**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM10-Q**

 

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2004**

 

**OR**

 

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom           to          **

 

**Commission file number 0-22149**

 

**EDGEPETROLEUM CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **76-0511037**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **Travis Tower  1301 Travis, Suite 2000  Houston, Texas 77002** |
| (Address of principal executive offices)  (Zip code)            |
|                                                            |       |                                  |
| **(713) 654-8960**                                              |
| (Registrant’s telephone number, including area code)       |

 

Indicate bycheckmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15 (d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.       Yes  ý   No  o

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act). Yes  o  No  ý

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

| **Class**    | ** ** | **Outstanding at August 9, 2004** |
|--------------|------------|-----------------------------------|
|         |       |                              |
| Common Stock |       | 12,993,308                        |

 

 

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                  | ** ** | **June 30,  2004** | ** **  | **December 31,  2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|------------------------|------------|
| ** **                                                                                                                                                                                                                  | ** ** | **(Unaudited)**    | ** **  | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                                                  |       |               |        |                   |       |
| CURRENT ASSETS:                                                                                                                                                                                                             |       |               |        |                   |       |
| Cash and cash equivalents                                                                                                                                                                                                   |       | $                  | 3,733,450   |                   | $          | 1,327,081 |   |
| Accounts receivable, trade, net of  allowance of $525,248 at June 30, 2004 and December 31, 2003                                                                                                                            |       | 10,460,034         |        | 8,889,734              |       |
| Accounts receivable, joint interest owners,  net of allowance of $82,000 at June 30, 2004 and December 31, 2003                                                                                                             |       | 2,062,619          |        | 1,797,877              |       |
| Deferred tax asset                                                                                                                                                                                                          |       | 1,246,843          |        | 1,138,492              |       |
| Derivative financial instruments                                                                                                                                                                                            |       | 325,965            |        | 120,801                |       |
| Other current assets                                                                                                                                                                                                        |       | 2,133,166          |        | 1,186,987              |       |
| Total current assets                                                                                                                                                                                                        |       | 19,962,077         |        | 14,460,972             |       |
| PROPERTY AND EQUIPMENT, Net – full cost  method of accounting for oil and natural gas properties (including  unevaluated costs of $5.5 million and $5.0 million at June 30, 2004 and  December 31, 2003, respectively) |       | 107,033,609        |        | 97,980,757             |       |
| DEFERRED TAX ASSET                                                                                                                                                                                                          |       | 2,144,334          |        | 5,570,137              |       |
| OTHER ASSETS                                                                                                                                                                                                                |       | 351,920            |        | —                 |       |
| TOTAL ASSETS                                                                                                                                                                                                                |       | $                  | 129,491,940 |                   | $          | 118,011,866 |   |
|                                                                                                                                                                                                                        |       |               |        |                   |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                               |       |               |        |                   |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                        |       |               |        |                   |       |
| Accounts payable, trade                                                                                                                                                                                                     |       | $                  | 2,710,732   |                   | $          | 1,732,935 |   |
| Accrued liabilities                                                                                                                                                                                                         |       | 13,270,047         |        | 11,456,036             |       |
| Accrued interest                                                                                                                                                                                                            |       | 20,573             |        | —                 |       |
| Asset retirement obligation                                                                                                                                                                                                 |       | 386,889            |        | 323,513                |       |
| Derivative financial instruments                                                                                                                                                                                            |       | 560,952            |        | —                 |       |
| Total current liabilities                                                                                                                                                                                                   |       | 16,949,193         |        | 13,512,484             |       |
| ASSET RETIREMENT OBLIGATION                                                                                                                                                                                                 |       | 1,504,208          |        | 1,488,482              |       |
| LONG-TERM DEBT                                                                                                                                                                                                              |       | 18,000,000         |        | 21,000,000             |       |
| Total liabilities                                                                                                                                                                                                           |       | 36,453,401         |        | 36,000,966             |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                               |       |               |        |                   |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                   |       |               |        |                   |       |
| Preferred stock, $0.01 par value; 5,000,000  shares authorized; none issued and outstanding                                                                                                                                 |       | —             |        | —                 |       |
| Common stock, $0.01 par value; 25,000,000  shares authorized; 12,972,284 and 12,581,032 shares issued and outstanding at  June 30, 2004 and December 31, 2003, respectively                                                 |       | 129,723            |        | 125,810                |       |
| Additional paid-in capital                                                                                                                                                                                                  |       | 79,379,264         |        | 75,282,007             |       |
| Retained earnings                                                                                                                                                                                                           |       | 14,105,874         |        | 6,966,557              |       |
| Accumulated other comprehensive loss                                                                                                                                                                                        |       | (576,322           | )           | (363,474               | )          |
| Total stockholders’ equity                                                                                                                                                                                             |       | 93,038,539         |        | 82,010,900             |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       | $                  | 129,491,940 |                   | $          | 118,011,866 |   |

 

See accompanying notes to consolidated financial statements.

 

1

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**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                                                                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                          | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| OIL AND NATURAL GAS REVENUE                                                                         |       | $                               | 15,847,404 |                          | $          | 7,994,395 |   | $ | 31,662,061 |   | $ | 14,833,165 |   |
| OPERATING EXPENSES:                                                                                 |       |                            |       |                          |       |   |   |   |   |
| Lease operating expenses                                                                            |       | 1,220,092                       |       | 550,998                       |       | 2,425,166 |   | 1,145,802 |   |
| Severance and ad valorem taxes                                                                      |       | 1,210,208                       |       | 521,904                       |       | 2,254,922 |   | 1,041,059 |   |
|                                                                                                |       |                            |       |                          |       |   |   |   |   |
| Depletion, depreciation, amortization and  accretion                                                |       | 5,141,387                       |       | 2,859,336                     |       | 10,383,802 |   | 5,607,209 |   |
| General and administrative expenses:                                                                |       |                            |       |                          |       |   |   |   |   |
| Deferred compensation – repriced options                                                       |       | 337,386                         |       | —                        |       | 1,448,485 |   | — |   |
| Deferred compensation – restricted stock                                                       |       | 114,600                         |       | 89,775                        |       | 211,100 |   | 176,439 |   |
| Other general and administrative expenses                                                           |       | 1,731,453                       |       | 1,430,756                     |       | 3,632,280 |   | 2,687,018 |   |
| Total operating expenses                                                                            |       | 9,755,126                       |       | 5,452,769                     |       | 20,355,755 |   | 10,657,527 |   |
| OPERATING INCOME                                                                                    |       | 6,092,278                       |       | 2,541,626                     |       | 11,306,306 |   | 4,175,638 |   |
| OTHER INCOME AND EXPENSE:                                                                           |       |                            |       |                          |       |   |   |   |   |
| Interest income                                                                                     |       | 4,023                           |       | 3,025                         |       | 8,031 |   | 5,148 |   |
| Interest expense, net of amounts  capitalized                                                       |       | (105,405                        | )          | (165,046                      | )          | (219,683 | ) | (341,435 | ) |
| Amortization of deferred loan costs                                                                 |       | (40,748                         | )          | —                        |       | (70,384 | ) | — |   |
| INCOME BEFORE INCOME TAXES AND CUMULATIVE  EFFECT OF ACCOUNTING CHANGE                              |       | 5,950,148                       |       | 2,379,605                     |       | 11,024,270 |   | 3,839,351 |   |
| INCOME TAX EXPENSE                                                                                  |       | (2,094,067                      | )          | (845,471                      | )          | (3,884,953 | ) | (1,367,193 | ) |
| INCOME BEFORE CUMULATIVE EFFECT OF  ACCOUNTING CHANGE                                               |       | 3,856,081                       |       | 1,534,134                     |       | 7,139,317 |   | 2,472,158 |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                              |       | —                          |       | —                        |       | — |   | (357,825 | ) |
| NET INCOME                                                                                          |       | 3,856,081                       |       | 1,534,134                     |       | 7,139,317 |   | 2,114,333 |   |
| OTHER COMPREHENSIVE INCOME (LOSS), net of  taxes:                                                   | ** ** | ** **                      | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unrealized hedge derivative fair value gain  (loss)                                                 |       | 563,039                         |       | (10,610                       | )          | (368,047 | ) | (860,727 | ) |
| Reclassification to earnings of realized  (gain) loss upon settlement of hedge derivative contracts |       | (208,275                        | )          | 165,814                       |       | 155,199 |   | 446,375 |   |
| Other comprehensive income (loss)                                                                   |       | 354,764                         |       | 155,204                       |       | (212,848 | ) | (414,352 | ) |
| COMPREHENSIVE INCOME                                                                                |       | $                               | 4,210,845  |                          | $          | 1,689,338 |   | $ | 6,926,469 |   | $ | 1,699,981 |   |
| BASIC EARNINGS PER SHARE:                                                                           |       |                            |       |                          |       |   |   |   |   |
| Income before cumulative effect of  accounting change                                               |       | $                               | 0.30       |                          | $          | 0.16 |   | $ | 0.56 |   | $ | 0.26 |   |
| Cumulative effect of accounting change                                                              |       | —                          |       | —                        |       | — |   | (0.04 | ) |
| Net income per share                                                                                |       | $                               | 0.30       |                          | $          | 0.16 |   | $ | 0.56 |   | $ | 0.22 |   |
| DILUTED EARNINGS PER SHARE:                                                                         |       |                            |       |                          |       |   |   |   |   |
| Income before cumulative effect of  accounting change                                               |       | $                               | 0.28       |                          | $          | 0.16 |   | $ | 0.53 |   | $ | 0.26 |   |
| Cumulative effect of accounting change                                                              |       | —                          |       | —                        |       | — |   | (0.04 | ) |
| Net income per share                                                                                |       | $                               | 0.28       |                          | $          | 0.16 |   | $ | 0.53 |   | $ | 0.22 |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING                                         |       | 12,940,504                      |       | 9,502,255                     |       | 12,833,226 |   | 9,471,227 |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING                                       |       | 13,588,578                      |       | 9,709,192                     |       | 13,412,589 |   | 9,641,851 |   |

 

See accompanying notes to consolidated financial statements.

 

2

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**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                    | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                             | 7,139,317  |   | $ | 2,114,333 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                          |       |   |   |
| Cumulative effect of accounting change                                             |       | —                        |       | 357,825 |   |
| Change in the fair value of derivative  instruments                                |       | (179,261                      | )          | — |   |
| Deferred income taxes                                                              |       | 3,884,953                     |       | 1,367,193 |   |
| Depletion, depreciation, amortization and  accretion                               |       | 10,383,802                    |       | 5,607,209 |   |
| Amortization of deferred loan costs                                                |       | 70,384                        |       | — |   |
| Deferred compensation                                                              |       | 1,659,585                     |       | 176,439 |   |
| Changes in assets and liabilities:                                                 |       |                          |       |   |   |
| Increase in accounts receivable, trade                                             |       | (1,356,450                    | )          | (2,385,505 | ) |
| Increase in accounts receivable, joint  interest owners                            |       | (264,742                      | )          | (50,498 | ) |
| Increase in other assets                                                           |       | (946,179                      | )          | (509,858 | ) |
| Increase (decrease) in accounts payable,  trade                                    |       | 977,797                       |       | (775,242 | ) |
| Increase in accrued liabilities                                                    |       | 1,857,593                     |       | 2,446,177 |   |
| Increase in accrued interest payable                                               |       | 20,573                        |       | 41,634 |   |
| Net cash provided by operating activities                                          |       | 23,247,372                    |       | 8,389,707 |   |
|                                                                               |       |                          |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                          |       |   |   |
| Oil and natural gas property and equipment  additions                              |       | (19,397,552                   | )          | (7,649,966 | ) |
| Proceeds from the sale of oil and natural  gas properties                          |       | 40,000                        |       | 55,096 |   |
| Net cash used in investing activities                                              |       | (19,357,552                   | )          | (7,594,870 | ) |
|                                                                               |       |                          |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                          |       |   |   |
| Borrowings from long-term debt                                                     |       | —                        |       | 1,700,000 |   |
| Payments of long-term debt                                                         |       | (3,000,000                    | )          | (1,200,000 | ) |
| Net proceeds from issuance of common stock                                         |       | 1,938,853                     |       | 53,499 |   |
| Deferred loan costs                                                                |       | (422,304                      | )          | — |   |
| Net cash provided by (used in) financing  activities                               |       | (1,483,451                    | )          | 553,499 |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                      |       | 2,406,369                     |       | 1,348,336 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 1,327,081                     |       | 2,568,176 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                             | 3,733,450  |   | $ | 3,916,512 |   |

 

See accompanying notes to consolidated financial statements.

 

3

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**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDERS’ EQUITY (Unaudited)**

 
| ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Stockholders’  Equity** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| **Common Stock**                                                     |
| **Shares**                                                           | ** ** | **Amount** |
| BALANCE, DECEMBER 31, 2003                                           |       | 12,581,032 |       | $          | 125,810    |                             | $          | 75,282,007             |       | $                                           | 6,966,557  |                                  | $          | (363,474 | ) | $ | 82,010,900 |   |
| Issuance of common stock                                             |       | 391,252    |       | 3,913      |       | 1,978,522                        |       | —                 |       | —                                      |       | 1,982,435                             |       |
| Deferred compensation - restricted stock                             |       | —     |       | —     |       | 211,100                          |       | —                 |       | —                                      |       | 211,100                               |       |
| Deferred compensation - repriced options                             |       | —     |       | —     |       | 1,448,485                        |       | —                 |       | —                                      |       | 1,448,485                             |       |
| Change in valuation of hedging instruments                           |       | —     |       | —     |       | —                           |       | —                 |       | (212,848                                    | )          | (212,848                              | )          |
| Tax benefit associated with exercise of  non-qualified stock options |       | —     |       | —     |       | 459,150                          |       | —                 |       | —                                      |       | 459,150                               |       |
| Net income                                                           |       | —     |       | —     |       | —                           |       | 7,139,317              |       | —                                      |       | 7,139,317                             |       |
| BALANCE, June 30, 2004                                               |       | 12,972,284 |       | $          | 129,723    |                             | $          | 79,379,264             |       | $                                           | 14,105,874 |                                  | $          | (576,322 | ) | $ | 93,038,539 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**EDGEPETROLEUM CORPORATION**

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

The financialstatements included herein have been prepared by Edge Petroleum Corporation, aDelaware corporation (“we”, “our”, “us” or the “Company”), without auditpursuant to the rules and regulations of the Securities and Exchange Commission(“SEC”), and reflect all adjustments which are, in the opinion of management,necessary to present a fair statement of the results for the interim periods ona basis consistent with the annual audited consolidated financialstatements.  All such adjustments are ofa normal recurring nature.  The resultsof operations for the interim periods are not necessarily indicative of theresults to be expected for an entire year. Certain information, accounting policies and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations, although we believe thatthe disclosures are adequate to make the information presented not misleading.These financial statements should be read in conjunction with our auditedconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

***Oil and Natural GasProperties* -    **Investmentsin oil and natural gas properties are accounted for using the full cost methodof accounting.  All costs associated withthe exploration, development and acquisition of oil and natural gas properties,including salaries, benefits and other internal costs directly attributable tothese activities are capitalized within a cost center.  The Company’s oil and natural gas propertiesare located within the United States of America and constitute one cost center.

 

In accordancewith the full cost method of accounting, the Company capitalizes a portion ofinterest expense on borrowed funds. Employee related costs that are directly attributable to exploration anddevelopment activities are also capitalized. These costs are considered to be direct costs based on the nature oftheir function as it relates to the exploration and development function.

 

Oil andnatural gas properties are amortized using the unit-of-production method usingestimates of proved reserve quantities. Investments in unproved properties are not amortized until provedreserves associated with the prospects can be determined or until impairmentoccurs.  Oil and natural gas propertiesinclude costs of $5.5 million and $5.0 million at June 30, 2004 and December31, 2003, respectively, related to unevaluated property, which were excludedfrom capitalized costs being amortized. Unevaluated properties are evaluatedperiodically for impairment on a property-by-property basis.  If the results of an assessment indicate thatan unproved property is impaired, the amount of impairment is added to theproved oil and natural gas property costs to be amortized.  The amortizable base includes estimatedfuture development and dismantlement costs, and restoration and abandonmentcosts, net of estimated salvage values.

 

In addition, thecapitalized costs of oil and natural gas properties are subject to a “ceilingtest,” whereby to the extent that such capitalized costs subject toamortization in the full cost pool (net of accumulated depletion, depreciationand amortization, asset retirement obligation and related deferred taxes)exceed the present value (using a 10% discount rate) of estimated future netafter-tax cash flows from proved oil and natural gas reserves, such excesscosts are charged to expense.  Onceincurred, an impairment of oil and natural gas properties is not reversible ata later date.  Impairment of oil andnatural gas properties is assessed on a quarterly basis in conjunction with theCompany’s quarterly filings with the SEC. In accordance with Staff Accounting Bulletin (“SAB”) No.103, “*Update of Codification of Staff Accounting Bulletins*,”derivative instruments qualifying as cash flow hedges are included in thecomputation of limitation on capitalized costs. The period end price exceeded the cap established by one of theCompany’s hedges at June 30, 2004 and thus a $284,000 reduction to thelimitation threshold was used in this calculation.  No impairment related to the ceiling test wasrequired during the six-month periods ended June 30, 2004 or 2003.

 

5

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In March 2004, theEmerging Issues Task Force (“EITF”) reached a consensus that mineral rights, asdefined in EITF Issue No. 04-2, “Whether Mineral Rights Are Tangible orIntangible Assets,” are tangible assets and that they should be removed asexamples of intangible assets in SFAS Nos. 141 and 142. The FASB has recentlyratified this consensus and directed the FASB staff to amend SFAS Nos. 141 and142 through the issuance of FASB Staff Positions FSP FAS 141-1 and FSP FAS142-1. In addition, proposed FSP FAS 142-b confirms that SFAS No. 142 does notchange the balance sheet classification or disclosures of mineral rights of oiland gas producing enterprises. Historically, we have included the costs of suchmineral rights as tangible assets, which is consistent with the EITF’sconsensus. As such, EITF 04-2 and the related FSPs have not affected ourconsolidated financial statements.

 

Sales of proved andunproved properties are accounted for as adjustments of capitalized costs withno gain or loss recognized, unless such adjustments would significantly alterthe relationship between capitalized costs and proved reserves.

 

***Asset RetirementObligations –***TheCompany records a liability for legal obligations associated with theretirement of tangible long-lived assets in the period in which they areincurred in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 143, “*Accounting for AssetRetirement Obligations*”. The Company adopted this policy effectiveJanuary 1, 2003, using a cumulative effect approach to recognize transitionamounts for asset retirement obligations, asset retirement costs andaccumulated accretion and depletion. Under this method, when liabilities fordismantlement and abandonment costs, excluding salvage values, are initiallyrecorded, the carrying amount of the related oil and gas properties isincreased. Accretion of the liability is recognized each period using theinterest method of allocation, and the capitalized cost is depleted over theuseful life of the related asset.

 

At January 1,2003, the Company recorded the present value of its future Asset RetirementObligations (“ARO”) for oil and natural gas properties and related equipment.The cumulative effect of the adoption of SFAS No. 143 and the change inaccounting principle was a charge to net income during the first quarter of2003 of $357,825, net of taxes of $192,675. The changes to the ARO during theperiods ended June 30, 2004 and 2003 are as follows:

 

| ** **                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| ARO, Beginning of Period                   |       | $                             | 1,811,995  |   | $ | 942,736 |   |
| Liabilities incurred in the current period |       | 139,737                       |       | 63,487 |   |
| Liabilities settled in the current period  |       | (113,136                      | )          | — |   |
| Accretion expense                          |       | 52,501                        |       | 29,853 |   |
| Revisions                                  |       | —                        |       | (9,714 | ) |
| ARO, End of Period                         |       | $                             | 1,891,097  |   | $ | 1,026,362 |   |

 

AROliabilities incurred during the six months ended June 30, 2004 includeobligations for 18 new wells drilled during the first half of the year.Liabilities settled during the six months ended June 30, 2004 included sevenwells that were plugged and one well that was sold.

 

***Stock-Based Compensation***- The Companyaccounts for stock compensation plans under the intrinsic value method ofAccounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*.”  No compensation expense is recognized forstock options that had an exercise price equal to or greater than the marketvalue of the underlying common stock on the date of grant.  As allowed by SFAS No. 123, “*Accounting for Stock-Based Compensation*,”the Company has continued to apply APB Opinion No. 25 for purposes ofdetermining net income.  In December2002, the FASB issued SFAS No. 148, “*Accountingfor Stock-Based Compensation – Transition and Disclosure – an amendment of FASBStatement No. 123”* to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  Additionally, thestatement amends the disclosure requirements of SFAS No. 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based compensation and the effect of the methodused on reported results.

 

6

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Hadcompensation expense for stock-based compensation been determined based on thefair value at the date of grant, the Company’s net income and earnings pershare would have been as follows:

 
| ** **                                                                                                                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2004**                        | ** ** | **2003**                      | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income as reported                                                                                                               |       | $                               | 3,856,081  |                          | $          | 1,534,134 |   | $ | 7,139,317 |   | $ | 2,114,333 |   |
| Add:                                                                                                                                 |       |                            |       |                          |       |   |   |   |   |
| Stock-based employee compensation expense  included in reported net income, net of related income tax                                |       | 293,791                         |       | 31,421                        |       | 1,078,730 |   | 61,753 |   |
| Deduct:                                                                                                                              |       |                            |       |                          |       |   |   |   |   |
| Total stock-based employee compensation  expense determined under fair value based method for all awards, net of  related income tax |       | (90,111                         | )          | (87,934                       | )          | (208,288 | ) | (176,075 | ) |
| Pro forma net income                                                                                                                 |       | $                               | 4,059,761  |                          | $          | 1,477,621 |   | $ | 8,009,759 |   | $ | 2,000,011 |   |
|                                                                                                                                 |       |                            |       |                          |       |   |   |   |   |
| Earnings Per Share:                                                                                                                  |       |                            |       |                          |       |   |   |   |   |
| Basic – as reported                                                                                                             |       | $                               | 0.30       |                          | $          | 0.16 |   | $ | 0.56 |   | $ | 0.22 |   |
| Basic – pro forma                                                                                                               |       | $                               | 0.31       |                          | $          | 0.16 |   | $ | 0.62 |   | $ | 0.21 |   |
|                                                                                                                                 |       |                            |       |                          |       |   |   |   |   |
| Diluted – as reported                                                                                                           |       | $                               | 0.28       |                          | $          | 0.16 |   | $ | 0.53 |   | $ | 0.22 |   |
| Diluted – pro forma                                                                                                             |       | $                               | 0.30       |                          | $          | 0.15 |   | $ | 0.60 |   | $ | 0.21 |   |

 

The Company isalso subject to reporting requirements of FASB Interpretation No. (“FIN”) 44, “*Accounting for Certain**Transactions involvingStock Compensation”* that requires a non-cash charge to deferredcompensation expense if the market price of the Company’s common stock at theend of a reporting period is greater than the exercise price of certain stockoptions.  After the first such adjustmentis made, each subsequent period is adjusted upward or downward to the extentthat the market price exceeds the exercise price of the options.  The charge is related to non-qualified stockoptions granted to employees and directors in prior years and re-priced in May1999, as well as certain options newly issued in conjunction with therepricing. A pre-tax charge of $1.4 million was required for the six months endedJune 30, 2004.  No charge related to FIN44 was required during the six-month period ended June 30, 2003.

 

***Accounting Pronouncements***– In March 2004, the FASB issued an exposure draft entitled “*Share-Based Payment, an Amendment of FASB StatementNo. 123 and 95*.”  Thisproposed statement addresses the accounting for share-based paymenttransactions in which an enterprise receives employee services in exchange for(a) equity instruments of the enterprise or (b) liabilities that are based onthe fair value of the enterprise’s equity instruments or that may be settled bythe issuance of such equity instruments. The proposed statement would eliminate the ability to account forshare-based compensation transactions using APB Opinion No. 25, “*Accounting for Stock Issued to Employees*”,and generally would require instead that such transactions be accounted forusing a fair-value-based method.  Asproposed, this statement would be effective for the Company on January 1, 2005.  The impact on the results of operations wouldbe similar to the pro forma disclosures made above.

 

**2.     LONGTERM DEBT**

 

EffectiveDecember 31, 2003, the Company entered into a new amended and restated creditfacility (the “Credit Facility”) which permits borrowings up to the lesser of(i) the borrowing base or (ii) $100 million. Borrowings under the Credit Facility bear interest at a rate equal toprime plus 0.50% or LIBOR plus 2.25%.  Asof June 30, 2004, $18.0 million in borrowings were outstanding under the CreditFacility.  The Credit Facility maturesDecember 31, 2006 and is secured by substantially all of the Company’s assets.

 

7

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Effective June8, 2004, the borrowing base under the Credit Facility was increased to $45.0million from $40.0 million; primarily as a result of our drilling activitiessince the last redetermination. At June 30, 2004, the Company’s availableborrowing capacity under this facility was $27.0 million.

 

The CreditFacility provides for certain restrictions, including but not limited to,limitations on additional borrowings, sales of oil and natural gas propertiesor other collateral, and engaging in merger or consolidation transactions. TheCredit Facility also prohibits dividends and certain distributions of cash orproperties and certain liens.  The CreditFacility also contains the following financial covenants, among others:

•                  The EBITDAX toInterest Expense ratio requires that (a) consolidated EBITDAX (defined asEBITDA plus similar non-cash items and exploration and abandonment expenses forsuch period) of the Company for the four fiscal quarters then ended to (b) theconsolidated interest expense of the Company for the four fiscal quarters thenended, not be less than 3.5 to 1.0.

•                  The WorkingCapital ratio requires that the amount of the Company’s consolidated currentassets less its consolidated current liabilities, as defined in the agreement,be at least $1.0 million.

•                  The MaximumLeverage ratio requires that the ratio, as of the last day of any fiscal quarter,of (a) Total Indebtedness (as defined in the Credit Facility) as of such fiscalquarter to (b) an amount equal to consolidated EBITDAX for the two quartersthen ended times two, not be greater than 3.0 to 1.0.

At June 30, 2004, the Companywas in compliance with the above-mentioned covenants. EBITDA and EBITDAX werepart of a negotiated covenant with our lender and are presented here asdisclosure of our compliance with that covenant.

 

**3.     SHELFREGISTRATION STATEMENT**

 

The Companyfiled a $150 million shelf registration statement, which became effective inMay 2004. Under the shelf registration statement, the Company may issue, fromtime to time, any combination of debt securities, preferred stock, common stockor warrants for debt securities or equity securities in one or more offeringsto those persons who agree to purchase our securities. At June 30, 2004, theCompany had $150 million remaining for issuance under the shelf registration.The Company has no immediate plans to issue equity securities, however theCompany will continue to explore opportunities in 2004 to replace existing debtand otherwise access capital through issuances of debt securities under thisregistration statement. Our ability to utilize the shelf registration statementwill depend upon, among other things, market conditions and the existence ofinvestors who wish to purchase our securities at prices and terms acceptable tous.

 

**4.     EARNINGSPER SHARE**

 

The Companyaccounts for earnings per share in accordance with SFAS No. 128 – “*Earnings per Share*,” which establishes therequirements for presenting earnings per share (“EPS”).  SFAS No. 128 requires the presentation of“basic” and “diluted” EPS on the face of the income statement.  Basic earnings per common share amounts arecalculated using the average number of common shares outstanding during eachperiod.  Diluted earnings per commonshare assumes the exercise of all stock options and warrants having exerciseprices less than the average market price of the common stock during the periods,using the treasury stock method.

 

The following is areconciliation of the numerators and denominators of basic and diluted earningsper common share computations, in accordance with SFAS No. 128, for thethree-month and six-month periods ended June 30, 2004 and 2003:

 

8

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| ** **                              | ** ** | **Three Months Ended June 30, 2004** | ** ** | **Three Months Ended June 30, 2003** | ** ** |
|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Income  (Numerator)**              | ** ** | **Shares  (Denominator)**            | ** ** | **Per Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| **Basic EPS**                           |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                    | 3,856,081  |                                 | 12,940,504 |   | $ | 0.30 |   | $ | 1,534,134 |   | 9,502,255 |   | $ | 0.16 |   |
| Effect of dilutive securities:          |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Restricted stock                        |       | —                               |       | 138,138                              |       | (0.01 | ) | — |   | 106,129 |   | — |   |
| Common stock options                    |       | —                               |       | 509,936                              |       | (0.01 | ) | — |   | 100,808 |   | — |   |
| **Diluted EPS**                         |       |                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                    | 3,856,081  |                                 | 13,588,578 |   | $ | 0.28 |   | $ | 1,534,134 |   | 9,709,192 |   | $ | 0.16 |   |

 
| ** **                              | ** ** | **Six Months Ended June 30, 2004** | ** ** | **Six Months Ended June 30, 2003** | ** ** |
|-----------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                              | ** ** | **Income  (Numerator)**            | ** ** | **Shares  (Denominator)**          | ** ** | **Per Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| **Basic EPS**                           |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                  | 7,139,317  |                               | 12,833,226 |   | $ | 0.56 |   | $ | 2,114,333 |   | 9,471,227 |   | $ | 0.22 |   |
| Effect of dilutive securities:          |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Restricted stock                        |       | —                             |       | 105,368                            |       | (0.01 | ) | — |   | 101,080 |   | — |   |
| Common stock options                    |       | —                             |       | 473,995                            |       | (0.02 | ) | — |   | 69,544 |   | — |   |
| **Diluted EPS**                         |       |                               |       |                               |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                  | 7,139,317  |                               | 13,412,589 |   | $ | 0.53 |   | $ | 2,114,333 |   | 9,641,851 |   | $ | 0.22 |   |

 

**5.     INCOMETAXES**

 

The Company accounts forincome taxes under the provisions of SFAS No. 109 – “*Accounting for Income Taxes*,” which provides for an assetand liability approach in accounting for income taxes.  Under this approach, deferred tax assets andliabilities are recognized based on anticipated future tax consequences, usingcurrently enacted tax laws, attributable to temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts calculated for income tax purposes.

 

The Company currentlyestimates that its effective tax rate for the year ending December 31, 2004will be approximately 35.2%.  A provisionfor income taxes of $3.9 million and $1.4 million was reported for the sixmonths ended June 30, 2004 and 2003, respectively. The Company was not requiredto pay income taxes in 2003 or 2002 because of the utilization net operatingloss carryforwards.

 

**6.     SUPPLEMENTALDISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES**

 

The Companyconsiders all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents. A summary of non-cashinvesting and financing activities for the six months ended June 30, 2004 and2003 is presented below:

 

9

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| **Description**                                                                                       | ** ** | **Number  of shares  issued** | ** ** | **Fair Market  Value** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------|------------|
| **Six months ended June 30, 2004:**                                                                   |       |                          |       |                   |       |
| Shares issued to satisfy restricted stock  grants                                                     |       | 56,136                        |       | $                      | 354,183    |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401 (k) plan |       | 3,360                         |       | $                      | 43,582     |   |
| **Six months ended June 30, 2003:**                                                                   |       |                          |       |                   |       |
| Shares issued to satisfy restricted stock  grants                                                     |       | 73,962                        |       | $                      | 390,238    |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401 (k) plan |       | 7,800                         |       | $                      | 31,307     |   |

 

For the six months ended June 30, 2004 and 2003, the non-cash portionof Asset Retirement Costs was $26,601 and $789,066.

 

#### **SupplementalDisclosure of Cash Flow Information**

 
| ** **                           | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| ** **                           | ** ** | **2004**                               | ** ** | **2003** | ** ** |
| Cash paid during the period for:     |       |                                   |       |   |   |
| Interest, net of amounts capitalized |       | $                                      | 199,109    |   | $ | 172,103 |   |
|                                      |            |                                        |            |  |  |  |  |

 

Interest paid for the six months ended June 30, 2004 and 2003 excludesamounts capitalized of $211,479 and $124,012, respectively. The Company was notrequired to pay income taxes in 2003 or 2002.

 

**7.     HEDGINGACTIVITIES**

 

Due to thevolatility of oil and natural gas prices, the Company periodically enters intoprice risk management transactions (e.g., swaps, collars and floors) for aportion of its oil and natural gas production to achieve a more predictablecash flow, as well as to reduce exposure from price fluctuations.  While the use of these arrangements limitsthe Company’s ability to benefit from increases in the price of oil and naturalgas, it also reduces the Company’s potential exposure to adverse pricemovements.  None of these instruments areused for trading purposes.  The Company’shedging arrangements, to the extent it enters into any, apply to only a portionof its production, provide only partial price protection against declines inoil and natural gas prices and limit the Company’s potential gains from futureincreases in prices.  The Company’smanagement sets all of the Company’s hedging policies, including volumes, typesof instruments and counterparties, on a quarterly basis. These policies areimplemented by management through the execution of trades by the Chief FinancialOfficer after consultation and concurrence by the President and Chairman of theBoard.  The Board of Directors reviewsthe Company’s hedge policies and trades. In accordance with SFAS No. 133, all derivative contracts are recordedon the balance sheet at fair value. The Company accounts for natural gascontracts as hedges of future cash flows from sale of natural gas. Accordingly,the effective portion of the changes in the fair value of the natural gascontracts are recorded in other comprehensive income. When the hedgedproduction is sold, the realized gains and losses on the natural gas contractsare removed from other comprehensive income and recorded in oil and natural gasrevenue.  Ineffective portions of the changesin fair value of the natural gas contracts are recognized in oil and naturalgas revenue as they occur.  While thehedge contract is outstanding, the ineffective gain or loss may increase ordecrease until settlement of the contract. There was no ineffectiveness recognized during the six months ended June30, 2004 or 2003.  For those derivativecontracts that either do not qualify for hedge accounting or the Company doesnot designate as hedges of future cash flows, the changes in fair value are notdeferred through other comprehensive income, but rather recorded in oil andnatural gas revenue immediately.

 

For the sixmonths ended June 30, 2004 and 2003, the Company included in other oil andnatural gas revenues realized and unrealized losses of $0.4 million and $3.3million, respectively, related to its natural gas hedges and oil derivatives.

 
| ** **                               | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------|------------|-------------------------------|------------|
| ** **                               | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Natural gas hedging contract settlements |       | $                             | (222,000   | ) | $ | (3,335,880 | ) |
| Oil derivative contract settlements      |       | (103,276                      | )          | — |   |
| Hedge premium reclassification           |       | (213,850                      | )          | — |   |
| Non-qualified derivative contracts       |       | 179,261                       |       | — |   |
|                                     |       | $                             | (359,865   | ) | $ | (3,335,880 | ) |

 

 

10

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The Company did not apply hedge accounting to its crude oil collarsentered into in March and May of 2004, because although they were economichedges, they did not qualify for hedge accounting.

 

The outstanding derivatives and hedges at June 30, 2004 and December31, 2003 impacting the balance sheet were as follows:

 
| ** **            | ** ** | ** **            | ** ** | ** **      | ** ** | ** **        | ** ** | ** **          | ** ** | ** **           | ** ** | **Unrealized Hedging Gains (Losses)  As of** | ** ** |
|-----------------------|------------|-----------------------|------------|-----------------|------------|-------------------|------------|---------------------|------------|----------------------|------------|----------------------------------------------|------------|
| **Transaction  Date** | ** ** | **Transaction  Type** | ** ** | **Beginning**   | ** ** | **Ending**        | ** ** | **Price  Per Unit** | ** ** | **Volumes  Per Day** | ** ** | **June 30,  2004**                           | ** ** | **December 31,  2003** | ** ** |
| ***Natural Gas:***    |       |                  |       |            |       |              |       |                |       |                 |       |                                         |       |   |   |
| 12/03                 |       | Natural  Gas  Collar  | (1)        | 1/1/04          |       | 3/31/04           |       | $4.50-$7.05         |       | 5,000                |       | $                                            | —     |   | $ | 37,688 |   |
| 08/03                 |       | Natural  Gas  Collar  | (1) (2)    | 4/1/04          |       | 9/30/04           |       | $4.50-$6.00         |       | 10,000               |       | (212,300                                     | )          | 42,996 |   |
| 08/03                 |       | Natural  Gas  Collar  | (1) (2)    | 1/1/04  10/1/04 |       | 3/31/04  12/31/04 |       | $4.50-$7.00         |       | 10,000               |       | (240,104                                     | )          | 40,117 |   |
| 02/04                 |       | Natural  Gas  Collar  | (1)        | 4/1/04          |       | 9/30/04           |       | $4.50-$6.20         |       | 5,000                |       | (70,410                                      | )          | — |   |
| ***Crude Oil:***      |       |                  |       |            |       |              |       |                |       |                 |       |                                         |       |   |   |
| 05/04                 |       | Crude Oil  Collar     | (3)        | 1/1/05          |       | 12/31/05          |       | $30.00-$39.15       |       | 200                  |       | (38,138                                      | )          | — |   |
|                  |       |                  |       |            |       |              |       |                |       |                 |       | $                                            | (560,952   | ) | $ | 120,801 |   |
|                  |       |                  |       |            |       |              |       |                |       |                 |       |                                         |       |   |   |
| ***Natural Gas:***    |       |                  |       |            |       |              |       |                |       |                 |       |                                         |       |   |   |
| 03/04                 |       | Natural  Gas  Collar  | (1)        | 10/1/04         |       | 12/31/04          |       | $4.50-$7.25         |       | 5,000                |       | 116,849                                      |       | — |   |
| 05/04                 |       | Natural  Gas  Collar  | (1)        | 1/1/05          |       | 03/31/05          |       | $5.00-$10.39        |       | 10,000               |       | (8,283                                       | )          | — |   |
| ***Crude Oil:***      |       |                  |       |            |       |              |       |                |       |                 |       |                                         |       |   |   |
| 03/04                 |       | Crude Oil  Collar     | (3)        | 4/1/04          |       | 12/31/04          |       | $30.00-$35.50       |       | 400                  |       | 217,399                                      |       | — |   |
|                  |       |                  |       |            |       |              |       |                |       |                 |       | $                                            | 325,965    |   | $ | — |   |

 

----

(1)                TheCompany’s current hedging activities for natural gas were entered into on a perMMbtu delivered price basis, using the Houston Ship Channel Index, withsettlement for each calendar month occurring five business days following theexpiration date.

(2)                Thishedge was entered into at a cost of $686,250.

(3)                Hedgeaccounting is not applied to the Company’s collars on crude oil, which wereentered into on a per barrel delivered price basis, using the West TexasIntermediate Index, with settlement for each calendar month occurring fivebusiness days following the expiration date. The change in fair value isreflected in net revenue for the six months ended June 30, 2004.

 

Hedges entered into after June 30, 2004 were as follows:

 
| **Transaction  Date** | ** ** | **Hedge Type**          | ** ** | **Effective Dates** | ** ** | **Price Per  Unit** | ** ** | **Volume Per Day** | ** ** |
|-----------------------|------------|-------------------------|------------|---------------------|------------|---------------------|------------|--------------------|------------|
| **Beginning**         | ** ** | **Ending**              |
| 07/04                 |       | Natural Gas  Collar (1) |       | 4/1/05              |       | 6/30/05             |       | $5.00-$7.53        |       | 10,000 MMBTU |   |
| 07/04                 |       | Natural Gas  Collar (1) |       | 7/1/05              |       | 9/30/05             |       | $5.00-$7.67        |       | 10,000 MMBTU |   |

 

----

(1)                      TheCompany’s current hedging activities for natural gas were entered into on a perMMbtu delivered price basis, Houston Ship Channel Index, with settlement foreach calendar month occurring five business days following the expiration date.

 

11

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**8.     MILLEREXPLORATION COMPANY MERGER**

 

On December 4, 2003, Edge acquired 100% of the outstanding common stockof Miller Exploration Company (“Miller”) in a transaction pursuant to whichMiller became a wholly-owned subsidiary of Edge. The acquisition of Miller wasaccounted for using the purchase method of accounting.

 

The following unaudited pro forma financial information has beenprepared to present the combined results of Edge and Miller for the six monthsended June 30, 2003, as if the merger had occurred at the beginning of theperiod presented. This unaudited pro forma consolidated statement of operationsdata does not include adjustments to reflect any cost savings or otheroperational efficiencies that may be realized as a result of the merger of Edgeand Miller, or any future merger-related restructuring or integration expenses.The pro forma data presented is based on numerous assumptions and is notnecessarily indicative of future results of operations of the merged companies.

 
| ** **                                                                | ** ** | **Six Months Ended  June 30, 2003**        | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **(In thousands, except  per share data)** | ** ** |
| STATEMENT OF OPERATIONS DATA                                              |       |                                       |       |
| Oil and natural gas revenue                                               |       | $                                          | 20,806     |   |
| Income before cumulative effect of  accounting change                     |       | $                                          | 4,017      |   |
| Basic earnings per share before cumulative  effect of accounting change   |       | $                                          | 0.33       |   |
| Diluted earnings per share before  cumulative effect of accounting change |       | $                                          | 0.33       |   |

 

**9.     COMMITMENTSAND CONTINGENCIES**

 

From time totime the Company is a party to various legal proceedings arising in theordinary course of business.  While theoutcome of lawsuits cannot be predicted with certainty, the Company is notcurrently a party to any proceeding that it believes, if determined in a manneradverse to the Company, could have a potential material adverse effect on itsfinancial condition, results of operations or cash flows.

 

During the secondquarter of 2004, the Company received notice that its franchise tax returns forthe State of Texas would be audited for the tax years 1999 through 2002. Afterreviewing documents submitted, the agent representing the Office of theComptroller of the State of Texas proposed adjustments to the calculation thatwould result in an increased franchise tax liability.  The agent maintains that transfers by theparent company to its subsidiaries that the Company classified as intercompanyloans should instead be classified as equity investments in the subsidiary. Ifthe State of Texas prevails in this assertion, the franchise tax liability ofthe subsidiaries would be increased by approximately $3.0 million for thefour-year period under audit.

 

At this time, theCompany is in preliminary discussions with the agent.  The Company believes its practice is correctand is vigorously contesting this matter. Should the Company’s negotiations with the agent prove unsuccessful, theCompany plans to file an administrative protest of these adjustments and beginthe appeals process.

 

The Company intends tovigorously contest the proposed adjustments and has not recognized any provisionfor the additional franchise tax that would result from the proposeddeficiency.

 

12

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**ITEM2.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following is management’s discussion andanalysis of significant factors that have affected certain aspects of ourfinancial position and operating results during the periods included in theaccompanying unaudited condensed consolidated financial statements.  This discussion should be read in conjunctionwith the accompanying unaudited condensed consolidated financial statementsincluded elsewhere in this Form 10-Q and with Management’s Discussion andAnalysis of Financial Condition and Results of Operations and our auditedconsolidated financial statements included in our annual report on Form 10-Kfor the year ended December 31, 2003.

 

### **FORWARD LOOKING STATEMENTS**

###  

The statements containedin all parts of this document, including, but not limited to, those relating toour outlook, the effects of the merger with Miller Exploration Company and ouracquisition of properties in South Texas (including any expectations regardingincreases in our liquidity or available credit), our ability to access thecapital markets to raise additional capital, our drilling plans, our 3-Dproject portfolio, capital expenditures, future capabilities, the sufficiencyof capital resources and liquidity to support working capital and capitalexpenditure requirements, reinvestment of cash flows, use of NOLs, tax rates,the outcome of litigation and audits, and any other statements regarding futureoperations, financial results, business plans, sources of liquidity and cashneeds and other statements that are not historical facts are forward looking statements.  When used in this document, the words“anticipate,” “estimate,” “expect,” “may,” “project,” “believe,” “budgeted,”“intend,” “plan,” “potential,” “forecast,” “might,” “predict,” “should” andsimilar expressions are intended to be among the statements that identifyforward looking statements.  Suchstatements involve risks and uncertainties, including, but not limited to,those relating to the results of and our dependence on our exploratory anddevelopment drilling activities, the volatility of oil and natural gas prices,the need to replace reserves depleted by production, operating risks of oil andnatural gas operations, our dependence on key personnel, our reliance ontechnological development and possible obsolescence of the technology currentlyused by us, the significant capital requirements of our exploration anddevelopment and technology development programs, the potential impact ofgovernment regulations and liability for environmental matters, results oflitigation and audits, expansion of our capital budgets, our ability to manageour growth and achieve our business strategy, competition from larger oil andgas companies, the uncertainty of reserve information and future net revenueestimates, property acquisition risks and other factors detailed in our Form10-K and other filings with the Securities and Exchange Commission(“SEC”).  Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual outcomes may vary materially from those indicated. Allsubsequent written and oral forward-looking statements attributable to theCompany or the persons acting on its behalf are expressly qualified in theirentirety by the reference to these risks and uncertainties.

 

## ***GENERAL OVERVIEW***

## ** **

Edge PetroleumCorporation is a Houston-based independent energy company that focuses itsexploration, production and marketing activities in selected onshore basins ofthe United States.

 

We wereorganized as a Delaware corporation in August 1996 in connection with ourinitial public offering (the “Offering”) and the related combination of certainentities that held interests in the Edge Joint Venture II (the “Joint Venture”)and certain other oil and natural gas properties, herein referred to as the“Combination”.  In a series ofcombination transactions, we issued an aggregate of 4,701,361 shares of commonstock and received in exchange 100% of the ownership interests in the JointVenture and certain other oil and natural gas properties.  In March 1997, and contemporaneously with theCombination, we completed the Offering of 2,760,000 shares of our common stockgenerating proceeds of approximately $40 million, net of expenses.  We undertook a top-level management change latein 1998 and began a shift in strategy from pure exploration which focused moreon prospect generation to our current strategy which focuses on a balancedprogram of exploration, exploitation and development and acquisition of oil andgas properties.

 

In December2003, we acquired 100 percent of the outstanding stock of Miller ExplorationCompany (“Miller”).  The transaction wastreated as a tax-free reorganization and accounted for as a purchase business

 

13

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combination.  In the merger, we issued approximately 2.6million shares of Edge common stock using a ratio of 1.22342 Edge shares foreach share of Miller common stock outstanding. Miller continues to conduct exploration and development activities as awholly-owned subsidiary of Edge.

 

# **Industry and EconomicFactors**

# ** **

In managingour business, we must deal with many factors inherent in our industry.  First and foremost is the fluctuation of oiland gas prices.  Historically, oil andgas markets have been cyclical and volatile, with future price movementsdifficult to predict.  While our revenuesare a function of both production and prices, wide swings in commodity priceshave most often had the greatest impact on our results of operations.

 

Our operationsentail significant complexities.  Advancedtechnologies requiring highly trained personnel are utilized in bothexploration and production.  Even whenthe technology is properly used, we may still not know conclusively ifhydrocarbons will be present or the rate at which they will be produced.  Exploration is a high-risk activity, oftentimes resulting in no commercially productive reservoirs being discovered.  Moreover, costs associated with operatingwithin our industry are substantial.

 

The oil andgas industry is highly competitive.  We competewith major and diversified energy companies, independent oil and gas businessesand individual operators.  In addition,the industry as a whole competes with other businesses that supply energy toindustrial and commercial end users.

 

Extensive federal,state and local regulation of the industry significantly affects ouroperations.  In particular, ouractivities are subject to stringent operational and environmentalregulations.  These regulations haveincreased the costs of planning, designing, drilling, installing, operating andabandoning oil and gas wells and related facilities.  These regulations may become more demandingin the future.

 

# **Approach to the Business**

# ** **

Profitablegrowth of our business will largely depend upon our ability to successfullyfind and develop new proved reserves of oil and natural gas in a cost effectivemanner.  In order to achieve an overallacceptable rate of growth, we maintain a blended portfolio of low, moderate andhigher risk exploration and development projects.  We also attempt to make selected acquisitionsof oil and gas properties to augment our growth and provide future drillingopportunities.  We believe that thisapproach should allow for consistent increases in our oil and gas reserves,while minimizing the chance of failure. To further mitigate risk, we have chosen to seek geologic and geographicdiversification by operating in multiple basins.  We periodically hedge our exposure tovolatile oil and gas prices on a portion of our production to reduce price risk.As of June 30, 2004, we have entered into hedge contracts coveringapproximately 60% and 65% of our remaining expected 2004 natural gas and crudeoil production, respectively.  During thesecond and third quarter, we entered into new hedge contracts resulting inapproximately 20% of our expected 2005 natural gas and crude oil productionbeing hedged.

 

Implementationof our business approach relies on our ability to fund ongoing exploration anddevelopment projects with cash flow provided by operating activities andexternal sources of capital.  In late2003, we announced plans for record capital expenditures of approximately $28million for 2004.   Subsequently, weannounced plans to expand the 2004 capital budget to approximately $39 millionand now expect it to increase to approximately $40 to $45 million. We do notinclude acquisitions in our budgeted capital expenditures.  Based on current expectations for productionvolumes and commodity prices, we expect to fund those capital expenditures frominternally generated cash from operating activities.

 

Debt wasreduced by $3.0 million in the first six months of 2004 to $18.0 million atJune 30, 2004. As of that date, our debt to total capital ratio wasapproximately 16%, which we believe leaves us with the financial flexibility tocontinue to execute our business strategies.

 

**Merger**

 

On December 4,2003 we completed our acquisition of Miller. Miller was an independent oil andgas exploration and production company with exploration efforts concentratedprimarily in the Mississippi Salt Basin of

 

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central Mississippi.  We acquired Miller for the development andexploitation projects in each of Miller’s core areas, increased financialflexibility, and expansion of our core areas.

 

Under theterms of the merger agreement, each share of issued and outstanding commonstock of Miller was converted into 1.22342 shares of Edge common stock.  We issued approximately 2.6 million shares ofEdge common stock to the shareholders of Miller in exchange for all of theoutstanding common stock of Miller. The merger was treated as a tax-freereorganization and accounted for as a purchase business combination undergenerally accepted accounting principles.

 

The fair valueof assets acquired from Miller totaled $15.7 million and included $6.4 millionof cash.  We incurred $1.2 million incosts associated with the merger resulting in cash acquired in the merger of$5.2 million for the year ended December 31, 2003. During the six months endedJune 30, 2004 we incurred approximately $252,000 of expenses associated withthe transaction.

 

The acquiredMiller properties were estimated to contain at least 5.6 Bcfe of provedreserves at December 31, 2003, of which approximately 60% was natural gas and100% was classified as proved developed. The acreage position was approximately83,800 gross (17,200 net) acres with an option to acquire 80,000 gross (68,000net) acres at December 31, 2003.We operate the majority of the acquiredproperties. Production from Miller properties for the six months ended June 30,2004 was approximately 964,000 Mcfe.

 

**Outlook**

 

We expect ourdrilling program to increase from 36 wells (17.922 net) in 2003 toapproximately 45 to 50 wells (23.4 to 26.0 net) in 2004. Our expected capitalprogram will be approximately $40 to $45 million, approximately 60% greaterthan 2003, excluding acquisitions. Our expected production volumes combinedwith a strong commodity-pricing environment expected for the remainder of theyear is anticipated to produce record cash flow. In order to manage theanticipated growth over the coming year, we are planning to increase ourheadcount resulting in increased G&A costs. To help protect against the possibility that commodity prices do notremain at the current levels, we have entered into several hedges coveringapproximately 60% of our expected natural gas production and 65% of ourexpected crude oil production streams for the remainder of 2004 to offset thenegative impact of potential downward price movements. During the secondquarter, we entered into new hedge contracts resulting in approximately 20% ofour expected 2005 natural gas and crude oil production being hedged.  We also expect to spend considerable effortin 2004 on acquisitions, as we seek to further our growth.

 

Our outlook and the expected resultsdescribed above are both subject to change based upon factors that include butare not limited to drilling results, commodity prices, access to capital, theacquisitions market and factors referred to in “Forward Looking Statements.”

 

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples in the United States requires management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenues,expenses and disclosure of contingent assets and liabilities in theaccompanying financial statements. Changes in these estimates could materially affect our financial position,results of operations or cash flows.  Keyestimates used by management include revenue and expense accruals,environmental costs, depreciation and amortization, asset impairment and fairvalues of assets acquired.  Significantaccounting policies that we employ are presented in the notes to theconsolidated financial statements.

 

**Revenue Recognition**

 

We recognize oil andnatural gas revenue from our interests in producing wells as oil and naturalgas is produced and sold from those wells. Oil and natural gas sold by us is not significantly different from ourshare of production.

 

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**Oil and Natural Gas Properties**

 

The accounting for ourbusiness is subject to special accounting rules that are unique to the oil andgas industry.  There are two allowablemethods of accounting for oil and gas business activities:  the successful-efforts method and thefull-cost method.  There are severalsignificant differences between these methods. Under the successful-efforts method, costs such as geological andgeophysical (“G&G”), exploratory dry holes and delay rentals are expensedas incurred whereas under the full-cost method these types of charges would becapitalized to their respective full-cost pool. In the measurement of impairment of oil and gas properties, thesuccessful-efforts method of accounting follows the guidance provided inStatement of Financial Accounting Standards (“SFAS”) No. 144, “*Accounting for the Impairment or Disposal ofLong-Lived Assets*,” where the first measurement for impairment is tocompare the net book value of the related asset to its undiscounted future cashflows using commodity prices consistent with management expectations.  Under the full-cost method, impairment isdetermined by comparing the net book value (full-cost pool) to the future netcash flows discounted at 10 percent using commodity prices in effect at the endof the reporting period.  Guidance todetermine this impairment is provided in SEC Regulation S-X Rule 4-10.

 

We have elected to usethe full-cost method to account for our oil and gas activities.  Under this method, all costs associated withacquisition, exploration and development of oil and gas reserves, includingsalaries, benefits and other internal costs directly attributable to theseactivities are capitalized within a cost center.  Our oil and natural gas properties arelocated within the United States of America, which constitutes one cost center.  Although some of these costs may ultimatelyresult in no additional reserves, we expect the benefits of successful wells tomore than offset the costs of any unsuccessful ones.  As a result, we believe that the full-costmethod of accounting better reflects the true economics of exploring for anddeveloping oil and gas reserves.  Ourfinancial position and results of operations would have been significantlydifferent had we used the successful-efforts method of accounting for our oiland gas investments.

 

Oil and natural gasproperties are amortized using the unit-of-production method using estimates ofproved reserve quantities.  Investmentsin unproved properties are not amortized until proved reserves associated withthe prospects can be determined or until impairment occurs.  Unproved properties are evaluated periodicallyfor impairment on a property-by-property basis. If the results of an assessment indicate that an unproved property isimpaired, the amount of impairment is added to the proved oil and natural gasproperty costs to be amortized.  Theamortizable base includes estimated future development and dismantlement costsand restoration and abandonment costs, net of estimated salvage value.

 

The capitalized costs ofoil and natural gas properties are subject to a “ceiling test,” whereby to theextent that such capitalized costs subject to amortization in the full-costpool (net of depletion, depreciation and amortization, asset retirementobligations and related deferred taxes) exceed the present value (using a 10%discount rate) of estimated future net after-tax cash flows from proved oil andnatural gas reserves using hedge adjusted period end prices, such excess costsare charged to operations.  Onceincurred, an impairment of oil and natural gas properties is not reversible ata later date.  Impairment of oil andnatural gas properties is assessed on a quarterly basis in conjunction with ourquarterly filings with the SEC.  Inaccordance with Staff Accounting Bulletin (“SAB”) No.103, “*Update of Codification of Staff Accounting Bulletins*,”derivative instruments qualifying as cash flow hedges are included in thecomputation of limitation on capitalized costs. The period end price exceeded the cap established by one of theCompany’s hedges at June 30, 2004 and thus a $284,000 reduction to thelimitation threshold was used in this calculation.  No adjustment related to the ceiling test wasrequired during the six months ended June 30, 2004 or 2003.

 

Sales of proved andunproved properties are accounted for as adjustments of capitalized costs withno gain or loss recognized, unless such adjustments would significantly alterthe relationship between capitalized costs and proved reserves.

 

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# **Asset Retirement Obligations**

# ** **

We havecertain obligations to remove tangible equipment and restore land at the end ofoil and gas production operations.  Ourremoval and restoration obligations are primarily associated with plugging andabandoning wells.  Under the full-costmethod of accounting, as described in the preceding critical accounting policysections, the estimated discounted costs of the abandonment obligations, net ofsalvage value, are currently included as a component of our depletion base andexpensed over the production life of the oil and gas properties.  Estimating the future asset removal costs isdifficult and requires management to make estimates and judgments because mostof the removal obligations are many years in the future and contracts andregulations often have vague descriptions of what constitutes removal.  Asset removal technologies and costs areconstantly changing, as are regulatory, political, environmental, safety andpublic relations considerations.

 

In 2001, theFASB issued SFAS No. 143, “*Accounting forAsset Retirement Obligations*.”  We adopted this statement effective January 1, 2003, as discussed inNote 1 to our Consolidated Financial Statements.  SFAS No. 143 significantly changed the methodof accruing for costs an entity is legally obligated to incur related to theretirement of fixed assets (“asset retirement obligations” or “ARO”).  Primarily, the new statement requires us torecord a separate liability for the discounted present value of our assetretirement obligations, with an offsetting increase to the related oil and gasproperties on the balance sheet.

 

Inherent inthe present value calculation are numerous assumptions and judgments includingthe ultimate settlement amounts, inflation factors, credit-adjusted discountrates, timing of settlement, and changes in the legal, regulatory,environmental and political environments. To the extent future revisions to these assumptions impact the presentvalue of the existing ARO liability, a corresponding adjustment is made to theoil and gas property balance.  Inaddition, increases in the discounted ARO liability resulting from the passageof time will be reflected as accretion expense in the consolidated statement ofoperations.

 

The adoption of SFAS No. 143 required a cumulative adjustment toreflect the impact of implementing the statement had the rule been in effectsince inception.  We, therefore,calculated the cumulative accretion expense on the ARO liability and thecumulative depletion expense on the corresponding property balance.  The sum of these cumulative expenses wascompared to the depletion expense originally recorded.  Because the historically recorded depletionexpense was lower than the cumulative expense calculated under SFAS No. 143,the difference resulted in a loss, which we recorded as cumulative effect ofchange in accounting principle on January 1, 2003.

 

Going forward,our depletion expense will be reduced since we will deplete a discounted amountof asset retirement costs rather than the undiscounted value previouslydepleted.  The lower depletion expenseunder SFAS No. 143 is offset, however, by accretion expense, which reflects theincreases in the discounted asset retirement obligation liability over time.

 

**Oil and Natural Gas Reserves**

 

Our estimate of provedreserves is based on the quantities of oil and gas which geological andengineering data demonstrate, with reasonable certainty, to be recoverable inthe future years from known reservoirs under existing economic and operatingconditions.  The accuracy of any reserveestimate is a function of the quality of available data, engineering andgeological interpretation, and judgment. For example, we must estimate the amount and timing of future operatingcosts, severance taxes, development costs, and workover costs, all of which mayin fact vary considerably from actual results. In addition, as prices and cost levels change from year to year, theestimate of proved reserves also changes. Any significant variance in these assumptions could materially affectthe estimated quantity and value of our reserves.

 

Despite the inherentimprecision in these engineering estimates, our reserves are used throughoutour financial statements.  For example,since we use the units-of-production method to amortize our oil and gasproperties, the quantity of reserves could significantly impact ourdepreciation, depletion, and amortization expense (“DD&A”) and accretionexpense.  Our oil and gas properties arealso subject to a “ceiling” limitation based in part on the quantity of ourproved reserves.  Finally, these reservesare the basis for our supplemental oil and gas disclosures.

 

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We engage an independentpetroleum engineering firm to prepare an independent estimate of our provedhydrocarbon liquid and gas reserves.

 

**IncomeTaxes**

 

We record deferred tax assets and liabilities to account for theexpected future tax consequences of events that have been recognized in ourfinancial statements and our tax returns. We routinely assess the realizability of our deferred tax assets.   If we conclude that it is more likely thannot that some portion or all of the deferred tax assets will not be realizedunder accounting standards, the tax asset would be reduced by a valuationallowance.  We consider future taxableincome in making such assessments. Numerous judgments and assumptions are inherent in the determination offuture taxable income, including factors such as future operating conditions(particularly as related to prevailing oil and gas prices). The Company is notcurrently required to pay any federal income taxes because of net operatingloss carryforwards.

 

**Derivativesand Hedging Activities**

 

Our revenue,profitability and future rate of growth and ability to borrow funds or obtainadditional capital, and the carrying value of our properties, are substantiallydependent upon prevailing prices for oil and natural gas.  These prices are dependent upon numerousfactors beyond our control, such as economic, political and regulatorydevelopments and competition from other sources of energy.  A substantial or extended decline in oil andnatural gas prices could have a material adverse effect on our financialcondition, results of operations and access to capital, as well as thequantities of oil and natural gas reserves that we may economically produce.

 

Due to theinstability of oil and natural gas prices, we may enter into, from time totime, price risk management transactions (e.g., swaps, collars and floors) fora portion of our oil and natural gas production to achieve a more predictablecash flow, as well as to reduce exposure from commodity pricefluctuations.  While the use of thesearrangements limits our ability to benefit from increases in the price of oiland natural gas, it also reduces our potential exposure to adverse price movements.  Our hedging arrangements, to the extent weenter into any, apply to only a portion of our production and provide onlypartial price protection against declines in oil and natural gas prices andlimits our potential gains from future increases in prices.  None of these instruments are used fortrading purposes.  Our management setsall of our hedging policies, including volumes, types of instruments andcounterparties, on a quarterly basis. These policies are implemented bymanagement through the execution of trades by the Chief Financial Officer afterconsultation and concurrence by the President and Chairman of the Board.  Our Board of Directors reviews all hedgingpolicies and trades.  In accordance withSFAS No. 133, all derivatives are recorded on the balance sheet at fair value.We account for natural gas contracts as hedges of future cash flows from saleof natural gas. Accordingly, the effective portion of the changes in the fairvalue of the natural gas contracts are recorded initially in othercomprehensive income. When the hedged production is sold, the realized gainsand losses on the natural gas contracts are removed from other comprehensiveincome and recorded in oil and natural gas revenue.  Ineffective portions of the changes in fairvalue of the natural gas contracts are recognized in oil and natural gasrevenue as they occur.  While the hedgecontract is outstanding, the ineffective gain or loss may increase or decreaseuntil settlement of the contract.  Therewas no ineffectiveness recognized during the six months ended June 30, 2004 or2003.  For transactions not accounted forusing hedge accounting, the change in the fair value is reflected in oil andnatural gas revenue immediately.

 

There are certaincomplexities inherent in hedge accounting like variations in production fromday to day, the possibility that the derivatives may be based on prices atdifferent delivery points that the pricing of the Company’s production, andthat prices at different delivery points can diverge. We formally assess, bothat the hedge’s inception and on an ongoing basis, whether the derivatives thatare used in hedging transactions are expected to be highly effective inoffsetting changes in cash flows of the hedged transactions.  In the event it is determined that the use ofa particular derivative may not be or has ceased to be effective in pursuing ahedging strategy, hedge accounting is discontinued prospectively.

 

**Stock-Based Compensation**

 

We account for stockcompensation plans under the intrinsic value method of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*.” No compensation expense is recognized for stock options that had anexercise price equal to or greater than the market value of their underlyingcommon stock on the date of grant.  Asallowed by SFAS No. 123, “*Accounting forStock Based Compensation*,” we have continued to apply APB OpinionNo. 25 for purposes of determining net income. In December 2002, the FASB issued SFAS No. 148, “*Accounting for Stock Based Compensation – Transitionand Disclosure – an amendment of*

 

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*FASB Statement No. 123*” to provide alternative methods oftransition for a voluntary change to the fair value based method of accountingfor stock-based employee compensation. We elected not to change to the fair value method.  Additionally, the statement amended thedisclosure requirements of SFAS No. 123 to require prominent disclosures inboth annual and interim financial statements about the method of accounting forstock-based compensation and the effect of the method used on reported results.

 

We are also subject toreporting requirements of FASB Interpretation No. (“FIN”) 44, “*Accounting for Certain Transactions involving StockCompensation*” that requires, among other things, a non-cash chargeto deferred compensation expense if the market price of our common stock on thelast trading day of a reporting period is greater than the exercise price ofcertain stock options.  FIN 44 could alsoresult in a credit to compensation expense to the extent that the trading pricedeclines from the trading price as of the end of the prior period, but notbelow the exercise price of the options. After the first such adjustment ismade, each subsequent period is adjusted upward or downward to the extent thatthe market price exceeds the exercise price of the options.  We are required to report under this rule asa result of non-qualified stock options granted to employees and directors in prioryears and re-priced in May of 1999, as well as certain newly issued options inconjunction with the repricing.

 

# **RESULTS OFOPERATIONS**

# ** **

Thissection includes discussion of our results of operations for the three-monthand six-month periods ended June 30, 2004. We are an independent energy company engaged in the exploration,development, acquisition and production of oil and natural gas.  Our resources and assets are managed and ourresults reported as one operating segment. We conduct our operations primarily along the onshore United States,Gulf Coast, with our primary emphasis in South Texas, Louisiana, Southeast NewMexico, and Southern Mississippi.

 

**Second Quarter 2004 Compared to the Second Quarter2003**

 

**Revenue and Production**

 

Oil and natural gasrevenue increased 98% from $8.0 million in the second quarter of 2003 to $15.8million in the comparable 2004 period. For the three months ended June 30, 2004, natural gas productioncomprised 79% of total production and contributed 83% of total revenue, naturalgas liquid (NGL) production comprised 12% of total production and contributed6% of total revenue, and oil and condensate production comprised 9% of totalproduction and contributed 11% of total revenue.  For the second quarter of 2003, natural gasproduction comprised 76% of total production and contributed 81% of totalrevenue, NGL production comprised 15% of total production and contributed 8% oftotal revenue, and oil and condensate production comprised 9% of totalproduction and contributed 11% of total revenue.

 

The following tablesummarizes volume and price information with respect to our oil and gasproduction for the three-month periods ended June 30, 2004 and 2003:

 
| ** **                                   | ** ** | ** **                      | ** ** | ** **   | ** ** | **2004 Period Compared  to 2003 Period** | ** ** |
|----------------------------------------------|------------|---------------------------------|------------|--------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | ** **                      | ** ** | ** **   | ** ** | ** **                               | ** ** | **%** | ** ** |
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Increase** | ** ** | **Increase**                             | ** ** |
| ** **                                   | ** ** | **2004**                        | ** ** | **2003**     | ** ** | **(Decrease)**                           | ** ** | **(Decrease)** | ** ** |
| **Production Volumes:**                      |       |                            |       |         |       |                                     |       |   |   |
| Natural gas (Mcf)                            |       | 2,298,064                       |       | 1,340,070    |       | 957,994                                  |       | 71 | % |
| Natural gas liquids (Bbls)                   |       | 57,602                          |       | 43,123       |       | 14,479                                   |       | 34 | % |
| Oil and condensate (Bbls)                    |       | 45,832                          |       | 25,852       |       | 19,980                                   |       | 77 | % |
| Natural gas equivalent (Mcfe)                |       | 2,918,668                       |       | 1,753,920    |       | 1,164,748                                |       | 66 | % |
| **Average Sales Price:**                     |       |                            |       |         |       |                                     |       |   |   |
| Natural gas ($ per Mcf)(1)              |       | $                               | 5.75       |         | $          | 4.86                                     |       | $ | 0.89 |   | 18 | % |
| Natural gas liquids ($ per Bbl)         |       | $                               | 14.87      |         | $          | 14.28                                    |       | $ | 0.59 |   | 4 | % |
| Oil and condensate ($ per Bbl)(1)       |       | $                               | 38.97      |         | $          | 33.70                                    |       | $ | 5.27 |   | 16 | % |
| Natural gas equivalent ($ per Mcfe) (1) |       | $                               | 5.43       |         | $          | 4.56                                     |       | $ | 0.87 |   | 19 | % |
| **Operating Revenue:**                       |       |                            |       |         |       |                                     |       |   |   |
| Natural gas (1)                              |       | $                               | 13,204,760 |         | $          | 6,507,095                                |       | $ | 6,697,665 |   | 103 | % |
| Natural gas liquids                          |       | 856,777                         |       | 615,981      |       | 240,796                                  |       | 39 | % |
| Oil and condensate (1)                       |       | 1,785,867                       |       | 871,319      |       | 914,548                                  |       | 105 | % |
| Total (1)                                    |       | $                               | 15,847,404 |         | $          | 7,994,395                                |       | $ | 7,853,009 |   | 98 | % |

 

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(1) Includes the effect ofhedging and derivative transactions.

 

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Ourrevenue is sensitive to changes in prices received for our products.  A substantial portion of our production issold at prevailing market prices, which fluctuate in response to many factorsthat are outside of our control. Imbalances in the supply and demand for oil and natural gas can have adramatic effect on the prices we receive for our production.  Political instability and availability ofalternative fuels could impact worldwide supply, while the economy, weather andother factors outside of our control could impact demand.

 

Natural gas revenue increased 103% from $6.5 million for the threemonths ended June 30, 2003 to $13.2 million for the same period in 2004 due tosignificantly higher production and lower realized hedge losses. Averagenatural gas production increased 71% from 14.7 MMcf/D in the three months endedJune 30, 2003 to 25.3 MMcf/D in the comparable 2004 period due to productionfrom new wells drilled and acquired, primarily our O’Connor Ranch East, GatoCreek, Encinitas and Miller properties, partially offset by natural declines atour Austin Field and O’Connor Ranch properties. This increase in production compared to the prior year period resulted inan increase in revenue of approximately $5.5 million (based on 2003 comparableperiod pre-hedge prices).  For the threemonths ended June 30, 2004, we realized natural gas hedge losses of$222,000.  In addition, we recognized$186,500 of the premium paid for a hedge entered into in 2003.  These losses decreased the effective naturalgas sales price by $0.18 per Mcf. Included within natural gas revenue for the three months ended June 30,2003 was $1.1 million representing realized losses from hedging activity.  These losses decreased the effective naturalgas sales price by $0.84 per Mcf for the three months ended June 30, 2003.  Excluding the effect of hedges, the averagenatural gas sales price for production in the second quarter of 2004 was $5.93per Mcf compared to $5.70 per Mcf for the same period in 2003.  This increase in average price receivedresulted in increased revenue of approximately $0.5 million (based on currentyear production).

 

Revenue from the sale of NGLs totaled $0.9 million for the three monthsended June 30, 2004, an increase of 39% from the 2003 second quarter total of$0.6 million. Production volumes for NGLs increased 34%, from 474 Bbls/D forthe three months ended June 30, 2003 to 633 Bbls/D for the three months endedJune 30, 2004 due primarily to increased production from new wells drilled andacquired.  The increase in NGL productionincreased revenue by $206,800 (based on 2003 comparable period averageprices).  Higher average realized pricesfor the three months ended June 30, 2004 resulted in an increase in revenue of$34,000 (based on current year production). The average realized price for NGLs for the three months ended June 30,2004 was $14.87 per barrel compared to $14.28 per barrel for the same period in2003.

 

Revenue from the sale of oil and condensate totaled $1.8 million forthe three months ended June 30, 2004, an increase of 105% from the comparableprior year period total of $0.9 million due to increased production and higherrealized prices.  Production volumes foroil and condensate increased 77% to 504 Bbls/D for the three months ended June30, 2004 compared to 284 Bbls/D for the same prior year period due primarily toproduction from the properties acquired from Miller, as well as new wellsdrilled.  The increase in oil andcondensate production resulted in an increase in revenue of approximately $0.7million (based on 2003 comparable period average prices). The average realizedprice for oil and condensate for the three months ended June 30, 2004 was$38.97 per barrel (including $0.67 per barrel associated with net derivativegains discussed below) compared to $33.70 per barrel in the same period of2003.  Higher average prices for thesecond quarter of 2004 resulted in an increase in revenue of approximately $0.2million (based on current year production). Included in oil revenue for the three months ended June 30, 2004 was$103,300 of realized losses on oil derivatives offset by $133,800, representinga mark to market gain on the fair value of an oil derivative.  We elected not to apply hedge accounting tothis transaction.  See Note 7 to ourConsolidated Financial Statements.

 

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**Costsand Operating Expenses**

 

The tablebelow presents a detail of our expenses for the three months ended June 30,2004 and 2003:

 
| ** **                                            | ** ** | ** **                      | ** ** | ** **               | ** ** | **2004 Period Compared  to 2003 Period** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|--------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **Three Months Ended June 30,** | ** ** | **Increase  (Decrease)** | ** ** | **%  Increase  (Decrease)**              | ** ** |
| **2004**                                              | ** ** | **2003**                        |
|                                                  |       |                            |       |                     |       |                                     |       |   |   |
| Lease operating expenses                              |       | $                               | 1,220,092  |                     | $          | 550,998                                  |       | $ | 669,094 |   | 121 | % |
| Severance and ad valorem taxes                        |       | 1,210,208                       |       | 521,904                  |       | 688,304                                  |       | 132 | % |
| Depreciation, depletion, amortization and  accretion: |       |                            |       |                     |       |                                     |       |   |   |
| Oil and gas property and equipment                    |       | 5,023,148                       |       | 2,728,625                |       | 2,294,523                                |       | 84 | % |
| Other assets                                          |       | 92,023                          |       | 115,946                  |       | (23,923                                  | )          | -21 | % |
| ARO accretion                                         |       | 26,216                          |       | 14,765                   |       | 11,451                                   |       | 78 | % |
| General and administrative expenses:                  |       |                            |       |                     |       |                                     |       |   |   |
| Deferred compensation – repriced options         |       | 337,386                         |       | —                   |       | 337,386                                  |       |   | * |
| Deferred compensation – restricted stock         |       | 114,600                         |       | 89,775                   |       | 24,825                                   |       | 28 | % |
| Other general and administrative expenses             |       | 1,731,453                       |       | 1,430,756                |       | 300,697                                  |       | 21 | % |
|                                                  |       | 9,755,126                       |       | 5,452,769                |       | 4,302,357                                |       | 79 | % |
| Other expense, net                                    |       | 142,130                         |       | 162,021                  |       | (19,891                                  | )          | -12 | % |
| Total                                                 |       | $                               | 9,897,256  |                     | $          | 5,614,790                                |       | $ | 4,282,466 |   | 76 | % |

 

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* Not meaningful

 

Lease operating expenses for the three months ended June 30, 2004totaled $1.2 million compared to $0.6 million in the same period of 2003, anincrease of 121%.  The 2003 acquisitionof properties in South Texas and the Miller merger contributed 21% of theincrease in costs in the second quarter of 2004 compared to the prior yearsecond quarter.  Wells drilled since thesecond quarter of 2003 as well as salt water disposal costs at the Thibodeauxwell further increased the costs for the second quarter of 2004 compared to theprior year.  Operating expenses averaged$0.42 per Mcfe for the three months ended June 30, 2004, compared to $0.31 perMcfe for the same prior year period.

 

Severance andad valorem taxes for the three months ended June 30, 2004 increased from $0.5 millionin the second quarter of 2003, to $1.2 million in same period of 2004.  Severance tax expense for the second quarterof 2004 of $1.1 million was 156% higher than the comparable prior year periodas a result of higher revenue.  For thethree months ended June 30, 2004, severance tax expense was approximately 6.7%of revenue subject to severance taxes compared to 4.7% of revenue subject toseverance taxes for the comparable 2003 period. The increase in tax as apercent of revenue was due primarily to a shift in our revenue stream toproperties with higher severance tax rates. Ad valorem costs increased 29% from$99,639 in the second quarter of 2003 to $128,609 in the second quarter of2004.  On an equivalent basis, severanceand ad valorem taxes averaged $0.41 per Mcfe and $0.30 per Mcfe for the threemonths ended June 30, 2004 and 2003, respectively.

 

Depletion,depreciation, and amortization (“DD&A”) and accretion expense for the threemonths ended June 30, 2004 totaled $5.1 million compared to $2.9 million forthe three months ended June 30, 2003. Depletion on our oil and natural gas properties totaled $5.0 million forthe second quarter of 2004 compared to $2.7 million in the same period of 2003.Depletion expense on a unit of production basis for the three months ended June30, 2004 was $1.72 per Mcfe, compared to $1.56 per Mcfe in the second quarterof 2003.  The increase in depletionexpense was due primarily to the higher production levels in the second quarterof 2004 as compared to the same period of 2003 that resulted in an increase inexpense of $1.8 million.  The increase inrate for the second quarter of 2004 compared to 2003 added $0.5 million indepletion expense.  Depreciation offurniture and fixtures totaled $92,023, a decrease of 21% compared to the prioryear second quarter total of $115,946.  We adopted SFASNo. 143 effective January 1,

 

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2003.  As a result, we recorded accretion expenseassociated with our asset retirement obligation for the three months ended June30, 2004 and 2003 of $26,216 and $14,765, respectively.

 

Total G&Afor the three months ended June 30, 2004 was $2.2 million, an increase of 44%compared to the prior year second quarter total of $1.5 million.  G&A costs include deferred compensationrelated to repriced options (FIN 44), deferred compensation related torestricted stock grants and other G&A costs. A FIN 44 charge, as discussed above in Critical Accounting Policies andEstimates, of $0.3 million was incurred for the three months ended June 30,2004 compared to no charge in the comparable prior year period. Amortizationrelated to restricted stock awards granted over the past three years totaled$114,600 and $89,775, respectively, for the three months ended June 30, 2004and 2003. Other G&A for the three months ended June 30, 2004, which doesnot include the deferred compensation expenses discussed above, totaled $1.7million, a 21% increase from the comparable 2003 period total of $1.4 million.  The increase in other G&A wasattributable to higher salary and benefits as well as higher professionalfees.  For the three months ended June30, 2004 and 2003, overhead reimbursement fees reduced G&A costs by $83,600and $27,500, respectively.  CapitalizedG&A costs further reduced other G&A by $532,100 and $319,000,respectively, for the three months ended June 30, 2004 and 2003.  Other G&A on a unit of production basisfor the three months ended June 30, 2004 was $0.59 per Mcfe compared to $0.82per Mcfe for the comparable 2003 period.

 

Included in other income (expense) was interest expense of $105,405 forthe three months ended June 30, 2004 compared to $165,046 in the same 2003period.  Interest expense, includingfacility fees, was $228,329 for the second quarter of 2004 on weighted averagedebt of $19.5 million compared to interest expense of $213,135 on weightedaverage debt of approximately $21.5 million for the second quarter of2003.  Capitalized interest for the threemonths ended June 30, 2004 totaled $122,924 compared to $48,089 in the sameprior year period.  We also reportedamortization of deferred loan costs of $40,748 during the second quarter of2004.  We amended our credit facilityafter the Miller merger resulting in loan costs of $422,304 that will beamortized over a three-year period ending December 31, 2006.

 

An income tax provision was recorded for the three months ended June30, 2004 and 2003 of $2.1 million and $0.8 million, respectively.  As of December 31, 2003, approximately $50.1million of net operating loss carryforwards had been accumulated or acquiredthat begin to expire in 2012.  Currently,we do not anticipate making federal tax payments in 2004.

 

For the threemonths ended June 30, 2004, we had net income of $3.9 million, or $0.30 basicearnings per share and $0.28 diluted earnings per share, as compared to netincome of $1.5 million, or $0.16 basic and diluted earnings per share in thecomparable 2003 period.  Basic weightedaverage shares outstanding increased from approximately 9.5 million for thethree months ended June 30, 2003 to 12.9 million in the comparable 2004period.  The increase in sharesoutstanding was due primarily to the issuance of stock for the acquisition ofMiller in December 2003 as well as the exercise of options, the exercise ofwarrants and the vesting and issuance of restricted stock during 2003 and thefirst half of 2004.

 

**Six Months Ended June 30, 2004 Compared to the SixMonths Ended June 30, 2003**

 

**Revenue and Production**

 

Oil and natural gasrevenue increased 113% from $14.8 million in the first half of 2003 to $31.7million in the comparable 2004 period. For the six months ended June 30, 2004, natural gas production comprised78% of total production and contributed 83% of total revenue, NGL productioncomprised 12% of total production and contributed 6% of total revenue, and oiland condensate production comprised 10% of total production and contributed 11%of total revenue.  For the first half of2003, natural gas production comprised 75% of total production and contributed79% of total revenue, NGL production comprised 15% of total production andcontributed 8% of total revenue, and oil and condensate production comprised10% of total production and contributed 13% of total revenue.

 

The following table summarizesvolume and price information with respect to our oil and gas production for thesix-month periods ended June 30, 2004 and 2003:

 

22

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| ** **                                   | ** ** | ** ** | ** ** | ** **               | ** ** | **2004 Period Compared  to 2003 Period** | ** ** |
|----------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------------------|------------|
| ** **                                   | ** ** | ** ** | ** ** | **Increase  (Decrease)** | ** ** | **%  Increase  (Decrease)**              | ** ** |
| **Six Months Ended June 30,**                | ** ** |
| **2004**                                     | ** ** | **2003**   |
| **Production Volumes:**                      |       |       |       |                     |       |                                     |       |   |   |
| Natural gas (Mcf)                            |       | 4,720,044  |       | 2,478,439                |       | 2,241,605                                |       | 90 | % |
| Natural gas liquids (Bbls)                   |       | 127,086    |       | 82,321                   |       | 44,765                                   |       | 54 | % |
| Oil and condensate (Bbls)                    |       | 99,660     |       | 54,826                   |       | 44,834                                   |       | 82 | % |
| Natural gas equivalent (Mcfe)                |       | 6,080,520  |       | 3,301,321                |       | 2,779,199                                |       | 84 | % |
| **Average Sales Price:**                     |       |       |       |                     |       |                                     |       |   |   |
| Natural gas ($ per Mcf)(1)              |       | $          | 5.54       |                     | $          | 4.75                                     |       | $ | 0.79 |   | 17 | % |
| Natural gas liquids ($ per Bbl)         |       | $          | 14.96      |                     | $          | 14.58                                    |       | $ | 0.38 |   | 3 | % |
| Oil and condensate ($ per Bbl)(1)       |       | $          | 36.07      |                     | $          | 33.72                                    |       | $ | 2.35 |   | 7 | % |
| Natural gas equivalent ($ per Mcfe) (1) |       | $          | 5.21       |                     | $          | 4.49                                     |       | $ | 0.72 |   | 16 | % |
| **Operating Revenue:**                       |       |       |       |                     |       |                                     |       |   |   |
| Natural gas (1)                              |       | $          | 26,166,411 |                     | $          | 11,784,315                               |       | $ | 14,382,096 |   | 122 | % |
| Natural gas liquids                          |       | 1,901,181  |       | 1,200,339                |       | 700,842                                  |       | 58 | % |
| Oil and condensate (1)                       |       | 3,594,469  |       | 1,848,511                |       | 1,745,958                                |       | 94 | % |
| Total (1)                                    |       | $          | 31,662,061 |                     | $          | 14,833,165                               |       | $ | 16,828,896 |   | 113 | % |

 

----

(1) Includes the effect ofhedging and derivative transactions.

 

Natural gas revenue increased 122% from $11.8 million for the sixmonths ended June 30, 2003 to $26.2 million for the same period in 2004 due tosignificantly higher production and lower realized hedge losses. Averagenatural gas production increased 90% from 13.7 MMcf/D in the six months endedJune 30, 2003 to 25.9 MMcf/D in the comparable 2004 period due to productionfrom new wells drilled and acquired, primarily our O’Connor Ranch East, GatoCreek, Encinitas and Miller properties, partially offset by natural declines atour Austin Field and O’Connor Ranch properties. This increase in production compared to the prior year period resultedin an increase in revenue of approximately $13.7 million (based on 2003comparable period pre-hedge prices).  Forthe six months ended June 30, 2004, we realized natural gas hedge losses of$222,000.  In addition, we recognized$213,800 of the premium paid for a hedge entered into in 2003.  These losses decreased the effective naturalgas sales price by $0.09 per Mcf. Included within natural gas revenue for the six months ended June 30,2003 was $3.3 million representing realized losses from hedging activity.  These losses decreased the effective naturalgas sales price by $1.35 per Mcf for the six months ended June 30, 2003.  Excluding the effect of hedges, the averagenatural gas sales price for production in the first half of 2004 was $5.63 perMcf compared to $6.10 per Mcf for the same period in 2003.  This decrease in average price receivedresulted in decreased revenue of approximately $2.2 million (based on currentyear production).

 

Revenue from the sale of NGLs totaled over $1.9 million for the sixmonths ended June 30, 2004, an increase of 58% from the 2003 first half totalof $1.2 million. Production volumes for NGLs increased 54%, from 455 Bbls/D forthe six months ended June 30, 2003 to 698 Bbls/D for the same period in 2004due primarily to increased production from new wells drilled and acquired.  The increase in NGL production increasedrevenue by $652,700 (based on 2003 comparable period average prices).  Higher average realized prices for the sixmonths ended June 30, 2004 resulted in an increase in revenue of $48,100 (basedon current year production).  The averagerealized price for NGLs for the six months ended June 30, 2004 was $14.96 perbarrel compared to $14.58 per barrel for the same period in 2003.

 

Revenue from the sale of oil and condensate totaled $3.6 million forthe six months ended June 30, 2004, an increase of 94% from the comparableprior year period total of $1.8 million due primarily to production from ourMiller properties acquired in late 2003. Production volumes for oil and condensate increased 82% to 548 Bbls/Dfor the six months ended June 30, 2004 compared to 303 Bbls/D.  The increase in oil and condensate productionresulted in an increase in revenue of approximately $1.5 million (based on 2003comparable period pre-hedge prices). Included in oil revenue for the six monthsended June 30, 2004 was $179,261, representing a mark to market

 

23

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gain on the fairvalue of an oil derivative.  We electednot to apply hedge accounting to this transaction.  See Note 7 to our Consolidated FinancialStatements.  This gain was partially offsetby $103,276 in realized losses related to our oil collars.  The net gain related to the oil collars inplace increased the average price per barrel by $0.76.  Excluding the effect of the oil collars, theaverage realized price for oil and condensate for the six months ended June 30,2004 was $35.31 per barrel compared to $33.72 per barrel in the same period of2003.  This higher average price for thefirst half of 2004 resulted in an increase in revenue of approximately $158,400(based on current year production).

 

**Costs and Operating Expenses**

** **

The tablebelow presents a detail of our expenses for the six months ended June 30, 2004and 2003:

 
| ** **                                            | ** ** | ** **                    | ** ** | ** **   | ** ** | **2004 Period Compared  to 2003 Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------|------------|--------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | ** **                    | ** ** | ** **   | ** ** | ** **                               | ** ** | **%** | ** ** |
| ** **                                            | ** ** | **Six Months Ended June 30,** | ** ** | **Increase** | ** ** | **Increase**                             | ** ** |
| ** **                                            | ** ** | **2004**                      | ** ** | **2003**     | ** ** | **(Decrease)**                           | ** ** | **(Decrease)** | ** ** |
|                                                  |       |                          |       |         |       |                                     |       |   |   |
| Lease operating expenses                              |       | $                             | 2,425,166  |         | $          | 1,145,802                                |       | $ | 1,279,364 |   | 112 | % |
| Severance and other taxes                             |       | 2,254,922                     |       | 1,041,059    |       | 1,213,863                                |       | 117 | % |
| Depreciation, depletion, amortization and  accretion: |       |                          |       |         |       |                                     |       |   |   |
| Oil and gas property and equipment                    |       | 10,152,301                    |       | 5,231,626    |       | 4,920,675                                |       | 94 | % |
| Other assets                                          |       | 179,000                       |       | 345,730      |       | (166,730                                 | )          | -48 | % |
| ARO accretion                                         |       | 52,501                        |       | 29,853       |       | 22,648                                   |       | 76 | % |
| General and administrative expenses:                  |       |                          |       |         |       |                                     |       |   |   |
| Deferred compensation – repriced options         |       | 1,448,485                     |       | —       |       | 1,448,485                                |       |   | * |
| Deferred compensation – restricted stock         |       | 211,100                       |       | 176,439      |       | 34,661                                   |       | 20 | % |
| Other general and administrative expenses             |       | 3,632,280                     |       | 2,687,018    |       | 945,262                                  |       | 35 | % |
|                                                  |       | 20,355,755                    |       | 10,657,527   |       | 9,698,228                                |       | 91 | % |
| Other expense, net                                    |       | 282,036                       |       | 336,287      |       | (54,251                                  | )          | -16 | % |
| Total                                                 |       | $                             | 20,637,791 |         | $          | 10,993,814                               |       | $ | 9,643,977 |   | 88 | % |

 

----

* Not meaningful

 

Lease operating expenses for the six months ended June 30, 2004 totaled$2.4 million compared to $1.1 million in the same period of 2003, an increaseof 112%.  Current year results wereimpacted by the drilling of 37 wells since the second quarter of 2003 as wellas increased production of 84% over 2003, the Miller merger, and acquisitionsof properties from third parties. Operating expenses averaged $0.40 per Mcfe for the six months ended June30, 2004, compared to $0.35 per Mcfe in the comparable prior year period.

 

Severance andad valorem taxes for the six months ended June 30, 2004 increased from $1.0million in the first half of 2003, to $2.3 million in same period of 2004.  Severance tax expense for the first half of2004 of $2.0 million was 131% higher than the comparable prior year period as aresult of higher revenue.  For the sixmonths ended June 30, 2004, severance tax expense was approximately 6.4% ofrevenue subject to severance taxes compared to 4.8% of revenue subject toseverance taxes for the comparable 2003 period. The increase in tax as apercent of revenue was due primarily to a shift in our revenue stream toproperties with higher severance tax rates. Ad valorem costs increased 42% from$171,639 in the first half of 2003 to $243,072 in the first half of 2004.  On an equivalent basis, severance and advalorem taxes averaged $0.37 per Mcfe and $0.32 per Mcfe for the six monthsended June 30, 2004 and 2003, respectively.

 

Depletion,depreciation, and amortization (“DD&A”) and accretion expense for the sixmonths ended June 30, 2004 totaled $10.4 million compared to $5.6 million forthe same period in 2003.  Depletion onour oil and

 

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natural gas properties totaled$10.2 million for the first half of 2004 compared to $5.2 million in the sameperiod of 2003. Depletion expense on a unit of production basis for the sixmonths ended June 30, 2004 was $1.67 per Mcfe, compared to a 2003 rate of $1.58per Mcfe for the same period.  Theincrease in depletion expense was due primarily to the higher production levelsin the first half of 2004 as compared to the same period of 2003.  Depreciation of furniture and fixtures forthe six months ended June 30, 2004 totaled $179,000, a decrease of 48% comparedto the prior year total of $345,730.  Inthe first quarter of 2003, we moved offices resulting in accelerated amortizationof leasehold costs associated with our prior office building lease.  We adopted SFAS No. 143 effective January 1,2003.  As a result, we recordedaccretion expense associated with our asset retirement obligation for the sixmonths ended June 30, 2004 and 2003 of $52,501 and $29,853, respectively.

 

Total G&Afor the six months ended June 30, 2004 was $5.3 million, an increase of 85%compared to the comparable prior year total of $2.9 million.  G&A costs include deferred compensationrelated to repriced options, deferred compensation related to restricted stockgrants and other G&A costs. A FIN44 charge, as discussed in Critical Accounting Policies and Estimates, of $1.4million was incurred for the six months ended June 30, 2004 compared to nocharge in the comparable prior year period. Amortization related torestricted stock awards granted over the past three years totaled $211,100 and$176,439, respectively, for the six months ended June 30, 2004 and 2003. OtherG&A for the six months ended June 30, 2004, which does not include thedeferred compensation expenses discussed above, totaled $3.6 million, a 35%increase from the comparable 2003 period total of $2.7 million.  The increase in other G&A was attributableto higher salary and benefits as well as higher professional fees and higherinvestor relation costs.  In addition, weincurred costs associated with the Miller acquisition of $252,000. For the sixmonths ended June 30, 2004 and 2003, overhead reimbursement fees reducedG&A costs by $130,000 and $56,200, respectively.  Capitalized G&A costs further reducedother G&A by $1.0 million and $0.6 million, respectively, for the sixmonths ended June 30, 2004 and 2003. Other G&A on a unit of production basis for the six months endedJune 30, 2004 was $0.60 per Mcfe compared to $0.81 per Mcfe for the comparable2003 period.

 

Included in other income (expense) was interest expense of $219,683 forthe six months ended June 30, 2004 compared to $341,435 in the same 2003period.  Interest expense, including facilityfees, was $431,162 for the first half of 2004 on weighted average debt of $20.2million compared to interest expense of $465,447 on weighted average debt ofapproximately $21.3 million for the first half of 2003.  Capitalized interest for the six months endedJune 30, 2004 totaled $211,479 compared to $124,012 in the same prior yearperiod.  At June 30, 2004, our unprovedproperty balance was $5.5 million compared to $5.0 million at December 31, 2003and $5.3 at June 30, 2003, resulting in the higher capitalized interest for the2004 period.  We also reported deferredloan costs of $70,384 during the first half of 2004.  We amended our credit facility after theMiller merger resulting in loan costs of $422,304 that will be amortized over athree-year period ending December 31, 2006.

 

An income tax provision was recorded for the six months ended June 30,2004 and 2003 of $3.9 million and $1.4 million, respectively.  As of December 31, 2003, approximately $50.1million of net operating loss carryforwards had been accumulated or acquiredthat begin to expire in 2012.  Currently,we do not anticipate making federal tax payments in 2004.

 

Upon adoption of SFASNo. 143 on January 1, 2003, we recorded a cumulative effect of a change inaccounting principal of $357,825 (net of income taxes of $192,675) to recognizetransition amounts for asset retirement obligations, asset retirement costs andaccumulated depletion.

 

For the sixmonths ended June 30, 2004, we had net income of $7.1 million, or $0.56 basicearnings per share and $0.53 diluted earnings per share, as compared to netincome of $2.1 million, or $0.22 basic and diluted earnings per share in thecomparable 2003 period.  Basic weightedaverage shares outstanding increased from approximately 9.5 million for the sixmonths ended June 30, 2003 to 12.8 million in the comparable 2004 period.  The increase in shares outstanding was dueprimarily to the issuance of stock for the acquisition of Miller in December2003 as well as the exercise of options, the exercise of warrants and thevesting and issuance of restricted stock during 2003 and the first half of2004.

 

25

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*Liquidity and Capital Resources*

 

In March 1997,we completed our initial public offering which provided us with proceeds ofapproximately $40 million, net of expenses and on May 6, 1999, we completed a“Private Offering” of 1,400,000 shares of common stock at a price of $5.40 pershare.  We also issued warrants, whichwere purchased for $0.125 per warrant, to acquire an additional 420,000 sharesof common stock at $5.35 per share and were exercisable through May 6,2004.    Total proceeds of the privateoffering, net of offering costs, were approximately $7.4 million of which $4.9million was used to repay debt under our revolving credit facility in place atthe time, with the remainder being utilized to satisfy working capitalrequirements and to fund a portion of our exploration program.  Pursuant to the terms of the privateplacement, we filed a registration statement with the SEC registering theresale of the shares of Common Stock and the warrants sold in the privateplacement, as well as the resale of any shares of Common Stock issued pursuantto such warrants.  During November andDecember of 2003, we issued 375,000 shares of Common Stock in connection withthe exercise of the warrants that resulted in proceeds to us of approximately$2.0 million.  As of December 31, 2003,45,000 of those warrants were outstanding. On March 2, 2004, Mr. Elias, our Chairman and Chief Executive Officer,exercised the remaining warrants which resulted in our issuance to him of45,000 shares of common stock and net proceeds to us of $240,750.

 

Our primaryongoing source of capital is the cash flow generated from our operatingactivities supplemented by borrowings under our credit facility.  Both of these sources are directly impactedby the amount of our oil and gas reserves, production volumes and the commodityprices we receive.  Reserves andproduction volumes are influenced, in part, by the amount of future capitalexpenditures.  In turn, capitalexpenditures are influenced by many factors including drilling results, oil andgas prices, industry conditions, prices, availability of goods and services andthe extent to which oil and gas properties are acquired.

 

*Capital Resources*

 

Our primary needs forcash are for exploration, development and acquisition of oil and gasproperties, and the repayment of principal and interest on outstandingdebt.  We attempt to fund our explorationand development activities primarily through internally generated cash flowsand budget capital expenditures based on projected cash flows.  We routinely adjust capital expenditures inresponse to changes in oil and natural gas prices, drilling and acquisitioncosts, and cash flow.  We typically havefunded acquisitions from borrowings under our credit facility and cash flowfrom operations.  We have historicallyutilized net cash provided by operating activities, debt and equity as capitalresources to obtain necessary funding for all of our cash needs.  Available borrowing capacity under ourfacility was $27.0 million at June 30, 2004.

 

We had cash and cashequivalents at June 30, 2004 of $3.7 million consisting primarily of short-termmoney market investments, as compared to $1.3 million at December 31,2003.  Working capital was $3.0 millionas of June 30, 2004, as compared to $0.9 million at December 31, 2003.

 

*Net Cash Provided By Operating Activities*

 

Cash flowsprovided by operating activities were $23.2 million for the six months endedJune 30, 2004 compared to $8.4 million for the six months ended June 30,2003.  The significant increase in cashflows provided by operating activities for the six months ended June 30, 2004compared to 2003 was primarily due to higher oil and gas production revenuepartially offset by higher operating expense. Although fluctuations in commodity prices have been the primary reasonfor our short-term changes in cash flow from operating activities, increasedproduction volumes significantly impacted us in the past few quarters.  In an effort to reduce the volatilityrealized on commodity prices, we enter into derivative instruments.  The impact in the first six months of 2004was not significant due to relatively stable market prices.  Oil and gas production revenue increased withan 84% increase in production and a 16% increase in the average price receivedfor our production.

 

Net cashgenerated from operating activities is a function of commodity prices, whichare inherently volatile and unpredictable, production volumes, operatingefficiency and capital spending.  Ourbusiness, as with other extractive industries, is a depleting one in which eachgas equivalent produced must be replaced or we, and a critical source of ourfuture liquidity, will shrink.   Ouroverall production decline is approximately 17% per year.

 

26

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Less predictable thanproduction declines from our proved reserves is the impact of constantlychanging oil and natural gas prices on cash flows and, therefore capitalbudgets.  We mitigate the price risk withour hedging.

 

For thesereasons, we only forecast, for internal use by management, an annual cashflow.  These annual forecasts are revisedmonthly and capital budgets are reviewed by management and adjusted aswarranted by market conditions. Longer-term cash flow and capital spending projections are neitherdeveloped nor used by management to operate our business.

 

In the eventsuch capital resources are not available to us, our drilling and otheractivities may be curtailed.

 

*Net Cash Used In Investing Activities*

 

We reinvest a substantial portion of our cashflows in our drilling, acquisition, land and geophysical activities.  As a result, we used $19.4 million ininvesting activities during the first six months of 2004.  Capital expenditures of $16.3 million wereattributable to the drilling of 20 gross wells, 18 of which were successful andone was being tested at quarter end. Leasehold acquisitions, including seismic data and other geological andgeophysical expenditures totaled $2.7 million and acquisition costs totaled$0.1 million for the six months ended June 31, 2004.  The remaining capital expenditures wereassociated with computer hardware and office equipment.  Proceeds from the sale of oil and gasproperties totaled $40,000 during the first six months of 2004.  During the six months ended June 30, 2003, weused $7.6 million in investing activities. Capital expenditures of $7.6 million for the six months ended June 30,2003, were partially offset by $55,096 in proceeds from the sale of oil and gasproperties.

 

We currentlyanticipate capital expenditures in 2004 to be approximately $40 to $45million.  Approximately $32.8 to $37.8million is allocated to our expected drilling and production activities; $4.6million is allocated to land and seismic activities; and $2.6 million relatesto capitalized interest and G&A and other. We plan to fund these expenditures from expected cash flow fromoperations plus some modest incremental borrowings.  We have not explicitly budgeted foracquisitions; however, we do expect to spend considerable effort evaluatingacquisition opportunities.  We expect tofund acquisitions through traditional reserve-based bank debt and/or theissuance of equity and, if required, through additional debt and equityfinancings.  We currently have $27.0million of unused borrowing capacity under our credit facility.

 

*Net Cash Provided By Financing Activities*

 

Cash flowsused in financing activities totaled $1.5 million for the six months ended June30, 2004. Repayments of $3.0 million under our current credit facility as wellas deferred loan costs of $0.4 million associated with amending that facilityafter the Miller merger were partially offset by $1.9 million in proceeds fromthe issuance of common stock related to options and warrants exercised in thefirst half of 2004. Cash flows provided by financing activities totaled $0.5million for the six months ended June 30, 2003, and included borrowings of $1.7million and payments of $1.2 million under our credit facility as well as$53,499 in proceeds from the issuance of common stock.

 

Due to ouractive exploration, development and acquisition activities, we have experiencedand expect to continue to experience substantial working capitalrequirements.  We intend to fund our 2004capital expenditures, commitments and working capital requirements through cashflows from operations, and to the extent necessary other financingactivities.  The projected 2004 cashflows from operations are estimated to be sufficient to fund our budgetedexploration and development program.  Webelieve we will be able to generate capital resources and liquidity sufficientto fund our capital expenditures and meet such financial obligations as theycome due.

 

*Credit Facility*

 

In March 2004,but effective December 31, 2003, the Company entered into a new amended andrestated credit facility (the “Credit Facility”) which permits borrowings up tothe lesser of (i) the borrowing base or (ii) $100 million.  Borrowings under the Credit Facility bearinterest at a rate equal to prime plus 0.50% or LIBOR plus 2.25%.  As of June 30, 2004, $18.0 million inborrowings were outstanding under the Credit Facility and our interest

 

27

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rate is 3.61%.  The Credit Facility matures December 31, 2006and is secured by substantially all of the Company’s assets.

 

Effective June2004, the borrowing base under the Credit Facility was increased to $45.0million from $40.0 million as a result of the acquisition of properties in theMiller merger and our drilling activities since the last redetermination.  Available borrowing capacity under ourfacility was $27.0 million at June 30, 2004.   We expect to redetermine our existing borrowing base in October 2004,and semiannually thereafter.

 

The CreditFacility provides for certain restrictions, including but not limited to,limitations on additional borrowings, sales of oil and natural gas propertiesor other collateral, and engaging in merger or consolidation transactions. TheCredit Facility also prohibits dividends and certain distributions of cash orproperties and certain liens.  The CreditFacility also contains the following financial covenants, among others,:

•                  The EBITDAX toInterest Expense ratio requires that (a) our consolidated EBITDAX (defined asEBITDA plus similar non-cash items and exploration and abandonment expenses forsuch period) for the four fiscal quarters then ended to (b) our consolidatedinterest expense for the four fiscal quarters then ended, to not be less than3.5 to 1.0.

•                  The WorkingCapital ratio requires that the amount of our consolidated current assets lessour consolidated current liabilities, as defined in the agreement, be at least$1.0 million.

•                  The MaximumLeverage ratio requires that the ratio, as of the last day of any fiscalquarter, of (a) Total Indebtedness (as defined in the Credit Facility) as ofsuch fiscal quarter to (b) an amount equal to consolidated EBITDAX for the twoquarters then ended times two, not be greater than 3.0 to 1.0. ConsolidatedEBITDAX is a component of negotiated covenants with our lenders and ispresented here as part of the Company’s disclosure of its covenant obligations.

 

*ShelfRegistration Statement*

 

We filed a $150 million shelfregistration statement with the SEC, which became effective in May 2004. Underthe shelf registration statement, we may issue, from time to time, anycombination of debt securities, preferred stock, common stock or warrants fordebt securities or equity securities in one or more offerings to those personswho agree to purchase our securities. At June 30, 2004, we had $150 millionremaining for issuance under the shelf registration. We have no immediate plansto issue equity securities, however we will continue to explore opportunitiesin the future to replace existing debt and otherwise access capital throughissuances of debt securities under this registration statement. Our ability toutilize the shelf registration statement will depend upon, among other things,market conditions and the existence of investors who wish to purchase oursecurities at prices acceptable to us.

 

*OffBalance Sheet Arrangements*

 

We currently do not have any off balance sheet arrangements.

 

*ContractualCash Obligations*

 

There were no material changes, outside the ordinary course of ourbusiness, in lease obligations or other contractual obligations since December31, 2003.

 

***Recently Issued******AccountingPronouncements***

 

 In March 2004, the FASB issued an exposuredraft entitled “*Share-Based Payment, anAmendment of FASB Statement No. 123 and 95*.”  This proposed statement addresses theaccounting for share-based payment transactions in which an enterprise receivesemployee services in exchange for (a) equity instruments of the enterprise or(b) liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.  The proposed statement would eliminate theability to account for share-based compensation transactions using APB OpinionNo. 25, “*Accounting for Stock Issued toEmployees*”, and generally would require instead that suchtransactions be accounted for using a fair-value-based method.  As

 

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proposed, this statement would be effective for theCompany on January 1, 2005.  We currentlyexpect the impact on results of operations to be similar to the pro formadisclosures made in Note 1 to the consolidated financial statements.

 

# **Hedging Activities**

# ** **

*GasHedges*

 

In August 2003, wepurchased natural gas options that cover 10,000 MMbtu per day for the periodJanuary 1, 2004 to December 31, 2004 at a floor of $4.50 per MMbtu and a ceilingof $7.00 per MMbtu for the first and fourth quarters of 2004 and $6.00 perMMbtu for the second and third quarters of 2004 for a cost of $686,250. At June30, 2004 the market value of this instrument was a liability of approximately$452,400.

 

In December 2003,we entered into a costless natural gas collar covering 5,000 MMbtu per day forthe period January 1, 2004 to March 31, 2004 with a floor of $4.50 per MMbtuand a ceiling of $7.05 per MMbtu.  Thenatural gas collar expired at no cost to us.

 

In February 2004,we entered into a costless natural gas collar covering 5,000 MMbtu per day forthe period April 1, 2004 to September 30, 2004 with a floor of $4.50 per MMbtuand a ceiling of $6.20 per MMbtu.  AtJune 30, 2004 the market value of this instrument was a liability ofapproximately $70,400.

 

In March 2004, weentered into a costless natural gas collar covering 5,000 MMbtu per day for theperiod October 1, 2004 to December 31, 2004 with a floor of $4.50 per MMbtu anda ceiling of $7.25 per MMbtu.  At June30, 2004 the market value of this instrument was an asset of approximately$116,800.

 

In May 2004, weentered into a costless natural gas collar covering 10,000 MMbtu per day forthe period January 1, 2005 to March 31, 2005 with a floor of $5.00 per MMbtuand a ceiling of $10.39 per MMbtu.  AtJune 30, 2004 the market value of this instrument was a liability ofapproximately $8,300 and is netted against current assets.

 

*OilDerivatives*

 

In March 2004, weentered into a costless crude oil collar covering 400 barrels per day for theperiod April 1, 2004 to December 31, 2004 with a floor of $30.00 per barrel anda ceiling of $35.50 per barrel.  At June30, 2004 the market value of this instrument was a gain of approximately$217,400 and is reflected in current assets.

 

In May 2004, weentered into a costless crude oil collar covering 200 barrels per day for theperiod January 1, 2005 to December 31, 2005 with a floor of $30.00 per barreland a ceiling of $39.15 per barrel.  AtJune 30, 2004 the market value of this instrument was a loss of approximately$38,100 and is reflected in current liabilities.

 

Hedge accountingwas not applicable to either of the oil collar transactions so the associatedgain or loss will not be deferred in Other Comprehensive Income, ratherreported as an unrealized gain or loss in oil and natural gas revenue.

 

**TaxMatters**

 

At December31, 2003, we had cumulative net operating loss carryforwards (“NOLs”) forfederal income tax purposes of approximately $50.1 million, including $17.4 millionof NOLs acquired in the Miller acquisition, that will begin to expire in2012.  We currently anticipate that allof these NOLs will be utilized in connection with federal income taxes payablein the future.  Our ability to fullyutilize the NOLs assumes that certain items, primarily intangible drillingcosts, have been written off for tax purposes in the current year.  However, we have not made a finaldetermination if an election will be made to capitalize all or part of theseitems for tax purposes in the future.

 

29

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***ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURESABOUT MARKET RISK***

 

We are exposed tomarket risk from changes in interest rates and commodity prices.  We use a credit facility, which has afloating interest rate, to finance a portion of our operations. We are notsubject to fair value risk resulting from changes in our floating interestrates.  The use of floating rate debtinstruments provides a benefit due to downward interest rate movements but doesnot limit us to exposure from future increases in interest rates.  Based on the June 30, 2004 outstandingborrowings and a floating interest rate of 3.61%, a 10% change in interestrates would result in an increase or decrease of interest expense ofapproximately $62,000 on an annual basis.

 

In the normalcourse of business we enter into hedging transactions, including commodityprice collars, swaps and floors to mitigate our exposure to commodity pricemovements, but not for trading or speculative purposes.   During 2003, due to the instability ofprices and to achieve a more predictable cash flow, we put in place two naturalgas collars for a portion of our 2004 production. During the first half of 2004,we put in place three additional natural gas collars and two crude oil collarscovering 2004 and 2005 production and in July 2004 we put in place twoadditional natural gas collars for 2005 production. Please refer to Note 7 toour consolidated financial statements. While the use of these arrangements maylimit the benefit to us of increases in the price of oil and natural gas, italso limits the downside risk of adverse price movements.    At June 30, 2004, the fair value of theoutstanding hedges was a liability of approximately $235,000. A 10% change inthe commodity price per unit, as long as the price is either above the ceilingor below the floor price would cause the fair value total of the hedge toincrease or decrease by approximately $86,200.

 

##### ***ITEM 4. CONTROLSAND PROCEDURES***

#####  

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of June 30, 2004 toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms.

 

There has been no changein our internal controls over financial reporting that occurred during thethree months ended June 30, 2004 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

30

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**PART II -OTHER INFORMATION**

 

**Item 1 -Legal Proceedings**

 

From time totime we are a party to various legal proceedings arising in the ordinary courseof business.  While the outcome oflawsuits cannot be predicted with certainty, we are not currently a party toany proceeding that we believe, if determined in a manner adverse to theCompany, could have a potential material adverse effect on our financialcondition, results of operations or cash flows.

 

During the secondquarter of 2004, the Company received notice that its franchise tax returns forthe State of Texas would be audited for the tax years 1999 through 2002. Afterreviewing documents submitted, the agent representing the Office of theComptroller of the State of Texas proposed adjustments to the calculation thatwould result in an increased franchise tax liability.  The agent maintains that transfers by theparent company to its subsidiaries that the Company classified as intercompanyloans should instead be classified as equity investments in the subsidiary. Ifthe State of Texas prevails in this assertion, the franchise tax liability ofthe subsidiaries would be increased by approximately $3.0 million for thefour-year period under audit.

 

At this time, theCompany is in preliminary discussions with the agent.  The Company believes its practice is correctand is vigorously contesting this matter. Should the Company’s negotiations with the agent prove unsuccessful, theCompany plans to file an administrative protest of these adjustments and beginthe appeals process.

 

The Companyintends to vigorously contest the proposed adjustments and has not recognizedany provision for the additional franchise tax that would result from theproposed deficiency.

 
| **Item 2 -  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity  Securities** |   | None   |
|-------------------------------------------------------------------------------------------------|--------|--------|
| **Item 3 -  Defaults Upon Senior Securities**                                                   |   | None   |
| **Item 4 -  Submission of Matters to a Vote of Security Holders**                               |   |   |

 

Our stockholders voted on thefollowing matters at the Annual Meeting of Shareholders on May 5, 2004:

 
| ** **                                                           | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker  Non Votes** | ** ** |
|----------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------|------------|-----------------------|------------|
| (A) Election of Directors:                                           |       |       |       |        |       |         |       |        |       |                  |       |
| Stanley S. Raphael                                                   |       | 11,261,698 |       | —      |       | 432,565      |       | —      |       | —                |       |
| Robert W. Shower                                                     |       | 11,312,616 |       | —      |       | 381,647      |       | —      |       | —                |       |
| David F. Work                                                        |       | 11,315,050 |       | —      |       | 379,213      |       | —      |       | —                |       |
|                                                                 |       |       |       |        |       |         |       |        |       |                  |       |
| (B) Approval of the Appointment of KPMG LLP  as Independent Auditors |       | 11,585,046 |       | 42,282      |       | —       |       | 66,935      |       | —                |       |

 

In addition tothe election of the directors indicated above, the following directorscontinued as directors following the meeting: Thurmon Andress, Vincent S.Andrews, John W. Elias, Joseph R. Musolino, and John Sfondrini.

 
| **Item 5 -  Other Information** |   | None |
|---------------------------------|--------|------|

 

**Item 6 -Exhibits and Reports on Form 8-K**

 

(A)          EXHIBITS.  The following exhibits are filed as part ofthis report:

 

31

----

 

# **INDEX TO EXHIBITS**

 
| **Exhibit No.** | ** ** |
|-----------------|------------|
|            |       |   |
| 2.1             | —     |   | Amended and  Restated Combination Agreement by and among (i) Edge Group II Limited  Partnership, (ii) Gulfedge Limited Partnership, (iii) Edge Group Partnership,  (iv) Edge Petroleum Corporation, (v) Edge Mergeco, Inc. and (vi) the  Company, dated as of January 13, 1997 (Incorporated by reference from  exhibit 2.1 to the Company’s Registration Statement on Form S-4 (Registration  No. 333-17269)). |
|            |       |   |   |
| 2.2             | —     |   | Agreement  and Plan of Merger dated as of May 28, 2003 among Edge Petroleum Corporation,  Edge Delaware Sub Inc. and Miller Exploration Company (Miller”) (Incorporated  by reference from Annex A to the Joint Proxy Statement/Prospectus contained  in the Company’s Registration Statement on Form S-4/A filed on October 31,  2003 (Registration No. 333-106484)). |
|            |       |   |   |
| 3.1             | —     |   | Restated  Certificate of Incorporation of the Company (Incorporated by reference from  exhibit 3.1 to the Company’s Registration Statement on Form S-1/A filed on  February 5, 1997 (Registration No. 333-17267)). |
|            |       |   |   |
| 3.2             | —     |   | Certificate  of Amendment to the Restated Certificate of Incorporation of the Company  (Incorporated by reference from exhibit 3.1 to the Company’s Registration  Statement on Form S-1/A filed on February 5, 1997 (Registration No.  333-17267)). |
|            |       |   |   |
| 3.3             | —     |   | Bylaws of  the Company (Incorporated by Reference from exhibit 3.3 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999). |
|            |       |   |   |
| 3.4             | —     |   | First  Amendment to Bylaws of the Company on September 28, 1999 (Incorporated by  reference from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 1999). |
|            |       |   |   |
| 3.5             | —     |   | Second  Amendment to Bylaws of the Company on May 7, 2003 (Incorporated by reference  from exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003). |
|            |       |   |   |
| 4.1             | —     |   | Third  Amended and Restated Credit Agreement dated December 31, 2003 by and between  Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge  Petroleum Operating Company, Inc., Miller Oil Corporation, and Miller  Exploration Company, as borrowers, and Union Bank of California, N.A., a  national banking association, as Agent for itself and as lender.  (Incorporated by reference from exhibit 4.1 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended March 31, 2004). |
|            |       |   |   |
| *4.2            | —     |   | Letter  Agreement dated as of June 8, 2004 by and between Edge Petroleum Corporation,  Edge Petroleum Exploration Company, Edge Petroleum Operating Company, Inc.,  Miller Oil Corporation, and Miller Exploration Company, as borrowers, and  Union Bank of California, N.A., a national banking association, as Agent for  itself and as lender. |
|            |       |   |   |
| 4.3             | —     |   | Common Stock  Subscription Agreement dated as of April 30, 1999 between the Company and the  purchasers named therein (Incorporated by reference from exhibit 4.5 to the  Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31,  1999). |
|            |       |   |   |
| 4.4             | —     |   | Warrant  Agreement dated as of May 6, 1999 between the Company and the Warrant holders  named therein (Incorporated by reference from exhibit 4.5 to the Company’s  Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1999). |

 

32

----

 
| 4.5    | — |   | Form of  Warrant for the purchase of the Common Stock (Incorporated by reference from  the Common Stock Subscription Agreement from exhibit 4.5 to the Company’s  Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1999).                                                                                                                                                                                                                                            |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6    | — |   | Registration  Rights Agreement by and among Edge, Guardian Energy Management Corp., Kelly  E. Miller and the Debra A. Miller Trust, dated December 4, 2003 (Incorporated  by reference from exhibit 4.2 of the Company’s Registration Statement on Form  S-3 filed on February 3, 2004 (Registration No. 333-112462)).                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7    | — |   | Securities  Purchase Agreement between Miller and Guardian Energy Management Corp., dated  July 11, 2000 (Incorporated by reference from exhibit 10.1 to Miller’s  Current Report on Form 8-K, filed on July 25, 2000).                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8    | — |   | Warrant  between Miller and Guardian Energy Management Corp., dated July 11, 2000,  exercisable for 900,000 shares of Miller’s common stock (as adjusted for the  one for ten reverse stock split of Miller effected October 11, 2002 and as  adjusted pursuant to the Agreement and Plan of Merger by and among the  Company, Edge Delaware Sub Inc. and Miller) (incorporated by reference from  Exhibit 4.3 to Miller’s Current Report on Form 8-K filed on July 25, 2000). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.9    | — |   | Miller  Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10   | — |   | Amendment  No. 1 to the Miller Exploration Company Stock Option and Restricted Stock  Plan of 1997 (Incorporated by reference to Exhibit 4.2 from Miller’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.11   | — |   | Amendment  No. 2 to the Miller Exploration Company Stock Option and Restricted Stock  Plan of 1997 (Incorporated by reference from Exhibit 4.3 to Miller’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.12   | — |   | Form of  Miller Stock Option Agreement (Incorporated by reference from exhibit 10.1(b)  to Miller’s Annual Report on Form 10-K for the year ended December 31, 1997  (File No. 000-23431)).                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1   | — |   | Joint  Venture Agreement between Edge Joint Venture II and Essex Royalty Limited  Partnership II, dated as of May 10, 1994 (Incorporated by reference from  exhibit 10.2 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   | — |   | Joint  Venture Agreement between Edge Joint Venture II and Essex Royalty Limited  Partnership, dated as of April 11, 1992 (Incorporated by reference from  exhibit 10.3 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   | — |   | Amendment dated  August 21, 2000 to the Joint Venture Agreement between Edge Joint Venture II  and Essex Royalty Limited Partnership II, dated as of May 10, 1994.  (Incorporated by reference from exhibit 10.3 to the Company’s Annual Report  on Form 10-K/A for the year ended December 31, 2002).                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   | — |   | Amendment  dated August 21, 2000 to the Joint Venture Agreement between Edge Joint  Venture II and Essex Royalty Limited Partnership, dated as of April 11,  1992.  (Incorporated by reference from  exhibit 10.2 to the Company’s Annual Report on Form 10-K/A for the year ended  December 31, 2002).                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   | — |   | Letter  Agreement between Edge Petroleum Corporation and Essex Royalty Limited  Partnership, dated as of July 30, 2002.   (Incorporated by reference from exhibit 10.4 to the Company’s Annual  Report on Form 10-K/A for the year ended December 31, 2002).                                                                                                                                                                                                                   |

 

33

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| 10.6   | — |   | Form of  Indemnification Agreement between the Company and each of its directors  (Incorporated by reference from exhibit 10.7 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-17269)).                                                                                                                  |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.7   | — |   | Stock Option  Plan of Edge Petroleum Corporation, a Texas corporation (Incorporated by  reference from exhibit 10.13 to the Company’s Registration Statement on Form  S-4 (Registration No. 333-17269)).                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.8   | — |   | Employment  Agreement dated as of November 16, 1998, by and between the Company and John  W. Elias. (Incorporated by reference from 10.12  to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1998).                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *10.9  | — |   | Incentive  Plan of Edge Petroleum Corporation as Amended and Restated Effective as of  June 1, 2004.                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.10  | — |   | Edge  Petroleum Corporation Incentive Plan “Standard Non-Qualified Stock Option  Agreement” by and between Edge Petroleum Corporation and the Officers named  therein. (Incorporated by reference from exhibit 10.2 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999).  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.11  | — |   | Edge  Petroleum Corporation Incentive Plan “Director Non-Qualified Stock Option  Agreement” by and between Edge Petroleum Corporation and the Directors named  therein. (Incorporated by reference from exhibit 10.3 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *10.12 | — |   | Form of  Director’s Restricted Stock Award Agreement under the Incentive Plan of Edge  Petroleum Corporation.                                                                                                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.13  | — |   | Severance  Agreements by and between Edge Petroleum Corporation and the Officers of the  Company named herein. (Incorporated by reference from exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999).                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.14  | — |   | Form of  Employee Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended March 31,  1999).                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.15  | — |   | Edge  Petroleum Corporation Amended and Restated Elias Stock Incentive Plan.  (Incorporated by reference from exhibit 4.5  to the Company’s Registration Statement on Form S-8 filed May 30, 2001  (Registration No. 333-61890)).                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.16  | — |   | Form of Edge  Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *31.1  | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *31.2  | — |   | Certification  by Michael G. Long, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *32.1  | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to 18 USC Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *32.2  | — |   | Certification  by Michael G. Long, Chief Financial Officer, pursuant to 18 USC Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                      |

 

34

----

 

----

* Filed herewith.

 

(B)   Reports on Form 8-K

 

The Company filed a Current Report on Form 8-K April 15, 2004(information furnished not filed) announcing the issuance of a press releasereporting its first quarter 2004 operating results and attaching a copy of thepress release as an exhibit.

 

The Company filed a Current Report on Form8-K on May 5, 2004 (information furnished not filed) announcing the issuance ofa press release reporting first quarter financial results and updated 2004guidance and attaching a copy of the press release as an exhibit.

 

The Company filed a Current Report on Form8-K on May 5, 2004 (information furnished not filed) announcing the issuance ofa press release reporting an increased capital spending plan for 2004 andattaching a copy of the press release as an exhibit.

 

The Company filed a Current Report on Form8-K on May 21, 2004 (information furnished not filed) announcing the issuanceof a press release announcing the filing of a Form S-3, shelf registrationstatement with the Securities and Exchange Commission and attaching a copy ofthe press release as an exhibit.

 

The Company filed a Current Report on Form 8-K on June 30, 2004announcing a change in the registrant’s certifying accountant.

 

35

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## **SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|   | EDGE  PETROLEUM CORPORATION, |
|--------|------------------------------|
|   | A DELAWARE  CORPORATION      |
|   | (REGISTRANT)                 |
|   |                         |
|   |                         |
| Date   | August 13, 2004              |   | /s/ John W. Elias |   |
|   | John W. Elias                |   |
|   | Chief Executive Officer and  |   |
|   | Chairman of the Board        |   |
|   |                         |   |
|   |                         |   |
| Date   | August 13, 2004              |   | /s/ Michael G. Long |   |
|   | Michael G. Long              |   |
|   | Senior Vice President and    |   |
|   | Chief Financial Officer      |   |

 

36

----

 

# **INDEX TO EXHIBITS**

 
| **Exhibit No.** | ** ** | ** ** |
|-----------------|------------|------------|
|            |       |       |   |
| 2.1             | —     |       | Amended and  Restated Combination Agreement by and among (i) Edge Group II Limited  Partnership, (ii) Gulfedge Limited Partnership, (iii) Edge Group Partnership,  (iv) Edge Petroleum Corporation, (v) Edge Mergeco, Inc. and (vi) the  Company, dated as of January 13, 1997 (Incorporated by reference from  exhibit 2.1 to the Company’s Registration Statement on Form S-4 (Registration  No. 333-17269)). |
|            |       |       |   |
| 2.2             | —     |       | Agreement  and Plan of Merger dated as of May 28, 2003 among Edge Petroleum Corporation,  Edge Delaware Sub Inc. and Miller Exploration Company (Miller”) (Incorporated  by reference from Annex A to the Joint Proxy Statement/Prospectus contained  in the Company’s Registration Statement on Form S-4/A filed on October 31,  2003 (Registration No. 333-106484)). |
|            |       |       |   |
| 3.1             | —     |       | Restated  Certificate of Incorporation of the Company (Incorporated by reference from  exhibit 3.1 to the Company’s Registration Statement on Form S-1/A filed on  February 5, 1997 (Registration No. 333-17267)). |
|            |       |       |   |
| 3.2             | —     |       | Certificate  of Amendment to the Restated Certificate of Incorporation of the Company  (Incorporated by reference from exhibit 3.1 to the Company’s Registration  Statement on Form S-1/A filed on February 5, 1997 (Registration No.  333-17267)). |
|            |       |       |   |
| 3.3             | —     |       | Bylaws of  the Company (Incorporated by Reference from exhibit 3.3 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999). |
|            |       |       |   |
| 3.4             | —     |       | First  Amendment to Bylaws of the Company on September 28, 1999 (Incorporated by  reference from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 1999). |
|            |       |       |   |
| 3.5             | —     |       | Second  Amendment to Bylaws of the Company on May 7, 2003 (Incorporated by reference  from exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003). |
|            |       |       |   |
| 4.1             | —     |       | Third  Amended and Restated Credit Agreement dated December 31, 2003 by and between  Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge  Petroleum Operating Company, Inc., Miller Oil Corporation, and Miller  Exploration Company, as borrowers, and Union Bank of California, N.A., a  national banking association, as Agent for itself and as lender.  (Incorporated by reference from exhibit 4.1 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended March 31, 2004). |
|            |       |       |   |
| *4.2            | —     |       | Letter  Agreement dated as of June 8, 2004 by and between Edge Petroleum Corporation,  Edge Petroleum Exploration Company, Edge Petroleum Operating Company, Inc.,  Miller Oil Corporation, and Miller Exploration Company, as borrowers, and  Union Bank of California, N.A., a national banking association, as Agent for  itself and as lender. |
|            |       |       |   |
| 4.3             | —     |       | Common Stock  Subscription Agreement dated as of April 30, 1999 between the Company and the  purchasers named therein (Incorporated by reference from exhibit 4.5 to the  Company’s Quarterly Report on Form 10-Q/A for the quarter ended March 31,  1999). |
|            |       |       |   |
| 4.4             | —     |       | Warrant  Agreement dated as of May 6, 1999 between the Company and the Warrant holders  named therein (Incorporated by reference from exhibit 4.5 to the Company’s  Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1999). |

 

37

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| 4.5    | — |   | Form of  Warrant for the purchase of the Common Stock (Incorporated by reference from  the Common Stock Subscription Agreement from exhibit 4.5 to the Company’s  Quarterly Report on Form 10-Q/A for the quarter ended March 31, 1999).                                                                                                                                                                                                                                            |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.6    | — |   | Registration  Rights Agreement by and among Edge, Guardian Energy Management Corp., Kelly  E. Miller and the Debra A. Miller Trust, dated December 4, 2003 (Incorporated  by reference from exhibit 4.2 of the Company’s Registration Statement on Form  S-3 filed on February 3, 2004 (Registration No. 333-112462)).                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.7    | — |   | Securities  Purchase Agreement between Miller and Guardian Energy Management Corp., dated  July 11, 2000 (Incorporated by reference from exhibit 10.1 to Miller’s  Current Report on Form 8-K, filed on July 25, 2000).                                                                                                                                                                                                                                                             |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.8    | — |   | Warrant  between Miller and Guardian Energy Management Corp., dated July 11, 2000,  exercisable for 900,000 shares of Miller’s common stock (as adjusted for the  one for ten reverse stock split of Miller effected October 11, 2002 and as  adjusted pursuant to the Agreement and Plan of Merger by and among the  Company, Edge Delaware Sub Inc. and Miller) (incorporated by reference from Exhibit  4.3 to Miller’s Current Report on Form 8-K filed on July 25, 2000). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.9    | — |   | Miller  Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.10   | — |   | Amendment  No. 1 to the Miller Exploration Company Stock Option and Restricted Stock  Plan of 1997 (Incorporated by reference to Exhibit 4.2 from Miller’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.11   | — |   | Amendment  No. 2 to the Miller Exploration Company Stock Option and Restricted Stock  Plan of 1997 (Incorporated by reference from Exhibit 4.3 to Miller’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 4.12   | — |   | Form of  Miller Stock Option Agreement (Incorporated by reference from exhibit 10.1(b)  to Miller’s Annual Report on Form 10-K for the year ended December 31, 1997  (File No. 000-23431)).                                                                                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.1   | — |   | Joint  Venture Agreement between Edge Joint Venture II and Essex Royalty Limited  Partnership II, dated as of May 10, 1994 (Incorporated by reference from  exhibit 10.2 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.2   | — |   | Joint  Venture Agreement between Edge Joint Venture II and Essex Royalty Limited  Partnership, dated as of April 11, 1992 (Incorporated by reference from  exhibit 10.3 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.3   | — |   | Amendment  dated August 21, 2000 to the Joint Venture Agreement between Edge Joint  Venture II and Essex Royalty Limited Partnership II, dated as of May 10,  1994. (Incorporated by reference from exhibit 10.3 to the Company’s Annual  Report on Form 10-K/A for the year ended December 31, 2002).                                                                                                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.4   | — |   | Amendment  dated August 21, 2000 to the Joint Venture Agreement between Edge Joint  Venture II and Essex Royalty Limited Partnership, dated as of April 11,  1992.  (Incorporated by reference from  exhibit 10.2 to the Company’s Annual Report on Form 10-K/A for the year ended  December 31, 2002).                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.5   | — |   | Letter  Agreement between Edge Petroleum Corporation and Essex Royalty Limited  Partnership, dated as of July 30, 2002.   (Incorporated by reference from exhibit 10.4 to the Company’s Annual  Report on Form 10-K/A for the year ended December 31, 2002).                                                                                                                                                                                                                   |

 

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| 10.6   | — |   | Form of  Indemnification Agreement between the Company and each of its directors  (Incorporated by reference from exhibit 10.7 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-17269)).                                                                                                                  |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.7   | — |   | Stock Option  Plan of Edge Petroleum Corporation, a Texas corporation (Incorporated by  reference from exhibit 10.13 to the Company’s Registration Statement on Form  S-4 (Registration No. 333-17269)).                                                                                                                            |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.8   | — |   | Employment  Agreement dated as of November 16, 1998, by and between the Company and John  W. Elias. (Incorporated by reference from 10.12  to the Company’s Annual Report on Form 10-K  for the year ended December 31, 1998).                                                                                                 |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *10.9  | — |   | Incentive  Plan of Edge Petroleum Corporation as Amended and Restated Effective as of  June 1, 2004.                                                                                                                                                                                                                                     |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.10  | — |   | Edge  Petroleum Corporation Incentive Plan “Standard Non-Qualified Stock Option  Agreement” by and between Edge Petroleum Corporation and the Officers named  therein. (Incorporated by reference from exhibit 10.2 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999).  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.11  | — |   | Edge  Petroleum Corporation Incentive Plan “Director Non-Qualified Stock Option  Agreement” by and between Edge Petroleum Corporation and the Directors named  therein. (Incorporated by reference from exhibit 10.3 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999). |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *10.12 | — |   | Form of  Director’s Restricted Stock Award Agreement under the Incentive Plan of Edge  Petroleum Corporation.                                                                                                                                                                                                                       |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.13  | — |   | Severance  Agreements by and between Edge Petroleum Corporation and the Officers of the  Company named herein. (Incorporated by reference from exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999).                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.14  | — |   | Form of  Employee Restricted Stock Award Agreement under the Incentive Plan of Edge  Petroleum Corporation (Incorporated by reference from exhibit 10.15 to the  Company’s Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999).                                                                         |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.15  | — |   | Edge  Petroleum Corporation Amended and Restated Elias Stock Incentive Plan.  (Incorporated by reference from exhibit 4.5  to the Company’s Registration Statement on Form S-8 filed May 30, 2001  (Registration No. 333-61890)).                                                                                              |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| 10.16  | — |   | Form of Edge  Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                          |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *31.1  | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *31.2  | — |   | Certification  by Michael G. Long, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                  |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *32.1  | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to 18 USC Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                        |
|   |   |   |                                                                                                                                                                                                                                                                                                                                     |
| *32.2  | — |   | Certification  by Michael G. Long, Chief Financial Officer, pursuant to 18 USC Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                      |

 

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* Filed herewith.

 

39

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