $
    62,234
 
 (1)
    
    These collars were settled in October at the final October NYMEX price of
$4.201 per Mcf.  32




---



##### Table of Contents



Weighted AvgProduct
    
    Type
    
    
    Contract Period
    
    
    Volume
    
    
    Price per Mcf
    
    
    Fair Value(in thousands)Fixed price sale contractsGas
    
    Sale
    
    Oct 2006
    
    234 Mcfd
    
    $
    8.77
    
    
    $
    33Gas
    
    Sale
    
    Oct 2006
    
    700 Mcfd
    
    $
    5.21
    
    
    
    22Gas
    
    Sale
    
    Oct 2006
    
    600 Mcfd
    
    $
    5.18
    
    
    
    18Gas
    
    Sale
    
    Oct 2006-Dec 2006
    
    296 Mcfd
    
    $
    8.20
    
    
    
    59$
    132Financial derivativesGas
    
    Floating Price
    
    Oct 2006
    
    323 Mcfd
    
    
    
    
    
    $
    (34
    )Gas
    
    Floating Price
    
    Oct 2006
    
    323 Mcfd
    
    
    
    
    
    
    (45
    )Gas
    
    Floating Price
    
    Oct 2006
    
    645 Mcfd
    
    
    
    
    
    
    (11
    )Gas
    
    Floating Price
    
    Oct 2006
    
    645 Mcfd
    
    
    
    
    
    
    (16
    )Gas
    
    Floating Price
    
    Nov 2006
    
    333 Mcfd
    
    
    
    
    
    
    (31
    )Gas
    
    Floating Price
    
    Dec 2006
    
    333 Mcfd
    
    
    
    
    
    
    (22
    )(159
    )Total-net
    
    $
    (27
    )
  Interest Rate Risk
    33




---



##### Table of Contents



ITEM 4. Controls and Procedures
 Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  34




---



##### Table of Contents



PART
II  OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
   
 ITEM 6. Exhibits:
 Exhibit No.
    
    Description*4.1
    
    Third Supplemental Indenture, dated as of September 26, 2006, among Quicksilver Resources Inc., the
subsidiary guarantors named therein and JPMorgan Chase Bank, National Association, as trustee.10.1
    
    Quicksilver Resources Inc. Amended and Restated Key Employee Change in Control Retention Incentive Plan
(filed as Exhibit 10.1 to the Companys Form 8-K filed August 31, 2006 and included herein by reference).*15.1
    
    Awareness Letter of Deloitte & Touche LLP.*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 35




---



##### Table of Contents



SIGNATURES
   Quicksilver Resources Inc.By:
    /s/ Glenn DardenGlenn DardenPresident and Chief Executive OfficerBy:
    /s/ Philip CookPhilip CookSenior Vice President  Chief Financial Officer 36




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description*4.1
    
    Third Supplemental Indenture, dated as of September 26, 2006, among Quicksilver Resources Inc., the
subsidiary guarantors named therein and JPMorgan Chase Bank, National Association, as trustee.10.1
    
    Quicksilver Resources Inc. Amended and Restated Key Employee Change in Control Retention Incentive
Plan
(filed as Exhibit 10.1 to the Companys Form 8-K filed August 31, 2006 and included herein by
reference).*15.1
    
    Awareness Letter of Deloitte & Touche LLP.*31.1
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 *
    
    Filed herewith 37