**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2006**

 

**OR**

 

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

 

**For the transition period from               to               **

 

**Commission file number 0-22149**

 

**EDGE PETROLEUM CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **76-0511037**      |
|------------------------------------------|------------|---------------------|
| (State or other  jurisdiction of         |       | (I.R.S. Employer    |
| incorporation or  organization)          |       | Identification No.) |
|                                     |       |                |
| **1301 Travis, Suite 2000**              | ** ** | ** **          |
| **Houston, Texas**                       | ** ** | **77002**           |
| (Address of principal executive offices) |       | (Zip code)          |

 

**(713) 654-8960**

(Registrant’s telephone number, including area code)

 

Indicateby checkmark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15 (d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

ý Yes o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filed, or a non-accelerated filer. See definition of “acceleratedfiler and larger accelerated filer” in Rule 12b-2 of the Exchange Act.:
| o Large accelerated filer |   | ýAccelerated filer |   | o Non-accelerated filer |
|---------------------------|--------|-------------------------|--------|-------------------------|

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  oYes ý No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**    | ** ** | **Outstanding at May 5, 2006** |
|--------------|------------|--------------------------------|
|         |       |                           |
| Common Stock |       | 17,370,076                     |

 

 

----

 

**EDGE PETROLEUM CORPORATION**

 

**Table of Contents**

 
| Part I. Financial Information |                                                                                                                               |
|-------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                          | Item 1. Financial Statements:                                                                                                      |   |
|                          | Consolidated Balance Sheets as of March 31, 2006 and December 31,  2005                                                            |   |
|                          | Consolidated Statements of Operations for the Three Months in the  Periods Ended March 31, 2006 and March 31, 2005                 |   |
|                          | Consolidated Statements of Other Comprehensive Income for the Three  Months in the Periods Ended March 31, 2006 and March 31, 2005 |   |
|                          | Consolidated Statements of Cash Flows for the Three Months in the  Periods Ended March 31, 2006 and March 31, 2005                 |   |
|                          | Consolidated Statement of Stockholders’ Equity as of March 31, 2006  and December 31, 2005                                    |   |
|                          | Notes to the Consolidated Financial Statements                                                                                     |   |
|                          | Item 2. Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                |   |
|                          | Item 3. Qualitative and Quantitative  Disclosures About Market Risk                                                                |   |
|                          | Item 4. Controls and Procedures                                                                                                    |   |
| Part II. Other Information    |                                                                                                                               |
|                          | Item 1. Legal Proceedings                                                                                                          |   |
|                          | Item 1A. Risk Factors                                                                                                              |   |
|                          | Item 2. Unregistered Sale of Equity  Securities and Use of Proceeds                                                                |   |
|                          | Item 3. Defaults Upon Senior Securities                                                                                            |   |
|                          | Item 4. Submission of Matters to a Vote of  Security Holders                                                                       |   |
|                          | Item 5. Other Information                                                                                                          |   |
|                          | Item 6. Exhibits                                                                                                                   |   |
| Signatures                    |                                                                                                                               |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 
| **EDGE  PETROLEUM CORPORATION**  |   |   |   |   |   |   |
|----------------------------------|--------|--------|--------|--------|--------|--------|
| **CONSOLIDATED  BALANCE SHEETS** |

 
| ** **                                                                                                                                                                                                                  | ** ** | **March 31,  2006**                                  | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                  | ** ** | **(Unaudited)**                                           | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                  | ** ** | **(in thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                  | * *   | * *                                                  | * *   | * *                    | * *   |
| CURRENT ASSETS:                                                                                                                                                                                                             |       |                                                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                   |       | $                                                         | 2,269      |                        | $          | 666 |   |
| Accounts receivable, trade, net of  allowance of $0.5 million at March 31, 2006 and December 31, 2005,  respectively                                                                                                        |       | 19,279                                                    |       | 24,980                      |       |
| Accounts receivable, joint interest owners,  net of allowance of $4,771 at March 31, 2006 and December 31, 2005,  respectively                                                                                              |       | 2,742                                                     |       | 2,100                       |       |
| Deferred income taxes                                                                                                                                                                                                       |       | 1,111                                                     |       | 2,518                       |       |
| Derivative financial instruments                                                                                                                                                                                            |       | 1,936                                                     |       | —                      |       |
| Other current assets                                                                                                                                                                                                        |       | 5,525                                                     |       | 6,437                       |       |
| Total current assets                                                                                                                                                                                                        |       | 32,862                                                    |       | 36,701                      |       |
| PROPERTY AND EQUIPMENT, net – full cost  method of accounting for oil and natural gas properties (including unproved  costs of $38.6 million and $36.9 million at March 31, 2006 and December 31,  2005, respectively) |       | 331,151                                                   |       | 306,456                     |       |
| OTHER ASSETS                                                                                                                                                                                                                |       | 188                                                       |       | 223                         |       |
| TOTAL ASSETS                                                                                                                                                                                                                |       | $                                                         | 364,201    |                        | $          | 343,380 |   |
|                                                                                                                                                                                                                        |       |                                                      |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                               |       |                                                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                        |       |                                                      |       |                        |       |
| Accounts payable, trade                                                                                                                                                                                                     |       | $                                                         | 4,074      |                        | $          | 5,571 |   |
| Accrued liabilities                                                                                                                                                                                                         |       | 13,780                                                    |       | 17,894                      |       |
| Accrued interest payable                                                                                                                                                                                                    |       | 906                                                       |       | 17                          |       |
| Asset retirement obligation – current  portion                                                                                                                                                                         |       | 195                                                       |       | 203                         |       |
| Derivative financial instruments                                                                                                                                                                                            |       | —                                                    |       | 2,479                       |       |
| Total current liabilities                                                                                                                                                                                                   |       | 18,955                                                    |       | 26,164                      |       |
| ASSET RETIREMENT OBLIGATION – long-term  portion                                                                                                                                                                       |       | 2,725                                                     |       | 2,564                       |       |
| DEFERRED TAX LIABILITY                                                                                                                                                                                                      |       | 41,022                                                    |       | 37,897                      |       |
| LONG-TERM DEBT                                                                                                                                                                                                              |       | 100,000                                                   |       | 85,000                      |       |
| Total liabilities                                                                                                                                                                                                           |       | 162,702                                                   |       | 151,625                     |       |
| COMMITMENTS AND CONTINGENCIES (NOTE 10)                                                                                                                                                                                     |       |                                                      |       |                        |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                   |       |                                                      |       |                        |       |
| Preferred stock, $0.01 par value; 5,000,000  shares authorized; none issued and outstanding                                                                                                                                 |       | —                                                    |       | —                      |       |
| Common stock, $0.01 par value; 60,000,000  shares authorized; 17,357,039 and 17,216,776 shares issued and outstanding at  March 31, 2006 and December 31, 2005, respectively                                                |       | 174                                                       |       | 172                         |       |
| Additional paid-in capital                                                                                                                                                                                                  |       | 138,979                                                   |       | 137,842                     |       |
| Retained earnings                                                                                                                                                                                                           |       | 62,346                                                    |       | 55,454                      |       |
| Accumulated other comprehensive loss                                                                                                                                                                                        |       | —                                                    |       | (1,713                      | )          |
| Total stockholders’ equity                                                                                                                                                                                             |       | 201,499                                                   |       | 191,755                     |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                             |       | $                                                         | 364,201    |                        | $          | 343,380 |   |

 
| See accompanying notes to consolidated financial statements. |
|--------------------------------------------------------------|

 

3

----

 
| **EDGE PETROLEUM CORPORATION**                         |
|--------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF  OPERATIONS (Unaudited)** |

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                                          | ** ** | **2005** | ** ** |
| ** **                                                    | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| OIL AND NATURAL GAS REVENUE:                                  |       |                                                              |       |   |   |
| Oil and natural gas sales                                     |       | $                                                                 | 32,895     |   | $ | 23,929 |   |
| Gain (loss) on hedging and derivatives                        |       | 2,099                                                             |       | (985 | ) |
| Total revenue                                                 |       | 34,994                                                            |       | 22,944 |   |
| OPERATING EXPENSES:                                           |       |                                                              |       |   |   |
| Oil and natural gas operating expenses                        |       | 2,189                                                             |       | 2,242 |   |
| Severance and ad valorem taxes                                |       | 2,589                                                             |       | 1,866 |   |
| Depletion, depreciation, amortization and  accretion          |       | 15,793                                                            |       | 8,636 |   |
| General and administrative expenses:                          |       |                                                              |       |   |   |
| Deferred compensation – repriced options                 |       | 29                                                                |       | 262 |   |
| Deferred compensation – restricted stock                 |       | 336                                                               |       | 144 |   |
| Deferred compensation – stock option  expense            |       | 42                                                                |       | — |   |
| Bad debt expense                                              |       | —                                                            |       | 11 |   |
| Other general and administrative expenses                     |       | 2,717                                                             |       | 2,479 |   |
| Total operating expenses                                      |       | 23,695                                                            |       | 15,640 |   |
| OPERATING INCOME                                              |       | 11,299                                                            |       | 7,304 |   |
| OTHER INCOME AND EXPENSE:                                     |       |                                                              |       |   |   |
| Interest income                                               |       | 38                                                                |       | 32 |   |
| Interest expense, net of amounts  capitalized                 |       | (668                                                              | )          | — |   |
| Amortization of deferred loan costs                           |       | (42                                                               | )          | (35 | ) |
| INCOME BEFORE INCOME TAXES                                    |       | 10,627                                                            |       | 7,301 |   |
| INCOME TAX EXPENSE                                            |       | (3,735                                                            | )          | (2,577 | ) |
| NET INCOME                                                    |       | $                                                                 | 6,892      |   | $ | 4,724 |   |
|                                                          |       |                                                              |       |   |   |
| BASIC EARNINGS PER SHARE                                      |       | $                                                                 | 0.40       |   | $ | 0.28 |   |
| DILUTED EARNINGS PER SHARE                                    |       | $                                                                 | 0.38       |   | $ | 0.27 |   |
|                                                          |       |                                                              |       |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING   |       | 17,239                                                            |       | 17,042 |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING |       | 17,976                                                            |       | 17,692 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

4

----

 
| **EDGE PETROLEUM CORPORATION**                                         |
|------------------------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF OTHER  COMPREHENSIVE INCOME (Unaudited)** |

 
| ** **                                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                   | ** ** | **(in  thousands)**                                  | ** ** |
| NET INCOME                                                   |       | $                                                    | 6,892      |   | $ | 4,724 |   |
| OTHER COMPREHENSIVE INCOME, net of tax:                      |       |                                                 |       |   |   |
| Change in fair value of outstanding hedging  instruments (1) |       | —                                               |       | (1,660 | ) |
| Reclassification of hedging losses (2)                       |       | —                                               |       | (338 | ) |
| Other comprehensive loss                                     |       | —                                               |       | (1,998 | ) |
| COMPREHENSIVE INCOME                                         |       | $                                                    | 6,892      |   | $ | 2,726 |   |
|                                                         |       |                                                 |       |   |   |
|                                                              |
| (1) net of income taxes                                      |       | $                                                    | —     |   | $ | 894 |   |
| (2) net of income taxes                                      |       | $                                                    | —     |   | $ | 182 |   |

 

See accompanying notes to the consolidatedfinancial statements**.**

 

5

----

 
| **EDGE PETROLEUM CORPORATION**                         |
|--------------------------------------------------------|
| **CONSOLIDATED STATEMENTS OF CASH  FLOWS (Unaudited)** |

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                              | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                    | 6,892      |   | $ | 4,724 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Unrealized loss (gain) on the fair value of  derivatives                           |       | (1,780                                               | )          | 883 |   |
| Deferred income taxes                                                              |       | 3,735                                                |       | 2,577 |   |
| Depletion, depreciation, amortization and  accretion                               |       | 15,793                                               |       | 8,636 |   |
| Amortization of deferred loan costs                                                |       | 42                                                   |       | 35 |   |
| Deferred compensation                                                              |       | 407                                                  |       | 406 |   |
| Bad debt expense                                                                   |       | —                                               |       | 11 |   |
| Changes in assets and liabilities:                                                 |       |                                                 |       |   |   |
| Decrease (increase) in accounts receivable,  trade                                 |       | 5,702                                                |       | (382 | ) |
| Decrease (increase) in accounts receivable,  joint interest owners                 |       | (642                                                 | )          | 3,666 |   |
| Increase in other assets                                                           |       | (440                                                 | )          | (1,091 | ) |
| Decrease in accounts payable, trade                                                |       | (1,497                                               | )          | (826 | ) |
| Decrease in accrued liabilities                                                    |       | (4,035                                               | )          | (670 | ) |
| Increase in accrued interest payable                                               |       | 889                                                  |       | — |   |
| Net cash provided by operating activities                                          |       | 25,066                                               |       | 17,969 |   |
|                                                                               |       |                                                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                          |       |                                                 |       |   |   |
| Oil and natural gas property and equipment  additions                              |       | (40,394                                              | )          | (12,810 | ) |
| Decrease in drilling advances                                                      |       | 1,309                                                |       | — |   |
| Proceeds from the sale of oil and natural  gas properties                          |       | 60                                                   |       | — |   |
| Net cash used in investing activities                                              |       | (39,025                                              | )          | (12,810 | ) |
|                                                                               |       |                                                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                          |       |                                                 |       |   |   |
| Net borrowings (repayments) of long-term  debt                                     |       | 15,000                                               |       | (10,000 | ) |
| Net proceeds from issuance of common stock                                         |       | 569                                                  |       | 7,211 |   |
| Deferred loan costs                                                                |       | (7                                                   | )          | — |   |
| Net cash provided by (used in) financing  activities                               |       | 15,562                                               |       | (2,789 | ) |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                      |       | 1,603                                                |       | 2,370 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                |       | 666                                                  |       | 2,267 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                       |       | $                                                    | 2,269      |   | $ | 4,637 |   |

 
| See accompanying notes  to consolidated financial statements. |
|---------------------------------------------------------------|

 

6

----

 
| **EDGE PETROLEUM CORPORATION**                                       |
|----------------------------------------------------------------------|
| **CONSOLIDATED STATEMENT OF  STOCKHOLDERS’ EQUITY (Unaudited)** |

 
| ** **                                                           | ** ** | **Common Stock**   | ** ** | **Additional** | ** ** | **Retained**             | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|----------------|------------|--------------------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                                           | ** ** | **Shares**              | ** ** | **Amount**     | ** ** | **Paid-in Capital** | ** ** | **Earnings**                          | ** ** | **Income (Loss)**        | ** ** | **Equity** | ** ** |
| ** **                                                           | ** ** | **(in thousands)** | ** ** |
| BALANCE, DECEMBER 31, 2005                                           |       | 17,217                  |       | $              | 172        |                     | $          | 137,842                               |       | $                             | 55,454     |   | $ | (1,713 | ) | $ | 191,755 |   |
| Issuance of common stock                                             |       | 140                     |       | 2              |       | 604                      |       | —                                |       | —                        |       | 606 |   |
| Deferred compensation – restricted stock                        |       | —                  |       | —         |       | 336                      |       | —                                |       | —                        |       | 336 |   |
| Deferred compensation - repriced options                             |       | —                  |       | —         |       | 29                       |       | —                                |       | —                        |       | 29 |   |
| Deferred compensation - stock option  expense                        |       | —                  |       | —         |       | 42                       |       | —                                |       | —                        |       | 42 |   |
| Change in valuation of hedging instruments                           |       | —                  |       | —         |       | —                   |       | —                                |       | 1,713                         |       | 1,713 |   |
| Tax benefit associated with exercise of  non-qualified stock options |       | —                  |       | —         |       | 126                      |       | —                                |       | —                        |       | 126 |   |
| Net income                                                           |       | —                  |       | —         |       | —                   |       | 6,892                                 |       | —                        |       | 6,892 |   |
|                                                                 |       |                    |       |           |       |                     |       |                                  |       |                          |       |   |   |
| BALANCE, MARCH 31, 2006                                              |       | 17,357                  |       | $              | 174        |                     | $          | 138,979                               |       | $                             | 62,346     |   | $ | — |   | $ | 201,499 |   |

 

See accompanying notes to consolidated financialstatements.

 

7

----

 

**EDGEPETROLEUM CORPORATION**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

The financial statements included herein have been prepared by EdgePetroleum Corporation, a Delaware corporation (“we”, “our”, “us” or the “Company”),without audit pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), and reflect all adjustments which are, in theopinion of management, necessary to present a fair statement of the results forthe interim periods on a basis consistent with the annual audited consolidatedfinancial statements.  All suchadjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarilyindicative of the results to be expected for an entire year.  Certain information, accounting policies andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations, althoughwe believe that the disclosures are adequate to make the information presentednot misleading. These financial statements should be read in conjunction withour audited consolidated financial statements included in our Annual Report onForm 10-K for the year ended December 31, 2005.

 

***Oil and Natural GasProperties*****-**    Investments in oil and naturalgas properties are accounted for using the full-cost method of accounting. Theaccounting for our business is subject to special accounting rules that areunique to the oil and gas industry. There are two allowable methods of accounting for oil and gas businessactivities:  the successful-effortsmethod and the full-cost method.  Thereare several significant differences between these methods. Among thesedifferences is that, under the successful-efforts method, costs such asgeological and geophysical (“G&G”), exploratory dry holes and delay rentalsare expensed as incurred whereas under the full-cost method these types ofcharges are capitalized to their respective full-cost pool.  In the measurement of impairment of oil andgas properties, the successful-efforts method of accounting follows theguidance provided in Statement of Financial Accounting Standards (“SFAS”) No.144, *Accounting for the Impairment orDisposal of Long-Lived Assets*, where the first measurement forimpairment is to compare the net book value of the related asset to itsundiscounted future cash flows using commodity prices consistent withmanagement expectations.  The full-cost methodfollows guidance provided in SEC Regulation S-X Rule 4-10, where 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.

 

In accordance with the full-cost method of accounting,all costs associated with the exploration, development and acquisition of oiland natural gas properties, including salaries, benefits and other internalcosts directly attributable to these activities are capitalized within a costcenter.  The Company’s oil and naturalgas properties are located within the United States of America and constituteone cost center. The Company also capitalizes a portion of interest expense onborrowed funds.  Employee related costs thatare directly attributable to exploration and development activities are alsocapitalized.  These costs are consideredto be direct costs based on the nature of their function as it relates to theexploration and development activities.

 

Oil and natural gas properties are amortized based ona unit-of-production method using estimates of proved reserve quantities. Oiland natural gas liquids (“NGL”s) are converted to gas equivalent basis (“Mcfe”)at the rate of one barrel equals six Mcf. Investments in unproved propertiesare not amortized until proved reserves associated with the prospects can bedetermined or until impairment occurs. Oil and natural gas properties include costs of $38.6 million and $36.9million at March 31, 2006 and December 31, 2005, respectively, related tounproved property, which were excluded from capitalized costs being amortized.Unproved properties are evaluated quarterly, and as needed, for impairment on aproperty-by-property basis.  If theresults of an assessment indicate that an unproved property is impaired, theamount of impairment is added to the proved oil and natural gas property coststo be amortized.  In accordance with SECStaff Accounting Bulletin (“SAB”) No. 106, *Interactionof Statement 143 and the Full Cost Rules,*the amortizable baseincludes estimated future development and dismantlement costs, and restorationand abandonment costs, net of estimated salvage values.

 

8

----

 

In addition, the capitalized costs of oil and naturalgas properties are subject to a “ceiling test,” whereby to the extent that suchcapitalized costs subject to amortization in the full-cost pool (net ofaccumulated depletion, depreciation and amortization, and related deferredtaxes) exceed the present value (using a 10% discount rate) of estimated futurenet after-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.  In accordance with SABNo.103, *Update of Codification of StaffAccounting Bulletins*, derivative instruments qualifying as cash flowhedges are to be included in the computation of limitation on capitalizedcosts.  As of March 31, 2006, the Companywas not applying cash flow hedge accounting to any derivative contracts (seeNote 7), therefore the ceiling test was not impacted.  Impairment of oil and natural gas propertiesis assessed on a quarterly basis in conjunction with the Company’s quarterlyand annual SEC filings.  No ceiling testimpairment was required during the three-month periods ended March 31, 2006 or2005.

 

Sales of proved and unproved properties are accountedfor as adjustments of capitalized costs with no gain or loss recognized, unlesssuch adjustments would significantly alter the relationship between capitalizedcosts and proved reserves.

 

***Inventories –***Inventoriesconsist principally of tubular goods and production equipment for wells andfacilities. They are stated at the lower of weighted-average cost or market.

 

***Asset Retirement Obligations –***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 SFAS No. 143, *Accountingfor Asset Retirement Obligations.* The Company adopted this policyeffective January 1, 2003, using a cumulative effect approach to recognizetransition amounts 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. The changes to the Asset RetirementObligations (“ARO”) for oil and natural gas properties and related equipmentduring the periods ended March 31, 2006 and 2005 are as follows:

 
| ** **                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | **(in thousands)**                              | ** ** |
| ARO, Beginning of Period                   |       | $                                                    | 2,767      |   | $ | 2,189 |   |
| Liabilities incurred in the current period |       | 148                                                  |       | 62 |   |
| Liabilities settled in the current period  |       | (39                                                  | )          | (50 | ) |
| Accretion expense                          |       | 44                                                   |       | 33 |   |
| Revisions                                  |       | —                                               |       | — |   |
| ARO, End of Period                         |       | $                                                    | 2,920      |   | $ | 2,234 |   |
|                                       |       |                                                 |       |   |   |
| Current Portion                            |       | $                                                    | 195        |   | $ | 196 |   |
| Long Term Portion                          |       | $                                                    | 2,725      |   | $ | 2,038 |   |

 

During the three months ended March 31, 2006, ARO liabilities incurredinclude 14 new well obligations and liabilities settled include four wells thatwere plugged.

 

***Stock-Based Compensation***– OnJanuary 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based Payment.* This statementrequires companies to measure the cost of employee services in exchange for anaward of equity instruments based on a grant-date fair value of the award (withlimited exceptions), and that cost must generally be recognized over thevesting period for the award. Prior to the adoption of SFAS No. 123(R), thisaccounting treatment was optional with pro forma disclosures required. SFAS No.123(R) amends the original SFAS No. 123 and SFAS No. 95 that had allowedcompanies to choose between expensing stock options or showing pro forma

 

9

----

 

disclosure only. This statementalso eliminated the ability to account for share-based compensationtransactions using Accounting Principles Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,which allowed companies to exclude stock option compensation cost from netincome when all options granted had an exercise price equal to the market valueof the underlying common stock on the date of grant. The Company adopted SFASNo. 123(R) using the modified prospective method for transition and the impactis reflected in “Deferred compensation – stock option expense” in the Company’sresults of operations. Under this method the Company recognizes compensationexpense for all stock-based awards granted or modified on or after July 1,2005, as well as any previously granted awards that are not fully vested as ofJuly 1, 2005. Compensation expense will be measured based on the fairvalue of the awards previously calculated in developing the pro formadisclosures in accordance with the provisions of SFAS No. 123, *Accounting for Stock-Based Compensation*.The Company expects the future impact on previously granted options to beimmaterial due to the fact that it has not issued stock options since April2004. SFAS No. 123(R) also requires the benefits of tax deductions in excess ofrecognized compensation cost be reflected as a financing cash flow, rather thanas an operating cash flow as currently required.

 

The Companypreviously accounted for stock compensation plans under the intrinsic valuemethod of APB Opinion No. 25, in which no compensation expense was recognizedfor stock options that had an exercise price equal to or greater than themarket value of the underlying common stock on the date of grant. Had the Companyapplied the provisions of SFAS No. 123(R) on January 1, 2005, the Company’s proforma net income and earnings per share would have been as follows:

 
| ** **                                                                                                   | ** ** | **Three Months Ended**                                  | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                                                   | ** ** | **March 31, 2005**                                      | ** ** |
| ** **                                                                                                   | ** ** | **(in thousands, except  per share amounts)** | ** ** |
| Net income as reported                                                                                       |       | $                                                                 | 4,724      |   |
| Deduct:                                                                                                      |       |                                                              |       |
| Stock based employee compensation expense  included in reported net income, net of related income tax        |       | 263                                                               |       |
| Add:                                                                                                         |       |                                                              |       |
| Total stock based employee compensation  expense determined under SFAS No. 123(R), net of related income tax |       | (125                                                              | )          |
| Pro forma net income                                                                                         |       | $                                                                 | 4,862      |   |
|                                                                                                         |       |                                                              |       |
| Earnings Per Share:                                                                                          |       |                                                              |       |
| Basic – as reported                                                                                     |       | $                                                                 | 0.28       |   |
| Basic – pro forma                                                                                       |       | $                                                                 | 0.29       |   |
|                                                                                                         |       |                                                              |       |
| Diluted – as reported                                                                                   |       | $                                                                 | 0.27       |   |
| Diluted – pro forma                                                                                     |       | $                                                                 | 0.27       |   |

 

The Company is also subject to reporting requirements of FinancialAccounting Standards Board (“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 $29,270 and $261,904 was required for the threemonths ended March 31, 2006 and 2005, respectively.

 

***AccountingPronouncements***– In December 2004, the FASBissued SFAS No. 153, *Exchanges of NonmonetaryAssets, an amendment of APB Opinion No. 29*. SFAS No. 153 isbased on the principle that exchanges of nonmonetary assets should be measuredbased on the fair value of the assets exchanged. APB Opinion No. 29, *Accounting for Nonmonetary Transactions*, provided anexception to its basic measurement principle (fair value) for exchanges ofsimilar productive assets. Under APB Opinion No. 29, an exchange of aproductive asset for a similar productive asset was based on the recordedamount of the asset relinquished. SFAS No. 153 eliminates the exception

 

10

----

 

for nonmonetary exchanges ofsimilar productive assets and replaces it with a general exception forexchanges of nonmonetary assets that do not have commercial substance.Nonmonetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange. SFASNo. 153 is effective for fiscal periods beginning after June 15, 2005. Theadoption of SFAS No. 153 is not expected to have a material effect on the Company’sconsolidated financial position, results of operations or cash flows.

 

In March 2005, the FASB issued FIN 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143*.  FIN 47 clarifies that the term, “conditionalasset retirement obligation” as used in SFAS No. 143, *Accounting for Asset Retirement Obligations*,refers to a legal obligation to perform an asset retirement activity in whichthe timing and/or method of settlement are conditional upon a future event thatmay or may not be within the control of the entity.  Even thoughuncertainty about the timing and/or method of settlement exists and may beconditional upon a future event, the obligation to perform the asset retirementactivity is unconditional.  Accordingly, an entity is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonablyestimated.  Uncertainty about the timing and/or method of settlement of aconditional asset retirement obligation should be factored into the measurementof the liability when sufficient information exists.  The fair value of aliability for the conditional asset retirement obligation should be recognizedwhen incurred generally upon acquisition, construction, or development orthrough the normal operation of the asset.  SFAS No. 143 acknowledges thatin some cases, sufficient information may not be available to reasonablyestimate the fair value of an asset retirement obligation.  FIN 47 alsoclarifies when an entity would have sufficient information to reasonablyestimate the fair value of an asset retirement obligation.  FIN 47 iseffective for fiscal years ending after December 15, 2005.  Retrospectiveapplication for interim financial information is permitted but is notrequired.  The adoption of FIN 47 is not expected to have a materialeffect on the Company’s consolidated financial position, results of operationsor cash flows.

 

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*, *a replacement of Accounting Principles Board (“APB”) OpinionNo. 20 and FASB Statement No. 3,*which changes therequirements for the accounting for and reporting of a change in accountingprinciple. It also applies to changes required by an accounting pronouncementin the unusual instance that the pronouncement does not include specifictransition provisions. Application is effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15, 2005.The adoption of SFAS No. 154 is not expected to have a material effect on theCompany’s consolidated financial position, results of operations or cash flows.

 

InFebruary 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments,*which improves financialreporting by eliminating the exemption from applying SFAS No. 133 to interestsin securitized financial assets so that similar instruments are accounted forsimilarly regardless of the form of the instruments and allows a preparer toelect fair value measurement at acquisition, at issuance, or when a previouslyrecognized financial instrument is subject to a remeasurement (new basis)event, on an instrument-by-instrument basis, in cases in which a derivative wouldotherwise have to be bifurcated. Providing a fair value measurement electionalso results in more financial instruments being measured at what the FASBregards as the most relevant attribute for financial instruments, fair value.SFAS No. 155 is effective for all financial instruments acquired or issuedafter the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. The Company is currently evaluating the impact of thisstandard on its financial position, results of operations and cash flows.

 

In March 2006, the FASB issued SFAS No. 156, *Accountingfor Servicing of Financial Assets*, which requires all separatelyrecognized servicing assets and servicing liabilities be initially measured atfair value. SFAS No. 156 permits, but does not require, the subsequentmeasurement of servicing assets and servicing liabilities at fair value.Adoption is required as of the beginning of the first fiscal year that beginsafter September 15, 2006. Early adoption is permitted. The adoption of SFASNo. 156 is not expected to have a material effect on our consolidated financialposition, results of operations or cash flows.

 

***Reclassifications***-Certain reclassifications of prior period statements have been made to conformto current reporting practices.

 

11

----

 

**2.     LONG TERM DEBT**

 

On November 30, 2005, the Company amended its Third Amended andRestated Credit Agreement (the “Credit Facility”), which it had originallyentered into in March 2004 (effective December 31, 2003) and previously amendedon May 31, 2005.  The Credit Facilitypermits borrowings up to the lesser of (i) the borrowing base and (ii) $150.0million.  Effective November 30, 2005,the Credit Facility’s borrowing base was increased from $70.0 million to $110.0million. The borrowing base under the Credit Facility was increased as a resultof the Chapman Ranch Field acquisitions and the Company’s drilling activitiessince the last redetermination. The Company’s available borrowing capacity underthis facility was $10.0 million at March 31, 2006. The borrowing base iscurrently being redetermined by the lender and the Company expects to benotified of any changes by the end of May 2006.

 

The Credit Facility matures December 31, 2007 and is secured bysubstantially all of the Company’s assets. Borrowings under the Credit Facilitybear interest at rates that are variable based on the percentage usage of thefacility. Borrowings can be at prime plus a margin of 0% to 0.25% or at Liborplus a margin of 1.75% to 2.125% . Outstanding availability will bear interestrates of 0.25% to 0.50% based on utilization levels. At March 31, 2006 theinterest rates applied to the Company’s outstanding prime and Libor borrowingswere 8.0% and 6.795%. As of March 31, 2006, $100.0 million in total borrowingswere outstanding under the Credit Facility.

 

The Credit Facility provides for certain restrictions, including butnot limited to, limitations on additional borrowings, sales of oil and naturalgas properties or other collateral, and engaging in merger or consolidationtransactions. The Credit Facility also prohibits dividends and certaindistributions of cash or properties and certain liens.  The Credit Facility also contains thefollowing financial covenants, among others:

 

•                  The EBITDAX toInterest Expense ratio requires that the ratio of (a) consolidated EBITDAX(defined as EBITDA plus similar non-cash items and exploration and abandonmentexpenses for such period) of the Company for the four fiscal quarters thenended to (b) the consolidated interest expense of the Company for the fourfiscal quarters then ended, 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 CreditFacility Agreement, be at least $1.0 million. For the purposes of calculatingthe Working Capital ratio, the total of current assets is adjusted for unusedcapacity under the Credit Facility Agreement, and derivative financialinstruments and the total of current liabilities is adjusted for the currentportion of indebtedness under the Credit Facility Agreement, derivativefinancial instruments and asset retirement obligations.

 

•                  The MaximumLeverage ratio requires that the ratio, as of the last day of any fiscalquarter, of (a) Total Indebtedness (as defined in the Credit FacilityAgreement) as of such fiscal quarter to (b) an amount equal to consolidatedEBITDAX for the two quarters then ended times two, not be greater than 3.0 to1.0.

 

Consolidated EBITDAX is a component of negotiated covenants with ourlender and is presented here as part of the Company’s disclosure of itscovenant obligations.

 

**3.     SHELF REGISTRATION STATEMENT**

 

During the second quarter 2005, the Company filed aregistration statement with the SEC which registered offerings up to $390million of any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities of the Company. Net proceeds,terms and pricing of the offering of securities issued under the shelfregistration statement will be determined at the time of the offerings. Theshelf registration statement does not provide assurance that the Company willor could sell any such securities. The Company’s ability to utilize the shelfregistration statement for the purpose of issuing, from time to time, anycombination of debt securities, preferred stock, common stock or warrants willdepend upon, among other things, market conditions and the existence ofinvestors who wish to purchase the Company’s securities at prices acceptable tothe Company. At March 31, 2006, the Company had $390 million available forissuance under its 2005 shelf registration statement.

 

12

----

 

**4.     EARNINGS PER SHARE**

 

The Company accounts for earnings per share in accordance with SFAS No.128, *Earnings per Share*, whichestablishes the requirements 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 theperiods, using the treasury stock method.

 

The following is a reconciliation of the numerators and denominators ofbasic and diluted earnings per common share computations, in accordance withSFAS No. 128, for the three-month periods ended March 31, 2006 and 2005:

 
| ** **                              | ** ** | **Three Months Ended March 31, 2006**        | ** ** | **Three Months Ended March 31, 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                              | ** ** | **Income  (Numerator)**                                               | ** ** | **Shares  (Denominator)**                                      | ** ** | **Per Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                              | ** ** | **(in thousands, except per share amounts)** | ** ** |
| **Basic EPS**                           |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                                                     | 6,892      |                                                           | 17,239     |   | $ | 0.40 |   | $ | 4,724 |   | 17,042 |   | $ | 0.28 |   |
| Effect of dilutive securities:          |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Restricted stock                        |       | —                                                                |       | 221                                                            |       | (0.01 | ) | — |   | 150 |   | — |   |
| Common stock options                    |       | —                                                                |       | 516                                                            |       | (0.01 | ) | — |   | 500 |   | (0.01 | ) |
| **Diluted EPS**                         |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Income available to common stockholders |       | $                                                                     | 6,892      |                                                           | 17,976     |   | $ | 0.38 |   | $ | 4,724 |   | 17,692 |   | $ | 0.27 |   |

 

**5.     INCOME TAXES**

 

The Company accounts for income taxes under theprovisions of SFAS No. 109, *Accounting forIncome Taxes*, which provides for an asset and liability approach inaccounting for income taxes.  Under thisapproach, deferred tax assets and liabilities are recognized based onanticipated future tax consequences, using currently enacted tax laws,attributable to temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amounts calculated forincome tax purposes.

 

The Company currently estimates that its effective taxrate for the year ending December 31, 2006 will be approximately 35.15%.  A provision for income taxes of $3.7 millionand $2.6 million was reported for the three months ended March 31, 2006 and2005, respectively. The Company was not required to pay federal income taxes in2005 because of the generation of net operating losses from drilling activity,but was required to pay federal alternative minimum taxes in 2005 and isexpected to also pay federal alternative minimum taxes in 2006.

 

13

----

 

**6.     SUPPLEMENTAL DISCLOSURE OF CASH FLOWINFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES**

 

The Company considers all highly liquid debt instruments purchased withan original maturity of three months or less to be cash equivalents. A summaryof non-cash investing and financing activities for the three months ended March31, 2006 and 2005 is presented below:

 
| **Description**                                                                                      | ** ** | **Number of  Shares  Issued** | ** ** | **Fair Market  Value** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                           | ** ** | **(in thousands)**            | ** ** |
| **Three months ended March 31, 2006:**                                                               |       |                               |       |                        |       |
| Shares issued to satisfy restricted stock  grants                                                    |       | 55                                 |       | $                           | 660        |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401(k) plan |       | 1                                  |       | $                           | 36         |   |
| **Three months ended March 31, 2005:**                                                               |       |                               |       |                        |       |
| Shares issued to satisfy restricted stock  grants                                                    |       | 37                                 |       | $                           | 324        |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401(k) plan |       | 2                                  |       | $                           | 27         |   |

 

For the three monthsended March 31, 2006 and 2005, the non-cash portion of Asset Retirement Costswas $110,311 and $11,699, respectively. A supplemental disclosure of cash flow information for the three monthsended March 31, 2006 and 2005 is presented below:

 
| ** **                               | ** ** | **For the Three Months Ended  March 31,** | ** ** |
|------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                               | ** ** | **2006**                                                           | ** ** | **2005** | ** ** |
| ** **                               | ** ** | **(in thousands)**                                            | ** ** |
| Cash paid during the period for:         |       |                                                               |       |   |   |
| Interest,                                |       | $                                                                  | 702        |   | $ | 224 |   |
| Federal alternative minimum tax payments |       | 43                                                                 |       | — |   |
|                                          |            |                                                                    |            |  |  |  |  |

 

**7.     HEDGING AND DERIVATIVE ACTIVITIES**

 

Due to the volatility of oil and natural gas prices, the Companyperiodically enters into price-risk management transactions (e.g., swaps,collars and floors) for a portion of its oil and natural gas production toachieve a more predictable cash flow, as well as to reduce exposure from pricefluctuations.  While the use of thesearrangements limits the Company’s ability to benefit from increases in theprice of oil and natural gas, it also reduces the Company’s potential exposureto adverse price movements.  The Company’sarrangements, to the extent it enters into any, apply to only a portion of itsproduction, provide only partial price protection against declines in oil andnatural gas prices and limit the Company’s potential gains from futureincreases in prices.  None of theseinstruments are used for trading purposes. On a quarterly basis, the Company’smanagement reviews all of the Company’s price-risk management policies,including volumes, types of instruments and counterparties. These policies areimplemented by management through the execution of trades by the ChiefFinancial Officer after consultation and concurrence by the President andChairman of the Board.  The Board ofDirectors continuously monitors the Company’s policies and trades.

 

All of these price-risk management transactions are consideredderivative instruments and accounted for in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities* (as amended)*.* These derivative instruments areintended to hedge the Company’s price risk and may be considered hedges foreconomic purposes, but certain of these transactions may not qualify for cashflow hedge accounting. All derivative instrument

 

14

----

 

contracts are recorded on thebalance sheet at fair value. For those derivative instrument contracts thatqualify for cash flow hedge accounting, the effective portion of the changes inthe fair value of the contracts is recorded in other comprehensive income andthe ineffective portion of the changes in the fair value of the contracts isrecorded in revenue as they occur. While the contract is outstanding, theineffective gain or loss may increase or decrease until settlement of thecontract depending on the fair value at the measurement dates. When the hedgedproduction is sold, the realized gains and losses on the contracts are removedfrom other comprehensive income and recorded in revenue.

 

During the first three months of 2006, the Company determined that thecash flow hedge accounting treatment previously applied to its natural gascontracts should be discontinued due to projected changes in the 2006 physicalproduction volumes hedged and to give the Company more flexibility in how itmarkets its physical production. The Company is currently accounting for allcontracts using mark-to-market accounting treatment, therefore the changes infair value are not deferred through other comprehensive income, but ratherrecorded in revenue immediately as unrealized gains or losses. Going forward,the Company will continue to evaluate the terms of new contracts entered intoto determine whether cash flow hedge accounting treatment or mark-to-marketaccounting treatment will be applied. In the past, the Company has usedmark-to-market accounting treatment for its crude oil contracts and cash flowhedge accounting treatment for its natural gas contracts, therefore unrealizedgains and losses on the change in fair value of natural gas contracts betweenperiods may not be comparable.

 

For the three months ended March 31, 2006 and 2005, the Companyincluded in total revenue realized and unrealized gains of $2.1 million andlosses of $1.0 million, respectively.

 
| ** **                                            | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | **(in thousands)**                              | ** ** |
| Natural gas collar realized settlements               |       | $                                                    | 319        |   | $ | 157 |   |
| Crude oil collar realized settlements                 |       | —                                               |       | (259 | ) |
| Natural gas contract unrealized change in  fair value |       | 2,010                                                |       | — |   |
| Crude oil contract unrealized change in  fair value   |       | (230                                                 | )          | (883 | ) |
| Gain (loss) on hedging and derivatives                |       | $                                                    | 2,099      |   | $ | (985 | ) |

 

The outstanding hedgingand derivative contracts at March 31, 2006 and December 31, 2005 impacting thebalance sheet were as follows: 

 
| ** **                | ** ** | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** | ** **        | ** ** | ** **       | ** ** | **Fair Value of Outstanding Hedging and  Derivative Contracts as of** | ** ** |
|---------------------------|------------|---------------------------|------------|---------------|------------|------------|------------|-------------------|------------|------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                | ** ** | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** | **Price**         | ** ** | **Volumes**      | ** ** | ** **                                                                                                    |
| **Transaction Date** | ** ** | **Transaction Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Per Unit** | ** ** | **Per Day** | ** ** | **March 31, 2006**                                                                                  | ** ** | **December 31, 2005** | ** ** |
| ** **                | ** ** | ** **                | ** ** | ** **    | ** ** | ** ** | ** ** | ** **        | ** ** | ** **       | ** ** | **(in thousands)**                                                                                       | ** ** |
| ***Natural  Gas (1):***   | * *   | * *                  | * *   | * *      | * *   | * *   | * *   | * *          | * *   | * *         | * *   | * *                                                                                                      | * *   | * * | * * |
| 08/05                     |       | Natural Gas Collar        |       | 01/01/2006    |       | 12/31/2006 |       | $7.00-$10.50      |       | 10,000MMbtu      |       | 766                                                                                                           |       | (2,498 | ) |
| 08/05                     |       | Natural Gas Collar        |       | 01/01/2006    |       | 12/31/2006 |       | $7.00-$16.10      |       | 10,000MMbtu      |       | 1,244                                                                                                         |       | (137 | ) |
| ***Crude  Oil (2):***     |       |                      |       |          |       |       |       |              |       |             |       |                                                                                                          |       |   |   |
| 08/05                     |       | Crude Oil Collar          |       | 01/01/2006    |       | 12/31/2006 |       | $55.00-$80.00     |       | 400Bbl           |       | (74                                                                                                           | )          | 156 |   |
|                      |       |                      |       |          |       |       |       |              |       |             |       |                                                                                                          |       |   |   |
|                      |       |                      |       |          |       |       |       |              |       |             |       | $                                                                                                             | 1,936      |   | $ | (2,479 | ) |
|                           |            |                           |            |               |            |            |            |                   |            |                  |            |                                                                                                               |            |  |  |  |  |

 

----

(1)    The Company’scurrent natural gas collars were entered into on a per MMbtu delivered pricebasis, using the Houston Ship Channel Index, with settlement for each calendarmonth occurring five business days following the expiration date.  During 2005, cash flow hedge accounting wasapplied to these contracts, which was then discontinued in 2006. During 2006,mark-to-market accounting treatment will be applied to these contracts and thechange in fair value is reflected in total revenue during the year.

 

(2)    Cash flowhedge accounting is not applied to the Company’s crude oil collars, 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

15

----

 

expiration date. Mark-to-market accounting treatment isapplied to these contracts and the change in fair value is reflected in totalrevenue during the year.

 

**8.     ACQUISITIONS**

 

On October 13, 2005, the Company consummated theacquisition of working interests in oil and natural gas properties located onthe Chapman Ranch Field in Nueces County, Texas. The final cash purchase pricewas $28.0 million, including the incremental purchase price and the results ofoperations between the September 1, 2005 effective date and the October 13,2005 closing date, pursuant to the closing adjustment provisions of therelevant agreement. On November 30, 2005, the Company also consummated theacquisition of the stock of a private company, Cinco Energy Corporation (“Cinco”),whose primary asset is ownership of working interests in oil and natural gasproperties located on the Chapman Ranch Field. The preliminarily adjusted cashpurchase price of $47.3 million was adjusted from the base purchase price of$35.8 million for, among other things, working capital as of September 1, 2005and an incremental purchase price, pursuant to the closing provisions of therelevant agreement. The Company financed the acquisitions through borrowingsunder its credit facility, the borrowing base of which increased in connectionwith these transactions and other recent activities since the lastredetermination.

 

The following unaudited pro forma results for2005 show the effect on the Company’s consolidated results of operations as ifthe Cinco transaction had occurred on January 1, 2005. The pro forma resultsare the result of combining the statement of income for the Company with thestatement of income for Cinco adjusted for (1) assumption of ARO liabilitiesand accretion expense for the properties acquired, (2) depletion expenseapplied to the adjusted basis of the properties acquired using the purchasemethod of accounting, (3) conversion of Cinco from the successful effortsmethod of accounting to the full cost method, (4) interest expense on addedborrowings necessary to finance the acquisition and (5) the related income taxeffects of these adjustments based on the applicable statutory rates. The pro formainformation is based upon numerous assumptions, and is not necessarilyindicative of future results of operations:

 

| **For the Three Months Ended  March 31, 2005** | ** ** |
|------------------------------------------------------------------------------|------------|
| **(unaudited)**                                                              | ** ** |
| **(in thousands, except per share amounts)**        | ** ** |
| Revenue                                                                      |       | $ | 24,712 |   |
| Net income                                                                   |       | 5,103 |   |
| Net income per common share:                                                 |       |   |   |
| Basic                                                                        |       | $ | 0.30 |   |
| Diluted                                                                      |       | $ | 0.29 |   |

 

**9.     SUBSEQUENT EVENTS**

 

On April 25, 2006, theCompany consummated the divestiture of its Buckeye properties located in LiveOak County, Texas for a base sale price of $600,000, of which $60,000 wasreceived as a deposit during the first quarter of 2006. The sale price will beadjusted for results of operations between the March 1, 2006 effective date andthe April 25, 2006 closing date, with a post closing adjustment to be finalizedin July 2006.

 

**10.  COMMITMENTS AND CONTINGENCIES**

 

From time to time the Company is a party to various legal proceedingsarising in the ordinary course of business. While the outcome of lawsuits cannot be predicted with certainty, theCompany is not currently a party to any proceeding that it believes, ifdetermined in a manner adverse to the Company, could have a material adverseeffect on its financial condition, results of operations or cash flows, exceptas set forth below.

 

16

----

 

**Texas Comptroller Audit**- During the second quarter of 2004, the Company received notice that itsfranchise tax returns for the State of Texas would be audited for the tax years1999 through 2002. After reviewing documents submitted, the agent representingthe Office of the Comptroller of the State of Texas proposed adjustments to thecalculation that would result in an increased franchise tax liability. The agent maintained that transfers by the parent company to its subsidiaries thatthe Company classified as intercompany loans should instead be classified asequity investments in the subsidiary. The State of Texas originally proposedthat the franchise tax liability of the subsidiaries would be increased byapproximately $3.0 million for the four-year period under audit.

 

During the third quarter of 2004, the agent reduced the proposedfranchise tax deficiency adjustment to the Company and its subsidiaries to anaggregate of $467,000. In the fourth quarter of 2004, there was an informalhearing at the local Comptroller’s Office during which the agent indicated hewould formally assess the proposed deficiency.  On March 24, 2005, theCompany received such deficiency assessment in the amount of $471,482 includingpenalty and interest. The Company responded on April 21, 2005 with a requestfor a formal redetermination hearing. On February 14, 2006, a Hearings Attorneyfor the Texas Comptroller of Public Accounts issued a Position Letterreaffirming the auditor’s assessment, and rejecting the Company’s arguments asset forth in its April 21, 2005 request for redetermination.  On February24, 2006, the Company filed a motion to set the matter for oral hearing beforean Administrative Law Judge and a hearing is currently set for July 18, 2006.  Prior to the oral hearing the Company willsubmit additional written materials to the Hearings Attorney. The Companyintends to continue to vigorously contest the assessment through appropriateadministrative levels in the Comptroller’s Office and any other availablemeans.  Due to its intention to continue to vigorously contest theproposed adjustments, the Company has not recognized any provision for theadditional franchise taxes that would result from the proposed deficiency.

 

**Wade and Joyce Montet, et al., v. Edge PetroleumCorp of Texas, et al., consolidated with Rolland L. Broussard, et al., v. EdgePetroleum Corp of Texas, et al.** - This is a consolidated suit, filed in state courtin Vermilion Parish, Louisiana in September 2003. Plaintiffs aremineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg TexReservoir C, Sand Unit A (Edge’s old Bayou Vermillion Prospect).  Plaitiffs claim the operator at the time,Norcen Explorer, now Anadarko, failed to “block squeeze” the sections of theNo. 2 well, as would a prudent operator, to protect the gas reservoir frombeing flooded with water from adjacent underground formations. Plaintiffsfurther allege Norcen was negligent in not creating a field-wide unit toprotect their interests. Plaintiffs have named the Company and other workinginterest owners in the leases as defendants, including Norcen Explorer’ssuccessors in interest, Anadarko. Plaintiffs seek unspecified damages for lostroyalties and damages due to alleged devaluation of their mineral and propertyinterests, plus interest and attorneys’ fees. In early 2005, the Company fileda motion for summary judgment in the case asserting, among other defenses,that:  (i) there has been no breach ofcontract, (ii) there is no express or implied duty imposed on us to blocksqueeze the well or form a field-wide unit, (iii) the units were properlyformed by the Conservation Commissioner in accordance with the statutory schemein Louisiana, (iv) plaintiffs’ claims are barred by limitations, and (v) otherdefenses. Along with the other defendants, the Company also filed a specialpreemptory challenge of no cause of action under the leases and the LouisianaMineral Code for failure to exhaust administrative remedies and due to lack ofa demand. In May and June 2005, the court ruled against the Company on themotion for summary judgment and the preemptory challenges. Of the 18.75%after-payout working interest that the Company originally reserved in theleases, the Company owned a 2.8% working interest at the time of the allegedacts or omissions. On September 6, 2005, the Company was granted leave by thecourt to file a third party demand to join the other working interest ownerswho hold the remainder of the 18.75% working interest as direct defendants inthis case, and those pleadings have been served on the parties.

 

As of the date of this report, it is not possible todetermine what, if any, the Company’s exposure might be in this matter. Theplaintiffs’ expert witness, in his December 2005 deposition, offered his theorythat plaintiffs’ gross damages are in the range of $19 to 20 million. Thatnumber is based on his theory that the alleged failure to block squeeze thewell resulted in the under-production of gas worth $300 million. Plaintiffs’royalty share of that figure yields the $19 to $22 million range of allegeddamages. Based on the expert’s testimony, damages attributable to the full18.75% interest would be in the range of $3.75 million gross or net to theCompany’s 2.8% share would be in the range of $560,000 (excluding interest andattorneys’ fees). Along with the other defendants, the Company hired its ownexpert witnesses who have refuted these claims, particularly the expert’sassertions that failure to block squeeze the well caused any damages to thereservoir. The deposition of a Norcen engineer who prepared the completion planfor the Broussard No. 2 well and supervised the completion operations, taken inApril 2006,

 

17

----

 

confirms thetestimony of the defense experts as to why the well was not blocksqueezed.  A hearing was held on April 3,2006 covering several motions before the court. At that hearing, (1) the trial, originally set for May 22, 2006, wascontinued until either August 28, 2006 or December 11, 2006, with the date tobe determined shortly; (2) plaintiffs’ and defendants’ motions to exclude eachother’s experts were denied and all experts will be allowed to testify; (3) thejudge ruled he would not grant any motions to sever absent an agreement by allparties consenting to severance; (4) the judge ruled on certain discoverymatters allowing certain limited discovery from one of the Company’spreliminary experts; and (5) the judge strongly suggested that the partiesparticipate in mediation.  While theCompany agrees that mediation would be appropriate and is seeking a mediationdate that is suitable with all parties, it will continue to vigorously defenditself against this lawsuit.

 

The Company may have insurance coverage for all orpart of this claim up to the $2.0 million limits of the policy. A claim wassubmitted to the Company’s casualty carrier, who is currently providing adefense under a reservation of rights letter. The Company believes that wewould only be liable for its 2.8% share of any damage award unless a co-partydefendant cannot satisfy its share of any final judgment. The Company intendsto continue to vigorously contest this suit and has not established any reservewith respect to these claims.

 

**DavidBlake, et al. v. Edge Petroleum Corporation** – On September 19, 2005, David Blake andDavid Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filedsuit against the Company in state district court in Goliad County, Texasalleging breach of contract for failure and refusal to transferoverriding royalty interests to plaintiffs in at least five leases in GoliadCounty, Texas and failure and refusal to pay monies to Blake pursuant to suchoverriding royalty interests for wells completed on the leases.  Venue of the case was transferred to HarrisCounty by agreement of the litigants. The Company has served Plaintiffs with discovery and has filed acounterclaim and an amended counterclaim joining various related entities thatare controlled by Plaintiffs.  Inaddition, Plaintiffs have filed an amended complaint alleging claims of slanderof title and tortuous interference related to its alleged right to receive anoverriding royalty interest from a third party. Plaintiffs currently have on file a motion for summary judgment, towhich the Company has objected, and this motion is expected to be heard laterthis summer. The Company has responded aggressively to this lawsuit, and itdoes not believe that the probability of recovery against the Company rises tothe level of reasonably possible. As of the date of this report, it is notpossible to determine what if any the Company’s exposure might be in thismatter, nor have we assigned a value to our counterclaims.

 

18

----

 

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

 

The following is Management’s Discussion and Analysis (“MD&A”) ofsignificant factors that have affected certain aspects of our financialposition and operating results during the periods included in the accompanyingunaudited condensed consolidated financial statements. The followingMD&A is intended to help the reader understand Edge Petroleum Corporation (“Edge”).This discussion should be read inconjunction with the accompanying unaudited condensed consolidated financialstatements included elsewhere in this Form 10-Q and with Management’sDiscussion and Analysis of Financial Condition and Results of Operations andour audited consolidated financial statements included in our annual report onForm 10-K for the year ended December 31, 2005.

 

### **FORWARD LOOKING STATEMENTS**

###  

Certainof the statements contained in all parts of this document, including, but notlimited to, those relating to our drilling plans (including scheduled andbudgeted wells), the effect of changes in strategy and business discipline,future tax matters, our 3-D project portfolio, future general andadministrative expenses on a per unit of production basis, changes in wellsoperated and reserves, future growth and expansion, future exploration, futureseismic data (including timing and results), expansion of operation, ourability to generate additional prospects, review of outside generated prospectsand acquisitions, additional reserves and reserve increases, replace productionand manage our asset base, enhancement of visualization and interpretationstrengths, expansion and improvement of capabilities, integration of newtechnology into operations, credit facilities, redetermination of our borrowingbase, attraction of new members to the technical team, future compensationprograms, new focus on core areas, new prospects and drilling locations, newalliances, future capital expenditures (or funding thereof) and workingcapital, sufficiency of future working capital, borrowings and capitalresources and liquidity, projected rates of return, retained earnings anddividend policies, projected cash flows from operations, future commodity priceenvironment, expectation or timing of reaching payout, outcome, effects ortiming of any legal proceedings or contingencies, the impact of any change inaccounting policies on our financial statements, the number, timing or resultsof any wells, the plans for timing, interpretation and results of new orexisting seismic surveys or seismic data, future production or reserves, futureacquisition of leases, lease options or other land rights, any other statementsregarding future operations, financial results, opportunities, growth, businessplans and strategy and other statements that are not historical facts areforward-looking statements. These forward-looking statements reflect ourcurrent view of future events and financial performance. When used in thisdocument, the words “budgeted,” “anticipate,” “estimate,” “expect,” “may,” “project,”“believe,” “intend,” “plan,” “potential,” “forecast,” “might,” “predict,” “should”and similar expressions are intended to be among the expressions that identifyforward-looking statements. These forward-looking statements speak only as oftheir dates and should not be unduly relied upon. We undertake no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events, or otherwise. Such statements involve risks anduncertainties, including, but not limited to, those set forth under ITEM 1A. “RISKFACTORS” of our 2005 Form 10-K and other factors detailed in this document andour other filings with the Securities and Exchange Commission (the “SEC”).Should one or more of these risks or uncertainties materialize, or shouldunderlying assumptions prove incorrect, actual outcomes may vary materiallyfrom those indicated. All subsequent written and oral forward-lookingstatements attributable to us or to persons acting on our behalf are expresslyqualified in their entirety by reference to these risks and uncertainties.

 

## **GENERAL OVERVIEW**

## ** **

Edge is a Houston-based independent energy companythat focuses its exploration, development, production, acquisition and marketingactivities in selected onshore basins of the United States. In late 1998, weundertook a top-level management change and began a shift in strategy from pureexploration, which focused more on prospect generation, to our current strategywhich focuses on a balanced program of exploration, exploitation anddevelopment and acquisition of oil and gas properties. We generate revenues,income and cash flows by producing and marketing oil and natural gas producedfrom our oil and natural gas properties. We make significant capitalexpenditures in our exploration, development, and production activities thatallow us to continue generating revenue, income and cash flows. We have alsospent considerable efforts on acquisitions, including both corporate and asset acquisitions,that have contributed to our growth in past years.

 

19

----

 

This overview provides our perspective on the individual sections ofMD&A, as well as helpful hints for reading these pages. Our MD&A includesthe following sections:

 

•                  **Industry and Economic Factors** – a generaldescription of value drivers of our business as well as opportunities,challenges and risks related to the oil and gas industry.

 

•                  **Approach to the Business** – additionalinformation regarding our approach and strategy.

 

•                  **Acquisitions and Divestitures** – informationabout significant changes in our business structure.

 

•                  **Outlook** – additional discussion relating tomanagement’s outlook to the future of our business.

 

•                  **Critical Accounting Policies and Estimates**– a discussion of certain accounting policies that require critical judgmentsand estimates.

 

•                  **Results of Operations** – an analysis of ourCompany’s consolidated results for the periods presented in our financialstatements.

 

•                  **Liquidity and Capital Resources**–****an analysis of cash flows, sources anduses of cash, and contractual obligations.

 

•                  **Risk Management Activities – Derivatives & Hedging**–****supplementaryinformation regarding our price-risk management activities involving commoditycontracts that are accounted for at fair value.

 

•                  **Tax Matters** – supplementary discussion ofincome tax matters.

 

•                  **Recently Issued Accounting Pronouncements** –a discussion of certain recently issued accounting pronouncements that mayimpact our future results.

 

# **Industry and EconomicFactors**

# ** **

In managing our business, we must deal with many factors inherent inour industry.  First and foremost is thefluctuation of oil and gas prices. Historically, oil and gas markets have been cyclical and volatile, whichmakes price movements difficult to predict. While our revenues are a function of both production and prices, wideswings in commodity prices have most often had the greatest impact on ourresults of operations. We have little ability to predict those prices or tocontrol them without losing some advantage of the upside potential. The oil andgas industry experienced a high commodity price environment in late 2005, whichhas positively impacted the entire industry as well as our Company. Although priceshave fallen since year-end 2005, they remain at historically high levels.

 

Our operations entail significant complexities.  Advanced technologies requiring highlytrained personnel are utilized in both exploration and production.  Even when the technology is properly used, wemay still not know conclusively if hydrocarbons will be present or the rate atwhich they will be produced.  Explorationis a high-risk activity, often times resulting in no commercially productivereserves being discovered. Moreover, costs associated with operating within ourindustry are substantial. The recent high commodity price environment has alsoled to increased costs in our industry, which together with increased demandfor rigs, equipment, supplies and services, have made it difficult at times forus to further our growth, and made timely execution of our planned activitiesdifficult.

 

Our business, as with other extractive businesses, is a depleting onein which each gas equivalent produced must be replaced or our asset base andcapacity to generate revenues in the future, will shrink.

 

20

----

 

The oil and gas industry is highly competitive. We compete with majorand diversified energy companies, independent oil and gas businesses andindividual operators in exploration, production, marketing and acquisitionactivities. In addition, the industry as a whole competes with other businessesthat supply energy to industrial and commercial end users.

 

Extensive federal, state and local regulation of the industrysignificantly affects our operations. In particular, our activities are subjectto stringent operational and environmental regulations. These regulations haveincreased the costs of planning, designing, drilling, installing, operating andabandoning oil and gas wells and related facilities. These regulations maybecome more demanding in the future.

 

# **Approach to the Business**

 

Profitable growth of our business will largely depend upon our abilityto successfully find and develop new proved reserves of oil and natural gas ina cost-effective manner. In order to achieve an overall acceptable rate of growth,we seek to maintain a prudent blend of low, moderate and higher riskexploration and development projects. We have chosen to seek geologic andgeographic diversification by operating in multiple basins in order to mitigaterisk in our operations. We also attempt to make selected acquisitions of oiland gas properties to augment our growth and provide future drillingopportunities.

 

We periodically hedge our exposure to volatile oil and gas prices on aportion of our production to reduce price risk. As of March 31, 2006, we hadhedge contracts in place covering approximately 45% and 37% of our remainingexpected 2006 natural gas and crude oil production, respectively, andapproximately 42% of total 2006 estimated production on an Mcfe basis, includingthe effect of the completed Chapman Ranch Field acquisitions but before anyother acquisitions that may occur.

 

Implementation of our business approach relies on ourability to fund ongoing exploration and development projects with cash flowprovided by operating activities and external sources of capital. During thefirst quarter of 2006, our Board approved a revised 2006 capital budget of $98million. Based upon current expectations for production volumes and commodityprices, we expect to fund those capital expenditures from internally generatedcash from operating activities. We do not typically include acquisitions in ourbudgeted capital expenditures, but expect to fund those with either borrowingsunder our credit facility, proceeds from offerings of common stock or othersecurities under our shelf registration statement or other sources.

 

Our long-term debt balance as of March 31, 2006 was$100.0 million and our debt to total capital ratio was approximately 33.2%.During the second quarter of 2005, we took steps to increase our shelfregistration statement capacity to $390 million from approximately $90 million(see Note 3 to our consolidated financial statements), which became effectiveon July 1, 2005. We believe we have the financial flexibility to continue toexecute our business strategies.

 

**Acquisitions and Divestitures**

 

*Acquisitions-*We have becomeincreasingly active in acquisitions in recent years. We have looked toacquisitions to enable us to achieve our growth objectives and we expect acquisitionswill continue to play a significant role in our future plans for growth.Acquisitions add meaningful incremental increases in reserves and productionand may range in size from acquiring a working interest in non-operatedproducing property to an entire field or company. Unlike drilling capital,which is planned and budgeted, acquisition capital is neither budgeted norallocated. Specific timing of acquisitions cannot be predicted. Although weconsider a wide variety of acquisitions, a significant part of our growthstrategy is expected to be focused toward producing property acquisitions,which we believe have exploitable potential. Because of our financialflexibility, we are positioned to take advantage of producing propertyacquisition opportunities as they may arise. In today’s high price environment,where production is providing greater cash flow and earnings to most companies,identifying quality opportunities is difficult. We believe through hard work,technical ability and creative thinking of our people, we will continue to growthrough both acquisitions and drilling. Any such acquisition could involve thepayment by us of a substantial amount of cash or the issuance of a substantialnumber of additional shares or other securities.

 

21

----

 

During the fourth quarter of 2005, we completed two acquisitionsincluding (i) the stock of a private company, whose primary asset is ownershipof working interests in oil and natural gas properties located on the ChapmanRanch Field in south Texas and (ii) additional working interests in the ChapmanRanch Field owned by two other private companies for an aggregate cash purchaseprice of approximately $62.8 million (of which $35.8 was attributable to the stockpurchase and $27.0 was attributable to the working interest asset purchase).Pursuant to closing adjustment provisions in the agreements, the purchase pricewas subject to adjustment for the results of operations between the September1, 2005 effective date and the closing dates and an incremental purchase pricerelated to the operator of the properties obtaining high-cost gascertification. The stock purchase was adjusted to $47.3 million and the assetpurchase was adjusted to $28.0 million. The properties acquired from theseentities are located in Nueces County, Texas and consisted of six producingwells, one well undergoing completion operations, one well drilling and anownership in approximately 1,300 net acres of developed and undevelopedleasehold.

 

*Divestitures-*We regularlyreview our asset base for the purpose of identifying non-core assets, thedisposition of which would increase capital resources available for otheractivities and create organizational and operational efficiencies. While we generallydo not dispose of assets solely for the purpose of reducing debt, suchdispositions can have the result of furthering our objective of financialflexibility through reduced debt levels. During the three months ended March31, 2006, we entered into a letter of intent to divest of our Buckeyeproperties in Live Oak County, Texas for a base sale price of $600,000, ofwhich $60,000 was received as a deposit during the first quarter of 2006. Thedivestiture closed on April 25, 2006 and the base sale price will be adjustedfor results of operations between the March 1, 2006 effective date and theclosing date, with a post closing adjustment to be finalized in July 2006.

 

**Outlook**

 

•                  We expect tocontinue to spend considerable effort in 2006 on acquisitions, as we seek tofurther our growth.

•                  We expect todrill between 55 and 60 wells (32 and 35 net, respectively) in 2006 and weestimate capital spending for the year to be approximately $98 million.Our ability to materially increase the number of wells to be drilled beyond theprior year or our original budget number is heavily dependent upon the timelyaccess to oilfield services, particularly drilling rigs. The shortage ofavailable rigs in 2005 delayed the drilling of several wells, slowing ourgrowth in production. We will continue to monitor the situation and look foropportunities to increase our production and reserves.

•                  Our expectedproduction volumes, including the addition of the Chapman Ranch Fieldproperties, combined with the current commodity-pricing environment, isanticipated to produce another year of record cash flow.

•                  To help protectagainst the possibility of downward commodity price movements, we have enteredinto several derivatives to hedge approximately 45% of our expected remaining naturalgas production and 37% of our expected remaining crude oil production streamsfor 2006. We discontinued cash flow hedge accounting treatment on our naturalgas collars, so all of our derivative transactions are now accounted for usingmark-to-market accounting treatment (see Note 7 to our consolidated financialstatements).

•                  We expect tomodestly add to our staff levels in 2006 both as a result of recent growth andanticipated future growth.

 

Our outlookand the expected results described above are both subject to change based uponfactors that include but are not limited to drilling results, commodity prices,access to capital, the acquisitions market and factors referred to in “ForwardLooking Statements.”

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformitywith generally accepted accounting principles in the United States requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues, expenses, contingent assets and liabilitiesand the related disclosures in the accompanying

 

22

----

 

financialstatements. Changes in these estimates and assumptions could materially affectour financial position, results of operations or cash flows. Managementconsiders an accounting estimate to be critical if:

 

•                  it requires assumptions to be made thatwere uncertain at the time the estimate was made, and

 

•                  changes in the estimate or differentestimates that could have been selected could have a material impact on ourconsolidated results of operations or financial condition.

 

All other significant accounting policies that weemploy are presented in the notes to the consolidated financial statements. Thefollowing discussion presents information about the nature of our most criticalaccounting estimates, our assumptions or approach used and the effects ofhypothetical changes in the material assumptions used to develop each estimate.

 

*Natureof Critical Estimate Item:*Oil and Natural Gas Reserves - Our estimate of proved reserves isbased on the quantities of oil and gas which geological and engineering datademonstrate, with reasonable certainty, to be recoverable in future years fromknown reservoirs under existing economic and operating conditions. The accuracyof any reserve estimate is a function of the quality of available data,engineering and geological interpretation, and judgment. For example, we mustestimate the amount and timing of future operating costs, severance taxes,development costs, and workover costs, all of which may in fact varyconsiderably from actual results. In addition, as prices and cost levels changefrom year to year, the economics of producing the reserves may change andtherefore the estimate of proved reserves also may change. Any significantvariance in these assumptions could materially affect the estimated quantityand value of our reserves. Despite the inherent imprecision in theseengineering estimates, our reserves are used throughout our financialstatements.

 

*Assumptions/ApproachUsed:*Units-of-production method to amortize ouroil and natural gas properties - The quantity of reserves couldsignificantly impact our depletion expense. Any reduction in proved reserveswithout a corresponding reduction in capitalized costs will increase thedepletion rate.

 

“Ceiling” Test  - The full-cost method of accounting for oiland gas properties requires a quarterly calculation of a limitation oncapitalized costs, often referred to as a full-cost ceiling calculation. Theceiling is the discounted present value of our estimated total proved reservesadjusted for taxes and the impact of cash flow hedges on pricing, using a 10%discount rate. To the extent that our capitalized costs (net of accumulated depletionand deferred taxes) exceed the ceiling, the excess must be written off toexpense. Once incurred, this impairment of oil and gas properties is notreversible at a later date even if oil and gas prices increase. No suchimpairment was required in the three months ended March 31, 2006 or 2005. Thiscalculation of our proved reserves could significantly impact our ceilinglimitation used in determining whether an impairment of our capitalized costsis necessary. The ceiling calculation dictates that prices and costs in effectas of the last day of the period are generally held constant indefinitely.Therefore, the future net revenues associated with the estimated provedreserves are not based on our assessment of future prices or costs, but ratherare based on prices and costs in effect as of the end of the period. Oil andnatural gas prices used in the reserve valuation at March 31, 2006 were $62.75per barrel and $7.18 per MMbtu.

 

*Effectif Different Assumptions Used:*Units-of-production method to amortize our oil andnatural gas properties - A 10% increase or decrease in reserves would have decreased orincreased, respectively, our depletion expense for the year by approximately10%.

 

“Ceiling” limitation test  -The most likely factor to contribute to a ceiling test impairment is the priceused to calculate the reserve limitation threshold. A significant reduction inthe prices at a future measurement date could trigger a full-cost ceilingimpairment. At March 31, 2006, we had a cushion (i.e., the excess of theceiling over our capitalized costs) of $48.4 million. A 10% increase ordecrease in prices used would have increased or decreased our cushion byapproximately 60%. At December 31, 2005 our cushion was approximately $151.1million, when prices were significantly higher than at March 31, 2005. Ourhedging program would serve to mitigate some of the impact of any pricedecline. Since we no longer apply cash

 

23

----

 

flow hedge accounting toour derivative contracts, there is no impact to the ceiling test. Anotherlikely factor to contribute to a ceiling test impairment is a revised estimateof reserve volume. A 10% increase or decrease in reserve volume would haveincreased or decreased our cushion by approximately 40%.

 

*Natureof Critical Estimate Item:*Unproved Property Impairment****- We have elected to use the full-costmethod to account for our oil and gas activities. Investments in unprovedproperties are not amortized until proved reserves associated with theprospects can be determined or until impairment occurs. Unproved properties areevaluated quarterly for impairment on a property-by-property basis. If theresults of an assessment indicate that an unproved property is impaired, theamount of impairment is added to the proved oil and natural gas property coststo be amortized.

 

*Assumptions/ApproachUsed:*At March31, 2006, we had $38.6 million allocated to unproved property. This allocationis based on our estimation of whether the property has potential attributablereserves. Therefore, our assessment of the potential reserves will determinewhether costs are moved from the unproved category to the full-cost pool fordepletion or whether an impairment is taken.

 

*Effectif Different Assumptions Used:* A 10% increase or decrease in the unproved propertybalance (i.e., transfer to full-cost pool) would have increased or decreasedour depletion expense by approximately 1% for the three months ended March 31,2006.

 

*Natureof Critical Estimate Item:*Asset Retirement Obligations**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and gas production operations. Our removal and restorationobligations are primarily associated with plugging and abandoning wells. Priorto January 1, 2003, the costs associated with this activity were capitalized tothe full-cost pool and charged to income through depletion. We adoptedStatement of Financial Accounting Standards (“SFAS”) No. 143, *Accounting for Asset Retirement Obligations*effective January 1, 2003, as discussed in Note 1 to our Consolidated FinancialStatements. SFAS No. 143 significantly changed the method of accruing for costsan entity is legally obligated to incur related to the retirement of fixedassets (“asset retirement obligations” or “ARO”). Primarily, SFAS No. 143requires us to estimate asset retirement costs for all of our assets, adjustthose costs for inflation to the forecast abandonment date, discount thatamount using a credit-adjusted-risk-free rate back to the date we acquired theasset or obligation to retire the asset and record an ARO liability in thatamount with a corresponding addition to our asset value. When new obligationsare incurred, i.e. a new well drilled or acquired, we add a layer to the ARO liability.We then accrete the liability layers quarterly using the applicable period-endeffective credit-adjusted-risk-free rates for each layer. Should either theestimated life or the estimated abandonment costs of a property change upon ourquarterly review, a new calculation is performed using the same methodology oftaking the abandonment cost and inflating it forward to its abandonment dateand then discounting it back to the present using our credit-adjusted-risk-freerate. The carrying value of the asset retirement obligation is adjusted to thenewly calculated value, with a corresponding offsetting adjustment to the assetretirement cost (included in the full-cost pool); therefore, abandonment costswill almost always approximate the estimate. When well obligations are relievedby sale of the property or plugging and abandoning the well, the relatedliability and asset costs are removed from our balance sheet.

 

*Assumptions/ApproachUsed:*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. Assetremoval technologies and costs are constantly changing, as are regulatory,political, environmental, safety and public relations considerations. Inherentin the estimate of the present value calculation of our AROs are numerousassumptions and judgments including the ultimate settlement amounts, inflationfactors, credit-adjusted-risk-free-rates, timing of settlement, and changes inthe legal, regulatory, environmental and political environments.

 

24

----

 

*Effectif Different Assumptions Used:* Since there are so many variables in estimating AROs,we attempt to limit the impact of management’s judgment on certain of thesevariables by using input of qualified third parties. We engage independentengineering firms to evaluate our properties annually. We use the remainingestimated useful life from the year-end reserve reports by our independentreserve engineers in estimating when abandonment could be expected for eachproperty. We utilize a three-year average rate for inflation to diminish anysignificant volatility that may be present in the short term. We expect to seeour calculations impacted significantly if interest rates move from theircurrent lows, as the credit-adjusted-risk-free rate is one of the variablesused on a quarterly basis. We have developed a standard cost estimate based onhistorical costs, industry quotes and depth of wells. Unless we expect a well’splugging to be significantly different than a normal abandonment, we use thisestimate. The resulting estimate, after application of a discount factor andsome significant calculations, could differ from actual results, despite allour efforts to make an accurate estimate.

 

*Natureof Critical Estimate Item:*Income Taxes**-**In accordance with the accounting for income taxesunder SFAS No. 109, *Accounting for IncomeTaxes,* we have recorded a deferred tax asset and liability toaccount for the expected future tax benefits and consequences of events thathave been recognized in our financial statements and our tax returns. There areseveral items that result in deferred tax asset and liability impact to thebalance sheet, but the largest of which is income taxes and the impact of netoperating loss (“NOL”) carryforwards. We routinely assess our ability to useall of our NOL carryforwards that resulted from substantial income taxdeductions, prior year losses and acquisitions. We consider future taxableincome in making such assessments. 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, it is reduced by a valuation allowance.

 

*Assumptions/ApproachUsed:*Numerousjudgments and assumptions are inherent in the determination of future taxableincome, including factors such as future operating conditions (particularly asrelated to prevailing oil and gas prices). We are not currently required to payany federal income taxes because of the prior generation of  NOL carryforwards.

 

*Effect if DifferentAssumptions Used:* We have engaged an independentpublic accounting firm to assist us in applying the numerous and complicatedtax law requirements. However, despite our attempt to make an accurateestimate, the ultimate utilization of our NOL carryforwards is highly dependentupon our actual production and the realization of taxable income in futureperiods. If we estimate that some or all of our NOL carryforwards are morelikely than not going to expire or otherwise not be utilized to reduce futuretax, we would record a valuation allowance to remove the benefit of those NOLcarryforwards from our financial statements.

 

*Nature of CriticalEstimate Item:*Derivative and Hedging Activities**-**Due to the instability of oil andnatural gas prices, we may enter into, from time to time, price-risk managementtransactions (e.g., swaps, collars and floors) for a portion of our oil andnatural gas production to achieve a more predictable cash flow, as well as toreduce exposure from commodity price fluctuations. While all of thesetransactions are economic hedges of price risk, different accounting treatmentmay apply depending on if they qualify for cash flow hedge accounting. Inaccordance with SFAS No. 133, *Accounting forDerivative Instruments and Hedging Activities (as amended),*alltransactions are recorded on the balance sheet at fair value.

 

Hedge Contracts - We formally assess, both at thehedge’s inception and on an ongoing basis, whether the derivatives that areused for hedging are expected to be highly effective in offsetting changes incash flows of the hedged transactions. The ongoing measurement of effectivenessdetermines whether the change in fair value is deferred through OtherComprehensive Income (“OCI”) on the balance sheet or recorded immediately inrevenue on the income statement. The effective portion of the changes in thefair value of hedge contracts is recorded initially in OCI. When the hedgedproduction is sold, the realized gains and losses on the hedge contracts areremoved from OCI and recorded in revenue. Ineffective portions of the changesin the fair value of the hedge contracts are recognized in revenue as theyoccur. While the hedge contract is outstanding, the ineffective gain or lossmay increase or decrease until settlement of the contract.

 

25

----

 

In the event it is determined that the use of aparticular derivative may not be or has ceased to be effective in pursuing ahedging strategy, hedge accounting is discontinued prospectively. During thefirst three months of 2006, we discontinued cash flow hedge accountingtreatment applied to our natural gas contracts due to projected changes in the2006 physical production volumes hedged and to give us flexibility in how wemarket our physical production, therefore all contracts are utilizingmark-to-market accounting treatment at March 31, 2006 as discussed below.

 

Derivative Contracts -For transactions not accounted for using cash flow hedge accounting, the changein the fair value of the derivative contract is reflected in revenueimmediately, and not deferred through OCI, and there is no measurement ofeffectiveness.

 

*Assumptions/ApproachUsed:*Estimatingthe fair values of derivative instruments requires complex calculations,including the use of a discounted cash flow technique, estimates of risk andvolatility, and subjective judgment in selecting an appropriate discount rate.In addition, the calculations use future market commodity prices, whichalthough posted for trading purposes, are merely the market consensus offorecasted price trends. The results of the fair value calculations cannot beexpected to represent exactly the fair value of our commodity derivatives. Wecurrently obtain the fair value of our positions from our counterparties. Ourpractice of relying on our counterparties who are more specialized andknowledgeable in preparing these complex calculations reduces our management’sinput. It also approximates the fair value of the contracts as that would bethe cost to us to terminate a contract at that point in time. Due to the factthat we apply mark-to-market accounting treatment, the offset to the balancesheet asset or liability, or the change in fair value of the contracts, isincluded in revenue on the income statement rather than in OCI on the balancesheet.

 

*Effectif Different Assumptions Used:* At March 31, 2006, a 10% change in the commodityprice per unit, as long as the price is either above the ceiling or below thefloor price, would cause the fair value total of our derivative financialinstruments to increase or decrease by approximately $0.2 million. Had weapplied cash flow hedge accounting treatment to all of our derivative contractsoutstanding at March 31, 2006, net income would have been $5.7 million.

 

# **Results of Operations**

# ** **

This section includesdiscussion of our results of operations for the three-month period ended March31, 2006 as compared to the same period of the prior year. We are anindependent energy company engaged in the exploration, development, acquisitionand production of oil and natural gas. Our resources and assets are managed andour results reported as one operating segment. We conduct our operationsprimarily along the onshore United States Gulf Coast, with our emphasis insouth Texas, Louisiana, Mississippi and southeast New Mexico.

 

Our revenue is sensitive tochanges in prices received for our products. A substantial portion of ourproduction is sold at prevailing market prices, which fluctuate in response tomany factors that are outside of our control. Imbalances in the supply anddemand for oil and natural gas can have a dramatic effect on the prices wereceive 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. We completed two acquisitions in thefourth quarter of 2005, which impacted revenues, production and costs for thefirst quarter of 2006 and due to timing, may distort comparability of periodspresented.

 

**FirstQuarter 2006 Compared to the First Quarter 2005**

 

**Revenueand Production**

 

Total revenue increased 53% from the first quarter of2005 to the comparable 2006 period. For the three months ended March 31, 2006and 2005, our product mix contributed the following percentages of productionand revenues:

 

26

----

 
| ** **                | ** ** | **REVENUES (1)** | ** ** | **PRODUCTION VOLUMES  (MCFE)** | ** ** |
|---------------------------|------------|------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **2006**         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Natural gas               |       | 82               | %          | 81                             | %          | 80 | % | 76 | % |
| Natural gas  liquids      |       | 4                | %          | 7                              | %          | 8 | % | 12 | % |
| Crude oil  and condensate |       | 14               | %          | 12                             | %          | 12 | % | 12 | % |
|                      |       |             |       |                           |       |   |   |   |   |
| Total                     |       | 100              | %          | 100                            | %          | 100 | % | 100 | % |

 

----

(1)Includes effect of hedging and derivative transactions.

 

The following table summarizes volume and priceinformation with respect to our oil and gas production for the three-monthperiods ended March 31, 2006 and 2005:

 
| ** **                             | ** ** | ** **                                                         | ** ** | **2006 Period Compared  to 2005 Period** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                             | ** ** | **Three Months Ended**                                   | ** ** | **$**                                                        | ** ** | **%** | ** ** |
| ** **                             | ** ** | **March 31,**                                                 | ** ** | **Increase  (Decrease) **                               | ** ** | **Increase  (Decrease)** | ** ** |
| **2006**                               | ** ** | **2005**                                                           |
|                                   |       | **(in thousands, except per Bbl/Mcf/Mcfe prices and percentages)** | ** ** |
| **Production  Volumes:**               |       |                                                               |       |                                                         |       |   |   |   |   |
| Natural gas (MMcf)                     |       | 3,429                                                              |       | 3,202                                                        |       | 227 |   | 7 | % |
| Natural gas liquids (MBbls)            |       | 61                                                                 |       | 84                                                           |       | (23 | ) | (27 | )% |
| Crude oil and condensate (MBbls)       |       | 87                                                                 |       | 83                                                           |       | 4 |   | 5 | % |
| Natural gas equivalent (MMcfe)         |       | 4,314                                                              |       | 4,205                                                        |       | 109 |   | 3 | % |
| **Average  Sales Price(1):**           |       |                                                               |       |                                                         |       |   |   |   |   |
| Natural gas ($per Mcf)(2)              |       | $                                                                  | 7.72       |                                                         | $          | 5.78 |   | $ | 1.94 |   | 34 | % |
| Natural gas liquids ($per Bbl)         |       | 20.57                                                              |       | 17.48                                                        |       | 3.09 |   | 18 | % |
| Crude oil and condensate ($per Bbl)(2) |       | 59.53                                                              |       | 47.76                                                        |       | 11.77 |   | 25 | % |
| Natural gas equivalent ($per Mcfe)(2)  |       | 7.63                                                               |       | 5.69                                                         |       | 1.94 |   | 34 | % |
| Natural gas equivalent ($per Mcfe)(3)  |       | 8.11                                                               |       | 5.46                                                         |       | 2.65 |   | 49 | % |
| **Operating  Revenue:**                |       |                                                               |       |                                                         |       |   |   |   |   |
| Natural gas (2)                        |       | $                                                                  | 26,473     |                                                         | $          | 18,495 |   | $ | 7,978 |   | 43 | % |
| Natural gas liquids                    |       | 1,245                                                              |       | 1,470                                                        |       | (225 | ) | (15 | )% |
| Crude oil and condensate (2)           |       | 5,177                                                              |       | 3,964                                                        |       | 1,213 |   | 31 | % |
| Gain (loss) on hedging and derivatives |       | 2,099                                                              |       | (985                                                         | )          | 3,084 |   | 313 | % |
| Total revenue                          |       | $                                                                  | 34,994     |                                                         | $          | 22,944 |   | $ | 12,050 |   | 53 | % |

 

----

(1) Prices are calculated basedon whole numbers, not rounded numbers.

(2) Excludes the effect ofhedging and derivative transactions.

(3) Includes the effect ofhedging and derivative transactions.

 

**Natural gas revenue** - Excluding hedging and derivativeactivity, natural gas revenue increased 43% for the three months ended March31, 2006 over the same period in 2005 due to higher realized prices and higherproduction volumes. Excluding the effect of hedging and derivatives, theaverage natural gas sales price for our production in the first quarter of 2006was $7.72 per Mcf which was 34% higher than the same period in 2005. Thisincrease in average price received resulted in increased revenue ofapproximately $6.7 million (based on current period production). Natural gasproduction increased 7% from 3.2 Bcf in the three months ended March 31, 2005to 3.4 Bcf in the comparable 2006 period due to production from new wellsdrilled on our Queen City project and the Chapman Ranch Field propertiesacquired in the fourth quarter of 2005, partially offset by declines on ourolder properties, including Encinitas, Gato Creek and Miller. The overallincrease in production compared to the prior year period resulted in anincrease in revenue of approximately $1.3 million (based on 2005 comparableperiod pre-hedge prices).

 

27

----

 

**Natural gas liquids (“NGL”) revenue**- Revenue from the sale of NGLs decreased15% for the three months ended March 31, 2006 over the same period in 2005.Production volumes for NGLs decreased 27% from the three months ended March 31,2005 to the three months ended March 31, 2006 due primarily to decliningproduction at our Encinitas, Gato Creek and Louisiana properties. The decreasein NGL production decreased revenue by approximately $0.4 million (based on2005 comparable period average prices). Higher average realized prices for thethree months ended March 31, 2006 resulted in an increase in revenue ofapproximately $0.2 million (based on current period production).

 

**Crude oil and condensate revenue**- Revenue from the sale of oil andcondensate, excluding hedging and derivative activity, increased 31% for thethree months ended March 31, 2006 as compared to the comparable prior yearperiod in 2005 due to higher price environment and higher production volumes.The average realized price for oil and condensate for the three months endedMarch 31, 2006 was $59.53 per barrel compared to $47.76 per barrel in the sameperiod of 2005, a 25% increase. These higher average prices for the firstquarter of 2006 resulted in an increase in revenue of approximately $1.0million (based on current period production). Production volumes for oil andcondensate increased 5% for the three months ended March 31, 2006 compared tothe same prior year period due primarily to new wells drilled on our Queen Cityand southeast New Mexico projects, as well as from the Chapman Ranch Fieldproperties acquired in the fourth quarter of 2005. These increases werepartially offset by declines on our Miller, Encinitas and Gato Creekproperties. The increase in oil and condensate production resulted in an increasein revenue of approximately $0.2 million (based on 2005 comparable periodpre-hedge prices).

 

**Hedging and derivatives**– For the three months ended March 31,2006 we recorded a net gain as compared to a net loss in the same period in2005. During the first three months of 2006 we discontinued cash flow hedgeaccounting treatment applied to our natural gas collars, due to projectedchanges in 2006 physical production volumes hedged and to give us moreflexibility in how we market our physical production. This change in accountingtreatment affects the comparability of the periods (see Note 7 to ourconsolidated financial statements) because the change in fair market value ofthe natural gas hedge contracts in 2005 was deferred through OCI on the balancesheet rather than presented in total revenue on the income statement aspresented in 2006. The volume and price contract terms vary from period toperiod and therefore interact differently with the market prices. While we areunable to predict the market prices, we enter into contracts that we expectwill protect us in the event of significant downturns in the market. Thefollowing table summarizes the various components of the total gain (loss) onhedging and derivatives for the three months ended March 31, 2006 and 2005 andthe impact each component had on our realized prices.

 
| ** **                                                                       | ** ** | **For the Three Months Ended March 31,**   | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
| ** **                                                                       | ** ** | **$**                                      | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit(1)** | ** ** |
| ** **                                                                       | ** ** | **(in thousands, except per unit prices)** | ** ** |
| Natural gas contract settlements (Mcf)                                           |       | $                                          | 319        |   | $ | 0.09 |   | $ | 157 |   | $ | 0.05 |   |
| Crude oil contract settlements (Bbl)                                             |       | —                                     |       | — |   | (259 | ) | (3.11 | ) |
| Mark-to-market unrealized change in fair  value of gas derivative contract (Mcf) |       | 2,010                                      |       | 0.59 |   | — |   | — |   |
| Mark-to-market reversal of prior period  unrealized change in fair value (Bbl)   |       | (17                                        | )          | (0.20 | ) | 209 |   | 2.52 |   |
| Mark-to-market unrealized change in fair  value of oil derivative contract (Bbl) |       | (213                                       | )          | (2.45 | ) | (1,092 | ) | (13.16 | ) |
| Gain (loss) on hedging and derivatives  (Mcfe)                                   |       | $                                          | 2,099      |   | $ | 0.48 |   | $ | (985 | ) | $ | (0.23 | ) |

 

----

(1) Prices per unit are calculated based onwhole numbers, not rounded numbers.

 

Should natural gas prices decrease from the highlevels of late 2005 and early 2006, this could materially affect our revenuesthat are not hedged.

 

28

----

 

**Costs and Operating Expenses**

 

The table below presents a detail of our expenses for the three monthsended March 31, 2006 and 2005:

 
| ** **                                           | ** ** | ** **                             | ** ** | ** **      | ** ** | **2006 Period Compared  to 2005 Period** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|-----------------|------------|------------------------------------------|------------|
| ** **                                           | ** ** | **Three Months Ended  March 31,**      | ** ** | **$  Increase** | ** ** | **%  Increase**                          | ** ** |
| ** **                                           | ** ** | **2006**                               | ** ** | **2005**        | ** ** | **(Decrease)**                           | ** ** | **(Decrease)** | ** ** |
| ** **                                           | ** ** | **(in thousands, except percentages)** | ** ** |
| Oil and natural gas operating expenses               |       | $                                      | 2,189      |            | $          | 2,242                                    |       | $ | (53 | ) | (2 | )% |
| Severance and ad valorem taxes                       |       | 2,589                                  |       | 1,866           |       | 723                                      |       | 39 | % |
| Depreciation, depletion, amortization and accretion: |       |                                   |       |            |       |                                     |       |   |   |
| Oil and gas property and equipment                   |       | 15,675                                 |       | 8,541           |       | 7,134                                    |       | 84 | % |
| Other assets                                         |       | 74                                     |       | 62              |       | 12                                       |       | 19 | % |
| ARO accretion                                        |       | 44                                     |       | 33              |       | 11                                       |       | 33 | % |
| General and  administrative:                         |       |                                   |       |            |       |                                     |       |   |   |
| Deferred compensation – repriced options        |       | 29                                     |       | 262             |       | (233                                     | )          | (89 | )% |
| Deferred compensation – restricted stock        |       | 336                                    |       | 144             |       | 192                                      |       | 133 | % |
| Deferred compensation – stock option  expense   |       | 42                                     |       | —          |       | 42                                       |       | * |   |
| Bad debt expense                                     |       | —                                 |       | 11              |       | (11                                      | )          | * |   |
| Other general and administrative                     |       | 2,717                                  |       | 2,479           |       | 238                                      |       | 10 | % |
|                                                 |       | 23,695                                 |       | 15,640          |       | 8,055                                    |       | 52 | % |
| Other  expense, net                                  |       | 672                                    |       | 3               |       | 669                                      |       | * |   |
| Total                                                |       | $                                      | 24,367     |            | $          | 15,643                                   |       | $ | 8,724 |   | 56 | % |

 

----

*Not meaningful

 

**Oil and natural gas operating expenses** - For the three months ended March 31, 2006 operating expenses decreasedfrom the same period of 2005. Although we experienced increases in costs forthe newly acquired Chapman Ranch Field properties and new wells drilled at GatoCreek, we experienced offsetting declines in costs for our outside operatedproperties at O’Connor Ranch and Spartan, as well as on our Louisianaproperties. Average oil and natural gas operating expenses were $0.51 per Mcfeand $0.53 per Mcfe for the three months ended March 31, 2006 and 2005,respectively.

 

**Severance and ad valorem taxes**  — For the three months ended March 31, 2006,severance and ad valorem taxes increased 39% from the first quarter of 2005. Severancetax expense for the first quarter of 2006 was 27% higher than the comparableprior year period as a result of higher revenue. Our severance tax expense islevied on our oil and gas revenue dollars (excluding hedging and derivativeimpact), so if commodity prices remain high, we expect to continue to incurhigher severance tax expense. For the three months ended March 31, 2006,severance tax expense was approximately 5.8% of revenue subject to severancetaxes compared to 6.2% of revenue subject to severance taxes for the comparable2005 period. Ad valorem tax expense for the first quarter of 2006 was impactedby increased accruals for the estimated costs related to the addition of theChapman Ranch Field properties acquired in the fourth quarter 2005 andincreases in estimated costs from the taxing authorities. On an equivalentbasis, severance and ad valorem taxes averaged $0.60 per Mcfe and $0.44 per Mcfefor the three months ended March 31, 2006 and 2005, respectively.

 

**Depletion, depreciation, and amortization (“DD&A”)and accretion**- DD&A and accretion expense for the three months ended March 31, 2006totaled $15.8 million compared to $8.6 million for the three

 

29

----

 

months ended March 31, 2005. Depletion on our oil and natural gasproperties increased 84% for the first quarter of 2006 compared to the sameperiod of 2005 due to an increase in production levels and in theunit-of-production depletion rate. The depletion rate increased from $2.03 perMcfe in the first quarter 2005 to $3.63 per Mcfe in the first quarter of 2006,adding approximately $6.9 million in depletion expense. Our rate has increaseddue to increased spending on our drilling program with disproportionate reserveadditions. The rate was also impacted in the fourth quarter of 2005 by theChapman Ranch Field acquisitions which added $0.52 per Mcfe. The increase indepletion expense from the higher production levels in the first quarter of2006 as compared to the same period of 2005 resulted in an increase in expenseof approximately $0.2 million. Depreciation of furniture and fixtures increased19% compared to the prior year first quarter due to the addition of furnitureand leasehold improvements for our expanded corporate office spaces andadditions to computer equipment for new employees. Accretion expense associatedwith our asset retirement obligations for the three months ended March 31, 2006increased 33% over the first quarter of 2005 for the new obligations incurredfrom the wells drilled in 2005 and the addition of properties acquired in thefourth quarter of 2005.

 

**Total G&A** -For the three months ended March 31, 2006, total G&A was $3.1 million, anincrease of 8% compared to the prior year first quarter total of $2.9 million.Total G&A includes deferred compensation related to repriced optionspursuant to FIN 44 discussed in Note 1 to the consolidated financialstatements, deferred compensation related to stock option expense pursuant tothe adoption of SFAS No. 123R, deferred compensation related to restrictedstock grants and other G&A costs. FIN44 expense has decreased as a result of the exercise of a substantial portionof the outstanding repriced options. Upon adoption of SFAS No. 123R in thefirst quarter of 2006, we recorded $41,738 in compensation expense for stockoptions that had not vested as of adoption of SFAS No. 123R. There was nocomparable expense in the same prior year period because we were applying APBOpinion No. 25, which allowed us to exclude expense related to stock options(see Note 1 to the consolidated financial statements). We do not expect anyfurther impact to our income statement as we discontinued issuing stock optionsin 2004. Amortization related to restricted stock awards granted overthe past three years has increased due to new grants that have occurred sincethe first quarter of 2005. We recorded $11,000 of bad debt expense in the firstquarter of 2005 and none in 2006. Other G&A for the three months endedMarch 31, 2006, which does not include the deferred compensation expensesdiscussed above, increased 10% from the comparable 2005 period. The increase inother G&A was attributable to higher salaries and benefits, due to adding14 additional employees since March 31, 2005 and for increased directorcompensation, as well as higher rent expense for additional office space,franchise tax expense, and legal costs for pending litigation. These increaseswere partially offset by decreases in regulatory fees, Sarbanes-Oxleyconsulting fees, and costs incurred in 2005 for strategic planning. For thethree months ended March 31, 2006 and 2005, overhead reimbursement feesreducing G&A costs doubled in 2006 as compared to 2005 as a result ofincreasing our operated properties. Capitalized G&A costs further reducedother G&A by $0.8 million and $0.7 million for the three months ended March31, 2006 and 2005, respectively. Other G&A on a unit of production basisfor the three months ended March 31, 2006 was $0.63 per Mcfe compared to $0.59per Mcfe for the comparable 2005 period.

 

**Other income (expense)** - During the three months ended March31, 2005, 100% of our interest expense for the quarter was capitalized ascompared to only a portion being capitalized in the same 2006 period. Wecalculate the amount of interest we can capitalize based on the comparison ofour unproved property costs and our weighted average debt balance, and in 2005our debt was lower than the unproved property balance. We incurred higherinterest costs for the three months ended March 31, 2006 than for the sameperiod of 2005 due to higher outstanding debt balances.

 
| ** **                  | ** ** | **For the Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------|------------|
| ** **                  | ** ** | **2006**                                 | ** ** | **2005** | ** ** |
| ** **                  | ** ** | **(in thousands)**                       | ** ** |
| Gross  interest expense     |       | $                                        | 1,607      |   | $ | 224 |   |
| Less:  Capitalized interest |       | (939                                     | )          | (224 | ) |
| Interest  expense, net      |       | $                                        | 668        |   | $ | — |   |
|                        |       |                                     |       |   |   |
| Weighted  Average Debt      |       | $                                        | 93,400     |   | $ | 12,022 |   |

 

30

----

 

We also recorded amortization of deferred loan costsrelated to our amended credit facility and interest income earned on ouroutstanding daily cash balances during the three months ended March 31, 2006and 2005, both of which were comparable amounts.

 

**Income tax expense** - An income tax provision was recordedfor the three months ended March 31, 2006 and 2005 of $3.7 million and $2.6million, respectively. The increase resulted from higher pre-tax income in 2006as compared to 2005.

 

**Earnings per share**- For the three months ended March 31, 2006, earnings per share increased incomparison to the same period in 2005 mainly as a result of increased netincome, partially offset by an increased number of shares. We had $0.40 basicearnings per share and $0.38 diluted earnings per share for the three monthsended March 31, 2006, as compared to $0.28 basic earnings per share and $0.27diluted earnings per share in the comparable 2005 period. Basic weightedaverage shares outstanding for the three months ended March 31, 2006 increasedapproximately 1% as compared to the same 2005 period primarily due to theexercise of stock options throughout the interim periods.

 

## **Liquidity and Capital Resources**

## ** **

Our primary ongoing source of capital is the cash flow generated fromour operating activities supplemented by borrowings under our credit facility. Netcash generated from operating activities is a function of production volumesand commodity prices, both of which are inherently volatile and unpredictable,as well as operating efficiency and capital spending. Our business, as withother extractive businesses, is a depleting one in which each gas equivalentunit produced must be replaced or our asset base and capacity to generaterevenues in the future will shrink. Our overall expected future productiondecline is estimated to be approximately 22% per year. 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 attempt to mitigate the price risk with our hedging program.Reserves and production volumes are influenced, in part, by the amount offuture capital expenditures. In turn, capital expenditures are influenced bymany factors including drilling results, oil and gas prices, industryconditions, prices, availability of goods and services and the extent to whichoil and gas properties are acquired.

 

Our primary cash requirements are for exploration, development andacquisition of oil and gas properties, and the repayment of principal andinterest on outstanding debt. We attempt to fund our exploration anddevelopment activities primarily through internally generated cash flows andbudget capital expenditures based on projected cash flows. We routinely adjustcapital expenditures in response to changes in oil and natural gas prices,drilling and acquisition costs, and cash flow. We have historically used ourcredit facility to supplement any deficiencies between operating cash flow andcapital expenditures. We typically have funded acquisitions from borrowingsunder our credit facility, cash flow from operations and sales of common stock.

 

Significant changes to working capital may affect our liquidity in theshort term. The change in our derivative instrument from a liability at December31, 2005 to an asset at March 31, 2006 is indicative of potential future cashreceipts on our derivative positions, which are scheduled to settle in thecoming months. The fair value of our outstanding derivative contracts,reflected in the derivative financial instrument on the balance sheet, is anasset because the price floors on our contracts exceed the future stripcommodity prices at the balance sheet date, such that if the contracts were tosettle at the balance sheet date we would have gains. The fair market valuerepresents the potential settlement for those contracts if the market pricesremain unchanged, but should commodity prices increase or decrease, the fairvalue of those outstanding contracts would change and the settlements at maturitywould also change. When our hedges and derivatives require us to pay a cashsettlement, we are receiving higher cash inflows on the sale of unhedgedproduction at higher prices, providing us with funds which would adequatelycover any settlements when they come due.

 

We had $100.0 million outstanding under the creditfacility at March 31, 2006. The maturity for this credit facility is December31, 2007. We have received significant funds through equity transactions in thepast, including through offerings of our common stock and the exercise ofwarrants and stock options. We typically do not,

 

31

----

 

however,rely on proceeds from the exercise of warrants and stock options to sustain ourbusiness as the timing of their exercise is unpredictable.

 

After considering the impact of these working capitalchanges and our forecasts of future results of operations, we believe that cashflows from operating activities, as supplemented by borrowings on our creditfacility, combined with our ability to control the timing of certain of ourfuture exploration and development requirements, will provide us with theflexibility and liquidity to meet our planned capital requirements for 2006. Inaddition, our credit facility had $10.0 million available at March 31, 2006.

 

We had cash and cash equivalents at March 31, 2006 of$2.3 million consisting primarily of short-term money market investments, ascompared to $0.7 million at December 31, 2005. Working capital was $13.9 millionas of March 31, 2006, as compared to $10.5 million at December 31, 2005. Oursources and uses of cash were as follows:

 
| ** **                                             | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                 | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                       | ** ** |
| *Net Cash  Provided By Operating Activities*           |       | $                                        | 25,066     |   | $ | 17,969 |   |
| *Net Cash  Used In Investing Activities*               |       | (39,025                                  | )          | (12,810 | ) |
| *Net Cash  Provided by (Used In) Financing Activities* |       | 15,562                                   |       | (2,789 | ) |
|                                                        |            |                                          |            |  |  |  |  |

 

*Net Cash Provided By Operating Activities-*The increase in cash flows provided by operating activities for the threemonths ended March 31, 2006 compared to 2005 was primarily due to higher oiland gas production revenue partially offset by higher operating expenses. Althoughfluctuations in commodity prices have been the primary reason for ourshort-term changes in cash flow from operating activities, increased productionvolumes significantly impacted us in the past few quarters. In an effort toreduce the volatility realized on commodity prices, we enter into derivativeinstruments. Although we have seen declines in natural gas prices sinceyear-end 2005, we have realized cash settlements from our derivatives to offseta portion of those price declines. Overall, oil and gas production revenueincreased for the three months ended March 31, 2006 as compared to the same periodin 2005 with a 49% increase in the average net price received for ourproduction and a 3% increase in production volumes.

 

*NetCash Used In Investing Activities -*We reinvest asubstantial portion of our cash flows from operating activities in our drilling,acquisition, land and geophysical activities. Capital expenditures of $36.5million were attributable to our drilling and operating program. In addition todrilling that was in progress at year-end 2005, we drilled 19 gross wellsduring the three months ended March 31, 2006, all but three of which wereapparent successes. Leasehold acquisitions, including seismic data and othergeological and geophysical expenditures totaled $3.6 million for the threemonths ended March 31, 2006. The remaining capital expenditures were associatedwith computer hardware and office equipment and other miscellaneous capitalcharges. Proceeds from the sale of oil and gas properties totaled $60,000during the three months ended March 31, 2006, which represents a deposit forthe divestiture of the Buckeye properties which closed after quarter-end.During the three months ended March 31, 2005, we incurred capital expendituresof $10.8 million attributable to the drilling of six gross wells, all of whichwere successful. Leasehold acquisitions, including seismic data and othergeological and geophysical expenditures, totaled $1.6 million and acquisitioncosts totaled $0.3 million for the three months ended March 31, 2005. Theremaining capital expenditures were associated with computer hardware andoffice equipment.

 

Due to our activeexploration, development and acquisition activities, we have experienced andexpect to continue to experience substantial working capital requirements. Wecurrently anticipate capital expenditures in 2006 to be approximately $98.0million. Approximately $74.5 million is allocated to our expected drilling andproduction activities; $16.5 million is allocated to land, legal and seismicactivities; and $7.0 million relates to capitalized interest, G&A andother. We intend to fund our total projected 2006 capital expenditures, andother commitments and working capital requirements with expected cash flow fromoperations and, to the extent necessary, other sources. Should there be achange in our pricing or production assumptions, we believe that we havesufficient financial flexibility from other financing sources to meet ourfinancial obligations as they come due, and we would recommend to our Board anadjustment to our capital expenditures program accordingly so as to avoidunnecessary incremental borrowings that may be needed for acquisitions. We donot explicitly budget for

 

32

----

 

acquisitions; however, we do expect tospend considerable effort evaluating acquisition opportunities. We expect tofund acquisitions through traditional reserve-based bank debt and/or theissuance of equity and, if required, through additional debt and equityfinancings.

 

*Net Cash Provided By (Used In) FinancingActivities -*We had net borrowings of $15.0million under our credit facility due to the accelerated timing of our drillingschedule. We received $0.6 million in proceeds from stock options exercised inthe first three months of 2006. For the three months ended March 31, 2005, wehad net repayments of $10.0 million under our credit facility and $7.2 millionin proceeds from the issuance of common stock related to the exercise of theover-allotment option on our December 2004 public offering and stock optionsexercised in the first three months of 2005.

 

We utilize our credit facility to supplement timing differences in ourprojected cash inflows and outflows and smaller acquisitions. We also have $390million available under our current shelf registration statement for largeracquisitions. We believe we will be able to generate capital resources andliquidity sufficient meet our financial obligations as they come due.

 

*Credit Facility*

 

On November 30, 2005, we amended our Third Amended and Restated CreditAgreement (the “Credit Facility”), which it had originally entered into inMarch 2004 (effective December 31, 2003) and previously amended on May 31, 2005.The Credit Facility permits borrowings up to the lesser of (i) the borrowingbase and (ii) $150.0 million. Effective November 30, 2005, the borrowing baseunder the Credit Facility was increased from $70.0 million to $110.0 million asa result of the Chapman Ranch Field acquisitions and our drilling activitiessince the last redetermination. Based on the increase, our available borrowingcapacity at March 31, 2006 was $10.0 million. The borrowing base is currentlybeing redetermined by the lender and we expect to be notified of any changes bythe end of May 2006.

 

The Credit Facility matures December 31, 2007 and is secured bysubstantially all of our assets. Borrowings under the Credit Facility bearinterest at rates that are variable based on the percentage usage of thefacility. Borrowings can be at prime plus a margin of up to 0.25% or at Liborplus a margin of 1.75% to 2.125%. As of March 31, 2006, our interest rates onour outstanding prime and Libor borrowings were 8.0% and 6.795%. As of March31, 2006, $100.0 million in total borrowings were outstanding under the CreditFacility.

 

The Credit Facility provides for certain restrictions, including butnot limited to, limitations on additional borrowings, sales of oil and naturalgas properties or other collateral, and engaging in merger or consolidationtransactions. The Credit Facility also prohibits dividends and certaindistributions of cash or properties and certain liens. The Credit Facility alsocontains the following financial covenants, among others:

 

•                  The EBITDAX toInterest Expense ratio requires that the ratio of (a) our consolidated EBITDAX(defined as EBITDA plus similar non-cash items and exploration and abandonmentexpenses for such period) for the four fiscal quarters then ended to (b) ourconsolidated interest expense for the four fiscal quarters then ended, to notbe less than 3.5 to 1.0.

 

•                  The Working Capitalratio requires that the amount of our consolidated current assets less ourconsolidated current liabilities, as defined in the Credit Facility Agreement,be at least $1.0 million. For the purposes of calculating the Working Capitalratio, the total of current assets is adjusted for unused capacity under theCredit Facility Agreement, and derivative financial instruments and the totalof current liabilities is adjusted for the current portion of indebtednessunder the Credit Facility Agreement, derivative financial instruments and assetretirement obligations.

 

•                  The MaximumLeverage ratio requires that the ratio, as of the last day of any fiscalquarter, of (a) Total Indebtedness (as defined in the Credit FacilityAgreement) as of such fiscal quarter to (b) an amount equal to consolidatedEBITDAX for the two quarters then ended times two, not be greater than 3.0 to1.0.

 

33

----

 

Consolidated EBITDAX is a component of negotiated covenants with ourlenders and is presented here as disclosure of our covenant obligations.

 

*Shelf Registration Statement*

 

During the second quarter 2005, we filed aregistration statement with the SEC which registered offerings of up to $390million of any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities of the Company. Net proceeds,terms and pricing of the offering of securities issued under the shelfregistration statement will be determined at the time of the offerings. Theshelf registration statement does not provide assurance that we will or couldsell any such securities. Our ability to utilize our shelf registrationstatement for the purpose of issuing, from time to time, any combination ofdebt securities, preferred stock, common stock or warrants for debt securitiesor equity securities will depend upon, among other things, market conditionsand the existence of investors who wish to purchase our securities at pricesacceptable to us. In connection with the filing of the 2005 registrationstatement, we deregistered the remaining shares then available for sale underour earlier $150 million shelf registration statement filed in 2004. At March31, 2006, we had $390 million remaining for issuance under our 2005 shelfregistration statement.

 

*Off Balance Sheet Arrangements*

 

We currently do not have any off balance sheetarrangements.

 

**Risk Management Activities – Derivatives & Hedging**

 

Due to the instability of oil and natural gas prices, we may enterinto, from time to time, price-risk management transactions (e.g., swaps,collars and floors) for a portion of our oil and natural gas production toachieve a more predictable cash flow, as well as to reduce exposure fromcommodity price fluctuations. While the use of these arrangements limits ourability to benefit from increases in the price of oil and natural gas, it alsoreduces our potential exposure to adverse price movements. Our arrangements, tothe extent we enter into any, apply to only a portion of our production,provide only partial price protection against declines in oil and natural gasprices and limit our potential gains from future increases in prices. None ofthese instruments are used for trading purposes. On a quarterly basis, ourmanagement reviews all of our price-risk management policies, includingvolumes, types of instruments and counterparties. These policies areimplemented by management through the execution of trades by the ChiefFinancial Officer after consultation and concurrence by the President andChairman of the Board. Our Board of Directors monitors our price-riskmanagement policies and trades.

 

All of these price-risk management transactions are consideredderivative instruments and accounted for in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*(as amended)*.* These derivative instruments areintended to hedge our price risk and may be considered hedges for economicpurposes. There are two types of accounting treatments for derivatives, (i)mark-to-market accounting and (ii) cash flow hedge accounting. We previouslyapplied cash flow hedge accounting treatment to our natural gas derivatives andmark-to-market accounting treatment to our crude oil derivatives. During thefirst quarter of 2006, we discontinued cash flow hedge accounting treatmentapplied to our natural gas derivatives. Therefore, all derivatives are recordedon the balance sheet at fair value and the changes in fair value are presentedin total revenue on the income statement, rather than deferred through OCI onthe balance sheet. The following table provides additional informationregarding our various derivative transactions that were recorded at fair valueon the balance sheet as of March 31, 2006.

 

34

----

 
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------|------------|
| Fair value  of contracts outstanding at December 31, 2005                               |       | $                  | (2,479     | ) |
| Contracts  realized or otherwise settled during the period                              |       | 319                |       |
| Fair value  of new contracts when entered into during 2006:                             |       |               |       |
| Asset                                                                                   |       | —             |       |
| Liability                                                                               |       | —             |       |
| Changes in  fair values attributable to changes in valuation techniques and assumptions |       | —             |       |
| Other  changes in fair values                                                           |       | 4,096              |       |
| Fair values  of contracts outstanding at March 31, 2006                                 |       | $                  | 1,936      |   |

 

The followingtable details the fair value of our commodity-based derivative contracts byyear of maturity and valuation methodology as of March 31, 2006.

 
| ** **                                           | ** ** | **Fair Value of Contracts at March 31, 2006** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| **Source of Fair Value**                             | ** ** | **Maturity less  than 1 year**                | ** ** | **Maturity 1-3  years** | ** ** | **Maturity 4-  5 years** | ** ** | **Maturity in  excess of 5  years** | ** ** | **Total fair  value** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                            | ** ** |
| Prices actively quoted:                              |       | —                                        |       | — |   | — |   | — |   | — |   |
| Prices provided by other external sources:           |       |                                          |       |   |   |   |   |   |   |   |   |
| Asset                                                |       | 1,936                                         |       | — |   | — |   | — |   | 1,936 |   |
| Liability                                            |       | —                                        |       | — |   | — |   | — |   | — |   |
| Prices based on models and other valuation  methods: |       | —                                        |       | — |   | — |   | — |   | — |   |
| Total                                                |       | $                                             | 1,936      |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,936 |   |
|                                                      |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Tax Matters**

 

At March 31, 2006, we had cumulative net operating loss carryforwards (“NOLs”)for federal income tax purposes of approximately $63.6 million, including $17.8million of NOLs acquired in the Miller merger that expire beginning 2020through 2024. The estimated NOLs presented herein assume that certain items,primarily intangible drilling costs, have been written off for tax purposes inthe current year. However, we have not made a final determination if anelection will be made to capitalize all or part of these items for tax purposesin the future.

 

**Recently Issued Accounting Pronouncements**

 

In December 2004, the Financial Accounting Standards Board(“FASB”)  issued SFAS No. 153, *Exchanges of Nonmonetary Assets, an amendment of APB OpinionNo. 29*. SFAS No. 153 is based on the principle thatexchanges of nonmonetary assets should be measured based on the fair value ofthe assets exchanged. APB Opinion No. 29, *Accountingfor Nonmonetary Transactions*, provided an exception to its basicmeasurement principle (fair value) for exchanges of similar productive assets.Under APB Opinion No. 29, an exchange of a productive asset for a similarproductive asset was based on the recorded amount of the asset relinquished.SFAS No. 153 eliminates the exception for nonmonetary exchanges of similarproductive assets and replaces it with a general exception for exchanges ofnonmonetary assets that do not have commercial substance. Nonmonetary exchangehas commercial substance if the future cash flows of the entity are expected tochange significantly as a result of the exchange. SFAS No. 153 iseffective for fiscal periods beginning after June 15, 2005. The adoption of SFASNo. 153 is not expected to have a material effect on our consolidated financialposition, results of operations or cash flows.

 

In March 2005, the FASB issued FIN 47, *Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASB StatementNo. 143*.  FIN 47 clarifies that the term, “conditional assetretirement obligation” as used in SFAS No. 143, *Accounting for Asset Retirement Obligations*, refers to alegal obligation to perform an asset retirement activity in which the timingand/or method of settlement are conditional upon a future event that may or maynot be within the control of the entity.  Even though uncertainty aboutthe timing and/or method of settlement exists and may be conditional upon afuture event, the obligation to perform the asset retirement activity isunconditional.  Accordingly, an entity is required to recognize aliability for the fair value of a conditional asset retirement obligation ifthe fair value of the liability can be reasonably estimated.  Uncertainty

 

35

----

 

about the timing and/or method of settlement of a conditional assetretirement obligation should be factored into the measurement of the liabilitywhen sufficient information exists.  The fair value of a liability for theconditional asset retirement obligation should be recognized when incurredgenerally upon acquisition, construction, or development or through the normaloperation of the asset.  SFAS No. 143 acknowledges that in some cases,sufficient information may not be available to reasonably estimate the fairvalue of an asset retirement obligation.  FIN 47 also clarifies when anentity would have sufficient information to reasonably estimate the fair valueof an asset retirement obligation.  FIN 47 is effective for fiscal yearsending after December 15, 2005.  Retrospective application for interimfinancial information is permitted but is not required.  The adoption ofFIN 47 is not expected to have a material effect on our consolidated financial position,results of operations or cash flows.

 

In June 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*, *a replacement of Accounting Principles Board (“APB”) OpinionNo. 20 and FASB Statement No. 3,*which changes therequirements for the accounting for and reporting of a change in accountingprinciple. It also applies to changes required by an accounting pronouncementin the unusual instance that the pronouncement does not include specifictransition provisions. Application is effective for accounting changes andcorrection of errors made in fiscal years beginning after December 15, 2005.The adoption of SFAS No. 154 is not expected to have a material effect on ourconsolidated financial position, results of operations or cash flows.

 

In February 2006, the FASB issued SFAS No. 155, *Accountingfor Certain Hybrid Financial Instruments,*which improves financialreporting by eliminating the exemption from applying SFAS No. 133 to interestsin securitized financial assets so that similar instruments are accounted forsimilarly regardless of the form of the instruments and allows a preparer toelect fair value measurement at acquisition, at issuance, or when a previouslyrecognized financial instrument is subject to a remeasurement (new basis)event, on an instrument-by-instrument basis, in cases in which a derivativewould otherwise have to be bifurcated. Providing a fair value measurementelection also results in more financial instruments being measured at what theFASB regards as the most relevant attribute for financial instruments, fairvalue. SFAS No. 155 is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006. We are currently evaluating the impact of this standard onour financial position, results of operations and cash flows.

 

In March 2006, the FASB issued SFAS No. 156,  *Accounting for Servicingof Financial Assets*, which requires all separately recognizedservicing assets and servicing liabilities be initially measured at fair value.SFAS No. 156 permits, but does not require, the subsequent measurement ofservicing assets and servicing liabilities at fair value. Adoption is requiredas of the beginning of the first fiscal year that begins afterSeptember 15, 2006. Early adoption is permitted. The adoption of SFAS No.156 is not expected to have a material effect on our consolidated financialposition, results of operations or cash flows.

 

***ITEM 3. QUALITATIVE AND QUANTITATIVEDISCLOSURES ABOUT MARKET RISK***

 

We are exposed to market risk from changes in interestrates and commodity prices. We use a credit facility, which has a floatinginterest rate, to finance a portion of our operations. We are not subject tofair value risk resulting from changes in our floating interest rates. The useof floating rate debt instruments provides a benefit due to downward interestrate movements but does not limit us to exposure from future increases ininterest rates. Based on the March 31, 2006 outstanding borrowings and interestrates of 6.8% and 8.0% applied to various borrowings, a 10% change in interestrates would result in an increase or decrease of interest expense ofapproximately $0.7 million on an annual basis.

 

In the normal course of business we enter into hedging transactions,including commodity price collars, swaps and floors to mitigate our exposure tocommodity price movements, but not for trading or speculative purposes. During2005, we put in place several natural gas and crude oil collars for a portionof our 2006 production to achieve a more predictable cash flow. Please refer toNote 7 to our consolidated financial statements. While the use of thesearrangements may limit the benefit to us of increases in the price of oil andnatural gas, it also limits the downside risk of adverse price movements. Thefollowing is a list of contracts outstanding as of March 31, 2006:

 

36

----

 
| **Transaction  Date**  | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  March 31, 2006** | ** ** |
|------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|---------------------|------------|----------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **          | ** ** | ** **           | ** ** | **(in thousands)**                                | ** ** |
| ***Natural Gas (1):*** | * *   | * *              | * *   | * *      | * *   | * *   | * *   | * *            | * *   | * *             | * *   | * *                                          | * *   |
| 08/05                  |       | Collar                |       | 01/01/06      |       | 12/31/06   |       | $7.00-$10.50        |       | 10,000 MMbtu         |       | $                                                 | 766        |   |
|                   |       |                  |       |          |       |       |       |                |       |                 |       |                                              |       |
| 08/05                  |       | Collar                |       | 01/01/06      |       | 12/31/06   |       | $7.00-$16.10        |       | 10,000 MMbtu         |       | 1,244                                             |       |
|                   |       |                  |       |          |       |       |       |                |       |                 |       |                                              |       |
| ***Crude Oil (2):***   |       |                  |       |          |       |       |       |                |       |                 |       |                                              |       |
| 08/05                  |       | Collar                |       | 01/01/06      |       | 12/31/06   |       | $55.00-$80.00       |       | 400 Bbl              |       | (74                                               | )          |
|                   |       |                  |       |          |       |       |       |                |       |                 |       |                                              |       |
|                   |       |                  |       |          |       |       |       |                |       |                 |       | $                                                 | 1,936      |   |

 

----

(1) The Company’s currentnatural gas collars were entered into on a per MMbtu delivered price basis,using the Houston Ship Channel Index, with settlement for each calendar monthoccurring five business days following the expiration date. During 2005, cashflow hedge accounting was applied to these contracts, which was thendiscontinued in 2006. During 2006, mark-to-market accounting treatment will beapplied to these contracts and the change in fair value is reflected in totalrevenue during the year.

 

(2) Cash flow hedgeaccounting is not applied to the Company’s crude oil collars, 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. Mark-to-market accountingtreatment is applied to these contracts and the change in fair value isreflected in total revenue during the year.

 

At March 31, 2006, the fair value of the outstandingderivatives was an asset of approximately $1.9 million. A 10% change in thecommodity price per unit, as long as the price is either above the ceiling orbelow the floor price, would cause the fair value total of the hedge toincrease or decrease by approximately $0.2 million.

 

##### ***ITEM 4. CONTROLS AND PROCEDURES***

#####  

In accordance with Exchange Act Rules 13a-15 and15d-15, we carried out an evaluation, under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this report. Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of March 31, 2006 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 change in our internal controls overfinancial reporting that occurred during the three months ended March 31, 2006that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

37

----

 

**PART II -OTHER INFORMATION**

 

**Item 1 -Legal Proceedings**

 

From time to time we are a party to various legal proceedings arisingin the ordinary course of business. While the outcome of lawsuits cannot bepredicted with certainty, we are not currently a party to any proceeding thatwe believe, if determined in a manner adverse to the Company, could have amaterial adverse effect on our financial condition, results of operations orcash flows, except as set forth below.

 

**Texas Comptroller Audit**- During the second quarter of 2004, we received notice that its franchise taxreturns for the State of Texas would be audited for the tax years 1999 through2002. After reviewing documents submitted, the agent representing the Office ofthe Comptroller of the State of Texas proposed adjustments to the calculationthat would result in an increased franchise tax liability.  The agentmaintained that transfers by the parent company to its subsidiaries that weclassified as intercompany loans should instead be classified as equityinvestments in the subsidiary. The State of Texas originally proposed that thefranchise tax liability of the subsidiaries would be increased by approximately$3.0 million for the four-year period under audit.

 

During the third quarter of 2004, the agent reduced the proposedfranchise tax deficiency adjustment to the Company and its subsidiaries to anaggregate of $467,000. In the fourth quarter of 2004, there was an informalhearing at the local Comptroller’s Office during which the agent indicated hewould formally assess the proposed deficiency.  On March 24, 2005, wereceived such deficiency assessment in the amount of $471,482 including penaltyand interest. We responded on April 21, 2005 with a request for a formal redeterminationhearing. On February 14, 2006, a Hearings Attorney for the Texas Comptroller ofPublic Accounts issued a Position Letter reaffirming the auditor’s assessment,and rejecting our arguments as set forth in its April 21, 2005 request forredetermination.  On February 24, 2006, we filed a motion to set thematter for oral hearing before an Administrative Law Judge and a hearing iscurrently set for July 18, 2006. Prior to the oral hearing we will submitadditional written materials to the Hearings Attorney. We intend to continue tovigorously contest the assessment through appropriate administrative levels inthe Comptroller’s Office and any other available means.  Due to ourintention to continue to vigorously contest the proposed adjustments, we havenot recognized any provision for the additional franchise taxes that wouldresult from the proposed deficiency. 

 

**Wade and Joyce Montet, et al., v.Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard,et al., v. Edge Petroleum Corp of Texas, et al****.** - This is a consolidated suit, filed instate court in Vermilion Parish, Louisiana in September 2003. Plaintiffs aremineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg TexReservoir C, Sand Unit A (Edge’s old Bayou Vermillion Prospect). They claim theoperator at the time, Norcen Explorer, now Anadarko, failed to “block squeeze”the sections of the No. 2 well, as would a prudent operator, to protect the gasreservoir from being flooded with water from adjacent underground formations.Plaintiffs further allege Norcen was negligent in not creating a field-wideunit to protect their interests. Plaintiffs have named us and other workinginterest owners in the leases as defendants, including Norcen Explorer’ssuccessors in interest, Anadarko. Plaintiffs seek unspecified damages for lostroyalties and damages due to alleged devaluation of their mineral and propertyinterests, plus interest and attorneys’ fees. In early 2005, we filed a motionfor summary judgment in the case asserting, among other defenses, that:  (i) there has been no breach of contract,(ii) there is no express or implied duty imposed on us to block squeeze thewell or form a field-wide unit, (iii) the units were properly formed by theConservation Commissioner in accordance with the statutory scheme in Louisiana,(iv) plaintiffs’ claims are barred by limitations, and (v) other defenses.Along with the other defendants, we also filed a special preemptory challengeof no cause of action under the leases and the Louisiana Mineral Code forfailure to exhaust administrative remedies and due to lack of a demand. In Mayand June 2005, the court ruled against us on the motion for summary judgmentand the preemptory challenges. Of the 18.75% after-payout working interest thatwe originally reserved in the leases, we owned a 2.8% working interest at thetime of the alleged acts or omissions. On September 6, 2005, we were grantedleave by the court to file a third party demand to join the other workinginterest owners who hold the remainder of the 18.75% working interest as directdefendants in this case, and those pleadings have been served on the parties.

 

As of the date of this report, it is not possible to determine what, ifany, our exposure might be in this matter. The plaintiffs’ expert witness, inhis December 2005 deposition, offered his theory that plaintiffs’ gross

 

38

----

 

damages are in the range of $19 to 20 million. That number is based onhis theory that the alleged failure to block squeeze the well resulted in theunder-production of gas worth $300 million. Plaintiffs’ royalty share of thatfigure yields the $19 to $22 million range of alleged damages. Based on theexpert’s testimony, damages attributable to the full 18.75% interest would bein the range of $3.75 million gross or net to our 2.8% share would be in therange of $560,000 (excluding interest and attorneys’ fees). Along with theother defendants, we hired our own expert witnesses who have refuted theseclaims, particularly the expert’s assertions that failure to block squeeze thewell caused any damages to the reservoir. The deposition of a Norcen engineerwho prepared the completion plan for the Broussard No. 2 well and supervisedthe completion operations, taken in April 2006, confirms the testimony of thedefense experts as to why the well was not block squeezed. A hearing was heldbefore Judge Conque on April 3, 2006 covering several motions before the court.At that hearing, (1) the trial, originally set for May 22, 2006, was continueduntil either August 28, 2006 or December 11, 2006, with the date to bedetermined shortly; (2) plaintiffs’ and defendants’ motions to exclude eachother’s experts were denied and all experts will be allowed to testify; (3) thejudge ruled he would not grant any motions to sever absent an agreement by allparties consenting to severance; (4) the judge ruled on certain discoverymatters allowing certain limited discovery from one of Edge’s preliminaryexperts; and (5) the judge strongly suggested that the parties participate inmediation. While the Company agrees that mediation would be appropriate and isseeking a mediation date that is suitable with all parties, it will continue tovigorously defend itself against this lawsuit.

 

We may have insurance coverage for all or part of thisclaim up to the $2.0 million limits of the policy. A claim was submitted to ourcasualty carrier, who is currently providing a defense under a reservation ofrights letter. We believe that we would only be liable for our 2.8% share ofany damage award unless a co-party defendant cannot satisfy its share of anyfinal judgment. We intend to continue to vigorously contest this suit. We havenot established any reserve with respect to these claims.

 

**David Blake, et al. v. Edge PetroleumCorporation**– On September 19, 2005, David Blake and David Blake, Trustee of the David andNita Blake 1992 Children’s Trust filed suit against Edge Petroleum Corporationin state district court in Goliad County, Texas alleging breach ofcontract for failure and refusal to transfer overriding royalty interests toplaintiffs in at least five leases in Goliad County, Texas and failure andrefusal to pay monies to Blake pursuant to such overriding royalty interestsfor wells completed on the leases. Venue of the case was transferred to HarrisCounty by agreement of the litigants. The Company has served Plaintiffs withdiscovery and has filed a counterclaim and an amended counterclaim joiningvarious related entities that are controlled by Plaintiffs. In addition,Plaintiffs have filed an amended complaint alleging claims of slander of titleand tortuous interference related to its alleged right to receive an overridingroyalty interest from a third party. Plaintiffs currently have on file a motionfor summary judgment, to which the Company has objected, and this motion isexpected to be heard later this summer. The Company has responded aggressivelyto this lawsuit, and it does not believe that the probability of recoveryagainst the Company rises to the level of reasonably possible. As of the dateof this report, it is not possible to determine what, if any, our exposuremight be in this matter, nor have we assigned a value to our counterclaims.

 

**Item 1A –Risk Factors**

 

In addition to the other information set forth in thisreport, you should carefully consider the factors discussed in Part I, “Item1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December31, 2005, which could materially affect our business, financial condition orfuture results. The risks described in our Annual Report on Form 10-K are notthe only risks facing our Company. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 
| **Item 2 - Unregistered Sale of Equity Securities and Use of Proceeds** |   | None |
|-------------------------------------------------------------------------|--------|------|
| **Item 3 - Defaults Upon Senior Securities**                            |   | None |
| **Item 4 - Submission of Matters to a Vote of Security Holders**        |   | None |
| **Item 5 -  Other Information**                                         |   | None |

 

39

----

 

**Item 6 -Exhibits**

 

The following exhibits arefiled as part of this report:

 

**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)). |
|             |       |       |   |
| 2.3              | —     |       | Asset Purchase Agreement by and among Contango STEP, L.P., Contango  Oil & Gas Company, Edge Petroleum Exploration Company and Edge Petroleum  Corporation dated October 7, 2004 (Incorporated by reference from exhibit 2.1  to the Company’s Current Report on Form 8-K filed October 12, 2004). |
|             |       |       |   |
| 2.4              | —     |       | Purchase and Sale Agreement, dated as of September 21, 2005 among  Pearl Energy Partners, Ltd., and Cibola Exploration Partners, L.P., as  Sellers; and Edge Petroleum Exploration Company as Buyer and Edge Petroleum  Corporation as Guarantor (Incorporated by reference from exhibit 2.01 to the  Company’s Current Report on Form 8-K filed October 19, 2005). |
|             |       |       |   |
| 2.5              | —     |       | Stock Purchase Agreement by and among Jon L. Glass,  Craig D. Pollard, Leigh T. Prieto, Yorktown Energy Partners V, L.P., Yorktown  Energy Partners VI, L.P., Cinco Energy Corporation, and Edge Petroleum  Exploration Company and Edge Petroleum Corporation dated September 21, 2005  (Incorporated by reference from exhibit 2.5 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 2005). |
|             |       |       |   |
| 2.6              | —     |       | Letter Agreement dated November 18, 2005 by and among Edge Petroleum  Exploration Company, Cinco Energy Corporation and Sellers (Incorporated by  reference from exhibit 2.02 to the Company’s Current Report on Form 8-K filed  December 6, 2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Company  had omitted certain Schedules to the Letter Agreement (all of which are  listed therein) from this Exhibit 2.6. It hereby agrees to furnish a  supplemental copy of any such omitted item to the SEC on its request. |
|             |       |       |   |
| 3.1              | —     |       | Restated Certificate of Incorporation of the Company effective  January 27, 1997 (Incorporated by reference from exhibit 3.1 to the Company’s  Current Report on Form 8-K filed April 29, 2005). |
|             |       |       |   |
| 3.2              | —     |       | Certificate of Amendment to the Restated Certificate of Incorporation  of the Company effective January 31, 1997 (Incorporated by reference from  exhibit 3.2 to the Company’s Current Report on Form 8-K filed April 29,  2005). |
|             |       |       |   |
| 3.3              | —     |       | Certificate of Amendment to the Restated Certificate of Incorporation  of the Company effective April 27, 2005 (Incorporated by reference from  exhibit 3.3 to the Company’s Current Report on Form 8-K filed April 29,  2005). |
|             |       |       |   |
| 3.4              | —     |       | 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). |

 

40

----

 
| 3.5        | — |   | 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).                                                                                                                                                                                                                                                                                                                                               |
|------------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.6        | — |   | 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  among Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge Petroleum  Operating Company, Inc., Miller Oil Corporation and Miller Exploration  Company, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as Agent (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        | — |   | Agreement and Amendment No. 1 to Third Amended and  Restated Credit Agreement dated May 31, 2005 among Edge Petroleum  Corporation, Edge Petroleum Exploration Company, Edge Petroleum Operating  Company, Inc., Miller Exploration Company and Miller Oil Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as agent for the lenders (Incorporated by reference from  Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended June 30, 2005).          |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3        | — |   | Agreement and Amendment No. 2 to the Third Amended and Restated  Credit Agreement dated November 30, 2005 among Edge Petroleum Corporation,  Edge Petroleum Exploration Company, Edge Petroleum Operating Company, Inc.,  Miller Oil Corporation, Miller Exploration Company, and Cinco Energy  Corporation, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as Agent (Incorporated by reference  from exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2005). |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4        | — |   | Miller Exploration Company Stock Option and Restricted Stock Plan of  1997 (Incorporated by reference from exhibit 10.1(a) to Miller Exploration  Company’s Annual Report on Form 10-K for the year ended December 31, 1997  (File No. 000-23431)).                                                                                                                                                                                                                                                                                                           |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.5        | — |   | 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 Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.6        | — |   | 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 Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.7        | — |   | Form of Miller Stock Option Agreement (Incorporated by reference from  exhibit 10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.1 | — |   | 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)).                                                                                                                                                                                                                                                                                                                                             |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.2 | — |   | 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)).                                                                                                                                                                                                                                                                                                                                                       |

 

41

----

 
| †10.3  | — |   | 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).                                                                                                       |
|-------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.4  | — |   | Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of June 1, 2004 (Incorporated by reference from exhibit 10.9 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended June  30, 2004).                                                                                   |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.5  | — |   | 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).  |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.6  | — |   | 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). |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.7  | — |   | Severance Agreements by and between Edge Petroleum Corporation and  the Officers of the Company named therein (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).                                                                   |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.8  | — |   | Form of Director’s Restricted Stock Award Agreement  under the Incentive Plan of Edge Petroleum Corporation (Incorporated by  reference from exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2004).                                                                    |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.9  | — |   | 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).                                                                        |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.10 | — |   | 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)).                                                                                                  |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.11 | — |   | 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)).                                                                                        |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.12 | — |   | Summary of Compensation of Non-Employee Directors  (Incorporated by reference from Exhibit 10.12 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2005).                                                                                                                                              |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.13 | — |   | 2005 Bonus Plan for Executive Officers (Incorporated  by reference from Exhibit 10.12 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2005).                                                                                                                                                         |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.14 | — |   | 2004 Bonus Program (Incorporated by reference from  Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005).                                                                                                                                                                             |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *31.1       | — |   | Certification by John W. Elias, Chief Executive  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                     |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *31.2       | — |   | Certification by Michael G. Long, Chief Financial  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                   |

 

42

----

 
| *32.1  | — |   | Certification by John W. Elias, Chief Executive Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of  Section 1350, Chapter 63 of Title 18, United States Code).                   |
|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                          |
| *32.2  | — |   | Certification by Michael G. Long, Chief Financial and Accounting  Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code). |

 

----

* Filed herewith.

† Denotes management or compensatorycontract, arrangement or agreement.

 

43

----

 

## **SIGNATURES**

 

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|   |        | EDGE PETROLEUM CORPORATION,  |
|--------|-------------|------------------------------|
|   |        | A DELAWARE CORPORATION       |
|   |        | (REGISTRANT)                 |
|   |        |                         |
|   |        |                         |
| Date   | May 8, 2006 |                         | /s/ John W. Elias |   |
|   |        |                         | John W. Elias |   |
|   |        | Chief Executive Officer and  |   |
|   |        | Chairman of the Board        |   |
|   |        |                         |   |
|   |        |                         |   |
| Date   | May 8, 2006 |                         | /s/ Michael G. Long |   |
|   |        | Michael G. Long              |   |
|   |        | Executive Vice President and |   |
|   |        | Chief Financial Officer      |   |
|        |             |                              |  |  |  |

 

44

----

 

# **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)). |
|             |       |       |   |
| 2.3              | —     |       | Asset Purchase Agreement by and among Contango STEP, L.P., Contango  Oil & Gas Company, Edge Petroleum Exploration Company and Edge Petroleum  Corporation dated October 7, 2004 (Incorporated by reference from exhibit 2.1  to the Company’s Current Report on Form 8-K filed October 12, 2004). |
|             |       |       |   |
| 2.4              | —     |       | Purchase and Sale Agreement, dated as of September 21, 2005 among  Pearl Energy Partners, Ltd., and Cibola Exploration Partners, L.P., as  Sellers; and Edge Petroleum Exploration Company as Buyer and Edge Petroleum  Corporation as Guarantor (Incorporated by reference from exhibit 2.01 to the  Company’s Current Report on Form 8-K filed October 19, 2005). |
|             |       |       |   |
| 2.5              | —     |       | Stock Purchase Agreement by and among Jon L. Glass,  Craig D. Pollard, Leigh T. Prieto, Yorktown Energy Partners V, L.P., Yorktown  Energy Partners VI, L.P., Cinco Energy Corporation, and Edge Petroleum  Exploration Company and Edge Petroleum Corporation dated September 21, 2005  (Incorporated by reference from exhibit 2.5 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 2005). |
|             |       |       |   |
| 2.6              | —     |       | Letter Agreement dated November 18, 2005 by and among Edge Petroleum  Exploration Company, Cinco Energy Corporation and Sellers (Incorporated by  reference from exhibit 2.02 to the Company’s Current Report on Form 8-K filed  December 6, 2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Company  had omitted certain Schedules to the Letter Agreement (all of which are listed  therein) from this Exhibit 2.6. It hereby agrees to furnish a supplemental  copy of any such omitted item to the SEC on its request. |
|             |       |       |   |
| 3.1              | —     |       | Restated Certificate of Incorporation of the Company effective  January 27, 1997 (Incorporated by reference from exhibit 3.1 to the Company’s  Current Report on Form 8-K filed April 29, 2005). |
|             |       |       |   |
| 3.2              | —     |       | Certificate of Amendment to the Restated Certificate of Incorporation  of the Company effective January 31, 1997 (Incorporated by reference from  exhibit 3.2 to the Company’s Current Report on Form 8-K filed April 29,  2005). |
|             |       |       |   |
| 3.3              | —     |       | Certificate of Amendment to the Restated Certificate of Incorporation  of the Company effective April 27, 2005 (Incorporated by reference from  exhibit 3.3 to the Company’s Current Report on Form 8-K filed April 29,  2005). |
|             |       |       |   |
| 3.4              | —     |       | 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). |
|             |       |       |   |
| 3.5              | —     |       | 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). |
|             |       |       |   |
| 3.6              | —     |       | 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). |

 

45

----

 
| 4.1        | — |   | Third Amended and Restated Credit Agreement dated December 31, 2003  among Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge  Petroleum Operating Company, Inc., Miller Oil Corporation and Miller  Exploration Company, as borrowers, the lenders thereto and Union Bank of  California, N.A., a national banking association, as Agent (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        | — |   | Agreement and Amendment No. 1 to Third Amended and  Restated Credit Agreement dated May 31, 2005 among Edge Petroleum  Corporation, Edge Petroleum Exploration Company, Edge Petroleum Operating  Company, Inc., Miller Exploration Company and Miller Oil Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as agent for the lenders (Incorporated by reference from  Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended June 30, 2005).          |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3        | — |   | Agreement and Amendment No. 2 to the Third Amended and Restated  Credit Agreement dated November 30, 2005 among Edge Petroleum Corporation,  Edge Petroleum Exploration Company, Edge Petroleum Operating Company, Inc.,  Miller Oil Corporation, Miller Exploration Company, and Cinco Energy  Corporation, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as Agent (Incorporated by reference  from exhibit 4.3 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2005). |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4        | — |   | Miller Exploration Company Stock Option and Restricted Stock Plan of  1997 (Incorporated by reference from exhibit 10.1(a) to Miller Exploration  Company’s Annual Report on Form 10-K for the year ended December 31, 1997  (File No. 000-23431)).                                                                                                                                                                                                                                                                                                           |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.5        | — |   | 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 Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.6        | — |   | 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 Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.7        | — |   | Form of Miller Stock Option Agreement (Incorporated by reference from  exhibit 10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.1 | — |   | 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)).                                                                                                                                                                                                                                                                                                                                             |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.2 | — |   | 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)).                                                                                                                                                                                                                                                                                                                                                       |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.3 | — |   | 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).                                                                                                                                                                                                                                                                                                                                   |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.4 | — |   | Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of June 1, 2004 (Incorporated by reference from exhibit 10.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                                                                                                                                                                                                                                               |
|       |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †10.5 | — |   | 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                                                                                                                                                                                                                                                                                                                                                          |

 

46

----

 
|        |   |   | from exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 1999).                                                                                                                                                                                                             |
|-------------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.6  | — |   | 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). |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.7  | — |   | Severance Agreements by and between Edge Petroleum Corporation and  the Officers of the Company named therein (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).                                                                   |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.8  | — |   | Form of Director’s Restricted Stock Award Agreement  under the Incentive Plan of Edge Petroleum Corporation (Incorporated by  reference from exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2004).                                                                    |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.9  | — |   | 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).                                                                        |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.10 | — |   | 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)).                                                                                                  |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.11 | — |   | 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)).                                                                                        |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.12 | — |   | Summary of Compensation of Non-Employee Directors  (Incorporated by reference from Exhibit 10.12 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2005).                                                                                                                                              |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.13 | — |   | 2005 Bonus Plan for Executive Officers (Incorporated  by reference from Exhibit 10.12 to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2005).                                                                                                                                                         |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.14 | — |   | 2004 Bonus Program (Incorporated by reference from  Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005).                                                                                                                                                                             |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *31.1       | — |   | Certification by John W. Elias, Chief Executive  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                     |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *31.2       | — |   | Certification by Michael G. Long, Chief Financial  Officer, pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                   |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *32.1       | — |   | Certification by John W. Elias, Chief Executive Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of  Section 1350, Chapter 63 of Title 18, United States Code).                                                                                                                            |
|        |   |   |                                                                                                                                                                                                                                                                                                                                   |
| *32.2       | — |   | Certification by Michael G. Long, Chief Financial and Accounting  Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                                                                                                          |

 

----

* Filed herewith.

 

† Denotes management or compensatorycontract, arrangement or agreement.

 

47

----