Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

** **

**FORM 10-Q**

** **

**(MARKONE)**

 
| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended March 31, 2009**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period from        to        **

 

**Commissionfile number 0-22149**

 

 

**EDGE PETROLEUM CORPORATION**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **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, IncludingArea Code)

 

Indicate by checkmark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. xYes ̈ No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  ̈Yes  ̈ No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. 

 
|  ̈ Large accelerated filer                |   | x Accelerated filer              |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
|  ̈ Non-accelerated filer                  |   |  ̈ Smaller reporting company |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   ̈Yes x No

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| **Class**    | ** ** | **Outstanding at May 6, 2009** |
|--------------|------------|-------------------------------------|
| Common Stock |       | 28,867,096                          |

 

 

 

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**EDGE PETROLEUM CORPORATION**

** **

**Table of Contents**

** **
| ** **                                                                                          | ** ** | **Page No.** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------|
| Part I.  Financial Information                                                                 |       |              |
| Item 1. Financial Statements (Unaudited):                                                           |       |              |
| Consolidated Balance Sheets as of March 31, 2009  and December 31, 2008                   |       | 3                 |
| Consolidated Statements of Operations for the Three  Months Ended March 31, 2009 and 2008      |       | 4                 |
| Consolidated Statements of Cash Flows for the Three  Months Ended March 31, 2009 and 2008      |       | 5                 |
| Consolidated Statement of Stockholders’ Equity for the  Three Months Ended March 31, 2009 |       | 6                 |
| Notes to the Consolidated Financial Statements                                                      |       | 7                 |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 25                |
| Item 3. Qualitative and Quantitative Disclosures About  Market Risk                                 |       | 50                |
| Item 4. Controls and Procedures                                                                     |       | 51                |
| Part II.  Other Information                                                                    |       | 52                |
| Item  1. Legal Proceedings                                                                          |       | 52                |
| Item  1A. Risk Factors                                                                              |       | 53                |
| Item 2. Unregistered Sale of Equity Securities and Use  of Proceeds                                 |       | 53                |
| Item  3. Defaults Upon Senior Securities                                                            |       | 53                |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        |       | 53                |
| Item  5. Other Information                                                                          |       | 53                |
| Item 6. Exhibits                                                                                    |       | 53                |
| Signatures                                                                                          |       | 59                |

 

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**PART I. FINANCIALINFORMATION**

** **

**Item 1. Financial Statements**

### **EDGE PETROLEUM CORPORATION**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                               | ** ** | **March 31,**                                        | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **2009**                                                  | ** ** | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **(Unaudited)**                                           | ** ** | ** **            | ** ** |
| ** **                                                                                                                                                                                                                               | ** ** | **(in thousands, except share data)** | ** ** |
| ASSETS                                                                                                                                                                                                                                   | * *   | * *                                                  | * *   | * *              | * *   |
|                                                                                                                                                                                                                                     | * *   | * *                                                  | * *   | * *              | * *   |
| CURRENT ASSETS:                                                                                                                                                                                                                          |       |                                                      |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                                |       | $                                                         | 9,901      |                  | $          | 8,475 |   |
| Accounts receivable, trade, net of  allowance                                                                                                                                                                                            |       | 10,343                                                    |       | 14,548                |       |
| Accounts receivable, joint interest owners  and other, net of allowance                                                                                                                                                                  |       | 3,400                                                     |       | 5,689                 |       |
| Derivative financial instruments                                                                                                                                                                                                         |       | 20,627                                                    |       | 15,407                |       |
| Other current assets                                                                                                                                                                                                                     |       | 4,800                                                     |       | 4,591                 |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| Total current assets                                                                                                                                                                                                                     |       | 49,071                                                    |       | 48,710                |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| PROPERTY AND EQUIPMENT, Net — full cost  method of accounting for oil and natural gas properties (including  unevaluated costs of $19.0 million and $16.4 million at March 31, 2009  and December 31, 2008, respectively) |       | 221,918                                                   |       | 307,059               |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| OTHER ASSETS                                                                                                                                                                                                                             |       | 1,153                                                     |       | 1,828                 |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| TOTAL ASSETS                                                                                                                                                                                                                             |       | $                                                         | 272,142    |                  | $          | 357,597 |   |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                            |       |                                                      |       |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| Accounts payable, trade                                                                                                                                                                                                                  |       | $                                                         | 1,803      |                  | $          | 3,086 |   |
| Accrued liabilities                                                                                                                                                                                                                      |       | 6,715                                                     |       | 8,779                 |       |
| Accrued interest payable                                                                                                                                                                                                                 |       | 13                                                        |       | 579                   |       |
| Current portion of debt                                                                                                                                                                                                                  |       | 234,000                                                   |       | 239,000               |       |
| Asset retirement obligation                                                                                                                                                                                                              |       | 550                                                       |       | 547                   |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| Total current liabilities                                                                                                                                                                                                                |       | 243,081                                                   |       | 251,991               |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| ASSET RETIREMENT OBLIGATION — long-term                                                                                                                                                                                             |       | 6,103                                                     |       | 6,011                 |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                                                                            |       | 102                                                       |       | 102                   |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| DELIVERY COMMITMENT                                                                                                                                                                                                                      |       | 2,005                                                     |       | 2,005                 |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| Total liabilities                                                                                                                                                                                                                        |       | 251,291                                                   |       | 260,109               |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                                                                                  |       |                                                      |       |                  |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                |       |                                                      |       |                  |       |
| Preferred stock, $0.01 par value; 5,000,000  shares authorized; 2,875,000 issued and outstanding at March 31, 2009  and December 31, 2008                                                                                      |       | 29                                                        |       | 29                    |       |
| Common stock, $0.01 par value; 60,000,000  shares authorized; 28,866,328, and 28,833,546 shares issued and outstanding  at March 31, 2009 and December 31, 2008, respectively                                                  |       | 289                                                       |       | 288                   |       |
| Additional paid-in capital                                                                                                                                                                                                               |       | 424,253                                                   |       | 423,951               |       |
| Retained deficit                                                                                                                                                                                                                         |       | (403,720                                                  | )          | (326,780              | )          |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| Total stockholders’ equity                                                                                                                                                                                                          |       | 20,851                                                    |       | 97,488                |       |
|                                                                                                                                                                                                                                     |       |                                                      |       |                  |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                          |       | $                                                         | 272,142    |                  | $          | 357,597 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**EDGE PETROLEUM CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended   March 31,**            | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                                          | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| OIL AND NATURAL GAS REVENUE:                                  |       |                                                              |       |   |   |
| Oil and natural gas sales                                     | ** ** | $                                                                 | 12,998     |   | $ | 47,016 |   |
| Gain (loss) on derivatives                                    |       | 11,068                                                            |       | (29,359 | ) |
| Total revenue                                                 |       | 24,066                                                            |       | 17,657 |   |
|                                                          |       |                                                              |       |   |   |
| OPERATING EXPENSES:                                           |       |                                                              |       |   |   |
| Oil and natural gas operating expenses                        |       | 3,825                                                             |       | 4,472 |   |
| Severance and ad valorem taxes                                |       | 1,091                                                             |       | 2,185 |   |
| Depletion, depreciation, amortization and  accretion          |       | 10,079                                                            |       | 27,371 |   |
| Impairment of oil and natural gas  properties                 |       | 78,254                                                            |       | — |   |
| General and administrative expenses                           |       | 4,595                                                             |       | 4,060 |   |
|                                                          |       |                                                              |       |   |   |
| Total operating expenses                                      |       | 97,844                                                            |       | 38,088 |   |
|                                                          |       |                                                              |       |   |   |
| OPERATING LOSS                                                |       | (73,778                                                           | )          | (20,431 | ) |
|                                                          |       |                                                              |       |   |   |
| OTHER INCOME AND EXPENSE:                                     |       |                                                              |       |   |   |
|                                                          |       |                                                              |       |   |   |
| Other income                                                  |       | 7                                                                 |       | 69 |   |
| Interest expense, net of amounts  capitalized                 |       | (2,243                                                            | )          | (4,224 | ) |
| Amortization of deferred loan costs                           |       | (926                                                              | )          | (239 | ) |
|                                                          |       |                                                              |       |   |   |
| LOSS BEFORE INCOME TAXES                                      |       | (76,940                                                           | )          | (24,825 | ) |
|                                                          |       |                                                              |       |   |   |
| INCOME TAX BENEFIT                                            |       | —                                                            |       | 8,646 |   |
|                                                          |       |                                                              |       |   |   |
| NET LOSS                                                      |       | (76,940                                                           | )          | (16,179 | ) |
|                                                          |       |                                                              |       |   |   |
| Preferred Stock Dividends                                     |       | —                                                            |       | (2,066 | ) |
|                                                          |       |                                                              |       |   |   |
| NET LOSS TO COMMON STOCKHOLDERS                               |       | $                                                                 | (76,940    | ) | $ | (18,245 | ) |
|                                                          |       |                                                              |       |   |   |
| BASIC LOSS PER SHARE                                          |       | $                                                                 | (2.74      | ) | $ | (0.64 | ) |
|                                                          |       |                                                              |       |   |   |
| DILUTED LOSS PER SHARE                                        |       | $                                                                 | (2.74      | ) | $ | (0.64 | ) |
|                                                          |       |                                                              |       |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING   |       | 28,840                                                            |       | 28,566 |   |
|                                                          |       |                                                              |       |   |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING |       | 28,840                                                            |       | 28,566 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**EDGE PETROLEUM CORPORATION**

** **

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                              | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                    | (76,940    | ) | $ | (16,179 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Unrealized loss (gain) on the fair value of  derivatives                         |       | (5,220                                               | )          | 25,360 |   |
| Deferred income taxes                                                            |       | —                                               |       | (9,227 | ) |
| Depletion, depreciation, amortization and  accretion                             |       | 10,079                                               |       | 27,371 |   |
| Impairment of oil and natural gas  properties                                    |       | 78,254                                               |       | — |   |
| Gain on ARO settlement                                                           |       | —                                               |       | (9 | ) |
| Amortization of deferred loan costs                                              |       | 926                                                  |       | 239 |   |
| Share-based compensation costs                                                   |       | 303                                                  |       | 907 |   |
| Changes in assets and liabilities:                                               |       |                                                 |       |   |   |
| Decrease (increase) in accounts receivable,  trade                               |       | 4,205                                                |       | (1,933 | ) |
| Decrease in accounts receivable, joint  interest owners                          |       | 2,289                                                |       | 4,746 |   |
| Increase in other assets                                                         |       | (149                                                 | )          | (425 | ) |
| Decrease in accounts payable, trade                                              |       | (1,283                                               | )          | (4,475 | ) |
| Decrease in accrued liabilities                                                  |       | (2,065                                               | )          | (5,226 | ) |
| Increase (decrease) in accrued interest  payable                                 |       | (566                                                 | )          | 201 |   |
|                                                                             |       |                                                 |       |   |   |
| Net cash provided by operating activities                                        |       | 9,833                                                |       | 21,350 |   |
|                                                                             |       |                                                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                        |       |                                                 |       |   |   |
| Oil and natural gas property and equipment  additions                            |       | (3,097                                               | )          | (22,190 | ) |
| (Increase) decrease in drilling advances                                         |       | (310                                                 | )          | 641 |   |
| Proceeds from the sale of oil and natural  gas properties                        |       | —                                               |       | 12,248 |   |
| Overhedged derivative settlements                                                |       | —                                               |       | (1,691 | ) |
|                                                                             |       |                                                 |       |   |   |
| Net cash used in investing activities                                            |       | (3,407                                               | )          | (10,992 | ) |
|                                                                             |       |                                                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                                                 |       |   |   |
| Repayments of debt                                                               |       | (5,000                                               | )          | (10,000 | ) |
| Preferred stock dividends paid                                                   |       | —                                               |       | (2,066 | ) |
|                                                                             |       |                                                 |       |   |   |
| Net cash used in financing activities                                            |       | (5,000                                               | )          | (12,066 | ) |
|                                                                             |       |                                                 |       |   |   |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                        |       | 1,426                                                |       | (1,708 | ) |
| ** **                                                                       |       |                                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                              |       | 8,475                                                |       | 7,163 |   |
| ** **                                                                       |       |                                                 |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                     |       | $                                                    | 9,901      |   | $ | 5,455 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**EDGE PETROLEUM CORPORATION**

** **

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

 
| ** **                     | ** **   | ** **               | ** **   | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**         | ** ** | ** **  | ** ** | **Total**  | ** ** |
|--------------------------------|--------------|--------------------------|--------------|-----------------------|------------|-------------|------------|--------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                     | ** **   | **Preferred Stock** | ** **   | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Stockholders’** | ** ** |
| ** **                     | ** **   | **Shares**               | ** **   | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| ** **                     | *** *** | **(in thousands)**       | *** *** |
| BALANCE, DECEMBER 31, 2008     |         | 2,875                    |         | $                     | 29         |        | 28,833     |         | $          | 288                    |       | $           | 423,951    |       | $          | (326,780 | ) | $ | 97,488 |   |
|                           |         |                     |         |                  |       |        |       |         |       |                   |       |        |       |       |       |
| Issuance of common stock       |         | —                   |         | —                |       | 33          |       | 1            |       | (1                     | )          | —      |       | —     |       |
|                           |         |                     |         |                  |       |        |       |         |       |                   |       |        |       |       |       |
| Share-based compensation costs |         | —                   |         | —                |       | —      |       | —       |       | 303                    |       | —      |       | 303        |       |
|                           |         |                     |         |                  |       |        |       |         |       |                   |       |        |       |       |       |
| Net loss                       |         | —                   |         | —                |       | —      |       | —       |       | —                 |       | (76,940     | )          | (76,940    | )          |
|                           |         |                     |         |                  |       |        |       |         |       |                   |       |        |       |       |       |
| BALANCE, MARCH 31, 2009   |         | 2,875                    |         | $                     | 29         |        | 28,866     |         | $          | 289                    |       | $           | 424,253    |       | $          | (403,720 | ) | $ | 20,851 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

 

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

 

**1.     ORGANIZATIONAND BASIS FOR PRESENTATION**

** **

**Thefinancial statements included herein have been prepared by Edge PetroleumCorporation, 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, except for the impairment of theCompany’s oil and natural gas properties, as discussed below.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for anentire year.  Certain information,accounting policies and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted pursuant to such rules andregulations, although we believe that the disclosures are adequate to make theinformation presented not misleading. These financial statements should be readin conjunction with our audited consolidated financial statements included inour Annual Report on Form 10-K for the year ended December 31, 2008.**

** **

**2.     RECENTDEVELOPMENTS**

** **

***Financial and StrategicAlternatives Process***- In late 2007, the Company announced the hiring of a financial advisor toassist its Board of Directors with an assessment of strategic alternatives. Thecredit crisis and related turmoil in the global financial system and economicrecession in the U.S. during the fourth quarter of 2008, along with declines incommodity prices and our stock prices, created a challenging environment forthe successful completion of our proposed merger with Chaparral Energy, Inc.(“Chaparral”), a privately held company. On December 17, 2008, the Companyannounced the termination of the Chaparral merger agreement after both theCompany and Chaparral determined it was highly unlikely that the conditions tothe closing of the proposed merger would be satisfied or that Chaparral wouldbe able to obtain sufficient debt and equity financing to allow them tocomplete the proposed merger and operate as a combined company, particularly inlight of the challenging environment in the financial markets and the energyindustry. The Company continues to pursue and review its financial andstrategic alternatives as it seeks to resolve the many challenges it currentlyfaces.

 

***Going Concern*** —  Inaddition to the Deficiency under our Revolving Facility (defined in Note 4)created by the January borrowing base redetermination (see discussion inNote 4), the capital expenditures required to maintain and/or grow productionand reserves are substantial. Prices for oil and natural gas declinedmaterially during the fourth quarter of 2008, and natural gas prices continuedto decline during the first quarter of 2009.  A continued or extendeddecline in oil or natural gas prices will have a material adverse effect on theCompany’s financial position, results of operations, cash flows and access tocapital and on the quantities of oil and natural gas reserves that the Companycan economically produce. The Company’s stock price has significantly declinedover the past year which also makes it more difficult to obtain equityfinancing on acceptable terms to address the Company’s liquidity issues. Inaddition, the Company is reporting negative working capital at March 31,2009 and continued to report net losses in the three months ended March 31,2009, following three consecutive years of net losses.  Therefore,there is substantial doubt as to the Company’s ability to continue as a goingconcern for a period longer than the next twelve months. Additionally, ourindependent auditors included an explanatory paragraph in their report on ourconsolidated financial statements in our Form 10-K for the year ended December 31,2008 that raises substantial doubt about our ability to continue as a goingconcern. The Company’s ability to continue as a going concern is dependent uponthe success of its financial and strategic alternatives process, which mayinclude the sale of some or all of our assets, a merger or other businesscombination involving the Company or the restructuring or recapitalization ofthe Company. Until the possible completion of the financial and strategicalternatives process, the Company’s future remains uncertain and there can beno assurance that its efforts in this regard will be successful.

 

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The accompanyingconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles applicable to a going concern, whichimplies that the Company will continue to meet its obligations and continue itsoperations for the next twelve months. Realization values may be substantiallydifferent from carrying values as shown, and these consolidated financialstatements do not include any adjustments relating to the recoverability orclassification of recorded asset amounts or the amount and classification ofliabilities that might be necessary as a result of this uncertainty.

 

**3.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

** **

***Oil and Natural GasProperties*****-**Investments in oil and natural gas properties are accounted for usingthe full-cost method of accounting. The accounting for our business is subjectto special accounting rules that are unique to the oil and natural gasindustry.  There are two allowablemethods of accounting for oil and natural gas business activities:  the successful-efforts method and thefull-cost method. There are several significant differences between thesemethods. Among these differences is that, under the successful-efforts method,costs such as geological and geophysical (“G&G”), exploratory dry holes anddelay rentals are expensed as incurred whereas under the full-cost method thesetypes of charges are capitalized to their respective full-cost pool. Inaccordance with the full-cost method of accounting, all costs associated withthe exploration, development and acquisition of oil and natural gas properties,including salaries, benefits and other internal costs directly attributable tothese activities are capitalized within a cost center.  The Company’s oil and natural gas propertiesare located within the United States of America, which constitutes one costcenter. The Company also capitalizes a portion of interest expense on borrowedfunds.

 

In the measurement ofimpairment of oil and natural gas properties, the successful-efforts methodfollows the guidance provided in Statement of Financial Accounting Standards(“SFAS”) No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*, where the firstmeasurement for impairment is to compare the net book value of the relatedasset to its undiscounted future cash flows using commodity prices consistentwith management expectations. The full-cost method follows guidance provided inSEC Regulation S-X Rule 4-10, where impairment is determined by the“ceiling test,” whereby to the extent that such capitalized costs subject toamortization in the full-cost pool (net of accumulated depletion, depreciationand amortization, prior impairments, and related tax effects) exceed thepresent value (using a 10% discount rate) of estimated future net after-taxcash flows from proved oil and natural gas reserves, such excess costs arecharged to expense. Once incurred, an impairment of oil and natural gasproperties is not reversible at a later date. A ceiling test impairment could result in a significant loss for areporting period; however, future depletion expense would be correspondinglyreduced. Impairment of oil and natural gas properties is assessed on aquarterly basis in conjunction with the Company’s quarterly and annual SECfilings. The Company recorded a net non-cash ceiling test impairment of $78.3million during the quarter ended March 31, 2009 as a result of furtherdeclines in commodity prices since December 31, 2008. No ceiling testimpairment was required during the quarter ended March 31, 2008.

 

In accordance with SEC StaffAccounting Bulletin (“SAB”) No. 103, *Updateof Codification of Staff Accounting Bulletins*, derivative instrumentsqualifying as cash flow hedges are to be included in the computation oflimitation on capitalized costs.  Since January 1,2006, the Company has not applied cash flow hedge accounting to any derivativecontracts (see Note 10), therefore the ceiling tests at March 31, 2009 and2008 were not impacted by the value of our derivatives.

 

Oil and natural gasproperties are amortized based on a unit-of-production method using estimatesof proved reserve quantities. Oil and natural gas liquids (“NGL”) are convertedto a gas equivalent basis (“Mcfe”) at the rate of one barrel equals six Mcf. Inaccordance with 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. Investments in unprovedproperties are not amortized until proved reserves associated with theprospects can be determined or until impairment occurs. Unproved properties areevaluated quarterly, and as needed, for impairment on a property-by-propertybasis. If the results of an assessment indicate that an unproved property isimpaired, the amount of impairment is added to the proved oil and natural gasproperty costs to be amortized. Costs excluded from amortization related to 

 

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unproved properties were $19.0 million and $16.4 million at March 31,2009 and December 31, 2008, respectively.

 

Sales of proved and unprovedproperties are accounted for as adjustments of capitalized costs with no gainor loss recognized, unless such adjustments would significantly alter therelationship between capitalized costs and proved reserves.

 

***Accounts Receivable and Allowancefor Doubtful Accounts*** - TheCompany routinely assesses the recoverability of all material trade and otherreceivables to determine its ability to collect the receivables in full. AccountsReceivable, Joint Interest Owners included an allowance for doubtful accountsof $15,300 at March 31, 2009 and December 31, 2008, respectively.Accounts Receivable, Trade included an allowance for doubtful accounts of$64,500 at March 31, 2009 and December 31, 2008, respectively.

** **

***Inventories —***Inventoriesconsist principally of tubular goods and production equipment for wells andfacilities. They are stated at the lower of weighted-average cost or market andare included in Other Current Assets on the consolidated balance sheet.

 

***Asset Retirement Obligations —***The Company records a liability for legalobligations associated with the retirement of tangible long-lived assets in theperiod in which they are incurred in accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations.*Under SFAS No. 143, when liabilities for dismantlement and abandonmentcosts, excluding salvage values, are initially recorded, the carrying amount ofthe related oil and natural gas properties is increased. Accretion of theliability is recognized each period using the interest method of allocation,and the capitalized cost is depleted over the useful life of the related asset.The changes to the Asset Retirement Obligations (“ARO”) for oil and natural gasproperties and related equipment during the three months ended March 31,2009 and 2008 are as follows:

 
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                              | ** ** |
| ARO, Beginning of Period                        |       | $                                                    | 6,558      |   | $ | 6,634 |   |
| Liabilities incurred in the current period      |       | 11                                                   |       | 406 |   |
| Liabilities settled/sold in the current  period |       | (2                                                   | )          | (1,098 | ) |
| Accretion expense                               |       | 99                                                   |       | 90 |   |
| Revisions                                       |       | (13                                                  | )          | — |   |
| ARO, End of Period                              |       | $                                                    | 6,653      |   | $ | 6,032 |   |
|                                            |       |                                                 |       |   |   |
| Current Portion                                 |       | $                                                    | 550        |   | $ | 432 |   |
| Long-Term Portion                               |       | $                                                    | 6,103      |   | $ | 5,600 |   |

 

Duringthe three months ended March 31, 2009, ARO liabilities were recorded fortwo new obligations and liabilities settled include two properties. Revisionsresulted from a change in working interest on a property located in Texas.

 

***Revenue Recognition and Gas Balancing -*** The Company recognizesoil and natural gas revenue from its interests in producing wells as oil andnatural gas is produced and sold from those wells. Oil and natural gas sold bythe Company is typically not significantly different from the Company’s shareof production. But gas imbalances can occur when sales are more or less thanthe Company’s entitled ownership percentage of total gas production. Gasimbalances may be accounted for under either the (1) entitlements method,whereby revenue is recorded on the Company’s interest in the gas productionactually sold or (2) sales method, whereby revenue is recorded on thebasis of total gas actually sold by the Company. The Company uses the salesmethod of accounting for gas balancing and an asset or a liability isrecognized to the extent that there is a material imbalance in excess of theremaining gas reserves on the underlying properties.  As of March 31,2009 and December 31, 2008, our gas production was materially in balance,i.e. our cumulative portion of gas production 

 

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taken and sold from wells in which we have aninterest was not materially different from our entitled interest in gasproduction from those wells.

 

***Share-Based Compensation***— The Company accountsfor share-based compensation in accordance with the provisions of SFAS No. 123R,*Share-Based Payment,* which requires thatthe compensation cost relating to share-based payment transactions berecognized in financial statements. Share-based compensation for the threemonths ended March 31, 2009 was approximately $0.3 million, of which $0.2million was included in general and administrative expenses (“G&A”) and$0.1 million was capitalized to oil and natural gas properties. Share-basedcompensation for the three months ended March 31, 2008 was approximately$0.8 million, of which $0.7 million was included in general and administrativeexpenses (“G&A”) and $0.1 million was capitalized to oil and natural gasproperties.

 

Duringthe three months ended March 31, 2009, no restricted stock units (“RSUs”)were granted. At March 31, 2009, there were 246,164 RSUs outstanding, allof which were classified as equity instruments. No options were granted during the three months ended March 31,2009, and at period end, there were 443,600 vested unexercised optionsoutstanding.

 

***Income Taxes -*** Effective January 1, 2007, the Companyadopted FASB Interpretation No. 48 *Accounting for Uncertaintyin Income Taxes (an interpretation of FASB Statement No. 109)*(“FIN48”).  This interpretation clarified theaccounting for uncertainty in income taxes recognized in the financialstatements by prescribing a recognition threshold and measurement attribute fora tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance onde-recognitions, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Company also adopted FASB StaffPosition (“FSP”) FIN 48-1, *Definition of Settlementin FASB Interpretation No. 48* as of January 1, 2007.  FSP FIN 48-1 provides that a company’s taxposition will be considered settled if the taxing authority has completed itsexamination, the company does not plan to appeal, and it is remote that thetaxing authority would reexamine the tax position in the future (see Note 8).

 

***OtherComprehensive Income (Loss)***— For the periodspresented, total comprehensive income (loss) consisted of:

 
| ** **                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                     | ** ** | **(in  thousands)**                                  | ** ** |
| * *                                       |       |                                                 |       |   |   |
| Net Loss                                       |       | $                                                    | (76,940    | ) | $ | (16,179 | ) |
| Preferred Stock Dividends                      |       | —                                               |       | (2,066 | ) |
| Net Loss to Common Stockholders                |       | (76,940                                              | )          | (18,245 | ) |
|                                           |       |                                                 |       |   |   |
| Other Comprehensive Income (Loss), net of  tax |       | —                                               |       | — |   |
|                                           |       |                                                 |       |   |   |
| Other Comprehensive Loss                       |       | $                                                    | (76,940    | ) | $ | (18,245 | ) |

 

 

***Fair ValueMeasurements —***Effective January 1,2008, the Company partially adopted SFAS No. 157, *Fair Value Measurements,* which provides acommon definition of fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements, but does notrequire any new fair value measurements. On January 1, 2009 the Companyadopted SFAS No. 157 for the non-financial assets and non-financialliabilities that were delayed in adoption by FSP FAS 157-2, *Effective Date of FASB Statement No. 157*. Accordingly,the Company has now applied the provisions of SFAS No. 157 to its AROs.The adoption of SFAS No. 157 had no impact on the Company’s financialstatements, but it did result in additional required disclosures as set forthin Note 11.

 

***Recent Accounting Pronouncements***— In December 2008, the SEC issued thefinal rule, *“Modernization of Oil and GasReporting*,” which adopts revisions to the SEC’s oil and natural gasreporting disclosure requirements and is effective for annual reports onForms 10-K for years ending on or after December 31, 2009. Earlyadoption of the new rules is prohibited. The new rules are intendedto provide 

 

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investors with a moremeaningful and comprehensive understanding of oil and natural gas reserves tohelp investors evaluate their investments in oil and natural gas companies. Thenew rules are also designed to modernize the oil and natural gasdisclosure requirements to align them with current practices and changes intechnology. The new rules include changes to the pricing used to estimatereserves, the ability to include nontraditional resources in reserves, the useof new technology for determining reserves and permitting disclosure ofprobable and possible reserves. The Company is currently evaluating thepotential impact of these rules. The SEC is discussing the rules with theFASB staff to align FASB accounting standards with the new SEC rules. Thesediscussions may delay the required compliance date. Absent any change in theeffective date, the Company will begin complying with the disclosurerequirements in our annual report on Form 10-K for the year ended December 31,2009.

 

In April 2009, the FASBissued FSP FAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,*which provides additional guidance in accordance with SFAS No. 157. If anentity determines that either the volume or level of activity for an asset orliability has significantly decreased from normal conditions, or that pricequotations or observable inputs are not associated with orderly transactions,increased analysis and management judgment will be required to estimate fairvalue. The objective in fair value measurement remains unchanged from what isprescribed in SFAS No. 157 and should be reflective of the current exitprice. Disclosures in interim and annual periods must include inputs andvaluation techniques used to measure fair value, along with any changes invaluation techniques and related inputs during the period. In addition,disclosures for debt and equity securities must be provided on a moredisaggregated basis than what was required in SFAS No. 157. FSP FAS 157-4is effective for interim and annual reporting periods ending after June 15,2009. The Company does not expect FSP FAS 157-4 to have a material impact onits financial position, results of operations or cash flows.

 

In April 2009, the FASBissued FSP FAS 107-1 and Accounting Principles Bulletin (“APB”) No. 28-1, *Interim Disclosures about Fair Value of Financial Instruments,*to require disclosures about fair value of financial instruments for publiclytraded companies for both interim and annual periods. Historically, thesedisclosures were only required annually. The interim disclosures are intendedto provide financial statement users with more timely and transparentinformation about the effects of current market conditions on an entity’sfinancial instruments that are not otherwise reported at fair value. FSP FAS107-1 and APB 28-1 is effective for interim reporting periods ending after June 15,2009. Comparative disclosures are only required for periods ending after theinitial adoption. The Company does not expect FSP FAS 107-1 and APB 28-1 tohave a material impact on its financial position, results of operations or cashflows.

 

InApril 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments,*which amends the other-than-temporary impairment guidance for debt securitiesto make the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existingrecognition and measurement guidance for equity securities, but does establisha new method of recognizing and reporting for debt securities. Disclosurerequirements for impaired debt and equity securities have been expandedsignificantly and will now be required quarterly, as well as annually. FSP FAS115-2 and FAS 124-2 is effective for interim and annual reporting periodsending after June 15, 2009. Comparative disclosures are only required forperiods ending after the initial adoption. The Company does not expect FSP FAS115-2 and FAS 124-2 to have a material impact on its financial position,results of operations or cash flows.

** **

In April 2009 the FASBissued FSP FAS 141(R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a s Business Combination That Arise fromContingencies*, which amends and clarifies SFAS No. 141, *Business Combinations,*(as amended), to address applicationissues raised by preparers, auditors, and members of the legal profession oninitial recognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination. FSP FAS 141(R)-1 is effective for assets and liabilities arisingfrom contingencies in business combinations for which the acquisition date ison or after the beginning of the first fiscal reporting period beginning on orafter December 15, 2008. The Company expects FSP FAS 141(R)-1 may impactits financial position, results of operations or cash flows if it were toundertake a business combination.

 

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**4.****              DEBT**

** **

On January 30, 2007,the Company entered into a Fourth Amended and Restated Credit Agreement (asamended, the “Revolving Facility”) for a new revolving credit facility withUnion Bank of California (“UBOC”), as administrative agent and issuing lender,and the other lenders party thereto (together with UBOC, the “Lenders”).Pursuant to the Revolving Facility, UBOC acts as the administrative agentfor a senior first lien secured borrowing base revolving credit facility infavor of the Company and certain of its wholly-owned subsidiaries in an amountequal to $750 million, of which $320 million was available under the borrowingbase at the time of closing (see below for discussion of currentavailability).  The Revolving Facilityhas a letter of credit sub-limit of $20 million. The Revolving Facility’soriginal maturity was scheduled for January 31, 2011.

 

At March 31, 2009,borrowings under the Revolving Facility bore interest at Prime plus a margin of2.5%. At March 31, 2009, the interest rate applied to the Company’soutstanding borrowings was 5.75%.  As of March 31,2009, $234 million in total borrowings were outstanding under the RevolvingFacility.

 

As a result of theredetermination process of the borrowing base by the Lenders under theRevolving Facility, which was completed in January 2009, the Lendersestablished a new borrowing base under the Revolving Facility of $125 million,resulting in a $114 million deficiency (the “Deficiency”).  Thesereductions were primarily the result of the sale of certain non-core assetsduring the first quarter of 2008 and the reduction of total proved reserves asreported in the year-end reserve reports of the Company’s independent reserveengineers.

 

Pursuant to the terms of theRevolving Facility, the Company elected to prepay the Deficiency in six equalmonthly installments, with the first $19 million installment being due on February 9,2009.  On February 9, 2009, theCompany entered into a Consent and Agreement (the “February Consent”)among the Company and the Lenders under the Revolving Facility deferring thepayment date of the first $19 million installment until March 10, 2009,and extending the due date for each subsequent installment by one month withthe last of the six installment payments to be due on August 10,2009.  In connection with the February Consent,the Company agreed to prepay $5.0 million of the Company’s outstanding advancesunder the Revolving Facility, in two equal installments.  The first $2.5 million prepayment was paid onFebruary 9, 2009 and the second $2.5 million prepayment was paid on February 23,2009, with each of the prepayments to be applied on a pro rata basis to reducethe remaining six $19 million deficiency payments.  On March 10, 2009, the Company enteredinto a Consent and Agreement (the “March Consent”) with the Lenders underthe Revolving Facility, which provided, among other things, for the extensionof the due date for the first installment to repay the Deficiency from March 10,2009 to March 17, 2009. Notwithstanding such extension, the Company agreedwith the Lenders that each of the other five equal installment paymentsrequired to eliminate the Deficiency would be due and payable as provided forin the February Consent. On March 16, 2009, the Company entered intoConsent and Amendment No. 4 (the “Amended Consent”) which provides, amongother things, (1) that the Company will make a $25 million payment on May 31,2009 with all remaining principal, fees and interest amounts under theRevolving Facility to be due and payable on June 30, 2009, (2) thatit will be an event of default (i) if the Company fails to have executedand delivered on or before May 15, 2009 at least one of the following (a) acommitment letter from a lender or group of lenders reasonably satisfactory tothe Lenders providing for the provision by such lender or group of lenders of acredit facility in an amount sufficient to repay all of our obligations underthe Revolving Facility on or before June 30, 2009, (b) a mergeragreement or similar agreement involving us as part of a transaction thatresults in the repayment of the Company’s obligations under the Revolving Facilityon or before June 30, 2009, and (c) a purchase and sale agreementwith a buyer or group of buyers reasonably acceptable to our Lenders providingfor a sale transaction by us that results in the repayment of all of theCompany’s obligations under the Revolving Facility on or before June 30,2009, or (ii) if the Company is in default under or its hedgingarrangements have been terminated or cease to be effective without the priorwritten consent of its Lenders, (3) that the Company’s advances under theRevolving Facility will bear interest at a rate equal to the greater of (a) thereference rate publicly announced by Union Bank of California, N.A. for suchday, (b) the Federal Funds Rate in effect on such day plus 0.50% and (c) arate determined by the Administrative Agent to be the Daily One-Month LIBOR (asdefined in the Revolving Facility), in each case plus 2.5% or, during thecontinuation of an event of default, plus 4.5% (resulting in an effectiveinterest rate of approximately 5.75% as of May 7, 2009), (4) forlimitations on the making of capital 

 

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expenditures and certain investments, and (5) forthe elimination of the current ratio, leverage ratio and interest coverageratio covenant requirements. The Amended Consent also eliminates the six $19million deficiency payments which were contemplated by the February Consentand the March Consent. To comply with the terms of the Amended Consent,the Company anticipates that it will need to (i) sell select individualassets prior to May 31, 2009 to enable us to make the $25 million paymentwhich is due on May 31, 2009, and/or (ii) negotiate a commitmentletter with a new lender or group of lenders prior to May 15, 2009 in anamount sufficient to repay all of the Company’s obligations under the RevolvingFacility on or before June 30, 2009, and/or (iii) have negotiated thesale, merger or other business combination involving us which results in therepayment of all of the Company’s obligations under the Revolving Facilityprior to May 15, 2009 and to have closed such transaction on or before June 30,2009. The Amended Consent limits the making of capital expenditures and theCompany anticipates a severe curtailment of its drilling plans and othercapital expenditures in 2009.

 

Ifthe Company breaches any of the provisions of the Amended Consent or RevolvingFacility, its Lenders will be entitled to declare an event of default, at whichpoint the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to our Lenders, wouldbecome immediately due and payable.  In anyevent, the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to the Lenders, willbe payable on June 30, 2009 unless earlier paid or a further extensionwith respect to payment is negotiated with the Lenders. The Lenders may takeaction to enforce their rights with respect to the outstanding obligationsunder the Revolving Facility. Because substantially all of the Company’s assetsare pledged as collateral under the Revolving Facility, if the Lenders declarean event of default, they would be entitled to foreclose on and take possessionof the Company’s assets.  In such anevent, the Company may be forced to liquidate or to otherwise seek protectionunder Chapter 11 of the U.S. Bankruptcy Code. These matters, as well as theother risk factors related to the Company’s liquidity and financial positionraise substantial doubt as to our ability to continue as a going concern (seeNote 2)*.* With respect to theCompany’s compliance with the Amended Consent, there can be no assurance thatthe Company will be able to further negotiate the terms of the Amended Consentor negotiate a further restructuring of the related indebtedness or that itwill be able to either make any required payments when they become due.Moreover, there can be no assurance that the Company will be successful in itsefforts to comply with the terms of the Amended Consent, including its ongoingefforts to evaluate and assess our various financial and strategic alternatives(which may include the sale of some or all of our assets, a merger or otherbusiness combination involving the Company, or the restructuring orrecapitalization of the Company).  Ifsuch efforts are not successful, the Company may be required to seek protectionunder Chapter 11 of the U.S. Bankruptcy Code.

 

The Company’s obligationsunder the Revolving Facility are secured by substantially all of the Company’sassets. The Revolving Facility provides for certain restrictions, including,but not limited to, limitations on additional borrowings, sales of oil andnatural gas properties or other collateral, and engaging in merger orconsolidation transactions. The Revolving Facility restricts dividends oncommon stock and certain distributions of cash or properties and certain liensbut no longer contains any financial covenants as a result of the AmendedConsent.

 

TheRevolving Facility includes certain other covenants and events of default thatare customary for similar facilities. It is an event of default under theRevolving Facility if the Company undergoes a change of control.  “Change of control,” as defined in theRevolving Facility, means any of the following events: (a) any “person” or“group” (within the meaning of Section 13(d) or 14(d) of theExchange Act) has become, directly or indirectly, the “beneficial owner” (asdefined in Rules 13d-3 and 13d-5 under the Exchange Act, except that aperson shall be deemed to have “beneficial ownership” of all such shares thatany such person has the right to acquire, whether such right is exercisable immediatelyor only after the passage of time, by way of merger, consolidation orotherwise), of a majority or more of the common stock of the Company on afully-diluted basis, after giving effect to the conversion and exercise of alloutstanding warrants, options and other securities of the Company (whether ornot such securities are then currently convertible or exercisable), (b) duringany period of two consecutive calendar quarters, individuals who at thebeginning of such period were members of the Company’s Board of Directors ceasefor any reason to constitute a majority of the directors then in office unless (i) suchnew directors were elected by a majority of the directors of the Company whoconstituted the Board of Directors at the beginning of such period (or bydirectors so elected) or (ii) the reason for such 

 

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directors failing to constitute a majority isa result of retirement by directors due to age, death or disability, or (c) theCompany ceases to own directly or indirectly all of the equity interests ofeach of its subsidiaries.

 

**5.   SHELF REGISTRATION STATEMENT**

** **

In the third quarter 2007, the SEC declared effectivethe Company’s registration statement filed with the SEC that registeredsecurities of up to $500 million of any combination of debt securities,preferred stock, common stock, warrants for debt securities or equitysecurities of the Company and guarantees of debt securities by the Company’ssubsidiaries. Net proceeds, terms and pricing of the offering of securitiesissued under the shelf registration statement will be determined at the time ofthe offerings. The shelf registration statement does not provide assurance thatthe Company will or could sell any such securities. The Company’s ability toutilize the shelf registration statement for the purpose of issuing, from timeto time, any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities will depend upon, among otherthings, market conditions and the existence of investors who wish to purchasethe Company’s securities at prices acceptable to the Company.  As of May 7, 2009, the Company had $500million available under its shelf registration statement. However, because theaggregate market value of the Company’s outstanding common stock is less than$75 million, the type and amount of any securities offering under theregistration statement may be limited.

 

**6.   PREFERRED STOCK**

** **

In January 2007,2,875,000 shares of its 5.75% Series A cumulative convertible perpetualpreferred stock (“Convertible Preferred Stock”) were issued in a publicoffering.

 

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by the Company’s debt agreements,assets are legally available to pay dividends and the Board of Directors or anauthorized committee of the board declares a dividend payable, the Company willpay dividends in cash, every quarter. The first payment was made on April 15,2007 and the Company continued to make quarterly dividends payments through October 15,2008. The Board did not declare a dividend in the fourth quarter of 2008 orfirst quarter of 2009 due to the Company’s current reduced liquidity.Cumulative dividends in arrears at March 31, 2009 amounted toapproximately $3.8 million.

** **

No dividends or other distributions (other thana dividend payable solely in shares of a like or junior ranking) may be paid orset apart for payment upon any shares ranking equally with the ConvertiblePreferred Stock (“parity shares”) or shares ranking junior to the ConvertiblePreferred Stock (“junior shares”), nor may any parity shares or junior sharesbe redeemed or acquired for any consideration by the Company (except byconversion into or exchange for shares of a like or junior ranking) unless allaccumulated and unpaid dividends have been paid or funds therefor have been setapart on the Convertible Preferred Stock and any parity shares.

 

*Liquidation preference*.  In the event of the Company’s voluntary or involuntaryliquidation, winding-up or dissolution, each holder of Convertible PreferredStock will be entitled to receive and to be paid out of the Company’s assetsavailable for distribution to our stockholders, before any payment ordistribution is made to holders of junior stock (including common stock), butafter any distribution on any of our indebtedness or senior stock, aliquidation preference in the amount of $50.00 per share of the ConvertiblePreferred Stock, plus accumulated and unpaid dividends on the shares to thedate fixed for liquidation, winding-up or dissolution.

 

*Ranking*.  Our Convertible Preferred Stock ranks:

 

·                  senior to all of the shares of common stockand to all of the Company’s other capital stock issued in the future unless theterms of such capital stock expressly provide that it ranks senior to, or on aparity with, shares of the Convertible Preferred Stock;

 

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·                  on a parity with all of the Company’s othercapital stock issued in the future, the terms of which expressly provide thatit will rank on a parity with the shares of the Convertible Preferred Stock;and

 

·                  junior to all of the Company’s existing andfuture debt obligations and to all shares of its capital stock issued in thefuture, the terms of which expressly provide that such shares will rank seniorto the shares of the Convertible Preferred Stock.

 

*Mandatory conversion*.On or after January 20, 2010, the Company may, at its option, cause sharesof its Convertible Preferred Stock to be automatically converted to shares ofcommon stock of the Company at the applicable conversion rate, but only if theclosing sale price of its common stock for 20 trading days within a period of30 consecutive trading days ending on the trading day immediately preceding thedate the Company gives the conversion notice equals or exceeds 130% of theconversion price in effect on each such trading day.

 

*Optional redemption*.If fewer than 15% of the shares of Convertible Preferred Stock issued in theConvertible Preferred Stock offering (including any additional shares issuedpursuant to the underwriters’ over-allotment option) are outstanding, theCompany may, at any time on or after January 20, 2010, at its option,redeem for cash all such Convertible Preferred Stock at a redemption priceequal to the liquidation preference of $50.00 plus any accrued and unpaiddividends, if any, on a share of Convertible Preferred Stock to, but excluding,the redemption date, for each share of Convertible Preferred Stock.

 

*Conversion rights*.Each share of Convertible Preferred Stock may be converted at any time, at theoption of the holder, into approximately 3.0193 shares of the Company’s commonstock (which is based on an initial conversion price of $16.56 per share ofcommon stock, subject to adjustment) plus cash in lieu of fractional shares,subject to the Company’s right to settle all or a portion of any suchconversion in cash or shares of its common stock. If the Company elects tosettle all or any portion of its conversion obligation in cash, the conversionvalue and the number of shares of its common stock the Company will deliverupon conversion (if any) will be based upon a 20 trading day averaging period.

 

Upon any conversion, the holder will not receiveany cash payment representing accumulated and unpaid dividends on theConvertible Preferred Stock, whether or not in arrears, except in limitedcircumstances. The conversion rate is equal to $50.00 divided by the conversionprice at the time. The conversion price is subject to adjustment upon theoccurrence of certain events. The conversion price on the conversion date andthe number of shares of the Company’s common stock, as applicable, to bedelivered upon conversion may be adjusted if certain events occur.

 

*Purchase upon fundamental change*. Ifthe Company becomes subject to a fundamental change (as defined below), eachholder of shares of Convertible Preferred Stock will have the right to requirethe Company to purchase any or all of its shares at a purchase price equal to100% of the liquidation preference, plus accumulated and unpaid dividends, tothe date of the purchase. The Company will have the option to pay the purchaseprice in cash, shares of common stock or a combination of cash and shares. TheCompany’s ability to purchase all or a portion of the Convertible PreferredStock for cash is subject to its obligation to repay or repurchase anyoutstanding debt required to be repaid or repurchased in connection with afundamental change and to any contractual restrictions then contained in ourdebt.

 

*Conversion in connection with a fundamental change*. Ifa holder elects to convert its shares of the Convertible Preferred Stock in connectionwith certain fundamental changes, the Company will in certain circumstancesincrease the conversion rate for such Convertible Preferred Stock. Upon aconversion in connection with a fundamental change, the holder will be entitledto receive a cash payment for all accumulated and unpaid dividends.

 

A “fundamental change” will be deemed to haveoccurred upon the occurrence of any of the following:

 

1. a “person” or “group” subject to specifiedexceptions, discloses that the person or group has become the direct orindirect ultimate “beneficial owner” of the Company’s common equityrepresenting more than 50% of the voting power of its common equity other thana filing with a disclosure relating to a transaction which complies with theproviso in subsection 2 below;

 

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2.consummation of any share exchange, consolidation or merger of the Companypursuant to which its common stock will be converted into cash, securities orother property or any sale, lease or other transfer in one transaction or aseries of transactions of all or substantially all of the consolidated assetsof the Company and its subsidiaries, taken as a whole, to any person other thanone of its subsidiaries; provided, however, that a transaction where theholders of more than 50% of all classes of its common equity immediately priorto the transaction own, directly or indirectly, more than 50% of all classes ofcommon equity of the continuing or surviving corporation or transfereeimmediately after the event shall not be a fundamental change;

 

3.the Company is liquidated or dissolved or holders of its capital stock approveany plan or proposal for its liquidation or dissolution; or

 

4.the Company’s common stock is neither listed on a national securities exchangenor listed nor approved for quotation on an over-the-counter market in theUnited States.

 

However, a fundamental change will not be deemedto have occurred in the case of a share exchange, merger or consolidation, orin an exchange offer having the result described in subsection 1 above, if 90%or more of the consideration in the aggregate paid for common stock (andexcluding cash payments for fractional shares and cash payments pursuant todissenters’ appraisal rights) in the share exchange, merger or consolidation orexchange offer consists of common stock of a United States company traded on anational securities exchange (or which will be so traded or quoted when issuedor exchanged in connection with such transaction).

 

*Voting rights*. Ifthe Company fails to pay dividends for six quarterly dividend periods (whetheror not consecutive) or if the company fails to pay the purchase price on thepurchase date for the Convertible Preferred Stock following a fundamentalchange, holders of the Convertible Preferred Stock will have voting rights toelect two directors to the board.

 

In addition, the Company may generally not,without the approval of the holders of at least 66 2/3% of the shares of theConvertible Preferred Stock then outstanding:

 

·                  amend the restated certificate ofincorporation, as amended, by merger or otherwise, if the amendment would alteror change the powers, preferences, privileges or rights of the holders ofshares of the Convertible Preferred Stock so as to adversely affect them;

 

·                  issue, authorize or increase the authorizedamount of, or issue or authorize any obligation or security convertible into orevidencing a right to purchase, any senior stock; or

 

·                  reclassify any of its authorized stock intoany senior stock of any class, or any obligation or security convertible intoor evidencing a right to purchase any senior stock.

 

**7.   EARNINGS (LOSS) PER SHARE**

 

TheCompany accounts for earnings (loss) per share in accordance with SFAS No. 128,*Earnings per Share,* which establishesthe requirements for presenting earnings per share (“EPS”).  SFAS No. 128 requires the presentationof “basic” and “diluted” EPS on the face of the statement of operations.  Basic EPS amounts are calculated using theweighted average number of common shares outstanding during each period.  Diluted EPS assumes the exercise of all stockoptions, warrants and convertible securities having exercise prices less thanthe average market price of the common stock during the periods, using thetreasury stock method. When a loss from continuing operations exists, as in theperiods presented, potential common shares are excluded in the computation ofdiluted EPS because their inclusion would result in an anti-dilutive effect onper share amounts.

 

DilutedEPS also includes the effect of convertible securities by application of the “if-converted”method.  Under this method, if an entityhas convertible preferred stock outstanding, the preferred dividends applicableto the convertible preferred stock are added back to the numerator.  The convertible preferred stock is assumed tohave been converted at the beginning of the period (or at time of issuance, iflater) and the resulting common 

 

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sharesare included in the denominator of the EPS calculation.  In applying the if-converted method,conversion is not assumed for purposes of computing diluted EPS if the effectwould be anti-dilutive. During 2009 and 2008, conversion of the 5.75% Series Acumulative convertible preferred stock is not assumed because the effect wouldbe anti-dilutive. The following tables present the computations of EPS for theperiods indicated.

 
| ** **                                 | ** ** | **Three Months Ended March 31, 2009**        | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Loss   (Numerator)**                                           | ** ** | **Shares   (Denominator)(1)**                             | ** ** | **Per   Share   Amount** | ** ** | **Loss   (Numerator)** | ** ** | **Shares   (Denominator)(2)** | ** ** | **Per   Share   Amount** | ** ** |
| ** **                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net loss                                   |       | $                                                                     | (76,940    | )                                                              |       |   |   |   | $ | (16,179 | ) |   |   |   |   |
| Less: Preferred stock dividends paid       |       | —                                                                |       |                                                           |       |   |   | (2,066 | ) |   |   |   |   |
| Less: Preferred stock dividends in arrears |       | (2,066                                                                | )          |                                                           |       |   |   | — |   |   |   |   |   |
|                                       |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                              |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | (79,006                                                               | )          | 28,840                                                         |       | $ | (2.74 | ) | (18,245 | ) | 28,566 |   | $ | (0.64 | ) |
| Effect of dilutive securities:             |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Restricted stock units                     |       | —                                                                |       | —                                                         |       | — |   | — |   | — |   | — |   |
| Common stock options                       |       | —                                                                |       | —                                                         |       | — |   | — |   | — |   | — |   |
| Convertible preferred stock                |       | —                                                                |       | —                                                         |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                            |       |                                                                  |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | $                                                                     | (79,006    | )                                                              | 28,840     |   | $ | (2.74 | ) | $ | (18,245 | ) | 28,566 |   | $ | (0.64 | ) |

 

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(1)          In the calculation of diluted EPS for the quarter ended March 31,2009, the 8.7 million shares of common stock resulting from an assumedconversion of the Company’s Convertible Preferred Stock and 8,730 equivalentshares of the Company’s restricted stock units were excluded because theconversion would be anti-dilutive.

 

(2)          In the calculation of diluted EPS for the quarter ended March 31,2008, the 8.7 million shares of common stock resulting from an assumedconversion of the Company’s Convertible Preferred Stock and 69,531 equivalentshares of the Company’s restricted stock units and common stock options wereexcluded because the conversion would be anti-dilutive.

 

**8.   INCOME TAXES**

 

The Company accounts forincome taxes under the provisions of SFAS No. 109, *Accounting for Income Taxes*, whichprovides for an asset and liability approach in accounting for incometaxes.  Under this approach, deferred taxassets and liabilities are recognized based on anticipated future taxconsequences, using currently enacted tax laws, attributable to temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts calculated for income taxpurposes.

 

In recording deferred income tax assets, theCompany considers whether it is more likely than not that some portion or allof the deferred income tax assets will be realized. The ultimate realization ofdeferred income tax assets is dependent upon the generation of future taxableincome during the periods in which those deferred income tax assets would bedeductible. The Company considers the scheduled reversal of deferred income taxliabilities and projected future taxable income for this determination. TheCompany believes that after considering all the available objective evidence,both positive and negative, historical and prospective, with greater weightgiven to the historical evidence, and in light of the current market situationand the uncertainty surrounding the Company’s Revolving Facility and relatedAmended Consent (see Notes 2 and 4), management is not able to determine thatit is more likely than not that the deferred tax assets will be realizedTherefore, the Company fully provided for additions to its deferred tax assetwith a valuation allowance during the period and did not record a tax benefitfor the three months ended March 31, 2009. The Company established a fullvaluation allowance and reduced its net deferred tax asset to zero during 2008.The Company 

 

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will continue to assess the valuationallowance against deferred income tax assets considering all availableinformation obtained in future reporting periods.  If the Company achieves profitable operationsin the future, it may reverse a portion of the valuation allowance in an amountat least sufficient to eliminate any tax provision in that period. Thevaluation allowance has no impact on the Company’s net operating loss (“NOL”)position for tax purposes, and if the Company generates taxable income infuture periods, it will be able to use its NOLs to offset taxes due at thattime.

 

As of March 31, 2009, the Company had$0.1 million of unrecognized tax benefits related to FIN 48. There were nosignificant changes to the calculation since December 31, 2008. TheCompany does not expect the amount of unrecognized tax benefits to materiallychange in 2009.

 

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

 

TheCompany considers all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents. A summary of non-cashinvesting and financing activities is presented below:

 
| **Description**                                                                                           | ** ** | **Number of   Shares Issued** | ** ** | **Grant Date  Fair Market Value** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                      | ** ** |
| **Three months ended March 31, 2009:**                                                               |       |                                         |       |                                        |       |
| Shares issued to satisfy restricted stock  grants                                                         |       | 33                                           |       | $                                           | 607        |   |
| **Three months ended March 31, 2008:**                                                               |       |                                         |       |                                        |       |
| Shares issued to satisfy restricted stock  grants                                                         |       | 45                                           |       | $                                           | 973        |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401(k) plan |       | 23                                           |       | $                                           | 141        |   |

 

Forthe three months ended March 31, 2009 and 2008, the non-cash portion ofAsset Retirement Costs was approximately $3,700 and $691,600, respectively. Preferredstock dividends declared but not yet paid at March 31, 2008 were $2.1million, of which $1.7 million was accrued at March 31, 2008. There wereno dividends declared or accrued at March 31, 2009. A supplementaldisclosure of cash flow information is presented below:

 
| ** **                           | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                                                 | ** ** | **2008** | ** ** |
| ** **                           | ** ** | **(in thousands)**                                                  | ** ** |
| Cash paid during the period for:     |       |                                                                     |       |   |   |
| Interest, net of amounts capitalized |       | $                                                                        | 2,811      |   | $ | 4,023 |   |
|                                      |            |                                                                          |            |  |  |  |  |

 

**10.****       HEDGING AND DERIVATIVEACTIVITIES**

 

TheCompany utilizes price-risk management transactions (e.g., swaps, collars andfloors) for a portion of its expected oil and natural gas production to seek toreduce exposure from the volatility of oil and natural gas prices and also toachieve a more predictable cash flow. While the use of these arrangements is intendedto reduce the Company’s potential exposure to significant commodity pricedeclines, they may limit the Company’s ability to benefit from increases in theprice of oil and natural gas. The Company’s arrangements, to the extent itenters into any, are intended to apply to only a portion of its expectedproduction and thereby provide only partial price protection against declinesin oil and natural gas prices. None of these instruments are, at the time oftheir execution, intended to be used for trading or speculative purposes, but aportion of the Company’s 2008 instruments was subsequently deemed as suchbecause of the decrease in the Company’s 2008 production. These price-riskmanagement transactions are generally placed with major financial institutionsthat the Company believes are financially stable; however, in light of therecent global financial crisis, there can be no assurance of the foregoing.None of the company’s derivative contracts contain collateral postingrequirements; however, the counterparty to the Company’s 2009 positions is amember of the lending group of the Company’s Revolving Facility, and certainevents of default under the Company’s Revolving Facility may result in a crossdefault of derivative instruments with such party. On a quarterly basis, theCompany’s 

 

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management sets all of the Company’sprice-risk management policies, including volumes, types of instruments andcounterparties. These policies are implemented by management through theexecution of trades by the Chief Financial Officer after consultation andconcurrence by the President and Chairman of the Board.  The Board of Directors reviews the Company’spolicies and trades monthly.

 

Allof these price-risk management transactions are considered derivativeinstruments and accounted for in accordance with SFAS No. 133 (as amended). These derivativeinstruments are intended to hedge the Company’s price risk and may beconsidered hedges for economic purposes, but certain of these transactions maynot qualify for cash flow hedge accounting. All derivative instruments, otherthan those that meet the normal purchases and sales exception, are recorded onthe balance sheet at fair value. The estimated fair value of these contracts isbased upon various factors, including closing exchange prices on the NYMEX,over-the-counter quotations, volatility and, in the case of collars and floors,the time value of options. The calculation of the fair value of collars andfloors requires the use of an option-pricing model (see Note 11). The cashflows resulting from settlement of derivative transactions which relate toeconomically hedging the Company’s physical production volumes are classifiedin operating activities on the statement of cash flows and the cash flowsresulting from settlement of derivative transactions considered “overhedged”positions are classified in investing activities on the statement of cash flows.For those derivatives in which mark-to-market accounting treatment is applied,the changes in fair value are not deferred through other comprehensive income (“OCI”)on the balance sheet. Rather they are immediately recorded in total revenue onthe statement of operations. For those derivative instrument contracts that aredesignated and qualify for cash flow hedge accounting, the effective portion ofthe changes in the fair value of the contracts is recorded in OCI on thebalance sheet and the ineffective portion of the changes in the fair value ofthe contracts is recorded in total revenue on the statement of operations, ineither case, as such changes occur. When the hedged production is sold, therealized gains and losses on the contracts are removed from OCI and recorded intotal revenue on the statement of operations, which reduces the period toperiod volatility impacting the statement of operations that may occurthroughout the contract term. While the contract is outstanding, the unrealizedgain or loss may increase or decrease until settlement of the contractdepending on the fair value at the measurement dates. The Company evaluates theterms of new contracts entered into to determine whether cash flow hedgeaccounting treatment or mark-to-market accounting treatment will be applied.The Company has applied mark-to-market accounting treatment to all outstandingcontracts since January 1, 2006.

 

The fair value of outstanding derivative contracts not designated ashedging instruments under SFAS No. 133 (as amended) reflected on thebalance sheet was as follows:

 
| ** **          | ** ** | ** **      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Price**       | ** ** | ** **       | ** ** | ** **                                        | ** ** | **Fair Value of Outstanding  Derivative Contracts as of** | ** ** |
|---------------------|------------|-----------------|------------|----------------------------------------------------------------------------------|------------|------------|------------|-----------------|------------|------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Transaction**     | ** ** | **Transaction** | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | **Per**         | ** ** | **Volumes**      | ** ** | **Balance Sheet**                            | ** ** | **March 31,**                                                                      | ** ** | **December 31,** | ** ** |
| **Date**            | ** ** | **Type**        | ** ** | **Beginning**                                                                    | ** ** | **Ending** | ** ** | **Unit**        | ** ** | **Per Day** | ** ** | **Location**                                      | ** ** | **2009**                                                                                | ** ** | **2008** | ** ** |
| ** **          | ** ** | ** **      | ** ** | ** **                                                                       | ** ** | ** ** | ** ** | ** **      | ** ** | ** **       | ** ** | ** **                                        | ** ** | **(in thousands)**                                                                 | ** ** |
| *Natural  Gas (1):* |       |            |       |                                                                             |       |       |       |            |       |             |       |                                              |       |                                                                                    |       |   |   |
| 04/07               |       | Collar          |       | 1/1/2009                                                                         |       | 12/31/2009 |       | $7.75-  $10.00  |       | 10,000 MMBtu     |       | Derivative Financial Instruments - Current Assets |       | $                                                                                       | 9,618      |   | $ | 6,688 |   |
| 10/07               |       | Collar          |       | 1/1/2009                                                                         |       | 12/31/2009 |       | $7.75-  $10.08  |       | 10,000 MMBtu     |       | Derivative Financial Instruments - Current Assets |       | 9,620                                                                                   |       | 6,702 |   |
| *Crude  Oil (2):*   |       |            |       |                                                                             |       |       |       |            |       |             |       |                                              |       |                                                                                    |       |   |   |
| 10/07               |       | Collar          |       | 1/1/2009                                                                         |       | 12/31/2009 |       | $70.00-  $93.55 |       | 300 Bbl          |       | Derivative Financial Instruments - Current Assets |       | 1,389                                                                                   |       | 2,017 |   |
|                |       |            |       | Total derivatives not  designated as hedging instruments under SFAS No. 133 |       | $          | 20,627     |            | $          | 15,407           |       |

 

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(1)   The Company’s natural gas contracts were enteredinto on a per MMBtu delivered price basis, using the NYMEX Natural Gas Index.Mark-to-market accounting treatment is applied to these contracts and thechange in fair value is reflected in total revenue.

 

(2)   The Company’s crude oilcontract was entered into on a per barrel delivered price basis, using the WestTexas Intermediate Light Sweet Crude Oil Index. Mark-to-market accountingtreatment is applied to this contract and the change in fair value is reflectedin total revenue.

 

The following tablereflects the realized and unrealized gains and losses included in total revenueon the statement of operations:

 
| ** **                                                    | ** ** | ** **                                                         | ** ** | **Amount of Gain or (Loss)  Recognized in Income on Derivative** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Derivatives Not Designated as Hedging** | ** ** | **Location of Gain or (Loss) Recognized** | ** ** | **For the Three Months Ended  March 31,**                                       | ** ** |
| **Instruments under SFAS No. 133**        | ** ** | **in Income on Derivative**                         | ** ** | **2009**                                                                                                 | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | ** **                                                         | ** ** | **(in thousands)**                                                                                  | ** ** |
| Natural gas derivative realized settlements                   |       | Gain  (loss) on derivatives — Total revenue                   |       | $                                                                                                        | 5,125      |   | $ | 363 |   |
| Crude oil derivative realized settlements                     |       | Gain  (loss) on derivatives — Total revenue                   |       | 723                                                                                                      |       | (4,362 | ) |
| Natural gas derivative unrealized change in fair value        |       | Gain  (loss) on derivatives — Total revenue                   |       | 5,848                                                                                                    |       | (25,564 | ) |
| Crude oil derivative unrealized change in fair value          |       | Gain  (loss) on derivatives — Total revenue                   |       | (628                                                                                                     | )          | 204 |   |
| Gain (loss) on derivatives                                    |       |                                                               |       | $                                                                                                        | 11,068     |   | $ | (29,359 | ) |

 

**11.**** ****FAIRVALUE MEASUREMENTS**

 

As defined in SFAS No. 157,fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date (an exit price). Where available, fair value is based onobservable market prices or parameters or derived from such prices orparameters. Where observable prices or inputs are not available, valuationmodels are applied. These valuation techniques involve some level of managementestimation and judgment, the degree of which is dependent on the pricetransparency for the instruments or market and the instruments’ complexity.

 

*Valuation Techniques*

 

In accordance with SFAS No. 157,valuation techniques used for assets and liabilities accounted for at fairvalue are generally categorized into three types:

 

·      MarketApproach*.*Market approach valuation techniques use prices and other relevant informationfrom market transactions involving identical or comparable assets orliabilities.

 

·      IncomeApproach*.*Income approach valuation techniques convert future amounts, such ascash flows or earnings, to a single present amount, or a discounted amount.These techniques rely on current market expectations of future amounts.

 

·      Cost Approach*.*Cost approach valuation techniques arebased upon the amount that, at present, would be required to replace theservice capacity of an asset, or the current replacement cost. That is, fromthe perspective of a market participant (seller), the price that would bereceived for the asset is determined based on the cost to a market participant(buyer) to acquire or construct a substitute asset of comparable utility.

 

The three approachesdescribed within SFAS No. 157 are consistent with generally acceptedvaluation methodologies. While all three approaches are not applicable to allassets or liabilities accounted for at fair value, where appropriate andpossible, one or more valuation techniques may be used. The selection of thevaluation method(s) to apply considers the definition of an exit price andthe nature of the asset or liability being valued and significant expertise andjudgment is required. For assets and liabilities accounted for at fair value,valuation techniques are generally a combination of the market and incomeapproaches. Accordingly, the 

 

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Company aims to utilizevaluation techniques that maximize the use of observable inputs and minimizethe use of unobservable inputs.

 

*Input Hierarchy*

 

SFAS No. 157establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value directly related to the amount ofsubjectivity associated with the inputs. The hierarchy gives the highest priorityto unadjusted quoted prices in active markets for identical assets orliabilities (Level 1 measurement) and the lowest priority to unobservableinputs (Level 3 measurement). The three levels of the fair value hierarchydefined by SFAS No. 157 are as follows:

 

·      Level 1 — Inputs are unadjusted, quoted prices in activemarkets for identical assets or liabilities at the measurementdate. Active markets are those in which transactions for the asset orliability occur in sufficient frequency and volume to provide pricinginformation on an ongoing basis.

 

·      Level 2 — Inputs (other than quoted prices included in Level 1)are either directly or indirectly observable for the asset or liability throughcorrelation with market data at the measurement date and for the duration ofthe instrument’s anticipated life. Level 2 includes those financial instrumentsthat are valued using models or other valuation methodologies, which considervarious assumptions, including quoted forward prices for commodities, timevalue, volatility factors, and current market and contractual prices for theunderlying instruments, as well as other relevant economic measures.

 

·      Level 3 — Inputs reflect management’s best estimate of whatmarket participants would use in pricing the asset or liability at themeasurement date.

 

*Fair Value on a Recurring Basis*

 

The following table setsforth by level within the fair value hierarchy the Company’s financial assetsand liabilities that were accounted for at fair value on a recurring basis asof March 31, 2009. As required by SFAS No. 157, financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement. The Company’s assessment ofthe significance of a particular input to the fair value measurement requiresjudgment, and may affect the valuation of fair value assets and liabilities andtheir placement within the fair value hierarchy levels.

 
| ** **             | ** ** | ** **              | ** ** | **Fair Value Measurements Using:** | ** ** |
|------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | ** **              | ** ** | **Quoted**                                        | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **              | ** ** | **Prices in**                                | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **             | ** ** | ** **              | ** ** | **Active**                                        | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **             | ** ** | **Total Fair**     | ** ** | **Markets**                                       | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **             | ** ** | **Value**               | ** ** | **(Level 1)**                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| Assets:                |       |                    |       |                                              |       |   |   |   |   |
| Derivative instruments |       | $                       | 20,627     |                                              | $          | — |   | $ | — |   | $ | 20,627 |   |
|                        |            |                         |            |                                                   |            |  |  |  |  |  |  |  |  |

 

The following table setsforth a reconciliation of changes in the fair value of the Company’s derivativeinstruments classified as Level 3 in the fair value hierarchy.

 

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| ** **                                                                     | ** ** | **Three months ended March 31, 2009** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **Assets**                                                     | ** ** | **Liabilities** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                                        | ** ** |
| Balance as of December 31, 2008                                           |       | $                                                              | 15,407     |   | $ | — |   |
| Realized and unrealized losses included in earnings                            |       | (628                                                           | )          | — |   |
| Realized and unrealized gains (losses) included in other  comprehensive income |       | —                                                         |       | — |   |
| Settlements                                                                    |       | 5,848                                                          |       | — |   |
| Transfers in and/or out of Level 3                                             |       | —                                                         |       | — |   |
| Balance as of March 31, 2009                                              |       | $                                                              | 20,627     |   | $ | — |   |

 
| Change in unrealized gains relating to instruments still  held as of March 31, 2009 |   | $ | 9,351 |   | $ | — |   |
|------------------------------------------------------------------------------------------|--------|---|-------|--------|---|--------|--------|

 

Gains and losses(realized and unrealized) for Level 3 recurring items are included in total revenueon the Consolidated Statements of Operations. Settlements represent cashsettlements of contracts during the period, which are included in total revenueon the Consolidated Statements of Operations.

 

Transfers in and/or outrepresent existing assets or liabilities that were either previouslycategorized as a higher level for which the inputs to the model becameunobservable or assets and liabilities that were previously classified as Level3 for which the lowest significant input became observable during the period.There were no transfers in or out of Level 3 during the periods presented.

 

*Fair Value on a NonrecurringBasis*

 

On January 1, 2009,the Company adopted the provisions of SFAS No. 157 for non-financialassets and liabilities, which were delayed by FSP FAS 157-2. Therefore, theCompany adopted the provisions of SFAS No. 157 for its AROs. The Company usesfair value measurements on a nonrecurring basis in its AROs. These liabilitiesare recorded at fair value initially and assessed for revisions periodicallythereafter. The lowest level of significant inputs for fair value measurementsfor ARO liabilities are Level 3. A reconciliation of the beginning and endingbalances of the Company’s ARO is presented in Note 3, in accordance with SFAS No. 143.New assets and liabilities measured at fair value during the three months endedMarch 31, 2009 include:

 
| ** **                                    | ** ** | ** **              | ** ** | **Fair Value Measurements Using:** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|---------------------------------------------------|------------|
| ** **                                    | ** ** | ** **              | ** ** | **Quoted**                                        | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | ** **              | ** ** | **Prices in**                                | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                                    | ** ** | ** **              | ** ** | **Active**                                        | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                                    | ** ** | **Total Fair**     | ** ** | **Markets**                                       | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **                                    | ** ** | **Value**               | ** ** | **(Level 1)**                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| Assets:                                       |       |                    |       |                                              |       |   |   |   |   |
| Asset retirement costs                        |       | $                       | 11         |                                              | $          | — |   | $ | — |   | $ | 11 |   |
|                                          |       |                    |       |                                              |       |   |   |   |   |
| Liabilities:                                  |       |                    |       |                                              |       |   |   |   |   |
| Asset retirement obligations — current   |       | $                       | —     |                                              | $          | — |   | $ | — |   | $ | — |   |
| Asset retirement obligations — long-term |       | 11                      |       | —                                            |       | — |   | 11 |   |

 

**12.**** ****COMMITMENTSAND CONTINGENCIES**

 

***Delivery Commitments —***During 2007, the Company executed a gasgathering and compression services agreement with Frontier Midstream, LLC (“Frontier”).Following execution of such agreement, Frontier expedited the installation ofthe Rose Bud system in White County, Arkansas, including the high and lowpressure gathering lines, dehydration, compression and the interconnect withOzark, in order to 

 

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accommodate the Company’s desire to be able to delivernatural gas as soon as its wells were completed. At the time of signing thecontract, the Company had completed and tested two productive wells in theMoorefield shale. The Rose Bud system was installed, operational and ready toreceive the Company’s production in June 2007. The contract minimumcommitment to Frontier is 2.7 Bcf over a three-year period for the pipelineinterconnect. This line carries a $0.29 per Mcf deficiency rate, for a totalcommitment for the pipeline of approximately $0.8 million. The Company hasdelivered approximately $68,400 of this commitment through March 31, 2009.In addition to the pipeline, Frontier also built and installed lateralgathering lines to eight locations.  Theremaining commitment on these laterals is $1.3 million, for a total potentialliability of approximately $2.0 million to be paid by June 2010 if theminimum volumes are not delivered. The Company recorded a long-term liabilityfor the aggregate amount of $2.0 million in the fourth quarter of 2008.Although the Company believes there is the potential to develop this area andincrease production, it does not currently have sufficient liquidity to ensurethat this occurs in the timeframe required by the gas gathering and compressionservices agreement with Frontier.

 

During 2008, the Company executed a gas gathering andcompression services agreement with Integrys Energy Services (“Integrys”)related to the construction and installation of a pipeline connecting theCompany’s Slick State properties to its Bloomberg properties in order to securemore advantageous plant processing, transportation and gathering fees andaccess to gas markets. The pipeline system was installed, operational and readyto redirect the production in September 2008. The contract minimumcommitment to Integrys is approximately 11.2 Bcf over a three year period forthe pipeline interconnect. The amount of total commitment is $550,000 plus 8%interest per annum, for a total liability of approximately $0.6 million. TheCompany has delivered approximately $124,000 of this commitment through March 31,2009. The Company has not recorded a liability for this commitment as itexpects to meet the minimum physical delivery based on estimated anticipatedproduction.

 

This contract is not considered a derivative, but hasbeen designated as an annual sales contract under SFAS No. 133 (as amended).

 

***Contingencies -*** From time to time the Company is a party to variouslegal proceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot bepredicted with certainty, the Company is not currently a party to anyproceeding that it believes, if determined in a manner adverse to the Company,could have a material adverse effect on the Company’s financial condition,results of operations or cash flows except as set forth below.

 

**David Blake, et al. v. Edge PetroleumCorporation** —On September 19, 2005, David Blake and David Blake, Trustee of the Davidand Nita Blake 1992 Children’s Trust, filed suit against the Company in statedistrict court in Goliad County, Texas alleging breach of contract for failureand refusal to transfer overriding royalty interests to plaintiffs in severalleases in the Nita and Austin prospects in Goliad County, Texas and failure andrefusal to pay monies to Blake pursuant to such overriding royalty interestsfor wells completed on the leases. The plaintiffs seek relief of (1) specificperformance of the alleged agreement, including granting of overriding royaltyinterests by us to Blake; (2) monetary damages for failure to grant theoverriding royalty interests; (3) exemplary damages for his claims ofbusiness disparagement and slander; (4) monetary damages for tortiousinterference; and (5) attorneys’ fees and court costs. Venue of the casewas transferred to Harris County, Texas by agreement of the litigants. The Company’ssubsidiaries, Edge Petroleum Exploration Company, Edge Petroleum OperatingCompany and Edge Petroleum Production Company, were also added as defendants.The Company filed a counterclaim against plaintiff and joined various relatedentities that are controlled by Blake, seeking lease interests in which theCompany contends it had been wrongfully denied participation and also claimingthat proprietary information was misappropriated. The parties have moved forsummary judgment on each other’s claims and counterclaims, which the trialcourt has denied as to both sides.  In November 2007,the Company filed a separate motion for summary judgment based on the statuteof frauds and; the court has not yet ruled on this separate motion. In June 2008,the Plaintiffs filed a Sixth Amended Petition conditionally adding claims forcertain prospects that had been previously settled by means of a Compromise andSettlement Agreement (the “Settlement Agreement”), entered in settlement ofprior litigation among some of the parties, but only to the extent thatrescission of the prior Settlement Agreement was being sought by the Company.The Company is not seeking rescission of the prior Settlement Agreement andresponded accordingly in its Fourth Amended Original Counterclaim and ClaimsAgainst Additional Parties 

 

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filed on October 16,2008.  On October 17, 2008, theplaintiffs filed their Seventh Amended Petition adding a claim for breach ofthe Settlement Agreement. The trial, originally scheduled to begin September 10,2007, has been reset several times, most recently for December 8, 2008,and will be reset in 2009 by the newly-elected judge of the 215th JudicialDistrict Court in Harris County.  In December 2008,one of the Blake counter-defendants filed a motion to arbitrate, which motionhas not been heard by the court. Extensive written discovery has occurred in the case, and the partiesare engaging in fact and expert witness depositions. The Company has respondedand will continue to respond aggressively to this lawsuit, and believes it hasmeritorious defenses and counterclaims.

 

**Mary JaneCarol Trahan Champagne, et al. v. Edge Petroleum Exploration Company, et al.** — On September 19, 2008 the Companywas sued in state district court in Vermilion Parish, Louisiana by Mary JaneTrahan, Carol Trahan Champagne and 29 other plaintiffs alleging breach ofobligations under mineral leases in Vermilion Parish regarding the Trahan No. 1well and the Trahan No. 3 well (MT RC SUB reservoir). Plaintiffs areseeking unspecified damages for lost revenue, lost royalties and devaluation ofproperty interest sustained as a result of the defendants’ alleged negligentand improper drilling operations on the Trahan No. 1 well and the Trahan No. 3well, including alleged failure to prevent underground water from flooding anddestroying plaintiffs’ portion of the reservoir beneath plaintiffs’property.  Plaintiffs also allegedefendants failed to “block squeeze” sections of the Trahan No. 3 well aswould a prudent operator. This lawsuit, previously removed from the state courtto the federal district court for the Western District of Louisiana, LafayetteDivision, has been remanded to state court. The Company’s insurance carrier hasretained counsel to represent the Company in this matter. The Company has notestablished a reserve with respect to this claim and it is not possible todetermine what, if any, its ultimate exposure might be in this matter. TheCompany intends to vigorously defend itself in this lawsuit.

 

**John Lemke, et al. v. Edge Petroleum Corporation** - In October 2008, the Company wassued by alleged assignees of Continental Seismic over an alleged contract toreceive a royalty of two-tenths of one percent in certain alleged areasdeveloped for oil and gas in South Louisiana. The Company has filed an answergenerally denying the allegations and raising the defenses of the statute oflimitations bar and laches. No discovery has been served. The court recentlyentered a docket control order which establishes a discovery timetable and atrial date of November 30, 2009. The Company has not established a reservewith respect to this claim and has not determined what, if any, the Company’sultimate exposure might be in this matter. The Company will respond aggressively to this lawsuit, and believes ithas meritorious defenses.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following is Management’s Discussion and Analysis(“MD&A”) of significant factors that have affected certain aspects of ourfinancial position and operating results during the periods included in theaccompanying unaudited condensed consolidated financial statements. Thefollowing MD&A is intended to help the reader understand Edge PetroleumCorporation (“Edge”). This discussion should be read in conjunction with theaccompanying unaudited condensed consolidated financial statements includedelsewhere in this Form 10-Q and with MD&A of Financial Condition andResults of Operations and our audited consolidated financial statementsincluded in our annual report on Form 10-K for the year ended December 31,2008 (“2008 Annual Report”).

 

### **FORWARD LOOKING STATEMENTS**

###  

The information containedin this quarterly Report on Form 10-Q includes certain forward-lookingstatements.  The words “may,” “will,” “expect,”“anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,” andsimilar expressions used in this Form 10-Q are intended to identifyforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Youshould not place undue reliance on these forward-looking statements, whichspeak only as of the date made.  Weundertake no obligation to publicly release the result of any revision of theseforward-looking statements to reflect events or circumstances after the datethey are made or to reflect the occurrence of unanticipated events. You shouldalso know that such statements are not guarantees of future performance and aresubject to risks, uncertainties and assumptions.  Should any of these risks or uncertaintiesmaterialize, or should any of our assumptions prove incorrect, actual resultsmay differ materially from those included within the forward-lookingstatements.  Such statements involverisks and uncertainties, including, but not limited to, those set forth under “ITEM1A. RISK FACTORS” of our 2008 Annual Report and this Quarterly Report on Form 10-Q.

 

## **GENERAL OVERVIEW**

## ** **

Edge Petroleum Corporation (“Edge”, “we” or the “Company”)is a Houston-based independent energy company that focuses its exploration,development, production, acquisition and marketing activities in selectedonshore basins of the United States. In late 1998, we undertook a top-levelmanagement change and began a shift in strategy from pure exploration, whichfocused more on prospect generation, to a strategy which focused on a balancedprogram of exploration, exploitation and development and acquisition of oil andnatural gas properties. In late 2007, in an attempt to enhance shareholdervalue we began to assess our strategic alternatives  and have subsequently expanded this processto include a further evaluation of both our financial and strategicalternatives in late 2008 and continuing into 2009. Our current primary focusis on capital preservation and resolving the uncertainty and challenges weface.

 

We generate revenues, income and cash flows byproducing and marketing oil and natural gas produced from our oil and naturalgas properties. We have historically made significant capital expenditures inour exploration, development, and production activities that have allowed us tocontinue generating revenue, income and cash flows. In recent years, we havealso spent considerable efforts on acquisitions, including both corporate andasset acquisitions. We are currently operating with a reduced capital spendingprogram as we continue to pursue the sale of some or all of our assets, a mergeror other business combination involving the Company or the restructuring orrecapitalization of the Company.

 

This overview providesour perspective on the individual sections of MD&A. Our MD&A includesthe following sections:

 

·                  **Outlook and Review ofFinancial and Strategic Alternatives** — additional discussion relating to management’soutlook to the future of our business.

 

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·                  **Industry and EconomicFactors** — ageneral description of value drivers of our business as well as opportunities,challenges and risks related to the oil and natural gas industry.

 

·                  **Approach to the Business** — information regarding our approach andstrategy.

 

·                  **Divestitures** — information about our sales anddivestitures.

 

·                  **Critical AccountingPolicies and Estimates** — a discussion of certain accounting policies that require criticaljudgments and estimates.

 

·                  **Results of Operations** — an analysis of our consolidatedresults for the periods presented in our financial statements.

 

·                  **Liquidity and CapitalResources**—****an analysis of cash flows, sources anduses of cash, and contractual obligations.

 

·                  **Fair Value Measurements—**supplementary discussion regarding fair value measurements andimplementation of SFAS No. 157, *Fair Value Measurements.*

 

·                  **Risk ManagementActivities**—****supplementary information regarding ourprice-risk management activities.

 

·                  **Tax Matters** — supplementary discussion of income taxmatters.

 

·                  **Recently IssuedAccounting Pronouncements** — a discussion of certain recently issued accounting pronouncementsthat may impact our future results.

 

**Outlook and Review of Financialand Strategic Alternatives**

 

On December 18,2007, we announced the hiring of a financial advisor to assist our Board ofDirectors with an assessment of strategic alternatives. During 2008, we focusedour efforts on a proposed merger with Chaparral Energy, Inc. (“Chaparral”).However, on December 17, 2008, we announced the termination of theChaparral merger agreement after both we and Chaparral determined it was highlyunlikely that the conditions to the closing of the proposed merger would besatisfied or that Chaparral would be able to obtain sufficient debt and equityfinancing to allow them to complete the proposed merger and operate as acombined company, particularly in light of the challenging environment in thefinancial markets and the energy industry.

 

Since December 2008,we have continued with our evaluation and assessment of various financial andstrategic alternatives, which may include the sale of some or all of ourassets, a merger or other business combination involving the Company,restructuring or recapitalization of the Company to address our liquidityissues and the Deficiency under our Revolving Facility (see discussion below).We are working with an investment banking firm to assist further in theevaluation of our financial and strategic alternatives.

 

During January 2009, we announced that thelenders (“Lenders”) to our Fourth Amended and Restated Credit Agreement (asamended, the “Revolving Facility”) had completed their borrowing baseredetermination and reduced our borrowing base to $125 million, resulting in a$114 million borrowing base deficiency (the “Deficiency”).

 

Pursuant to the terms of the Revolving Facility,we elected to prepay the Deficiency in six equal monthly installments, with thefirst $19 million installment being due on February 9, 2009. On February 9,2009, we entered into a Consent and Agreement (the “February Consent”)among us and the Lenders under the Revolving Facility deferring the paymentdate of the first $19 million installment until March 10, 2009, andextending the due date for each subsequent installment by one month with thelast of the six installment payments to be due on August 10, 2009.  In connection with the February Consent,we agreed to prepay $5.0 million of our

 

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outstandingadvances under the Revolving Facility, in two equal installments. The first$2.5 million prepayment was paid on February 9, 2009 and the second $2.5million prepayment was paid on February 23, 2009, with each of theprepayments to be applied on a pro rata basis to reduce the remaining six $19million deficiency payments.  On March 10,2009, we entered into a Consent and Agreement (the “March Consent”) withthe Lenders under the Revolving Facility, which provided, among other things,for the extension of the due date for the first installment to repay theDeficiency from March 10, 2009 to March 17, 2009.  Notwithstanding such extension, we agreedwith the Lenders that each of the other five equal installment paymentsrequired to eliminate the Deficiency would be due and payable as provided forin the February Consent. On March 16, 2009, we entered into Consentand Amendment No. 4 to our Revolving Facility (the “Amended Consent”)which provides, among other things, (1) that we will make a $25 millionpayment on May 31, 2009 with all remaining principal, fees and interestamounts under our Revolving Facility to be due and payable on June 30,2009, (2) that it will be an event of default (i) if we fail to haveexecuted and delivered on or before May 15, 2009 at least one of thefollowing (a) a commitment letter from a lender or group of lendersreasonably satisfactory to our Lenders providing for the provision by such lenderor group of lenders of a credit facility in an amount sufficient to repay allof our obligations under the Revolving Facility on or before June 30,2009, (b) a merger agreement or similar agreement involving us as part ofa transaction that results in the repayment of our obligations under theRevolving Facility on or before June 30, 2009, and (c) a purchase andsale agreement with a buyer or group of buyers reasonably acceptable to ourLenders providing for a sale transaction by us that results in the repayment ofall of our obligations under the Revolving Facility on or before June 30,2009, or (ii) if we are in default under or our hedging arrangements havebeen terminated or cease to be effective without the prior written consent ofour Lenders, (3) that our advances under the Revolving Facility will bearinterest at a rate equal to the greater of (a) the reference rate publiclyannounced by Union Bank of California, N.A. for such day, (b) the FederalFunds Rate in effect on such day plus 0.50% and (c) a rate determined bythe Administrative Agent to be the Daily One-Month LIBOR (as defined in theRevolving Facility), in each case plus 2.5% or, during the continuation of anevent of default, plus 4.5% (resulting in an effective interest rate of approximately5.75% as of May 7, 2009), (4) for limitations on the making ofcapital expenditures and certain investments, and (5) for the eliminationof the current ratio, leverage ratio and interest coverage ratio covenantrequirements. The Amended Consent also eliminates the six $19 milliondeficiency payments which were contemplated by the February Consent andthe March Consent. To comply with the terms of the Amended Consent, weanticipate that we will need to (i) sell select individual assets prior toMay 31, 2009 to enable us to make the $25 million payment which is due on May 31,2009, and/or (ii) negotiate a commitment letter with a new lender or groupof lenders prior to May 15, 2009 in an amount sufficient to repay all ofour obligations under the Revolving Facility on or before June 30, 2009,and/or (iii) have negotiated the sale, merger or other businesscombination involving us which results in the repayment of all of ourobligations under the Revolving Facility prior to May 15, 2009 and to haveclosed such transaction on or before June 30, 2009. The Amended Consentlimits the making of capital expenditures and we anticipate a severecurtailment of our drilling plans and other capital expenditures in 2009.

 

If we breach any of theprovisions of the Amended Consent or the Revolving Facility, our Lenders willbe entitled to declare an event of default, at which point the entire unpaidprincipal balance of the loans, together with all accrued and unpaid interestand other amounts then owing to our Lenders, would become immediately due andpayable.  In any event, the entire unpaidprincipal balance of the loans, together with all accrued and unpaid interestand other amounts then owing to our Lenders, will be payable on June 30,2009 unless earlier paid or a further extension with respect to payment isnegotiated with our Lenders. Our Lenders may take action to enforce theirrights with respect to the outstanding obligations under the RevolvingFacility. Because substantially all of our assets are pledged as collateralunder the Revolving Facility, if our Lenders declare an event of default, theywould be entitled to foreclose on and take possession of our assets.  In such an event, we may be forced toliquidate or to otherwise seek protection under Chapter 11 of the U.S.Bankruptcy Code. These matters, as well as the other risk factors related toour liquidity and financial position raise substantial doubt as to our abilityto continue as a going concern. See *ITEM 2. “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*— LIQUIDITY AND CAPITAL RESOURCES — *REVOLVINGFACILITY.”* With respect to our compliance with the Amended Consent,there can be no assurance that we will be able to further negotiate the termsof the Amended Consent or negotiate a further restructuring of the relatedindebtedness or that we will be able to make any required payments when theybecome due.  Moreover, there can be noassurance that we will be successful in our efforts to comply with the terms ofthe Amended Consent, including our ongoing efforts to evaluate and assess ourvarious financial

 

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and strategic alternatives(which may include the sale of some or all of our assets, a merger or otherbusiness combination involving the Company, or the restructuring orrecapitalization of the Company).  Ifsuch efforts are not successful, we may be required to seek protection underChapter 11 of the U.S. Bankruptcy Code.

 

*GoingConcern* — Inaddition to the Deficiency under our Revolving Facility, the capitalexpenditures required to maintain and/or grow production and reserves aresubstantial. Prices for oil and natural gas declined materially during thefourth quarter of 2008, and natural gas prices continued to decline during thefirst quarter of 2009.  A continued or extended decline in oil ornatural gas prices will have a material adverse effect on our financialposition, results of operations, cash flows and access to capital and on thequantities of oil and natural gas reserves that we can economically produce.Our stock price has significantly declined over the past year which also makesit more difficult to obtain equity financing on acceptable terms to address ourliquidity issues. In addition, we are reporting negative working capital at March 31,2009 and continue to report net losses in the first quarter of 2009 followingthree consecutive years of net losses.  Therefore, there issubstantial doubt as to our ability to continue as a going concern for a periodlonger than the next twelve months. Additionally, our independent auditorsincluded an explanatory paragraph in their report on our consolidatedfinancials statements as of and for the year ended December 31, 2008 thatraises substantial doubt about our ability to continue as a going concern. Ourability to continue as a going concern is dependent upon the success of ourfinancial and strategic alternatives process, which may include the sale ofsome or all of our assets, a merger or other business combination involving theCompany or the restructuring or recapitalization of the Company and an increasein commodity prices. Until the possible completion of the financial andstrategic alternatives process, our future remains uncertain and there can beno assurance that our efforts in this regard will be successful.

 

Our consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles applicable to a going concern, which implies we willcontinue to meet our obligations and continue our operations for the nexttwelve months. Realization values may be substantially different from carryingvalues as shown, and our consolidated financial statements do not include anyadjustments relating to the recoverability or classification of recorded assetamounts or the amount and classification of liabilities that might be necessaryas a result of this uncertainty.

 

Our outlook and theexpected results described above are both subject to change based upon factorsthat include, but are not limited to, drilling results, commodity prices, theresults of our financial and strategic alternatives process, access to capital,the acquisitions market and factors referred to in “FORWARD LOOKING INFORMATION”in our 2008 Annual Report.

 

# **Industry and Economic Factors**

# ** **

In managing our business,we must deal with many factors inherent to our industry.  First and foremost is the fluctuation of oiland natural gas prices. Our revenues, the value of our assets, our ability toobtain bank loans or additional capital on attractive terms have been and willcontinue to be affected by changes in oil and natural gas prices and the coststo produce our reserves. Oil and natural gas prices are subject to significantfluctuations that are beyond our ability to control or predict without losingsome advantage of the upside potential. In recent years, oil and natural gascommodity prices have generally trended upwards in response to robust demandand constrained supplies, with oil and natural gas prices peaking at more than$140.00 per barrel and $13.00 per Mcf, respectively, in July 2008. In late2008 and early 2009, a world-wide economic recession and oversupply of naturalgas in North America led to an unprecedented decline in oil and natural gasprices, with oil falling by more than $100.00 per barrel and natural gasfalling more than $10.00 per Mcf from their peaks in July 2008.

 

Although certain of ourcosts and expenses are affected by general inflation, inflation does notnormally have a significant effect on our business. Our costs and expenses tendto react to activity levels in our industry and commodity price movements. Inresponse to the recent historically high commodity prices, the oil and naturalgas industry experienced significant increases in activity and in demand foroil field services. The increased demand for these services resulted insignificant inflation in both operating and capital costs in 2008. Althoughcommodity prices have declined significantly in recent months, the inflatedcost of oil field services resulting from recent historically high commodityprices did not decrease as rapidly. While these costs are declining, they havelagged in comparison to the rapid commodity price decline; thus the prospect ofcontinued

 

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low commodity prices anddisproportionately higher service costs will constrain the industry’s capitalreinvestment for the near future.

 

Our operations entailsignificant complexities. Advanced technologies requiring highly trainedpersonnel 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, oftentimes resulting in no commercially productivereserves being discovered.  Thesefactors, together with increased demand for rigs, equipment, supplies andservices, have made it difficult at times for us to further our growth, andmade timely execution of our planned activities difficult.

 

Our business, as with other extractive businesses, isa depleting one in which each gas equivalent produced must be replaced or ourasset base and capacity to generate revenues in the future will shrink.  In 2008 and the first quarter of 2009, wewere unable to replace the production we generated due to our reduced capitalspending program and higher drilling and operating costs. This will continue tobe a factor in 2009 as we operate under a severely limited capital andoperating budget.

 

The oil and natural gasindustry is highly competitive. We compete with major and diversified energycompanies, independent oil and natural gas businesses and individual operatorsin exploration, production, marketing and acquisition activities.  In addition, the industry as a whole competeswith other businesses that supply energy to industrial and commercial endusers.

 

Extensive federal, stateand local regulation of the industry significantly affects our operations.  In particular, our activities are subject tostringent operational and environmental regulations.  These regulations have increased the costs ofplanning, designing, drilling, installing, operating and abandoning oil andnatural gas wells and related facilities. These regulations may become more demanding in the future.

 

Poor economic conditions continue to create considerable challenges anduncertainties for the energy industry. We are unable to predict the impact onour business of a continued decline in commodity prices and the global economy,but the current conditions have made it difficult at times for us in ourongoing financial and strategic alternatives process. We expect that continuedweakening in the economy could result in further declines in our revenue, cashflows and liquidity.

 

# **Approach to the Business**

# ** **

Historically, our goal has been to fund ongoingexploration and development projects with cash flow provided by operatingactivities, occasionally supplemented with external sources of capital. Inconnection with our ongoing financial and strategic alternatives process andour liquidity issues resulting from the Deficiency under our Revolving Facilityand the related Amended Consent, we have operated and will continue to operatewith a severely limited capital spending program in 2009 as we continue topursue the sale of some or all of our assets, a merger or other businesscombination involving the Company or the restructuring or recapitalization ofthe Company. Our strategy is currently to continue under a severely limitedcapital and operating budget, thereby reducing our normal exploration anddevelopment activities as we seek to preserve liquidity and resolve theuncertainty and challenges that we face as we pursue various financial andstrategic alternatives.

 

We normally hedge ourexposure to volatile oil and natural gas prices on a portion of our expectedproduction to reduce price risk. As of March 31, 2009, we had derivativecontracts in place covering 20,000 MMBtu/d of natural gas and 300 Bbl/d ofcrude oil for the remainder of 2009.

 

**Divestitures**

 

We regularly review our asset base for the purpose ofidentifying non-core assets, the disposition of which would increase capitalresources available for other activities and create organizational andoperational efficiencies. While we generally do not dispose of assets solelyfor the purpose of reducing debt, such dispositions can have the result offurthering our objective of financial flexibility through reduced debt levels.We have not completed any divestitures in the first quarter of 2009, but duringthe first quarter of 2008, we

 

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completed the sale of certain working interests inapproximately 100 properties located in Texas to various buyers for aggregateproceeds of approximately $12.2 million.

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformitywith generally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue, expenses, contingent assets andliabilities and the related disclosures in the accompanying 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 natural gas which geological and engineeringdata demonstrate, with reasonable certainty, to be recoverable in future yearsfrom known reservoirs under existing economic and operating conditions.  The accuracy of any reserve estimate is afunction of the quality of available data, engineering and geologicalinterpretation, and judgment, as well as prices and cost levels at that pointin time. Any significant variance in these assumptions could materially affectthe estimated quantity and value of our reserves. Despite the inherentimprecision in these engineering estimates, our reserves are used throughoutour financial statements.

 

*Assumptions/Approach Used:*Units-of-production method to amortizeour oil and natural gas properties - The quantity of reservesis used in calculating depletion expense and could significantly impact our depletionexpense. Any reduction in provedreserves without a corresponding reduction in capitalized costs will increasethe depletion rate.

 

* *“Ceiling” Test - The full-cost method of accounting for oil andnatural gas properties requires a quarterly calculation of a limitation oncapitalized costs, often referred to as a full-cost ceiling test. The ceilingis the discounted present value of our estimated total proved reserves (using a10% discount rate) adjusted for taxes and the impact of cash flow hedges onpricing, if cash flow hedge accounting is applied. The ceiling test calculationdictates that prices and costs in effect as of the last day of the period areto be used in calculating the discounted present value of our estimated totalproved reserves.  However, if pricesincrease subsequent to the balance sheet date, but before the filing date, SECguidelines allow a company to use the subsequent date’s higher prices incalculating the full-cost ceiling. To the extent that our capitalized costs(net of accumulated depletion and deferred taxes) exceed the ceiling, theexcess must be written off to expense. Once incurred, this impairment of oiland natural gas properties is not reversible at a later date even if oil andnatural gas prices increase. A ceiling test impairment could result in asignificant loss for a reporting period; however, future depletion expensewould be correspondingly reduced.  Ourestimated proved reserves volumes have decreased during the period fromyear-end 2008 to March 31, 2009, and the average oil, NGL and natural gasprices at the balance sheet date as of March 31, 2009 were $49.66 perbarrel, $29.80 per barrel and $3.78 per MMBtu, respectively. As a result, werecorded a net ceiling test impairment for the three months ended March 31,2009 of approximately $78.3 million, net of tax. This impairment willsignificantly affect the comparability of results between the 2009 and 2008periods. Additionally the impairments taken in the third and fourth quarters of2008 significantly impacted our depletion

 

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expense in the firstquarter of 2009. If the 2008 impairments had not been taken, our depletion ratewould have been approximately $6.40 per Mcfe as compared to $3.16 per Mcfereported for the three months ended March 31, 2009.

 

*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 quarter by approximately10%.

 

“Ceiling” limitation test - Factors that contribute to a ceilingtest impairment include the price used to calculate the reserve limitationthreshold and reserve quantities. A reduction in prices at a measurement datecould trigger a full-cost ceiling impairment. We recorded an impairment ofapproximately $78.3 million, net of tax, at March 31, 2009. A 10% increaseor decrease in prices would have decreased or increased our impairment byapproximately 40%, net of tax, respectively. Therefore, should prices continue to decline in 2009,the potential for additional impairments at upcoming quarter-ends exists. Although our hedging program is intended tomitigate the economic impact of any significant price decline, it did notimpact our ceiling test at March 31, 2009 because we do not apply cashflow hedge accounting to our derivative contracts. Had we applied cash flowhedge accounting to our outstanding derivative contracts, there would have beena 29% decrease in the impairment taken as a result of the low prices at themeasurement date falling below the price floors. A 10% increase or decrease inreserve volume would have decreased or increased the impairment calculated at March 31,2009 by approximately 20%.

 

*Natureof Critical Estimate Item:*Asset Retirement Obligations**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and natural gas production operations. Our removal and restorationobligations are primarily associated with plugging and abandoning wells. Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 143,*Accounting for Asset Retirement Obligations,*we estimate asset retirement costs for all of our assets upon acquisition ofthe asset, adjust those costs for inflation to the forecast abandonment date,discount that amount using a credit-adjusted-risk-free rate back to the date weacquired the asset or obligation to retire the asset and record an AROliability in that amount with a corresponding addition to our asset value. Whennew obligations are incurred, i.e. a new well is drilled or acquired, we add tothe ARO liability. Should either the estimated life or the estimatedabandonment costs of a property change upon our quarterly review, our estimatemust be revised. When well obligations are relieved by sale of the property orplugging and abandoning the well, the related estimated liability and assetcosts are removed from our balance sheet and replaced by the costs actuallyspent on retiring the asset.

 

Estimating the futureasset removal costs is difficult and requires management to make estimates andjudgments because most of the removal obligations are many years in the future,and contracts and regulations often have vague descriptions of what constitutesremoval.  Asset removal technologies andcosts are constantly changing, as are regulatory, political, environmental,safety and public relations considerations. Inherent in the estimate of thepresent value calculation of our AROs are numerous assumptions and judgmentsincluding the ultimate settlement amounts, inflation factors,credit-adjusted-risk-free-rates, timing of settlement, and changes in thelegal, regulatory, environmental and political environments.

 

*Assumptions/Approach Used:*  Since thereare so many variables in estimating AROs, we attempt to limit the impact ofmanagement’s judgment on certain of these variables by using input of qualifiedthird parties. We engage independent engineering firms to evaluate ourproperties annually. We use the remaining estimated useful life from theperiod-end reserve reports prepared by our independent reserve engineers inestimating when abandonment could be expected for each property. We utilize athree-year average rate for inflation to diminish any significant volatilitythat may be present in the short term. We have developed a standard costestimate based on historical costs, industry quotes and depth of wells. Thiscost estimate is reviewed annually to determine whether it is a reasonableestimate in the

 

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current environment.Unless we expect a well’s plugging to be significantly different than a normalabandonment, we use this estimate.

 

*Effectif Different Assumptions Used:* We expect to see our calculations for new propertiesand revisions to existing properties impacted significantly if interest ratesrise, as the credit-adjusted-risk-free rate is one of the variables used on aquarterly basis. We also expect that significant changes to the cost ofretiring assets or the reserve life of our assets would have significant impacton our estimated ARO.

 

*Natureof Critical Estimate Item:*Income Taxes**-**In accordance with SFAS No. 109, *Accounting for Income Taxes,* we haverecorded a deferred tax asset and liability to account for the expected futuretax benefits and consequences, respectively, of events that have beenrecognized in our financial statements and our tax returns. There are severalitems that result in deferred tax assets and liabilities on the balance sheet,the largest of which are deferred liabilities attributable to book basis inexcess of tax basis in oil and natural gas properties 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 weconclude that it is more likely than not that some portion or all of thedeferred tax assets will not be realized under accounting standards, it isreduced by a valuation allowance to remove the benefit of those NOLcarryforwards from our financial statements. Additionally, in accordance withFinancial Accounting Standards Board (“FASB”) Interpretation 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109* (“FIN 48”)**we haverecorded a liability of $0.1 million associated with uncertain tax positions.FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return.  We are required to determinewhether it is more likely than not (a likelihood of more than 50 percent) thata tax position will be sustained upon examination, including resolution of anyrelated appeals or litigation processes, based on the technical merits of theposition in order to record any financial statement benefit.  If that stepis satisfied, then we must measure the tax position to determine the amount ofbenefit to recognize in the financial statements.  The tax position ismeasured at the largest amount of benefit that is greater than 50 percentlikely of being realized upon ultimate settlement.

 

*Assumptions/Approach Used:*Numerous judgments and assumptions areinherent in the determination of future taxable income and tax return filingpositions that we take, including factors such as future operating conditions(particularly as related to prevailing oil and natural gas prices).

 

*Effect if Different AssumptionsUsed:* Along withconsultation from an independent public accounting firm used in taxconsultation, we continually evaluate complicated tax law requirements andtheir effect on our current and future tax liability and our tax filingpositions.  Despite our attempt to makean accurate estimate, the ultimate utilization of our NOL carryforwards ishighly dependent upon our actual production, the realization of taxable incomein future periods, Internal Revenue Code Section 382 limitations andpotential tax elections.  If we estimatethat some or all of our NOL carryforwards are more likely than not going toexpire or otherwise not be utilized to reduce future tax, we would be requiredto record a valuation allowance to remove the benefit of those NOL carryforwardsfrom our financial statements, as was done most recently in the fourth quarterof 2008 and the first quarter of 2009. Our liability for uncertain taxpositions is dependent upon our judgment on the amount of financial statementbenefit that an uncertain tax position will realize upon ultimate settlementand on the probabilities of the outcomes that could be realized upon ultimatesettlement of an uncertain tax position using the facts, circumstances andinformation available at the reporting date to establish the appropriate amountof financial statement benefit. To the extent that a valuation allowance oruncertain tax position is established or increased or decreased during aperiod, we may be required to include an expense or benefit within tax expensein the statement of operations. During the first quarter of 2009, we recorded avaluation allowance of approximately $26.9 million which completely offsetdeferred tax assets recorded during the quarter. This valuation allowance wasrecorded as a result of our anticipated inability to utilize all of ourdeferred tax assets.

 

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*Nature of Critical Estimate Item:*Derivative and Hedging Activities**-**Due to the instability of oil and naturalgas prices, we may enter into, from time to time, price-risk managementtransactions (e.g. swaps, collars and floors) related to our expected oil andnatural gas production to seek to achieve a more predictable cash flow, as wellas to reduce exposure from commodity price fluctuations. While thesetransactions are intended to be economic hedges of price risk, differentaccounting treatment may apply depending on if they qualify for cash flow hedgeaccounting. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities (asamended),*all derivatives, other than those that meet the normalpurchases and sales exception, are recorded on the balance sheet at fair value.

 

Cash Flow Hedge Accounting - For transactions accounted for undercash flow hedge accounting treatment, the effective portion of the change infair value of outstanding derivative contracts is deferred through othercomprehensive income (“OCI”) on the balance sheet, rather than recordedimmediately in total revenue on the statement of operations. Ineffectiveportions of the changes in the fair value of the derivative contracts arerecognized in total revenue as they occur. While the hedge contract isoutstanding, the fair value may increase or decrease until settlement of thecontract. The cash flows resulting from settlement of derivative transactionswhich relate to economically hedging our physical production volumes areclassified in operating activities on the statement of cash flows, and the cashflows resulting from settlement of derivative transactions considered “overhedged”positions are classified in investing activities on the statement of cashflows.

 

Mark-to-Market Accounting - For transactions accounted for usingmark-to-market accounting treatment, until the contract settles, the entirechange in the fair value of the outstanding derivative contract is recorded intotal revenue immediately, and not deferred through OCI, and there is nomeasurement of effectiveness. Since January 1, 2006, we have appliedmark-to-market accounting treatment to all outstanding derivative contracts.

 

*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 and review the fair value of our positions from ourcounterparties. Our practice of relying on our counterparties who are morespecialized and knowledgeable in preparing these complex calculations reducesour management’s input. It also approximates the fair value of the contracts asit would be the cost to us to terminate a contract at that point in time, aswell as the potential inflows or outflows of cash at the expiration of thecontracts. Due to the fact that we apply mark-to-market accounting treatment,the offset to the balance sheet asset or liability, or the change in fair valueof the contracts, is included in total revenue on the statement of operationsrather than deferred in OCI on the balance sheet.

 

*Effectif Different Assumptions Used:* At March 31, 2009, a 10% change in the commodityprice per unit would cause the fair value total of our derivative financialinstruments to increase or decrease by approximately $2.0 million. Had weapplied cash flow hedge accounting treatment to all of our derivative contractsoutstanding at March 31, 2009, our net loss to common stockholders for thethree months would have been approximately $38.7 million, or $1.41 per basicand diluted loss per share, assuming that all hedges were fully effective, ascompared to our reported net loss to common stockholders for the three monthsended March 31, 2009 of $76.9 million, or $2.74 basic and diluted loss pershare.

 

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# **Results of Operations**

# ** **

This section includes discussion of our results of operations for thethree months ended March 31, 2009 as compared to the same period of theprior year.  We are an independent oiland natural gas company engaged in the exploration, development, acquisitionand production of crude oil and natural gas properties in the UnitedStates.  Our resources and assets aremanaged and our results reported as one operating segment. We conduct ouroperations primarily along the onshore United States Gulf Coast, with ourprimary emphasis in Texas, Mississippi, New Mexico and Louisiana.

 

**FirstQuarter 2009 Compared to the First Quarter 2008**

 

**Revenueand Production**

 

Total revenueincreased 36% from the first quarter of 2008 to the comparable 2009 period.Excluding the effects of derivative activity, revenue decreased 72% from thefirst quarter of 2008 to the comparable 2009 period.  For the three months ended March 31,2009 and 2008, our product mix contributed the following percentages of revenueand production volumes:

 
| ** **               | ** ** | **REVENUE (1)** | ** ** | **REVENUE (2)  Three Months Ended March 31,** | ** ** | **PRODUCTION  VOLUMES (MCFE)** | ** ** |
|--------------------------|------------|----------------------|------------|------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **2009**             | ** ** | **2008**                                                               | ** ** | **2009**                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Natural gas              |       | 83                   | %          | 20                                                                     | %          | 69                                  | %          | 62 | % | 70 | % | 69 | % |
| Natural gas liquids      |       | 8                    | %          | 55                                                                     | %          | 15                                  | %          | 20 | % | 19 | % | 21 | % |
| Crude oil and condensate |       | 9                    | %          | 25                                                                     | %          | 16                                  | %          | 18 | % | 11 | % | 10 | % |
|                     |       |                 |       |                                                                   |       |                                |       |   |   |   |   |   |   |
| Total                    |       | 100                  | %          | 100                                                                    | %          | 100                                 | %          | 100 | % | 100 | % | 100 | % |

 

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(1) Includes effect of derivative transactions

(2) Excludes effect of derivative transactions

 

The following tablesummarizes volume and price information with respect to our oil and natural gasproduction:

 

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| ** **                                   | ** ** | ** **                                                                 | ** ** | ** **      | ** ** | **2009 Period Compared  to 2008 Period** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                                   | ** ** | **Three Months Ended  March 31,**                           | ** ** | **$  Increase** | ** ** | **%  Increase**                                              | ** ** |
| ** **                                   | ** ** | **2009**                                                                   | ** ** | **2008**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(in thousands, except prices and percentages)** | ** ** | ** **      | ** ** |
| **Production Volumes:**                      |       |                                                                       |       |            |       |                                                         |       |   |   |
| Natural gas (MMcf)                           |       | 2,170                                                                      |       | 3,773           |       | (1,603                                                       | )          | (42 | )% |
| Natural gas liquids (MBbls)                  |       | 97                                                                         |       | 191             |       | (94                                                          | )          | (49 | )% |
| Crude oil and condensate (MBbls)             |       | 59                                                                         |       | 85              |       | (26                                                          | )          | (31 | )% |
| Natural gas equivalent (MMcfe)               |       | 3,106                                                                      |       | 5,429           |       | (2,323                                                       | )          | (43 | )% |
| **Average Sales Price(1):**                  |       |                                                                       |       |            |       |                                                         |       |   |   |
| Natural gas ($ per Mcf)(2)              |       | $                                                                          | 4.11       |            | $          | 7.62                                                         |       | $ | (3.51 | ) | (46 | )% |
| Natural gas liquids ($ per Bbl)         |       | 20.44                                                                      |       | 50.51           |       | (30.07                                                       | )          | (60 | )% |
| Crude oil and condensate ($ per Bbl)(2) |       | 35.30                                                                      |       | 101.07          |       | (65.77                                                       | )          | (65 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |       | 4.18                                                                       |       | 8.66            |       | (4.48                                                        | )          | (52 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |       | 7.75                                                                       |       | 3.25            |       | 4.50                                                         |       | 138 | % |
| **Operating Revenue:**                       |       |                                                                       |       |            |       |                                                         |       |   |   |
| Natural gas (2)                              |       | $                                                                          | 8,928      |            | $          | 28,744                                                       |       | $ | (19,816 | ) | (69 | )% |
| Natural gas liquids                          |       | 1,981                                                                      |       | 9,628           |       | (7,647                                                       | )          | (79 | )% |
| Crude oil and condensate (2)                 |       | 2,089                                                                      |       | 8,644           |       | (6,555                                                       | )          | (76 | )% |
| Gain (loss) on derivatives                   |       | 11,068                                                                     |       | (29,359         | )          | 40,427                                                       |       | 138 | % |
| Total revenue                                |       | $                                                                          | 24,066     |            | $          | 17,657                                                       |       | $ | 6,409 |   | 36 | % |

 

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(1) Prices are calculated based on wholenumbers, not rounded numbers.

(2) Excludes the effect of derivativetransactions.

(3) Includes the effect of derivativetransactions.

 

**Production****—**For the quarter ended March 31, 2009, productionvolumes decreased as compared to the same 2008 period primarily due to normalproduction declines, asset sales completed during early 2008 and decreasedcapital re-investment in replacing production as compared to historical levels.The following summarizes our average daily production volumes:

 

| ** **                       | ** ** | **For the Three Months  Ended March 31,** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                                           | ** ** | **2008** | ** ** |
| **Production Volumes per Day:**  |       |                                                               |       |   |   |
| Natural gas (MMcf/D)             |       | 24.1                                                               |       | 41.5 |   |
| Natural gas liquids (MBbls/D)    |       | 1.1                                                                |       | 2.1 |   |
| Oil and condensate (MBbls/D)     |       | 0.7                                                                |       | 0.9 |   |
| Natural gas equivalent (MMcfe/D) |       | 34.5                                                               |       | 59.7 |   |

 

**Average sales price**— Our sales revenue issensitive to the changes in prices received for our products.  Asubstantial portion of our production is sold at prevailing market prices,which fluctuate in response to many factors that are outside of our control.Imbalances in the supply and demand for oil and natural gas can have a dramaticeffect on the prices we receive for our production. Political instability andavailability of alternative fuels could impact worldwide supply, while theeconomy, weather and other factors outside of our control could impact demand.In recent years, oil and natural gas commodity prices have generally trendedupwards in response to robust demand and constrained supplies, with oil andnatural gas prices peaking at more than $140.00 per barrel and $13.00 per Mcf,respectively, in July 2008. In the second half of 2008, a world-wideeconomic recession and oversupply of natural gas in North America led to anunprecedented decline in oil and natural gas prices, with oil falling by morethan $100.00 per barrel and natural gas falling more than $10.00 per

 

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Mcf from their peaks in July 2008. Thishas significantly affected our business, but in 2009 our commodity derivativeshave provided some protection against these falling prices, see “Derivative”discussion below. A continued or extended decline in oil or natural gas pricescould have a material adverse effect on our financial position, results ofoperations, cash flows and access to capital and on the quantities of oil andnatural gas reserves that we can economically produce.

 

**Natural gas revenue** - For the three months ended March 31,2009, natural gas revenue, excluding derivative activity, decreased 69% overthe same period in 2008 due to both lower average realized prices andproduction volumes. The overall decrease in production compared to the prioryear period resulted in a decrease in revenue of approximately $12.2 million(based on 2008 comparable period pre-derivative prices). The decrease inproduction was primarily the result of asset sales, normal production declinesand reduced reinvestment in replacing or maintaining production to historicallevels. The decrease in average price received, excluding derivative activity,resulted in decreased revenue of approximately $7.6 million (based on currentperiod production).  See below for adiscussion of the impact of natural gas derivatives on prices and revenue.

 

**Natural gas liquids (“NGL”) revenue**- For the three months ended March 31,2009, NGL revenue decreased 79% over the same period in 2008 due to decreasesin prices realized and production volumes. The price decrease resulted in adecrease in revenue of approximately $2.9 million (based on current periodproduction).  The decrease in NGLproduction decreased revenue by approximately $4.7 million (based on 2008comparable period average prices).

 

**Crude oil and condensate revenue**- For the three months ended March 31,2009, oil and condensate sales revenue, excluding derivative activity,decreased 76% from the comparable period in 2008, due to the 65% decrease inprices realized as a result of decreasing crude oil prices in the market anddecreased production volumes. The decreased average realized price for oil andcondensate for the three months ended March 31, 2009 resulted in adecrease in revenue of approximately $3.9 million (based on current periodproduction). The decrease in oil and condensate production resulted in adecrease in revenue of approximately $2.7 million (based on 2008 comparableperiod pre-derivative prices). Production volumes for oil and condensatedecreased for the three months ended March 31, 2009 compared to the sameprior year period due to asset sales, normal production declines and reducedreinvestment in replacing or maintaining production to historical levels. Seebelow for a discussion of the impact of crude oil derivatives on prices and revenue.

 

**Derivatives**—The volume and price contract terms of our derivative contracts vary fromperiod to period and therefore interact differently with the changing pricingenvironment, which makes the comparability of the results for each perioddifficult. In all periods presented, we applied mark-to-market accountingtreatment to our derivative contracts; therefore the full volatility of thenon-cash change in fair value of our outstanding contracts is reflected intotal revenue and will continue to affect total revenue until outstandingcontracts expire. Since these gains/losses are not a function of the operatingperformance of our oil and natural gas assets, excluding their impact from theabove discussions helps isolate the operating performance of those assets. Thefollowing table summarizes the various components of the total gain or loss onderivatives for each of the periods indicated and the impact each component hadon our realized prices:

 

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| ** **                                                                                                 | ** ** | **Three Months Ended March 31,**                | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                                                            | ** ** | **2008** | ** ** |
| ** **                                                                                                 | ** ** | **$**                                                               | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit (1)** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands, except per unit prices)** | ** ** |
| Natural gas derivative contract settlements  (Mcf)                                                         |       | $                                                                   | 5,125      |   | $ | 2.36 |   | $ | 363 |   | $ | 0.10 |   |
| Crude oil derivative contract settlements  (Bbl)                                                           |       | 723                                                                 |       | 12.22 |   | (4,362 | ) | (51.00 | ) |
| Mark-to-market reversal of prior period  unrealized change in fair value of gas derivative contracts (Mcf) |       | (13,390                                                             | )          | (6.17 | ) | (2,626 | ) | (0.70 | ) |
| Mark-to-market unrealized change in fair  value of gas derivative contracts (Mcf)                          |       | 19,238                                                              |       | 8.87 |   | (22,938 | ) | (6.08 | ) |
| Mark-to-market reversal of prior period  unrealized change in fair value of oil derivative contracts (Bbl) |       | (2,015                                                              | )          | (34.08 | ) | 14,955 |   | 174.85 |   |
| Mark-to-market unrealized change in fair  value of oil derivative contracts (Bbl)                          |       | 1,387                                                               |       | 23.48 |   | (14,751 | ) | (172.47 | ) |
| Gain (loss) on derivatives (Mcfe)                                                                          |       | $                                                                   | 11,068     |   | $ | 3.57 |   | $ | (29,359 | ) | $ | (5.41 | ) |

 

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(1) Prices per unit arecalculated based on whole numbers, not rounded numbers.

 

**Shouldcrude oil or natural gas prices increase or decrease from the current levels,it could materially impact our revenues. In a high price environment, hedgedpositions could result in lost opportunities if there is a cap in place, thuslowering our effective realized prices on hedged production, but in anenvironment of falling prices, these transactions offer some pricing protectionfor hedged production.**

 

**Costs and Operating Expenses**

 

Thetable below details our expenses:

 

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| ** **                                            | ** ** | ** **                                             | ** ** | ** **      | ** ** | **2009 Period Compared  to 2008 Period** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Three Months Ended  March  31,** | ** ** | **$  Increase** | ** ** | **%  Increase**                                              | ** ** |
| ** **                                            | ** ** | **2009**                                               | ** ** | **2008**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)**  | ** ** |
| Oil and natural gas operating expenses                |       | $                                                      | 3,825      |            | $          | 4,472                                                        |       | $ | (647 | ) | (14 | )% |
| Severance and ad valorem taxes                        |       | 1,091                                                  |       | 2,185           |       | (1,094                                                       | )          | (50 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                                   |       |            |       |                                                         |       |   |   |
| Oil and natural gas property and equipment            |       | 9,804                                                  |       | 27,088          |       | (17,284                                                      | )          | (64 | )% |
| Other assets                                          |       | 176                                                    |       | 193             |       | (17                                                          | )          | (9 | )% |
| ARO accretion                                         |       | 99                                                     |       | 90              |       | 9                                                            |       | 10 | % |
| Impairment of oil and natural gas  properties         |       | 78,254                                                 |       | —          |       | 78,254                                                       |       | 100 | % |
| General and administrative expenses                   |       | 4,595                                                  |       | 4,060           |       | 535                                                          |       | 13 | % |
| Total operating expenses                              |       | $                                                      | 97,844     |            | $          | 38,088                                                       |       | $ | 59,756 |   | 157 | % |
|                                                  |       |                                                   |       |            |       |                                                         |       |   |   |
| Other income and expense, net                         |       | 3,162                                                  |       | 4,394           |       | (1,232                                                       | )          | (28 | )% |
| Income tax benefit                                    |       | —                                                 |       | (8,646          | )          | 8,646                                                        |       | 100 | % |
| Preferred stock dividends                             |       | —                                                 |       | 2,066           |       | (2,066                                                       | )          | (100 | )% |

 

**Oil and natural gas operatingexpenses** -Oil and natural gas operating expenses include direct operating costs, repairsand maintenance and workover expenses. For the three months ended March 31,2009, operating expenses decreased primarily as a result of properties we soldeffective March 1, 2008. Partially offsetting this decrease were increasesdue to higher expensed workovers and higher costs for compressor rent, gasprocessing, and salt-water disposal. Average oil and natural gas operatingexpenses were $1.23 per Mcfe and $0.82 per Mcfe for the three months ended March 31,2009 and 2008, respectively. On a per Mcfe basis, the decline in productionvolume resulted in the 50% increase in cost per Mcfe.

 

**Severance and ad valorem taxes** - Severance tax expense for the three monthsended March 31, 2009 was 75% lower than the prior year period as a resultof the lower revenue received in the current year.  In addition, our effective severance tax ratewas lower due to abatements received during the first quarter of 2009. For thethree months ended March 31, 2009, severance tax expense was approximately4.9% of revenue subject to severance taxes compared to 5.5% of revenue subjectto severance taxes for the first quarter of 2008. Ad valorem tax expense forthe first quarter of 2008 was significantly affected by adjustments from 2007due to realized ad valorem taxes on properties acquired in January 2007coming in much lower than anticipated. These adjustments cause the comparisonto the first quarter of 2009 to appear as if cost was significantly higher thanthe prior year period. On an equivalent basis, severance and ad valorem taxesaveraged $0.35 per Mcfe and $0.40 per Mcfe for the three months ended March 31,2009 and 2008, respectively.

 

**Depletion,depreciation, and amortization (“DD&A”) and accretion**- Full-cost depletion on our oil andnatural gas properties has decreased substantially as a result of a decrease inour depletion rate and 43% lower production volumes. Our depletion rate for thethree months ended March 31, 2009 was $3.16 per Mcfe, a 37% decrease comparedto the first quarter 2008 rate of $4.99 per Mcfe. The depletion rate hasdecreased over the past year due to significant impairments taken in the thirdand fourth quarters of 2008. Depreciation of other assets for the first quarterof 2009 decreased 9% compared to the same period in 2008. Accretion expenseassociated with our ARO for the three months ended March 31, 2009 increased dueto additions of properties throughout 2008 partially offset by the impact ofover 100 properties retired from our ARO as a result of the sales completedduring the first quarter of 2008. 

 

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**General and administrative (“G&A”) expenses** — G&A expense increased 13% between thethree months ended March 31, 2009 and 2008 due primarily to $1.6 millionin strategic alternative costs incurred in the first quarter of 2009 and highercontract labor costs, partially offset by lower salary and benefit costs as aresult of the 34% drop in our staffing levels since March 31, 2008. Salaryand benefit costs typically comprise approximately 70-80% of our G&Aexpense. Capitalized G&A costs for first quarter 2009 and 2008 wereapproximately $0.7 million and $1.0 million, respectively. G&A on aunit-of-production basis for the three months ended March 31, 2009 was$1.48 per Mcfe compared to $0.75 per Mcfe for the comparable 2008 period.G&A, excluding non-cash share-based compensation costs, for the threemonths ended March 31, 2009 averaged $1.38 per Mcfe compared to $0.61 perMcfe in the same period in 2008.

 

**Other income and expense** - During the three months ended March 31,2009, our other income and expense decreased primarily due to a decrease ingross interest expense resulting from lower outstanding debt balances as wellas a lower average interest rate for amounts borrowed. For the first quarter of2009, we capitalized much less interest due to a 41% lower unproved propertybase on which we calculate interest expense subject to capitalization.

 

| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                 | ** ** | **(in thousands)**                              | ** ** |
| Gross interest expense     |       | $                                                    | 2,421      |   | $ | 5,015 |   |
| Less: capitalized interest |       | (178                                                 | )          | (791 | ) |
| Interest expense, net      |       | $                                                    | 2,243      |   | $ | 4,224 |   |
|                       |       |                                                 |       |   |   |
| Weighted average debt      |       | $                                                    | 236,556    |   | $ | 257,253 |   |

 

We recorded amortization of deferred loan costs related to ourRevolving Facility during the three months ended March 31, 2009 and 2008.These costs for 2009 were significantly higher than the prior year due tochanges to our maturity date accelerating the amortization. During the threemonths ended March 31, 2009, we recorded a minimal gain on ARO settlementsas compared to approximately $9,400 in the same 2008 period.

 

**Income tax benefit** — We did not record a tax benefit forthe three months ended March 31, 2009. We fully provided for additions toour deferred tax asset with a valuation allowance during the period.  During the three months ended March 31,2008, we recorded an income tax benefit of $8.6 million with no valuationallowance.

 

**Preferred stock dividends** — Our Board of Directors did not declarequarterly dividends on our 5.75% Series A cumulative convertible perpetualpreferred stock in December 2008 or March 2009.  Such dividends were declared in December 2007and March 2008. As a result, there is no dividend expense reported for thethree months ended March 31, 2009 compared to $2.1 million for the sameperiod in 2008.

 

**Loss pershare** — Wereported a net loss for the quarters ended March 31, 2009 and 2008.  The loss in the first quarter of 2009 wasprimarily due to the impairment of oil and natural gas properties of $78.3million, net of tax while the prior year loss was due primarily to unrealizedderivative losses of approximately $25.4 million ($16.5 million, net of tax).Basic weighted average shares outstanding for the three months ended March 31,2009 and 2008 were comparable. At March 31, 2009 and 2008, we excluded theeffect of restricted stock units, common stock options, and 8.7 million sharesof if-converted common stock from the diluted shares calculations because theywould have an anti-dilutive effect on loss per share.

 

## **Liquidity and Capital Resources**

## ** **

Historically,our primary ongoing source of capital was the cash flow generated from ouroperating activities supplemented by borrowings under our Revolving Facility.We currently do not have any available borrowing capacity under our RevolvingFacility (see “Revolving Facility” below for additional discussion) and we havea $25 million payment due on May 31, 2009 with all remaining principal,fees and interest amounts under our Revolving Facility due and payable on June 30,2009 to our lenders. Net cash generated from

 

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operating activities is a function of productionvolumes and commodity prices, both of which are inherently volatile andunpredictable, as well as operating efficiency and costs. 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. Less predictable than production declinesfrom our proved reserves is the impact of constantly changing oil and naturalgas prices on cash flows.  We attempt tomitigate the price risk with our hedging program. Reserves and productionvolumes are influenced, in part, by the amount of future capital expenditures.In turn, capital expenditures are influenced by many factors including drillingresults, oil and natural gas prices, industry conditions, availability and costof goods and services and the extent to which oil and natural gas propertiesare acquired. In 2009, our capital expenditures will also be impacted by ourliquidity issues and the related Deficiency under our Revolving Facility, aswell as the Amended Consent which imposes significant constraints on ourcapital expenditures.

 

Ourprimary cash requirements are for exploration, development and acquisition ofoil and natural gas properties, payment of preferred stock dividends, paymentof derivative loss settlements and the repayment of principal and interest onoutstanding debt (including the Deficiency under our Revolving Facility). Wehave historically attempted to fund our exploration and development activitiesprimarily through internally generated cash flows and budget capitalexpenditures based largely on projected cash flows, however we do notanticipate that our cash flows will be sufficient to fund our primary cashrequirements. We routinely adjust capital expenditures in response to changesin oil and natural gas prices, drilling and acquisition costs, and cash flow.We typically have funded acquisitions from borrowings under our creditfacilities, cash flow from operations and sales of common stock and preferredstock, though we do not anticipate making any acquisitions in the foreseeablefuture.

 

Significant changes to working capitalaffects our liquidity in the short term. As of March 31, 2009, ouroutstanding debt was classified as current due to the amendment in the maturitydate to June 30, 2009 as provided by the Amended Consent which requires a$25 million payment due on May 31, 2009 with all remaining principal, feesand interest amounts under our Revolving Facility to be due and payable on June 30,2009 (see “Revolving Facility” below for additional discussion). Our derivativeinstrument asset is indicative of potential future cash settlement inflows onour outstanding oil and natural gas derivative positions, which are scheduledto settle in future months. The fair market value represents the potentialsettlement for those contracts if the market prices remain unchanged. Shouldcommodity prices increase or decrease, the fair value of those outstandingcontracts would also change.  When ourderivatives result in cash settlement outflows, we receive higher cash inflowson the sale of our physical production at those higher market prices, thusproviding us with funds to cover at least a portion of any derivative paymentsthat may come due in the future.

 

We have historically used our creditfacilities to supplement any deficiencies between operating cash flow andcapital expenditures. Our outstanding debt balance at May 7, 2009 was$234.0 million. We have also used proceeds of asset divestitures to supplementthese deficiencies and reduce outstanding debt.

 

Although we have used proceeds from private and publicofferings of our stock to fund certain acquisition activities in the past, wetypically do not rely on proceeds from the exercise of warrants and stockoptions to sustain our business, as the timing of their exercise isunpredictable.

 

As a result of the strategic alternativesprocess we began in late 2007, we reduced our planned capital spending for 2008as compared to recent years. The recent worldwide financial and credit crisishas reduced the availability of liquidity and credit worldwide, and the recentsubstantial declines in worldwide equity markets, including our stock prices,make it more difficult to effectively raise capital through equity issuances.Additionally, prices for oil and natural gas declined materially during thefourth quarter of 2008, and natural gas prices continued to decline during thefirst quarter of 2009.  A continued or extended decline in oil ornatural gas prices will have a material adverse effect on our financialposition, results of operations, cash flows and access to capital and on thequantities of oil and natural gas reserves that we can economically produce.

 

We had cash and cash equivalents at March 31,2009 of $9.9 million consisting primarily of short-term money marketinvestments, as compared to $8.5 million at December 31, 2008.  Our working capital deficit was $194.0million at March 31, 2009, as compared to a working capital deficit of$203.3 million at December 31, 2008. At March 31, 2009 and December 31,2008, we classified all of our outstanding debt as current due to the

 

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amendment in the maturity date to June 30,2009 required by the Amended Consent. Our sources and uses of cash were as follows:

** **
| ** **                                  | ** ** | **For the Three Months Ended March 31,** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                                               | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                                                | ** ** |
| *Net Cash Provided By Operating Activities* |       | $                                                                      | 9,833      |   | $ | 21,350 |   |
| *Net Cash Used In Investing Activities*     |       | (3,407                                                                 | )          | (10,992 | ) |
| *Net Cash Used In Financing Activities*     |       | (5,000                                                                 | )          | (12,066 | ) |
|                                             |            |                                                                        |            |  |  |  |  |

 

**Net Cash Provided By Operating Activities***-*The decrease in cash flows provided byoperating activities for the first three months of 2009 as compared to the sameperiod in 2008 is primarily a result of a decrease in production revenue,partially offset by a decrease in cash costs such as severance taxes and oiland natural gas operating expenses. Changes in working capital increased totalcash flows by $2.4 million in the first three months of 2009 as compared to adecrease of $7.1 million in the same period of 2008.

 

**NetCash Used In Investing Activities***-*We have historically reinvested a substantial portion of our cash flowsin our drilling, acquisition, land and geophysical activities.  We are operating under a limited capitalinvestment program and spent approximately $3.1 million during the firstquarter of 2009.  During the first threemonths of 2008, we spent $20.9 million on our drilling and operating program,which included drilling 8 wells in the first quarter of 2008, all of which wereapparent successes. Leasehold and geological and geophysical activitiesaccounted for expenditures of $1.3 million through March 31, 2008.Proceeds from the sale of certain non-core properties in Texas to variousbuyers totaled approximately $12.2 million.

 

**Due to the overhedged position in2008, cash settlements related to the overhedged position are reflected ininvesting activities because they do not apply to operating revenues and aresimilar in nature to an investment. Approximately 38% of our oil settlementsand 3% of our natural gas settlements are represented by the $1.7 million ofspeculative settlements in this section of the statement of cash flows. Theremainder is located in net cash provided by operating activities. There was nooverhedged position in the first three months of 2009. For further discussionof our overhedged position, see “Approach to the Business” above.**

** **

**Net Cash Used In Financing Activities***-*During the three months ended March 31,2009, we repaid $5.0 million under our Revolving Facility (as defined below).In the comparable period of 2008, we repaid $10.0 million using proceeds fromour asset sales. We also paid quarterly dividends on our preferred stock in January 2008.

 

*Revolving Facility*

 

OnJanuary 30, 2007, we entered into the Revolving Facility with the Lenders,in favor of the Company and certain of its wholly-owned subsidiaries in anamount equal to $750 million. The Revolving Facility has a letter of creditsub-limit of $20 million. The Revolving Facility was scheduled to mature on January 31,2011. At March 31, 2009, borrowings under the Revolving Facility boreinterest at Prime plus an applicable margin of 2.50%. At March 31, 2009,the interest rate applied to our outstanding borrowings was 5.75%

 

As of March 31, 2009, we had $234 millionin total borrowings outstanding under the Revolving Facility. During January 2009, the Lenders established a newborrowing base of $125 million under the Revolving Facility resulting in aborrowing base deficiency of $114 million.

 

Pursuant to the terms of the Revolving Facility,we elected to prepay the Deficiency in six equal monthly installments, with thefirst $19 million installment being due on February 9, 2009.  On February 9, 2009, we entered into theFebruary Consent among us and the Lenders under the Revolving Facilitydeferring the payment date of the first $19 million installment until March 10,2009, and extending the due date for each subsequent installment by one monthwith the last of the six installment payments to be due on August 10,2009.  In connection with the February Consent,we agreed to prepay $5.0 million of our outstanding advances

 

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under the RevolvingFacility, in two equal installments. The first $2.5 million prepayment was paidon February 9, 2009 and the second $2.5 million prepayment was paid on February 23,2009, with each of the prepayments to be applied on a pro rata basis to reducethe remaining six $19 million deficiency payments.  On March 10, 2009, we entered into the March Consentwith the Lenders under the Revolving Facility, which provided, among otherthings, for the extension of the due date for the first installment to repaythe Deficiency from March 10, 2009 to March 17, 2009.  Notwithstanding such extension, we agreedwith the Lenders that each of the other five equal installment paymentsrequired to eliminate the Deficiency would be due and payable as provided forin the February Consent. On March 16, 2009, we entered into theAmended Consent which provides, among other things, (1) that we will makea $25 million payment on May 31, 2009 with all remaining principal, feesand interest amounts under our Revolving Facility to be due and payable on June 30,2009, (2) that it will be an event of default (i) if we fail to haveexecuted and delivered on or before May 15, 2009 at least one of thefollowing (a) a commitment letter from a lender or group of lendersreasonably satisfactory to our Lenders providing for the provision by suchlender or group of lenders of a credit facility in an amount sufficient torepay all of our obligations under the Revolving Facility on or before June 30,2009, (b) a merger agreement or similar agreement involving us as part ofa transaction that results in the repayment of our obligations under theRevolving Facility on or before June 30, 2009, and (c) a purchase andsale agreement with a buyer or group of buyers reasonably acceptable to ourLenders providing for a sale transaction by us that results in the repayment ofall of our obligations under the Revolving Facility on or before June 30,2009, or (ii) if we are in default under or our hedging arrangements havebeen terminated or cease to be effective without the prior written consent ofour Lenders, (3) that our advances under the Revolving Facility will bearinterest at a rate equal to the greater of (a) the reference rate publiclyannounced by Union Bank of California, N.A. for such day, (b) the FederalFunds Rate in effect on such day plus 0.50% and (c) a rate determined bythe Administrative Agent to be the Daily One-Month LIBOR (as defined in theRevolving Facility), in each case plus 2.5% or, during the continuation of anevent of default, plus 4.5% (resulting in an effective interest rate ofapproximately 5.75% as of May 7, 2009), (4) for limitations on themaking of capital expenditures and certain investments, and (5) for theelimination of the current ratio, leverage ratio and interest coverage ratiocovenant requirements.  The AmendedConsent also eliminates the six $19 million deficiency payments which werecontemplated by the February Consent and the March Consent. To complywith the terms of the Amended Consent, we anticipate that we will need to (i) sellselect individual assets prior to May 31, 2009 to enable us to make the $25million payment which is due on May 31, 2009, and/or (ii) negotiate acommitment letter with a new lender or group of lenders prior to May 15,2009 in an amount sufficient to repay all of our obligations under theRevolving Facility on or before June 30, 2009, and/or (iii) havenegotiated the sale, merger or other business combination involving us whichresults in the repayment of all of our obligations under the Revolving Facilityprior to May 15, 2009 and to have closed such transaction on or before June 30,2009. The Amended Consent limits the making of capital expenditures and weanticipate a severe curtailment of our drilling plans and other capitalexpenditures in 2009.

 

### If we breach any of the provisions of the AmendedConsent or the Revolving Facility, our Lenders will be entitled to declare anevent of default, at which point the entire unpaid principal balance of theloans, together with all accrued and unpaid interest and other amounts thenowing to our Lenders, would become immediately due and payable.  In any event, the entire unpaid principalbalance of the loans, together with all accrued and unpaid interest and otheramounts then owing to our Lenders, will be payable on June 30, 2009 unlessearlier paid or a further extension with respect to payment is negotiated withour Lenders. Our Lenders may take action to enforce their rights with respectto the outstanding obligations under the Revolving Facility. Becausesubstantially all of our assets are pledged as collateral under the Revolving Facility,if our Lenders declare an event of default, they would be entitled to forecloseon and take possession of our assets.  Insuch an event, we may be forced to liquidate or to otherwise seek protectionunder Chapter 11 of the U.S. Bankruptcy Code. These matters, as well as theother risk factors related to our liquidity and financial position raisesubstantial doubt as to our ability to continue as a going concern. Withrespect to our compliance with the Amended Consent, there can be no assurancethat we will be able to further negotiate the terms of the Amended Consent ornegotiate a further restructuring of the related indebtedness or that we willbe able to make any required payments when they become due.  Moreover, there can be no assurance that we willbe successful in our efforts to comply with the terms of the Amended Consent,including our ongoing efforts to evaluate and assess our various financial andstrategic alternatives (which may include the sale of some or all of ourassets, a merger or other business combination involving the Company, or therestructuring or recapitalization of the

 

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### Company).  If such efforts are not successful, we may berequired to seek protection under Chapter 11 of the U.S. Bankruptcy Code.

###  

Our obligations under theRevolving Facility are secured by substantially all of our assets. TheRevolving Facility provides for certain restrictions, including, but notlimited to, limitations on additional borrowings, sales of oil and natural gasproperties or other collateral, and engaging in merger or consolidationtransactions. The Revolving Facility restricts common stock dividends andcertain distributions of cash or properties and certain liens but no longercontains any financial covenants.

 

TheRevolving Facility includes other covenants and events of default that arecustomary for similar facilities. It is an event of default under the RevolvingFacility if we undergo a change of control. “Change of control,” as defined inthe Revolving Facility, means any of the following events: (a) any “person”or “group” (within the meaning of Section 13(d) or 14(d) of theExchange Act) has become, directly or indirectly, the “beneficial owner” (asdefined in Rules 13d-3 and 13d-5 under the Exchange Act, except that aperson shall be deemed to have “beneficial ownership” of all such shares thatany such person has the right to acquire, whether such right is exercisableimmediately or only after the passage of time, by way of merger, consolidationor otherwise), of a majority or more of our common stock on a fully-dilutedbasis, after giving effect to the conversion and exercise of all of our outstandingwarrants, options and other securities (whether or not such securities are thencurrently convertible or exercisable), (b) during any period of twoconsecutive calendar quarters, individuals who at the beginning of such periodwere members of our Board of Directors cease for any reason to constitute amajority of the directors then in office unless (i) such new directorswere elected by a majority of our directors who constituted the Board ofDirectors at the beginning of such period (or by directors so elected) or (ii) thereason for such directors failing to constitute a majority is a result ofretirement by directors due to age, death or disability, or (c) we ceaseto own directly or indirectly all of the equity interests of each of oursubsidiaries.

 

*Shelf Registration Statement & Offerings*

 

In the third quarter of2007, the SEC declared effective our registration statement filed with the SECthat registered securities of up to $500 million of any combination of debtsecurities, preferred stock, common stock, warrants for debt securities orequity securities of the Company and guarantees of debt securities by oursubsidiaries. Net proceeds, terms and pricing of the offering of securitiesissued under the shelf registration statement will be determined at the time ofthe offerings. The shelf registration statement does not provide assurance thatwe will or could sell any such securities. Our ability to utilize our shelfregistration statement for the purpose of issuing, from time to time, any combinationof debt securities, preferred stock, common stock or warrants for debtsecurities or equity securities will depend upon, among other things, marketconditions and the existence of investors who wish to purchase our securitiesat prices acceptable to us.  However, because the aggregate marketvalue of our outstanding common stock is less than $75 million, the type andamount of any securities offering under the registration statement may belimited.

 

*ConvertiblePreferred Stock*

 

We completed the public offering of 2,875,000 sharesof 5.75% Series A cumulative convertible perpetual preferred stock (“ConvertiblePreferred Stock”) in January 2007.

 

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by our debt agreements, assetsare legally available to pay dividends and our Board of Directors or an authorizedcommittee of our board declares a dividend payable, we will pay dividends incash, every quarter.  The first paymentwas made on April 15, 2007 and we continued to make quarterly dividendspayments through October 15, 2008. The Board did not declare a dividend inthe fourth quarter of 2008 or first quarter of 2009 due to our current lack ofliquidity. Cumulative dividends in arrears at March 31, 2009 amounted to$3.8 million.

 

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No dividends or other distributions (other thana dividend payable solely in shares of a like or junior ranking) may be paid orset apart for payment upon any shares ranking equally with the ConvertiblePreferred Stock (“parity shares”) or shares ranking junior to the ConvertiblePreferred Stock (“junior shares”), nor may any parity shares or junior sharesbe redeemed or acquired for any consideration by us (except by conversion intoor exchange for shares of a like or junior ranking) unless all accumulated andunpaid dividends have been paid or funds therefor have been set apart on theConvertible Preferred Stock and any parity shares.

 

*Liquidation preference*.  In the event of our voluntary or involuntaryliquidation, winding-up or dissolution, each holder of Convertible PreferredStock will be entitled to receive and to be paid out of our assets availablefor distribution to our stockholders, before any payment or distribution ismade to holders of junior stock (including common stock), but after anydistribution on any of our indebtedness or senior stock, a liquidationpreference in the amount of $50.00 per share of the Convertible PreferredStock, plus accumulated and unpaid dividends on the shares to the date fixedfor liquidation, winding-up or dissolution.

 

*Ranking*.  Our Convertible Preferred Stock ranks:

 

·                  senior to all of the shares of our commonstock and to all of our other capital stock issued in the future unless theterms of such capital stock expressly provide that it ranks senior to, or on aparity with, shares of our Convertible Preferred Stock;

 

·                  on a parity with all of our other capitalstock issued in the future, the terms of which expressly provide that it willrank on a parity with the shares of our Convertible Preferred Stock; and

 

·                  junior to all of our existing and future debtobligations and to all shares of our capital stock issued in the future, theterms of which expressly provide that such shares will rank senior to theshares of our Convertible Preferred Stock.

 

*Mandatory conversion*.On or after January 20, 2010, we may, at our option, cause shares of ourConvertible Preferred Stock to be automatically converted to shares of ourcommon stock at the applicable conversion rate, but only if the closing saleprice of our common stock for 20 trading days within a period of 30 consecutivetrading days ending on the trading day immediately preceding the date we givethe conversion notice equals or exceeds 130% of the conversion price in effecton each such trading day.

 

*Optional redemption*.If fewer than 15% of the shares of Convertible Preferred Stock issued in theConvertible Preferred Stock offering (including any additional shares issuedpursuant to the underwriters’ over-allotment option) are outstanding, we may,at any time on or after January 20, 2010, at our option, redeem for cashall such Convertible Preferred Stock at a redemption price equal to theliquidation preference of $50.00 plus any accrued and unpaid dividends, if any,on a share of Convertible Preferred Stock to, but excluding, the redemptiondate, for each share of Convertible Preferred Stock.

 

*Conversion rights*.Each share of Convertible Preferred Stock may be converted at any time, at theoption of the holder, into approximately 3.0193 shares of our common stock(which is based on an initial conversion price of $16.56 per share of commonstock, subject to adjustment) plus cash in lieu of fractional shares, subjectto our right to settle all or a portion of any such conversion in cash orshares of our common stock. If we elect to settle all or any portion of ourconversion obligation in cash, the conversion value and the number of shares ofour common stock we will deliver upon conversion (if any) will be based upon a20 trading day averaging period.

 

Upon any conversion, the holder will not receiveany cash payment representing accumulated and unpaid dividends on theConvertible Preferred Stock, whether or not in arrears, except in limitedcircumstances. The conversion rate is equal to $50.00 divided by the conversionprice at the time. The conversion price is subject to adjustment upon theoccurrence of certain events. The conversion price on the conversion date andthe number of shares of our common stock, as applicable, to be delivered uponconversion may be adjusted if certain events occur.

 

*Purchase upon fundamental change*. Ifwe become subject to a fundamental change (as defined herein), each holder ofshares of Convertible Preferred Stock will have the right to require us topurchase any or all of its shares at a purchase price equal to 100% of theliquidation preference, plus accumulated and unpaid dividends,

 

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to the date of thepurchase. We will have the option to pay the purchase price in cash, shares ofcommon stock or a combination of cash and shares. Our ability to purchase allor a portion of the Convertible Preferred Stock for cash is subject to ourobligation to repay or repurchase any outstanding debt required to be repaid orrepurchased in connection with a fundamental change and to any contractualrestrictions then contained in our debt.

 

*Conversion in connection with a fundamental change*. Ifa holder elects to convert its shares of our Convertible Preferred Stock in connectionwith certain fundamental changes, we will in certain circumstances increase theconversion rate for such Convertible Preferred Stock. Upon a conversion inconnection with a fundamental change, the holder will be entitled to receive acash payment for all accumulated and unpaid dividends.

 

A “fundamental change” will be deemed to haveoccurred upon the occurrence of any of the following:

 

1.a “person” or “group” subject to specified exceptions, discloses that theperson or group has become the direct or indirect ultimate “beneficial owner”of our common equity representing more than 50% of the voting power of ourcommon equity other than a filing with a disclosure relating to a transactionwhich complies with the proviso in subsection 2 below;

 

2.consummation of any share exchange, consolidation or merger of us pursuant towhich our common stock will be converted into cash, securities or otherproperty or any sale, lease or other transfer in one transaction or a series oftransactions of all or substantially all of the consolidated assets of us andour subsidiaries, taken as a whole, to any person other than one of oursubsidiaries; provided, however, that a transaction where the holders of morethan 50% of all classes of our common equity immediately prior to thetransaction own, directly or indirectly, more than 50% of all classes of commonequity of the continuing or surviving corporation or transferee immediatelyafter the event shall not be a fundamental change;

 

3.we are liquidated or dissolved or holders of our capital stock approve any planor proposal for our liquidation or dissolution; or

 

4.our common stock is neither listed on a national securities exchange nor listednor approved for quotation on an over-the-counter market in the United States.

 

However, a fundamental change will not be deemedto have occurred in the case of a share exchange, merger or consolidation, orin an exchange offer having the result described in subsection 1 above, if 90%or more of the consideration in the aggregate paid for common stock (andexcluding cash payments for fractional shares and cash payments pursuant todissenters’ appraisal rights) in the share exchange, merger or consolidation orexchange offer consists of common stock of a United States company traded on anational securities exchange (or which will be so traded or quoted when issuedor exchanged in connection with such transaction).

 

*Voting rights*. Ifwe fail to pay dividends for six quarterly dividend periods (whether or notconsecutive) or if we fail to pay the purchase price on the purchase date forthe Convertible Preferred Stock following a fundamental change, holders of ourConvertible Preferred Stock will have voting rights to elect two directors toour board.

 

In addition, we may generally not, without theapproval of the holders of at least 66 2/3% of the shares of our ConvertiblePreferred Stock then outstanding:

 

·                  amend our restated certificate ofincorporation, as amended, by merger or otherwise, if the amendment would alteror change the powers, preferences, privileges or rights of the holders ofshares of our Convertible Preferred Stock so as to adversely affect them;

 

·                  issue, authorize or increase the authorizedamount of, or issue or authorize any obligation or security convertible into orevidencing a right to purchase, any senior stock; or

 

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·                  reclassify any of our authorized stock intoany senior stock of any class, or any obligation or security convertible intoor evidencing a right to purchase any senior stock.

 

* Off Balance SheetArrangements*

 

Wecurrently do not have any off balance sheet arrangements.

 

**FairValue Measurements**

 

Effective January 1, 2008, we partiallyadopted SFAS No. 157, *Fair ValueMeasurements* which provides a common definition of fair value, establishesa framework for measuring fair value and expands disclosures about fair valuemeasurements, but does not require any new fair value measurements. The partialadoption of SFAS No. 157 had no impact on our financial statements, but itdid result in additional required disclosures as set forth in Note 11 to ourconsolidated financial statements. In February 2008, the FASB issued FSPFAS 157-2, *Effective Date of FASB Statement No. 157*,which delayed the effective date of SFAS No. 157 for all non-financialassets and non-financial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). Accordingly, we applied the provisions of SFAS No. 157 toour AROs on January 1, 2009.

 

SFAS No. 157 defines fair value as theprice that would be received to sell an asset or transfer a liability in anorderly transaction between market participants at the measurement date.Currently the only fair value measurements we utilize are related to our AROsand derivative instruments. While our derivative instruments are executed inliquid markets where price transparency exists, we are not involved in themonthly calculation of fair value. We utilize valuations provided by ourcounterparties, which include inputs such as commodity exchange prices on theNYMEX, over-the-counter quotations, volatility, historical correlations ofpricing data and LIBOR and, in the case of collars and floors, the time valueof options, and other liquid money market instrument rates. Our counterpartiesutilize internally developed basis curves that incorporate observable andunobservable market data. Although we believe these valuations are the bestestimates of the fair value of the derivative contracts we have executed, theultimate market prices realized could differ from these estimates, and thedifferences could be material.

 

SFAS No. 157 establishes a fair valuehierarchy that prioritizes the inputs to valuation techniques used to measurefair value based on observable and unobservable data and categorizes the inputsinto three levels, with the highest priority given to Level 1 and the lowestpriority given to Level 3. The three levels of the fair value hierarchy definedby SFAS No. 157 are as follows:

 

·                  Level 1 — Inputs areunadjusted, quoted prices in active markets for identical assets orliabilities.

 

·                  Level 2 —Significant observable pricing inputs other than quoted prices included withinLevel 1 that are either directly or indirectly observable as of the reportingdate. Essentially, inputs that are derived principally from or corroborated byobservable market data.

 

·                  Level 3 — Generally,inputs are unobservable, developed based on the best information available andreflect management’s best estimate of what market participants would use inpricing the asset or liability at the measurement date.

 

Determining the appropriateclassification of our fair value measurements within the fair value hierarchyrequires management’s judgment regarding the degree to which market data isobservable or corroborated by observable market data. Currently we havecategorized derivative instruments’ fair value measurements and our AROs asLevel 3. As interpretations of SFAS No. 157 evolve, our classification of certaininstruments within the hierarchy may be revised. See “Critical AccountingPolicies and Estimates – Derivative and Hedging Activities” above, “RiskManagement Activities” below and Note 11 to our consolidated financialstatements for additional discussion of our derivative instruments.

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**RiskManagement Activities**

 

Weutilize price-risk management transactions (e.g., swaps, collars and floors)for a portion of our expected oil and natural gas production to seek to reduceexposure from the volatility of oil and natural gas prices and also to achievea more predictable cash flow. While the use of these arrangements are intendedto reduce our potential exposure to significant commodity price declines, theymay limit our ability to benefit from increases in the price of oil and naturalgas. Our arrangements, to the extent we enter into any, are intended to applyto only a portion of our expected production and thereby provide only partialprice protection against declines in oil and natural gas prices. None of theseinstruments are, at the time of their execution, intended to be used fortrading or speculative purposes, but a portion of our 2008 instruments wassubsequently deemed as such because of the decrease in our 2008 production.These price-risk management transactions are generally placed with majorfinancial institutions that we believe are financially stable; however, inlight of the recent global financial crisis, there can be no assurance of theforegoing. In the event any such counterparty fails to perform, our financialresults could be adversely affected and we could incur losses and our liquiditycould be negatively impacted. None of our derivative contracts containcollateral posting requirements; however, the counterparty to our 2009positions is a member of the lending group of our Revolving Facility, andcertain events of default under our Revolving Facility may result in a crossdefault of derivative instruments with such party On a quarterly basis, ourmanagement sets all of our price-risk management policies, including volumes,types of instruments and counterparties. These policies are implemented bymanagement through the execution of trades by the Chief Financial Officer afterconsultation and concurrence by the President and Chairman of the Board. OurBoard of Directors monitors our price-risk management policies and trades on amonthly basis.

 

Allof these price-risk management transactions are considered derivativeinstruments and accounted for in accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*(as amended).These derivative instruments are intended to hedge our price risk and may beconsidered hedges for economic purposes. There are two types of accountingtreatments for derivatives, (i) mark-to-market accounting and (ii) cashflow hedge accounting. For a discussion of these accounting treatments, seeNote 10 to our consolidated financial statements. We currently applymark-to-market accounting treatment to all of our derivative contracts. Allderivatives are recorded on the balance sheet at fair value and the changes infair value are presented in total revenue on the statement of operations. Thecash flows resulting from settlement of derivative transactions which relate toeconomically hedging our physical production volumes are classified inoperating activities on the statement of cash flows and the cash flowsresulting from settlement of derivative transactions considered “overhedged” positionsare classified in investing activities on the statement of cash flows. Thefollowing table provides additional information regarding our variousderivative transactions that were recorded at fair value on the balance sheetas of March 31, 2009.

 
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Fair value of contracts outstanding at  December 31, 2008                          |       | $                       | 15,407     |   |
| Contracts realized or otherwise settled  during the period                              |       | 5,848                   |       |
| Fair value at March 31, 2009 of new  contracts entered into during 2009:           |       |                    |       |
| Asset                                                                                   |       | —                  |       |
| Liability                                                                               |       | —                  |       |
| Changes in fair values attributable to  changes in valuation techniques and assumptions |       | —                  |       |
| Other changes in fair values                                                            |       | (628                    | )          |
| Fair values of contracts outstanding at  March 31, 2009                            |       | $                       | 20,627     |   |

 

The following table detailsthe fair value of our commodity-based derivative contracts by year of maturityand valuation methodology as of March 31, 2009.

 
| ** **                                           | ** ** | **Fair Value of Contracts at March 31, 2009** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **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                                                |       | 20,627                                                                           |       | — |   | — |   | — |   | 20,627 |   |
| Liability                                            |       | —                                                                           |       | — |   | — |   | — |   | — |   |
| Prices based on models and other valuation  methods: |       | —                                                                           |       | — |   | — |   | — |   | — |   |
| Total                                                |       | $                                                                                | 20,627     |   | $ | — |   | $ | — |   | $ | — |   | $ | 20,627 |   |

 

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**TaxMatters**

 

At March 31, 2009, we had cumulative netoperating loss carryforwards (“NOLs”) for federal and state income tax purposesof approximately $140.4 million and $5.7 million, respectively, withoutconsideration of valuation allowances The federal and state NOL carryforwardswill expire in varying amounts between 2009 and 2028. In addition to thedeferred tax assets associated with NOLs discussed above, we have additionalnet deferred tax assets of approximately $86.5 million related to both federaland state tax positions.

 

In recording deferred income tax assets, we considerwhether it is more likely than not that some portion or all of the deferredincome tax assets will be realized. The ultimate realization of deferred incometax assets is dependent upon the generation of future taxable income during theperiods in which those deferred income tax assets would be deductible. Weconsider the scheduled reversal of deferred income tax liabilities andprojected future taxable income for this determination. We believe that afterconsidering all the available objective evidence, both positive and negative,historical and prospective, with greater weight given to the historicalevidence, and in light of the current market situation and the uncertaintysurrounding our Revolving Facility and related Amended Consent, management isnot able to determine that it is more likely than not that the deferred taxassets will be realized and therefore established a full valuation allowance toreduce our net deferred tax asset to zero at March 31, 2009 and December 31,2008. We will continue to assess the valuation allowance against deferred taxassets considering all available information obtained in future reportingperiods. If we achieve profitable operations in the future, we may reverse aportion of the valuation allowance in an amount at least sufficient toeliminate any tax provision in that period. The valuation allowance has noimpact on our NOL position for tax purposes, and if we generate taxable incomein future periods, we will be able to use our NOLs to offset taxes due at thattime.

 

Our ability to utilize federal and state NOLcarryforwards in cases where the NOL was acquired in a reorganization aresubject to limitations under Section 382 of the Internal Revenue Code of1986, as amended (“Section 382”). There will be further limitations if weundergo another majority ownership change as defined by Section 382.

 

Wewould undergo a majority ownership change if, among other things, thestockholders who own or have owned, directly or indirectly, five percent ormore of our common stock or are otherwise treated as five percent stockholdersunder Section 382 and the regulations promulgated thereunder, increasetheir aggregate percentage ownership of our stock by more than 50 percentagepoints over the lowest percentage of stock owned by these stockholders at anytime during the testing period, which is generally the three-year periodpreceding the potential ownership change. In the event of a majority ownershipchange, Section 382 imposes an annual limitation on the amount of taxableincome a corporation may offset with the NOL carryforwards. Any unused annuallimitation may be carried over to later years until the applicable expirationof the respective NOL carryforwards. The amount of the limitation may, undercertain circumstances, be increased by built-in gains held by us at the time ofthe change that are recognized in the five-year period after the change. Anybuilt-in losses on assets held subsequent to a merger are subject to thelimitation. If we were to undergo a majority ownership change, we will likelybe required to record a reserve for some or all of the asset that may berecorded on our balance sheet at that time. During 2007, we believe that therewas a change of ownership pursuant to Section 382 as a result of theconcurrent public offerings of our common and preferred stock that occurred in January 2007.The 2007 limitation did not result in the requirement to record a reserve.  We cannot make assurances that we will notundergo a majority ownership change in the future because an ownership changefor federal tax purposes can occur based on trades among our existingstockholders. Whether we undergo a majority ownership change may be a matterbeyond our control. Further, in light of the ongoing financial and strategicalternatives process, we cannot provide any assurance that a potential sale ormerger will not reduce the availability of our NOL carryforward and otherfederal income tax attributes, which may be significantly limited or possiblyeliminated.

 

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FASB Interpretation No. 48(“FIN 48”), *Accounting for Uncertainty in Income Taxes*,provides guidance on recognition and measurement of uncertainties in incometaxes. FIN 48 requires that we recognize the financial statement benefit of atax position only after determining that the relevant tax authority would morelikely than not sustain the position following an audit. For tax positionsmeeting the more-likely-than-not threshold, the amount recognized in thefinancial statements is the largest benefit that has a greater than 50 percentlikelihood of being realized upon ultimate settlement with the relevant taxauthority. See Notes 3 and 8 to our consolidated financial statements. We haverecorded our FIN 48 liability of approximately $0.1 million under long termliabilities on the balance sheet and there has been no change since December 31,2008.

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2008, the SEC issued the final rule, *“Modernization of Oil and Gas Reporting*,”which adopts revisions to the SEC’s oil and natural gas reporting disclosurerequirements and is effective for annual reports on Forms 10-K for yearsending on or after December 31, 2009. Early adoption of the new rules isprohibited. The new rules are intended to provide investors with a moremeaningful and comprehensive understanding of oil and natural gas reserves tohelp investors evaluate their investments in oil and natural gas companies. Thenew rules are also designed to modernize the oil and natural gasdisclosure requirements to align them with current practices and changes intechnology. The new rules include changes to the pricing used to estimatereserves, the ability to include nontraditional resources in reserves, the useof new technology for determining reserves and permitting disclosure ofprobable and possible reserves. We are currently evaluating the potentialimpact of these rules. The SEC is discussing the rules with the FASB staffto align FASB accounting standards with the new SEC rules. These discussionsmay delay the required compliance date. Absent any change in the effectivedate, we will begin complying with the disclosure requirements in our annualreport on Form 10-K for the year ended December 31, 2009.

 

In April 2009, the FASB issued FSP FAS157-4, *Determining Fair Value When the Volume and Level ofActivity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly,* which providesadditional guidance in accordance with SFAS No. 157. If an entitydetermines that either the volume or level of activity for an asset or liabilityhas significantly decreased from normal conditions, or that price quotations orobservable inputs are not associated with orderly transactions, increasedanalysis and management judgment will be required to estimate fair value. Theobjective in fair value measurement remains unchanged from what is prescribedin SFAS No. 157 and should be reflective of the current exit price.Disclosures in interim and annual periods must include inputs and valuationtechniques used to measure fair value, along with any changes in valuationtechniques and related inputs during the period. In addition, disclosures fordebt and equity securities must be provided on a more disaggregated basis thanwhat was required in SFAS No. 157. FSP FAS 157-4 is effective for interimand annual reporting periods ending after June 15, 2009. We do not expectFSP FAS 157-4 to have a material impact on our financial position, results ofoperations or cash flows.

 

In April 2009, the FASB issued FSP FAS107-1 and Accounting Principles Bulletin (“APB”) No. 28-1, *Interim Disclosures about Fair Value of Financial Instruments,*to require disclosures about fair value of financial instruments for publiclytraded companies for both interim and annual periods. Historically, thesedisclosures were only required annually. The interim disclosures are intendedto provide financial statement users with more timely and transparentinformation about the effects of current market conditions on an entity’sfinancial instruments that are not otherwise reported at fair value. FSP FAS107-1 and APB 28-1 is effective for interim reporting periods ending after June 15,2009. Comparative disclosures are only required for periods ending after theinitial adoption. We do not expect FSP FAS 107-1 and APB 28-1 to have a materialimpact on our financial position, results of operations or cash flows.

 

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, *Recognition and Presentation of Other-Than-Temporary Impairments,*which amends the other-than-temporary impairment guidance for debt securitiesto make the guidance more operational and to improve the presentation anddisclosure of other-than-temporary impairments on debt and equity securities inthe financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing recognitionand measurement guidance for equity securities, but does establish a new methodof

 

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recognizingand reporting for debt securities. Disclosure requirements for impaired debtand equity securities have been expanded significantly and will now be requiredquarterly, as well as annually. FSP FAS 115-2 and FAS 124-2 is effective forinterim and annual reporting periods ending after June 15, 2009.Comparative disclosures are only required for periods ending after the initialadoption. We do not expect FSP FAS 115-2 and FAS 124-2 to have a materialimpact on our financial position, results of operations or cash flows.

 

In April 2009 the FASBissued FSP FAS 141(R)-1, *Accounting for AssetsAcquired and Liabilities Assumed in a s Business Combination That Arise fromContingencies*, which amends and clarifies SFAS No. 141, *Business Combinations,*(as amended), to address applicationissues raised by preparers, auditors, and members of the legal profession oninitial recognition and measurement, subsequent measurement and accounting, anddisclosure of assets and liabilities arising from contingencies in a businesscombination. FSP FAS 141(R)-1 is effective for assets and liabilities arisingfrom contingencies in business combinations for which the acquisition date ison or after the beginning of the first fiscal reporting period beginning on orafter December 15, 2008. We expect FSP FAS 141(R)-1 may impact ourfinancial position, results of operations or cash flows if we were to undertakea business combination.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisk from changes in interest rates and commodity prices.  We use a Revolving Facility, which has afloating interest rate. We are not subject to fair value risk resulting fromchanges in our floating interest rates. The use of floating rate debt instruments provides a benefit due todownward interest rate movements but does not limit us to exposure from futureincreases in interest rates.  Based onthe March 31, 2009 outstanding borrowings and an interest rate of 5.75%, a10% change in these interest rates would result in an increase or decrease ininterest expense of approximately $1.3 million on an annual basis.

 

The debt and equity marketshave recently exhibited adverse conditions. The unprecedented volatility andupheaval in the capital markets may increase costs associated with issuing debtinstruments due to increased spreads over relevant interest rate benchmarks andaffect our ability to access those markets. We believe the recent events in theglobal markets had significant impact on our recent borrowing base redeterminationthat resulted in our significant borrowing base deficiency. The continuedcredit crisis and related turmoil in the global financial system and economicrecession in the U.S. create financial challenges if conditions do not improveand will affect our ability to access credit markets. We will continue tomonitor our liquidity and the capital markets as we continue to assess ourfinancial and strategic alternatives.

 

As of December 31, 2008and March 31, 2009, our outstanding debt was classified as current due tothe amendment in the maturity date to June 30, 2009 as provided by theAmended Consent which requires a $25 million payment due on May 31, 2009with all remaining principal, fees and interest amounts under our RevolvingFacility to be due and payable on June 30, 2009 to our lenders.

 

Inthe normal course of business, we enter into derivative transactions, includingcommodity price collars, swaps and floors, to mitigate our exposure tocommodity price movements. At the time of their execution, they are notintended for trading or speculative purposes. While the use of these arrangements may limit the benefit to us ofincreases in the price of oil and natural gas, it also limits the downside riskof adverse price movements.  During 2007,we put in place several natural gas and crude oil derivatives to hedge ourexpected 2009 production to achieve a more predictable cash flow. Please referto Note 10 to our consolidated financial statements for a discussion of thesecontracts. The following is a list of contracts outstanding at March 31,2009:

 
| **Transaction  Date**  | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  March 31, 2009** | ** ** |
|------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|--------------------------|------------|----------------------|------------|----------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **               | ** ** | ** **           | ** ** | **(in thousands)**                                                    | ** ** |
| ***Natural Gas (1):*** | * *   | * *              | * *   | * *      | * *   | * *   | * *   | * *                 | * *   | * *             | * *   | * *                                                                   | * *   |
| 04/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.00             |       | 10,000 MMBtu         |       | $                                                                          | 9,618      |   |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.08             |       | 10,000 MMBtu         |       | 9,620                                                                      |       |
|                   |       |                  |       |          |       |       |       |                     |       |                 |       |                                                                       |       |
| ***Crude Oil (2):***   |       |                  |       |          |       |       |       |                     |       |                 |       |                                                                       |       |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $70.00-$93.55            |       | 300 Bbl              |       | 1,389                                                                      |       |
|                   |       |                  |       |          |       |       |       |                     |       |                 |       | $                                                                          | 20,627     |   |

 

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(1)          Our natural gas contracts were entered into on a per MMBtu deliveredprice basis, using the NYMEX Natural Gas Index. Mark-to-market accountingtreatment is applied to these contracts and the change in fair value isreflected in total revenue.

 

(2)          Our crude oil contract was entered into on a per barrel delivered pricebasis, using the West Texas Intermediate Light Sweet Crude Oil Index.Mark-to-market accounting treatment is applied to this contract and the changein fair value is reflected in total revenue.

 

At March 31, 2009, thefair value of the outstanding derivatives was a net asset of approximately$20.6 million. A 10% change in the commodity price per unit, as long as theprice is either above the ceiling or below the floor price, would cause thefair value total of the derivative instruments to increase or decrease by approximately$2.0 million.

 

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

#####  

In accordance with ExchangeAct Rules 13a-15 and 15d-15, we carried out an evaluation, under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of March 31, 2009 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 rules andforms.

 

There has beenno change in our internal controls over financial reporting that occurredduring the three months ended March 31, 2009 that has materially affected, oris reasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II- OTHER INFORMATION**

 

**Item 1 - Legal Proceedings**

 

Fromtime to time we are a party to various legal proceedings arising in theordinary course of our business.  Whilethe outcome of lawsuits cannot be predicted with certainty, we are notcurrently a party to any proceeding that we believe, if determined in a manneradverse to us, could have a material adverse effect on our financial condition,results of operations or cash flows, except as set forth below.

 

**DavidBlake, et al. v. Edge Petroleum Corporation** — On September 19, 2005, David Blakeand David Blake, Trustee of the David and Nita Blake 1992 Children’s Trust,filed suit against us in state district court in Goliad County, Texas allegingbreach of contract for failure and refusal to transfer overriding royaltyinterests to plaintiffs in several leases in the Nita and Austin prospects inGoliad County, Texas and failure and refusal to pay monies to Blake pursuant tosuch overriding royalty interests for wells completed on the leases. Theplaintiffs seek relief of (1) specific performance of the allegedagreement, including granting of overriding royalty interests by us to Blake; (2) monetarydamages for failure to grant the overriding royalty interests; (3) exemplarydamages for his claims of business disparagement and slander; (4) monetarydamages for tortious interference; and (5) attorneys’ fees and courtcosts. Venue of the case was transferred to Harris County, Texas by agreementof the litigants. Our subsidiaries, Edge Petroleum Exploration Company, EdgePetroleum Operating Company and Edge Petroleum Production Company, were alsoadded as defendants. We filed a counterclaim against plaintiff and joinedvarious related entities that are controlled by Blake, seeking lease interestsin which we contend it had been wrongfully denied participation and alsoclaiming that proprietary information was misappropriated. The parties havemoved for summary judgment on each other’s claims and counterclaims, which thetrial court has denied as to both sides. In November 2007, we filed a separate motion for summary judgmentbased on the statute of frauds and; the court has not yet ruled on thisseparate motion. In June 2008, the Plaintiffs filed a Sixth AmendedPetition conditionally adding claims for certain prospects that had beenpreviously settled by means of a Compromise and Settlement Agreement (the “SettlementAgreement”), entered in settlement of prior litigation among some of theparties, but only to the extent that rescission of the prior SettlementAgreement was being sought by us. We are not seeking rescission of the priorSettlement Agreement and responded accordingly in our Fourth Amended OriginalCounterclaim and Claims Against Additional Parties filed on October 16,2008.  On October 17, 2008, theplaintiffs filed their Seventh Amended Petition adding a claim for breach ofthe Settlement Agreement. The trial, originally scheduled to begin September 10,2007, has been reset several times, most recently for December 8, 2008,and will be reset in 2009 by the newly-elected judge of the 215th JudicialDistrict Court in Harris County.  In December 2008,one of the Blake counter-defendants filed a motion to arbitrate, which motionhas not been heard by the court. Extensive written discovery has occurred in the case, and the partiesare engaging in fact and expert witness depositions. We have responded and willcontinue to respond aggressively to this lawsuit, and believe we havemeritorious defenses and counterclaims.

 

**Mary Jane Carol Trahan Champagne, et al. v. Edge Petroleum ExplorationCompany, et al.** —On September 19, 2008 we were sued in state district court in VermilionParish, Louisiana by Mary Jane Trahan, Carol Trahan Champagne and 29 otherplaintiffs alleging breach of obligations under mineral leases in VermilionParish regarding the Trahan No. 1 well and the Trahan No. 3 well (MTRC SUB reservoir). Plaintiffs are seeking unspecified damages for lost revenue,lost royalties and devaluation of property interest sustained as a result ofthe defendants’ alleged negligent and improper drilling operations on theTrahan No. 1 well and the Trahan No. 3 well, including allegedfailure to prevent underground water from flooding and destroying plaintiffs’portion of the reservoir beneath plaintiffs’ property.  Plaintiffs also allege defendants failed to “blocksqueeze” sections of the Trahan No. 3 well as would a prudent operator.This lawsuit, previously removed from the state court to the federal districtcourt for the Western District of Louisiana, Lafayette Division, has beenremanded to state court. Our insurance carrier has retained counsel torepresent us in this matter. We have not established a reserve with respect tothis claim and it is not possible to determine what, if any, our ultimateexposure might be in this matter. We intend to vigorously defend ourselves inthis lawsuit.

 

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**John Lemke, et al. v. EdgePetroleum Corporation** - In October 2008, we were sued by alleged assignees ofContinental Seismic over an alleged contract to receive a royalty of two-tenthsof one percent in certain alleged areas developed for oil and gas in SouthLouisiana. We have filed an answer generally denying the allegations andraising the defenses of the statute of limitations bar and laches. No discoveryhas been served. The court recently entered a docket control order whichestablishes a discovery timetable and a trial date of November 30, 2009.We have not established a reserve with respect to this claim and have notdetermined what, if any, our ultimate exposure might be in this matter.  We will respond aggressively to this lawsuit,and believe we have meritorious defenses.

 

 **Item 1A — Risk Factors**

 

In addition to the otherinformation and risk factors set forth in this report, you should carefullyconsider the factors discussed in Part I, “Item 1A. Risk Factors” in our2008 Annual Report on Form 10-K, which could materially affect ourbusiness, financial condition or future results. The risks described in our2008 Annual Report on Form 10-K are not the only risks facing our Company.Additional risks and uncertainties not currently known to us or that wecurrently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 
| **Item 2 - Unregistered Sale of Equity Securities and Use of  Proceeds**                                                                                                                                                                                                                                                                                                                                                                                                                        |   | None   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| **Item 3 - Defaults Upon Senior Securities**                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   |
| The Company's Board of Directors did not declare a dividend on the  Company’s 5.75% Series A cumulative convertible perpetual preferred stock  ("Convertible Preferred Stock") for the fourth quarter of 2008 or  the first quarter of 2009, which dividends would have been paid on  January 15 and April 15, 2009. Therefore, as of May 7, 2009,  the Company has Convertible Preferred Stock dividends in arrears that total  approximately $4.1 million. |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |
| **Item 4 - Submission of Matters to a Vote of Security Holders**                                                                                                                                                                                                                                                                                                                                                                                                                                |   | None   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |
| **Item 5 - Other Information**                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | None   |

** **

**Item 6 - Exhibits**

 

Thefollowing exhibits are filed 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 Appendix A to the Joint Proxy  Statement/Prospectus contained in the Company’s Registration Statement on  Form S-4/A filed on January 15, 1997 (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 as of 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                                                                                                                                                                                                                                                                                                                                                                   |

 

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|   |   |   |   | Company  as Buyer and Edge Petroleum Corporation as Guarantor (Incorporated by  reference from exhibit 2.1 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 as of 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. |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.7    |   | — |   | Agreement  and Plan of Merger, dated July 14, 2008, among Chaparral  Energy, Inc., Chaparral Exploration, L.L.C. and Edge Petroleum  Corporation (Incorporated by reference from exhibit 2.1 to the Company’s  Current Report on Form 8-K filed July 15, 2008). Pursuant to Item  601(b)(2) of Regulation S-K, the Company had omitted the disclosure  schedules to the Merger Agreement from this Exhibit 2.1. 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 (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                   |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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 (File  No. 000-22149)).                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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).                                                                                                                                                                                                                                                                                                                                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.7    |   | — |   | Certificate of Designations establishing the 5.75%  Series A cumulative convertible perpetual preferred stock, dated  January 25, 2007 (Incorporated by reference to exhibit 3.1 to the  Company’s Current Report on Form 8-K filed January 30, 2007).                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.8    |   | — |   | Third Amendment to Bylaws of Edge Petroleum  Corporation on October 21, 2008 (Incorporated by reference to exhibit  3.4 to the Company’s Current Report on Form 8-K filed October 23,  2008).                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 4.1        |   | — |   | Miller  Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from exhibit 10.1(a) to Miller’s Annual  Report on Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                            |
|------------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2        |   | — |   | Amendment  No. 1 to the Miller Exploration Company Stock Option and Restricted  Stock Plan of 1997 (Incorporated by reference to Exhibit 4.2 from  Miller’s Registration Statement on Form S-8 filed on April 11, 2001  (Registration No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3        |   | — |   | Amendment  No. 2 to the Miller Exploration Company Stock Option and Restricted  Stock Plan of 1997 (Incorporated by reference from Exhibit 4.3 to  Miller’s Registration Statement on Form S-8 filed on April 11, 2001  (Registration No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4        |   | — |   | Form of  Miller Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                            |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5        |   | — |   | Fourth  Amended and Restated Credit Agreement dated January 31, 2007 by and  among Edge Petroleum Corporation, as borrower, and Union Bank of California,  N.A., as Administrative Agent and Issuing Lender, and the other lenders party  thereto (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed on February 5, 2007).                                                                                                                                                           |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6        |   | — |   | Amendments  No. 1, 2 and 3 to the Fourth Amended and Restated Credit Agreement dated  as of July 11, 2007, December 10, 2007 and May 8, 2008,  respectively, by and among Edge Petroleum Corporation, as borrower, and Union  Bank of California, N.A., as Administrative Agent and Issuing Lender, and the  other lenders party thereto (Incorporated by reference from exhibit 4.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending March 31, 2008 filed on May 12, 2008). |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7        |   | — |   | Consent,  executed July 11, 2008, among Edge Petroleum Corporation, the Lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such Lenders (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                                      |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8        |   | — |   | Letter  Agreement dated November 5, 2008 by and among Edge Petroleum  Corporation, Union Bank of California, N.A., as Administrative Agent and  Issuing Lender, and the other lenders party thereto (Incorporated by  reference from exhibit 4.11 to the Company’s Quarterly Report on  Form 10-Q for the quarterly period ending September 30, 2008 filed  November 10, 2008).                                                                                                                                             |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9        |   | — |   | Consent  and Agreement, executed February 9, 2009, among Edge Petroleum  Corporation, the lenders party thereto and Union Bank of California, N.A., as  administrative agent for such lenders. (Incorporated by reference from  exhibit 4.1 to the Company’s Current Report on Form 8-K filed  February 9, 2009).                                                                                                                                                                                                                |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.10       |   | — |   | Consent  and Agreement, executed March 10, 2009, among Edge Petroleum  Corporation, the lenders party thereto and Union Bank of California, N.A., as  administrative agent for such lenders. (Incorporated by reference from  exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 10,  2009).                                                                                                                                                                                                                    |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.11       |   | — |   | Consent  and Amendment No. 4 executed March 16, 2009, among Edge Petroleum  Corporation, the lenders party thereto and Union Bank of California, N.A., as  administrative agent for such lenders. (Incorporated by reference from  exhibit 4.1 to the Company’s Current Report on Form 8-K filed  March 16, 2009).                                                                                                                                                                                                          |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| †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)).                                                                                                                                                                                                                                                                                                               |

 

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| †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 exhibit 10.12 to the Company’s  Annual Report on Form 10-K for the year ended December 31, 1998  (File No. 000-22149)).                                                                                         |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.4  |   | — |   | Amended  and Restated Incentive Plan of Edge Petroleum Corporation as Amended and  Restated Effective as of August 1, 2006 (Incorporated by reference from  exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ending June 30, 2006).                                                                                |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †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 (File No. 000-22149)).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †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 (File No. 000-22149)). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.7  |   | — |   | 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).                                                                                          |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.8  |   | — |   | 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 (File No. 000-22149)).                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.9  |   | — |   | 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)).                                                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.10 |   | — |   | 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)).                                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.11 |   | — |   | Summary of Compensation of Non-Employee Directors  (Incorporated by reference from exhibit 10.11 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2008).                                                                                                                                                                         |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.12 |   | — |   | Salaries and Certain Other Compensation of 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, 2008).                                                                                                                                                             |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.13 |   | — |   | Description of Annual Cash Bonus Program for  Executive Officers (Incorporated by reference from exhibit 10.2 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                                                                            |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.14 |   | — |   | New Base Salaries and Long-Term Incentive Awards for  Certain Executive Officers (Incorporated by reference from exhibit 10.1 to  the Company’s Current Report on Form 8-K filed August 29, 2006).                                                                                                                                                           |

 

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| 10.15       |   | — |   | Purchase and Sale Agreement between Smith  Production, Inc., as seller, and Edge Petroleum Exploration Company, as  purchaser, dated November 16, 2006 (Incorporated by reference to exhibit  10.1 to the Company’s Current Report on Form 8-K filed January 16,  2007).                    |
|-------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.16       |   | — |   | Purchase and Sale Agreement between Smith  Production, Inc., as seller, and Edge Petroleum Exploration Company, as  purchaser, dated November 16, 2006 (Incorporated by reference to exhibit  10.2 to the Company’s Current Report on Form 8-K filed January 16,  2007).                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.17       |   | — |   | First Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated December 16, 2006 (Incorporated  by reference to exhibit 10.3 to the Company’s Current Report on Form 8-K  filed January 16, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.18       |   | — |   | Second Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 15, 2007 (Incorporated  by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K  filed January 19, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.19       |   | — |   | First Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 15, 2007 (Incorporated  by reference to exhibit 10.2 to the Company’s Current Report on Form 8-K  filed January 19, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| 10.20       |   | — |   | Third Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 31, 2007 (Incorporated  by reference to exhibit 10.6 to the Company’s Current Report on Form 8-K  filed February 5, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.21 |   | — |   | New Base Salaries of Executive Officers  (Incorporated by reference from Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed March 12, 2007).                                                                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.22 |   | — |   | Form of Amended and Restated Severance  Agreement dated April 3, 2008, between the Company and Executive  Officers of the Company Named Therein (Incorporated by reference from exhibit  10.1 to the Company’s Current Report on Form 8-K filed April 4,  2008).                            |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.23 |   | — |   | Amended and Restated Severance Agreement dated  April 3, 2008, between the Company and John W. Elias (Incorporated by  reference from exhibit 10.2 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                                                                            |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.24 |   | — |   | Amended and Restated Employment Agreement dated  April 3, 2008, between the Company and John W. Elias (Incorporated by  reference from exhibit 10.3 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                                                                           |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.25 |   | — |   | First Amendment to Amended and Restated Severance  Agreement, dated July 14, 2008, between the Company and John W. Elias  (Incorporated by reference from exhibit 10.1 to the Company’s Current Report  on Form 8-K filed July 15, 2008).                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.26 |   | — |   | First  Amendment to Second Amended and Restated Severance Agreement, dated  July 14, 2008, between the Company and Executive Officers of the Company  Named Therein (Incorporated by reference from exhibit 10.2 to the Company’s  Current Report on Form 8-K filed July 15, 2008).              |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                 |
| †10.27 |   | — |   | Fourth  Amended and Restated Severance Agreement among Edge Petroleum Corporation and  Kirsten A. Hink (Incorporated by reference from exhibit 10.1 to the Company’s  Current Report on Form 8-K filed April 6, 2009).                                                                                |

 

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| 10.28  |   | — |   | Merger  Termination Agreement, dated December 16, 2008, among Chaparral  Energy, Inc., Chaparral Exploration, L.L.C. and Edge Petroleum  Corporation (Incorporated by reference to exhibit 10.1 to the Company’s  Current Report on Form 8-K filed December 17, 2008).                                                                                                                                                             |
|--------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.29  |   | — |   | Termination  and Settlement Agreement, dated December 16, 2008, among Magnetar  Financial LLC**,**Investment  Partners II (B), LLC, QRA SR, LLC, Triangle Peak Partners Private Equity, LP,  Post Oak Energy Capital, LP, Chaparral Energy, Inc., Chaparral  Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by reference  to exhibit 10.2 to the Company’s Current Report on Form 8-K filed  December 17, 2008). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *31.1  |   | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *31.2  |   | — |   | Certification  by Gary L. Pittman, Chief Financial Officer, pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *32.1  |   | — |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| *32.2  |   | — |   | Certification  by Gary L. Pittman, Chief Financial Officer, pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                |

 

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*Filed herewith.

†Denotes management or compensatory contract, arrangement or agreement.

 

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## **Tableof Contents**

 

## **SIGNATURES**

## ** **

                Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|   |              |   | EDGE PETROLEUM CORPORATION,          |
|--------|-------------------|--------|--------------------------------------|
|   |              |   | A  DELAWARE CORPORATION              |
|   |              |   | (REGISTRANT)                         |
|   |              |   |                                 |
|   |              |   |                                 |
| Date   | May 7,  2009 |   |                                 | /s/  John W. Elias |
|   |              |   |                                 | John W. Elias |
|   |              |   | Chairman of the Board, President and |
|   |              |   | Chief Executive Officer              |
|   |              |   |                                 |   |
|   |              |   |                                 |   |
| Date   | May 7,  2009 |   |                                 | /s/  Gary L. Pittman |
|   |              |   |                                 | Gary L. Pittman |
|   |              |   | Executive Vice President and         |
|   |              |   | Chief Financial Officer              |
|   |              |   |                                 |   |
|   |              |   |                                 |   |
| Date   | May 7, 2009       |   |                                 | /s/ Kirsten A. Hink |
|   |              |   |                                 | Kirsten  A. Hink |
|   |              |   | Vice  President and Controller       |

 

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# **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 Appendix A to the Joint Proxy  Statement/Prospectus contained in the Company’s Registration Statement on  Form S-4/A filed on January 15, 1997 (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 as of 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 2.1 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 as of 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. |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.7                  | —     | Agreement and Plan of  Merger, dated July 14, 2008, among Chaparral Energy, Inc.,  Chaparral Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by  reference from exhibit 2.1 to the Company’s Current Report on Form 8-K  filed July 15, 2008). Pursuant to Item 601(b)(2) of Regulation S-K,  the Company had omitted the disclosure schedules to the Merger Agreement from  this Exhibit 2.1. 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).                                                                                                                                                                                                                                                                                                                |

 

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| 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  (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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 (File No. 000-22149)).                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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).                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.7    | — | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to the Company’s Current Report on Form 8-K  filed January 30, 2007).                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.8    | — | Third Amendment to  Bylaws of Edge Petroleum Corporation on October 21, 2008 (Incorporated  by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K  filed October 23, 2008).                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1    | — | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2    | — | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3    | — | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4    | — | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5    | — | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6    | — | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated as of  July 11, 2007, December 10, 2007 and May 8, 2008,  respectively, by and among Edge Petroleum Corporation, as borrower, and Union  Bank of California, N.A., as Administrative Agent and Issuing Lender, and the  other lenders party thereto (Incorporated by reference from exhibit 4.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending March 31, 2008 filed on May 12, 2008). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7    | — | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8    | — | Letter Agreement dated  November 5, 2008 by and among Edge Petroleum Corporation, Union Bank of  California, N.A., as Administrative Agent and Issuing Lender, and the other  lenders party thereto (Incorporated by reference from exhibit 4.11 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ending  September 30, 2008 filed November 10, 2008).                                                                                                                                              |

 

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| 4.9         | — | Consent and Agreement,  executed February 9, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed February 9, 2009).                                        |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.10        | — | Consent and Agreement,  executed March 10, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed March 10, 2009).                                            |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.11        | — | Consent and Amendment  No. 4 executed March 16, 2009, among Edge Petroleum Corporation,  the lenders party thereto and Union Bank of California, N.A., as  administrative agent for such lenders. (Incorporated by reference from  exhibit 4.1 to the Company’s Current Report on Form 8-K filed  March 16, 2009).                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †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 exhibit 10.12 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1998 (File  No. 000-22149)).                                                                                         |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.4  | — | Amended and Restated  Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of August 1, 2006 (Incorporated by reference from exhibit  10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ending June 30, 2006).                                                                                |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †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 (File No. 000-22149)).  |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †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 (File No. 000-22149)). |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.7  | — | 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).                                                                                          |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.8  | — | 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 (File No. 000-22149)).                                                                   |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.9  | — | 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)).                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.10 | — | 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)).                                                                                                         |

 

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| †10.11 | — | Summary of Compensation of Non-Employee Directors  (Incorporated by reference from exhibit 10.11 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2008).                                                                                                                  |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.12 | — | Salaries and Certain Other Compensation of 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, 2008).                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.13 | — | Description of Annual Cash Bonus Program for  Executive Officers (Incorporated by reference from exhibit 10.2 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                     |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.14 | — | New Base Salaries and Long-Term Incentive Awards for  Certain Executive Officers (Incorporated by reference from exhibit 10.1 to  the Company’s Current Report on Form 8-K filed August 29, 2006).                                                                                                    |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.15       | — | Purchase and Sale Agreement between Smith  Production, Inc., as seller, and Edge Petroleum Exploration Company, as  purchaser, dated November 16, 2006 (Incorporated by reference to exhibit  10.1 to the Company’s Current Report on Form 8-K filed January 16,  2007).                    |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.16       | — | Purchase and Sale Agreement between Smith  Production, Inc., as seller, and Edge Petroleum Exploration Company, as  purchaser, dated November 16, 2006 (Incorporated by reference to exhibit  10.2 to the Company’s Current Report on Form 8-K filed January 16,  2007).                    |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.17       | — | First Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated December 16, 2006 (Incorporated  by reference to exhibit 10.3 to the Company’s Current Report on Form 8-K  filed January 16, 2007). |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.18       | — | Second Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 15, 2007 (Incorporated  by reference to exhibit 10.1 to the Company’s Current Report on Form 8-K  filed January 19, 2007). |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.19       | — | First Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 15, 2007 (Incorporated  by reference to exhibit 10.2 to the Company’s Current Report on Form 8-K  filed January 19, 2007).  |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| 10.20       | — | Third Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated January 31, 2007 (Incorporated  by reference to exhibit 10.6 to the Company’s Current Report on Form 8-K  filed February 5, 2007).  |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.21 | — | New Base Salaries of Executive Officers  (Incorporated by reference from Exhibit 10.1 to the Company’s Current  Report on Form 8-K filed March 12, 2007).                                                                                                                                        |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.22 | — | Form of Amended and Restated Severance  Agreement dated April 3, 2008, between the Company and Executive  Officers of the Company Named Therein (Incorporated by reference from exhibit  10.1 to the Company’s Current Report on Form 8-K filed April 4,  2008).                            |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.23 | — | Amended and Restated Severance Agreement dated  April 3, 2008, between the Company and John W. Elias (Incorporated by  reference from exhibit 10.2 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                                                                            |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.24 | — | Amended and Restated Employment Agreement dated  April 3, 2008, between the Company and John W. Elias (Incorporated by  reference from exhibit 10.3 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                                                                           |
|        |   |                                                                                                                                                                                                                                                                                                                 |
| †10.25 | — | First Amendment to Amended and Restated Severance  Agreement, dated July 14, 2008, between the Company and John W. Elias  (Incorporated by reference from exhibit 10.1 to the Company’s Current Report  on Form 8-K filed July 15, 2008).                                                        |

 

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| †10.26 | — | First Amendment to  Second Amended and Restated Severance Agreement, dated July 14, 2008,  between the Company and Executive Officers of the Company Named Therein  (Incorporated by reference from exhibit 10.2 to the Company’s Current Report  on Form 8-K filed July 15, 2008).                                                                                                                                                    |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| †10.27 | -      | Fourth Amended and  Restated Severance Agreement among Edge Petroleum Corporation and Kirsten A.  Hink (Incorporated by reference from exhibit 10.1 to the Company’s Current  Report on Form 8-K filed April 6, 2009).                                                                                                                                                                                                                      |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.28       | — | Merger Termination  Agreement, dated December 16, 2008, among Chaparral Energy, Inc.,  Chaparral Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by  reference to exhibit 10.1 to the Company’s Current Report on Form 8-K  filed December 17, 2008).                                                                                                                                                            |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.29       | — | Termination and  Settlement Agreement, dated December 16, 2008, among Magnetar Financial  LLC**,**Investment Partners II (B),  LLC, QRA SR, LLC, Triangle Peak Partners Private Equity, LP, Post Oak Energy  Capital, LP, Chaparral Energy, Inc., Chaparral Exploration, L.L.C. and  Edge Petroleum Corporation (Incorporated by reference to exhibit 10.2 to the  Company’s Current Report on Form 8-K filed December 17, 2008). |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *31.1       | — | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *31.2       | — | Certification by Gary  L. Pittman, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                               |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *32.1       | — | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *32.2       | — | Certification by  Gary L. Pittman, Chief Financial Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                               |

 

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* Filed herewith.

† Denotes management orcompensatory contract, arrangement or agreement.

 

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