**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**x****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2008**

 

**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 asspecified in its charter)

 

| **Delaware**                     | ** ** | **76-0511037**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

| **1301 Travis, Suite 2000**          |   | ** ** |
|-------------------------------------------|--------|------------|
| **Houston,  Texas**                       |   | **77002**  |
| (Address of  principal executive offices) |   | (Zip code) |

 

**(713) 654-8960**

(Registrant’s telephone number,including area code)

 

Indicate by checkmark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15 (d) ofthe Securities 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.

x Yes o 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. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (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).  oYesxNo

 

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

 

| **Class**     | ** ** | **Outstanding at May 8, 2008** |
|---------------|------------|----------------------------------------------------|
| Common  Stock |       | 28,655,142                                         |

 

 

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**EDGE PETROLEUM CORPORATION**

 

**Table of Contents**

** **
| ** **                                                                                           | **Page No.** |
|------------------------------------------------------------------------------------------------------|-------------------|
| Part I.  Financial Information                                                                  |              |
| Item  1. Financial Statements:                                                                       |              |
| Consolidated Balance  Sheets as of March 31, 2008 and December 31, 2007                    | 3                 |
| Consolidated  Statements of Operations for the Three Months Ended March 31, 2008 and  2007      | 4                 |
| Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2008 and  2007      | 5                 |
| Consolidated  Statement of Stockholders’ Equity for the Three Months Ended March 31,  2008 | 6                 |
| Notes to the  Consolidated Financial Statements                                                      | 7                 |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations | 22                |
| Item 3.  Qualitative and Quantitative Disclosures About Market Risk                                  | 42                |
| Item 4. Controls and  Procedures                                                                     | 43                |
| Part II. Other  Information                                                                     |              |
| Item 1. Legal Proceedings                                                                            | 44                |
| Item  1A. Risk Factors                                                                               | 45                |
| Item 2. Unregistered  Sale of Equity Securities and Use of Proceeds                                  | 45                |
| Item 3.  Defaults Upon Senior Securities                                                             | 45                |
| Item 4.  Submission of Matters to a Vote of Security Holders                                         | 45                |
| Item 5. Other Information                                                                            | 45                |
| Item 6.  Exhibits                                                                                    | 45                |
| Signatures                                                                                           | 50                |

 

2

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**PART I.FINANCIAL INFORMATION**

** **

**Item 1. Financial Statements**

**EDGEPETROLEUM CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                            | ** ** | **March 31,  2008**                                  | ** ** | **December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                            | ** ** | **(Unaudited)**                                           | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                            | ** ** | **(in thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                            | * *   | * *                                                  | * *   | * *                    | * *   |
| CURRENT ASSETS:                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                             |       | $                                                         | 5,455      |                        | $          | 7,163 |   |
| Accounts receivable, trade                                                                                                                                                                                                            |       | 23,778                                                    |       | 21,845                      |       |
| Accounts receivable, joint interest owners,  net of allowance                                                                                                                                                                         |       | 9,714                                                     |       | 14,460                      |       |
| Deferred tax asset                                                                                                                                                                                                                    |       | 10,331                                                    |       | 5,818                       |       |
| Derivative financial instruments                                                                                                                                                                                                      |       | —                                                    |       | 619                         |       |
| Other current assets                                                                                                                                                                                                                  |       | 3,868                                                     |       | 4,079                       |       |
| Total current assets                                                                                                                                                                                                                  |       | 53,146                                                    |       | 53,984                      |       |
| PROPERTY AND EQUIPMENT, net – full cost  method of accounting for oil and natural gas properties (including unproved  costs of $32.1 million and $34.9 million at March 31, 2008 and December 31,  2007, respectively) |       | 699,269                                                   |       | 717,290                     |       |
| OTHER ASSETS                                                                                                                                                                                                                          |       | 2,992                                                     |       | 3,231                       |       |
| TOTAL ASSETS                                                                                                                                                                                                                          |       | $                                                         | 755,407    |                        | $          | 774,505 |   |
|                                                                                                                                                                                                                                  |       |                                                      |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                         |       |                                                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                  |       |                                                      |       |                        |       |
| Accounts payable, trade                                                                                                                                                                                                               |       | $                                                         | 3,190      |                        | $          | 7,665 |   |
| Accrued liabilities                                                                                                                                                                                                                   |       | 22,699                                                    |       | 29,616                      |       |
| Accrued interest payable                                                                                                                                                                                                              |       | 1,207                                                     |       | 1,006                       |       |
| Asset retirement obligation                                                                                                                                                                                                           |       | 432                                                       |       | 589                         |       |
| Derivative financial instruments                                                                                                                                                                                                      |       | 34,246                                                    |       | 12,846                      |       |
| Total current liabilities                                                                                                                                                                                                             |       | 61,774                                                    |       | 51,722                      |       |
| ASSET RETIREMENT OBLIGATION – long-term                                                                                                                                                                                          |       | 5,600                                                     |       | 6,045                       |       |
| DERIVATIVE FINANCIAL INSTRUMENTS –  long-term                                                                                                                                                                                    |       | 3,443                                                     |       | 102                         |       |
| DEFERRED TAX LIABILITY – long-term                                                                                                                                                                                               |       | 16,894                                                    |       | 21,326                      |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                                                                         |       | 534                                                       |       | 534                         |       |
| LONG-TERM DEBT                                                                                                                                                                                                                        |       | 250,000                                                   |       | 260,000                     |       |
| Total liabilities                                                                                                                                                                                                                     |       | 338,245                                                   |       | 339,729                     |       |
| COMMITMENTS AND CONTINGENCIES (NOTE 11)                                                                                                                                                                                               |       |                                                      |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                            |       |                                                      |       |                        |       |
| Preferred stock, $0.01 par value; 5,000,000  shares authorized; 2,875,000 issued and outstanding at March 31, 2008  and December 31, 2007                                                                                   |       | 29                                                        |       | 29                          |       |
| Common stock, $0.01 par value; 60,000,000  shares authorized; 28,611,632 and 28,544,160 shares issued and outstanding at  March 31, 2008 and December 31, 2007, respectively                                                |       | 286                                                       |       | 285                         |       |
| Additional paid-in capital                                                                                                                                                                                                            |       | 422,438                                                   |       | 421,808                     |       |
| Retained earnings (deficit)                                                                                                                                                                                                           |       | (5,591                                                    | )          | 12,654                      |       |
| Total stockholders’ equity                                                                                                                                                                                                       |       | 417,162                                                   |       | 434,776                     |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                       |       | $                                                         | 755,407    |                        | $          | 774,505 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

3

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**EDGE PETROLEUM CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended  March 31,**                  | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                          | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | **(in thousands,  except per share amounts)** | ** ** |
| OIL AND NATURAL GAS REVENUE:                                  |       |                                                              |       |   |   |
| Oil and natural gas sales                                     |       | $                                                                 | 47,016     |   | $ | 39,214 |   |
| Loss on derivatives                                           |       | (29,359                                                           | )          | (16,331 | ) |
| Total revenue                                                 |       | 17,657                                                            |       | 22,883 |   |
|                                                          |       |                                                              |       |   |   |
| OPERATING EXPENSES:                                           |       |                                                              |       |   |   |
| Oil and natural gas operating expenses                        |       | 4,472                                                             |       | 3,380 |   |
| Severance and ad valorem taxes                                |       | 2,185                                                             |       | 2,311 |   |
| Depletion, depreciation, amortization and  accretion          |       | 27,371                                                            |       | 18,542 |   |
| General and administrative expenses                           |       | 4,060                                                             |       | 4,395 |   |
| Total operating expenses                                      |       | 38,088                                                            |       | 28,628 |   |
| OPERATING LOSS                                                |       | (20,431                                                           | )          | (5,745 | ) |
| OTHER INCOME AND EXPENSE:                                     |       |                                                              |       |   |   |
| Interest income                                               |       | 60                                                                |       | 57 |   |
| Interest expense, net of amounts capitalized                  |       | (4,224                                                            | )          | (2,762 | ) |
| Gain on ARO settlement                                        |       | 9                                                                 |       | — |   |
| Amortization of deferred loan costs                           |       | (239                                                              | )          | (253 | ) |
| LOSS BEFORE INCOME TAXES                                      |       | (24,825                                                           | )          | (8,703 | ) |
| INCOME TAX BENEFIT                                            |       | 8,646                                                             |       | 2,935 |   |
| NET LOSS                                                      |       | (16,179                                                           | )          | (5,768 | ) |
| Preferred Stock Dividends                                     |       | (2,066                                                            | )          | (1,381 | ) |
| NET LOSS TO COMMON STOCKHOLDERS                               |       | $                                                                 | (18,245    | ) | $ | (7,149 | ) |
|                                                          |       |                                                              |       |   |   |
| BASIC LOSS PER SHARE                                          |       | $                                                                 | (0.64      | ) | $ | (0.29 | ) |
| DILUTED LOSS PER SHARE                                        |       | $                                                                 | (0.64      | ) | $ | (0.29 | ) |
|                                                          |       |                                                              |       |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING   |       | 28,566                                                            |       | 24,867 |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING |       | 28,566                                                            |       | 24,867 |   |

 

See accompanying notes to consolidated financial statements.

 

4

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**EDGE PETROLEUM CORPORATION**

**CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                              | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                    | (16,179    | ) | $ | (5,768 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Unrealized loss on the fair value of  derivatives                                |       | 25,360                                               |       | 17,743 |   |
| Deferred income taxes                                                            |       | (9,227                                               | )          | (2,935 | ) |
| Depletion, depreciation, amortization and  accretion                             |       | 27,371                                               |       | 18,542 |   |
| Gain on ARO settlement                                                           |       | (9                                                   | )          | — |   |
| Amortization of deferred loan costs                                              |       | 239                                                  |       | 253 |   |
| Stock based compensation costs                                                   |       | 907                                                  |       | 786 |   |
| Changes in assets and liabilities:                                               |       |                                                 |       |   |   |
| Increase in accounts receivable, trade                                           |       | (1,933                                               | )          | (11,288 | ) |
| Decrease (increase) in accounts receivable,  joint interest owners               |       | 4,746                                                |       | (1,092 | ) |
| Decrease (increase) in other assets                                              |       | (425                                                 | )          | 189 |   |
| Decrease in accounts payable, trade                                              |       | (4,475                                               | )          | (930 | ) |
| Decrease in accrued liabilities                                                  |       | (5,226                                               | )          | (2,803 | ) |
| Increase in accrued interest payable                                             |       | 201                                                  |       | 2,211 |   |
| Net cash provided by operating activities                                        |       | 21,350                                               |       | 14,908 |   |
|                                                                             |       |                                                 |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                        |       |                                                 |       |   |   |
| Oil and natural gas property and equipment  additions                            |       | (22,190                                              | )          | (17,491 | ) |
| Acquisition of Smith assets                                                      |       | —                                               |       | (379,457 | ) |
| Decrease (increase) in drilling advances                                         |       | 641                                                  |       | (1,147 | ) |
| Proceeds from the sale of oil and natural  gas properties                        |       | 12,248                                               |       | 1,125 |   |
| Overhedged derivative settlements                                                |       | (1,691                                               | )          | — |   |
| Net cash used in investing activities                                            |       | (10,992                                              | )          | (396,970 | ) |
|                                                                             |       |                                                 |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                        |       |                                                 |       |   |   |
| Borrowings of long-term debt                                                     |       | —                                               |       | 240,000 |   |
| Repayments of long-term debt                                                     |       | (10,000                                              | )          | (129,000 | ) |
| Proceeds of preferred stock offering                                             |       | —                                               |       | 143,750 |   |
| Costs of preferred stock offering                                                |       | —                                               |       | (5,293 | ) |
| Proceeds of common stock offering                                                |       | —                                               |       | 144,756 |   |
| Costs of common stock offering                                                   |       | —                                               |       | (6,642 | ) |
| Preferred dividends paid                                                         |       | (2,066                                               | )          | — |   |
| Deferred loan costs                                                              |       | —                                               |       | (3,563 | ) |
| Net cash provided by (used in) financing  activities                             |       | (12,066                                              | )          | 384,008 |   |
| **NET INCREASE (DECREASE) IN CASH AND CASH  EQUIVALENTS**                        |       | (1,708                                               | )          | 1,946 |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                              |       | 7,163                                                |       | 2,081 |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                     |       | $                                                    | 5,455      |   | $ | 4,027 |   |

 

See accompanying notes to consolidated financialstatements.

 

5

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**EDGE PETROLEUM CORPORATION**

**CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITY (Unaudited)**

 
| ** **                                                           | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**         | ** ** | **Retained**  | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|------------------------|------------|---------------|------------|------------|------------|
| ** **                                                           | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Earnings** | ** ** | **Stockholders’** | ** ** |
| ** **                                                           | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **(Deficit)** | ** ** | **Equity** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**  | ** ** |
| BALANCE, DECEMBER 31, 2007                                           |       | 2,875                    |       | $                     | 29         |        | 28,544     |         | $          | 285                    |       | $             | 421,808    |       | $          | 12,654 |   | $ | 434,776 |   |
| Issuance of common stock                                             |       | —                   |       | —                |       | 68          |       | 1            |       | 140                    |       | —        |       | 141        |       |
| Stock based compensation costs                                       |       | —                   |       | —                |       | —      |       | —       |       | 767                    |       | —        |       | 767        |       |
| Tax benefit associated with exercise of  non-qualified stock options |       | —                   |       | —                |       | —      |       | —       |       | (277                   | )          | —        |       | (277       | )          |
| Preferred stock dividends ($0.71875 per  share)                      |       | —                   |       | —                |       | —      |       | —       |       | —                 |       | (2,066        | )          | (2,066     | )          |
| Net loss                                                             |       | —                   |       | —                |       | —      |       | —       |       | —                 |       | (16,179       | )          | (16,179    | )          |
| BALANCE, MARCH 31, 2008                                         |       | 2,875                    |       | $                     | 29         |        | 28,612     |         | $          | 286                    |       | $             | 422,438    |       | $          | (5,591 | ) | $ | 417,162 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

**NOTES TO THE CONSOLIDATED FINANCIALSTATEMENTS**

** **

**1.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

** **

The financial statementsincluded herein have been prepared by Edge Petroleum Corporation, a Delawarecorporation (“we”, “our”, “us” or the “Company”), without audit pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”),and reflect all adjustments which are, in the opinion of management, necessaryto present a fair statement of the results for the interim periods on a basisconsistent with the annual audited consolidated financial statements.  All such adjustments are of a normalrecurring nature.  The results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for an entire year. Certain information, accounting policies and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations, although we believethat the disclosures are adequate to make the information presented notmisleading. These financial statements should be read in conjunction with ouraudited consolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007.

* *

***Strategic Assessment Process -***In late 2007, the Company announced thehiring of a financial advisor to assist its Board of Directors with anassessment of strategic alternatives. On February 7, 2008, the Company providedan update on the strategic assessment process, which included a thorough reviewand assessment of the Company’s strengths and weaknesses, competitive positionand asset base, reporting that after careful analysis, management and the Boardof Directors believed that the best route to maximizing stockholder value atthat time was to focus on an assessment of a potential merger or sale of Edge.That process is ongoing.  Adecision on any particular course of action has not been made and there can beno assurance that the Board of Directors will authorize any transaction.

 

***Oil and Natural Gas Properties*****-**Investments in oil andnatural gas properties are accounted for using the full-cost method ofaccounting. The accounting for our business is subject to special accounting rules thatare unique to the oil and gas industry. There are two allowable methods of accounting for oil and gas businessactivities:  the successful-effortsmethod and the full-cost method. There are several significant differencesbetween these methods. Among these differences is that, under thesuccessful-efforts method, costs such as geological and geophysical (“G&G”),exploratory dry holes and delay rentals are expensed as incurred whereas underthe full-cost method these types of charges are capitalized to their respectivefull-cost pool. In accordance with the full-cost method of accounting, allcosts associated with the exploration, development and acquisition of oil andnatural gas properties, including salaries, benefits and other internal costsdirectly attributable to these activities are capitalized within a costcenter.  The Company’s oil and naturalgas properties are located within the United States of America, whichconstitutes one cost center. The Company also capitalizes a portion of interestexpense on borrowed funds.

 

In the measurement ofimpairment of oil and gas properties, the successful-efforts method follows theguidance provided in Statement of Financial Accounting Standards (“SFAS”) No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, where the first measurement for impairment is tocompare the net book value of the related asset to its undiscounted future cashflows using commodity prices consistent with management expectations. Thefull-cost method follows guidance provided in SEC Regulation S-X Rule 4-10,where impairment is determined by the “ceiling test,” whereby to the extentthat such capitalized costs subject to amortization in the full-cost pool (net ofaccumulated depletion, depreciation and amortization, and related tax effects)exceed the present value (using a 10% discount rate) of estimated future netafter-tax cash flows from proved oil and natural gas reserves, such excesscosts are charged to expense.  Onceincurred, an impairment of oil and natural gas properties is not reversible ata later date.  A ceiling test impairmentcould result in a significant loss for a reporting period; however, futuredepletion expense would be correspondingly reduced. Impairment of oil andnatural gas properties is assessed on a quarterly basis in conjunction with theCompany’s quarterly and annual SEC filings. No ceiling test impairment was required during the quarters ended March 31,2008 or 2007.

 

In accordance with SEC StaffAccounting Bulletin (“SAB”) No. 103, *Updateof Codification of Staff Accounting Bulletins*, derivativeinstruments qualifying as cash flow hedges are to be included in thecomputation of limitation on capitalized costs. Since January 1, 2006, the Company has not applied cash flow hedgeaccounting to any derivative contracts (see Note 8), therefore the ceilingtests at March 31, 2008 and 2007 were not impacted by the value of ourderivatives.

 

Oil and natural gasproperties are amortized based on a unit-of-production method using estimatesof proved reserve quantities. Oil and natural gas liquids (“NGL”s) areconverted to a gas equivalent basis (“Mcfe”) at the rate of one barrel equalssix Mcf. In accordance with SAB No. 106, *Interactionof Statement 143 and the Full Cost Rules,*the amortizable baseincludes estimated future development and dismantlement costs, and restoration 

 

7

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and abandonment costs, net of estimated salvagevalues. Investments in unproved properties are not amortized until provedreserves associated with the prospects can be determined or until impairmentoccurs. Unproved properties are evaluated quarterly, and as needed, forimpairment on a property-by-property basis. If the results of an assessmentindicate that an unproved property is impaired, the amount of impairment isadded to the proved oil and natural gas property costs to be amortized. Oil andnatural gas properties included costs of $32.1 million and $34.9 million at March 31,2008 and December 31, 2007, respectively, related to unproved property,which were excluded from capitalized costs being amortized.

 

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.

 

***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 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 in Arkansas. The Rose Bud system was installed, operationaland ready to receive the Company’s production in June 2007. The contractminimum commitment to Frontier is 2.7 Bcf over a three year period for thepipeline interconnect. This line carries a $0.29 per Mcf deficiency rate, for atotal commitment for the pipeline of approximately $0.8 million. The Company hasdelivered approximately $48,700 of this commitment through March 31, 2008.In addition to the pipeline, Frontier also built and installed lateralgathering lines to eight locations.  Theremaining commitment on these laterals is approximately $1.3 million, for atotal potential liability of approximately $2.0 million to be paid by June 2010if the minimum volumes are not delivered. We currently have not recorded aliability for these commitments, but if the Company were  to cease drilling or otherwise decide thereis no development potential in this area, it may not be able to meet theminimum physical delivery based on estimated future production and thus recorda liability for the remaining amount of the commitment.

 

These contracts are not considered derivatives, buthave been designated as annual sales contracts under Statement of Financial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities* (as amended).

 

***Accounts Receivable and Allowance for Doubtful Accounts*** - The Company routinely assesses therecoverability of all material trade and other receivables to determine itsability to collect the receivables in full. Accounts Receivable, JointInterest Owners included an “allowance” for doubtful accounts of $3,200 at March 31,2008 and December 31, 2007.

 

***Inventories –***Inventories consist principally of tubular goods and productionequipment for wells and facilities. They are stated at the lower ofweighted-average cost or market and are included in Other Current Assets on theconsolidated balance sheet.

 

***Asset RetirementObligations –***TheCompany records a liability for legal obligations associated with the retirementof tangible long-lived assets in the period in which they are incurred inaccordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations.* Under SFAS No. 143, whenliabilities for dismantlement and abandonment costs, excluding salvage values,are initially recorded, the carrying amount of the related oil and gasproperties is increased. Accretion of the liability is recognized each periodusing the interest method of allocation, and the capitalized cost is depletedover the useful life of the related asset. The changes to the Asset RetirementObligations (“ARO”) for oil and natural gas properties and related equipmentduring the three months ended March 31, 2008 and 2007 are as follows:

 

8

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| ** **                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                              | ** ** |
| ARO, Beginning of Period                       |       | $                                                    | 6,634      |   | $ | 3,371 |   |
| Liabilities incurred in the current period     |       | 406                                                  |       | 910 |   |
| Liabilities settled/sold in the current period |       | (1,098                                               | )          | (17 | ) |
| Accretion expense                              |       | 90                                                   |       | 64 |   |
| ARO, End of Period                             |       | $                                                    | 6,032      |   | $ | 4,328 |   |
|                                           |       |                                                 |       |   |   |
| Current Portion                                |       | $                                                    | 432        |   | $ | 332 |   |
| Long-Term Portion                              |       | $                                                    | 5,600      |   | $ | 3,996 |   |

 

During the three monthsended March 31, 2008, ARO liabilities were recorded for 32 new obligationsand liabilities settled include three properties that were plugged andabandoned and 104 properties that were sold. We also recorded a net gain ofapproximately $9,400 related to ARO settlements.

 

***Share-BasedCompensation***– The Company accounts for share-basedcompensation in accordance with the provisions of SFAS No. 123R, *Share-Based Payment,* which requires that the compensationcost relating to share-based payment transactions be recognized in financialstatements. Share-based compensation for the three months ended March 31,2008 was approximately $0.8 million, of which $0.7 million was included ingeneral and administrative expenses (“G&A”) and $0.1 million wascapitalized to oil and natural gas properties. Share-based compensation for thethree months ended March 31, 2007 was approximately $0.7 million, of whichapproximately $0.5 million was included in general and administrative expenses(“G&A”) and $0.2 million was capitalized to oil and natural gas properties.

 

During the three monthsended March 31, 2008, 1,600 restricted stock units (“RSUs”) were granted.At March 31, 2008, 560,750 RSUs were outstanding, all of which areclassified as equity instruments.  Nooptions were granted during the three months ended March 31, 2008, and atperiod end 643,600 vested unexercised options were outstanding.

 

***IncomeTaxes -***Effective January 1, 2007, the Company adopted FASB Interpretation No. 48*Accounting for Uncertainty in Income Taxes (aninterpretation of FASB Statement No. 109)*(“FIN 48”).  This interpretation clarified the accountingfor uncertainty in income taxes recognized in the financial statements byprescribing a recognition threshold and measurement attribute for a taxposition 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”) No. 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 6).

 

***OtherComprehensive Income (Loss)***– For the periodspresented, other comprehensive loss consisted of:

*** ***
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                              | ** ** |
| Net Loss                                      |       | $                                                    | (16,179    | ) | $ | (5,768 | ) |
| Preferred Dividends                           |       | (2,066                                               | )          | (1,381 | ) |
| Net Loss to Common Stockholders               |       | (18,245                                              | )          | (7,149 | ) |
|                                          |       |                                                 |       |   |   |
| Other Comprehensive Income (Loss), net of tax |       | —                                               |       | — |   |
| Other Comprehensive Loss                      |       | $                                                    | (18,245    | ) | $ | (7,149 | ) |

 

9

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***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. The partial adoption of SFAS No. 157had no impact on the Company’s financial statements, but it did result inadditional required disclosures as set forth in Note 9. In February 2008,the FASB issued FSP 157-2, *Effective Date of FASBStatement No. 157*, which delays the effective date of SFAS No. 157for all non-financial assets and non-financial liabilities, except those thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Accordingly, the Company has not yetapplied the provisions of SFAS No. 157 to its AROs.

 

In conjunction with theadoption of SFAS No. 157, the Company also adopted SFAS No. 159, *The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115,*effective January 1, 2008. SFAS No. 159allows a company the option to value its financial assets and liabilities, onan instrument by instrument basis, at fair value, and include the change infair value of such assets and liabilities in its results of operations. TheCompany did not apply the provisions of SFAS No. 159 to any of itsfinancial assets or liabilities. Accordingly, there was no impact to theCompany’s financial statements resulting from the adoption of SFAS No. 159.

 

***RecentAccounting Pronouncements***–In December 2007, the FASB issued SFAS No. 141(R), *Business Combinations* (“SFAS No. 141(R)”).SFAS No. 141(R) expands the definition of transactions and eventsthat qualify as business combinations; requires that the acquired assets andliabilities, including contingencies, be recorded at the fair value determinedon the acquisition date and changes thereafter reflected in revenue, notgoodwill; changes the recognition timing for restructuring costs; and requiresacquisition costs to be expensed as incurred. Adoption of SFAS No. 141(R) isrequired for combinations after December 15, 2008. Early adoption andretroactive application of SFAS No. 141(R) to fiscal years precedingthe effective date are not permitted. However, accounting for changes invaluation allowances for acquired deferred tax assets and the resolution ofuncertain tax positions for prior business combinations will impact income taxexpense instead of impacting the prior business combination accounting startingJanuary 1, 2009. The Company is currently evaluating the changes providedin SFAS No. 141(R) and believes it could have a material impact onthe Company’s consolidated financial statements if it were to undertake asignificant acquisition or business combination.

 

In December 2007,the FASB issued SFAS No. 160, *NoncontrollingInterest in Consolidated Financial Statements*(“SFAS No. 160”).SFAS No. 160 re-characterizes minority interests in consolidatedsubsidiaries as non-controlling interests and requires the classification ofminority interests as a component of equity. Under SFAS No. 160, a changein control will be measured at fair value, with any gain or loss recognized inearnings. The effective date for SFAS No. 160 is for annual periodsbeginning on or after December 15, 2008. Early adoption and retroactiveapplication of SFAS No. 160 to fiscal years preceding the effective dateare not permitted. The Company currently does not expect adoption of thisstatement to have an impact on its consolidated financial statements.

 

In March 2008,the FASB issued SFAS No. 161, *Disclosures aboutDerivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133*(“SFAS No. 161”). SFAS No. 161requires entities to provide enhanced disclosures about (a) how and why anentity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 is effective for annual periods beginning on or after November 15,2008. Early application of SFAS No. 161 is encouraged, as are comparativedisclosures for earlier periods at initial adoption. The Company will adoptSFAS No. 161 on January 1, 2009 and does not expect adoption of thisstatement to impact its consolidated financial statements, but it does expectit to impact disclosures made in its future quarterly and annual filings.

 

10

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**2.   LONG-TERM DEBT**

 

On January 30, 2007, the Company enteredinto a Fourth Amended and Restated Credit Agreement (the “Agreement”) for a newRevolving Credit Facility with Union Bank of California (“UBOC”), asadministrative agent and issuing lender, and the other lenders party thereto.Pursuant  to the Agreement, UBOC acts as the administrative agent for asenior, first lien secured borrowing base revolving credit facility (the “RevolvingFacility”) in favor of the Company and certain of its wholly-owned subsidiariesin an amount equal to $750 million, of which only $300 million was availableunder the borrowing base at March 31, 2008. The Revolving Facility has aletter of credit sub-limit of $20 million.

 

The Revolving Facilitymatures on January 31, 2011 and bears interest at LIBOR plus an applicablemargin ranging from 1.25% to 2.5% or Prime plus a margin of up to 0.25%, withan unused commitment fee ranging from 0.50% to 0.25%. At March 31, 2008,the interest rates applied to the Company’s outstanding Prime and LIBORborrowings were 5.50% and 6.99%, respectively. As of March 31, 2008, $250 million in total borrowings wereoutstanding under the Revolving Facility. The Company’s available borrowingcapacity under the Revolving Facility was $50 million at March 31, 2008.The borrowing base was reduced from $320 million to $300 million during thefourth quarter of 2007. In early May 2008, our Revolving Facility’sborrowing base was redetermined by our banks and set at $250 million, by whichtime the Company also repaid $5 million of outstanding borrowings leaving $5million of availability at the time of this filing. The borrowing base isscheduled to be redetermined again on or before June 30, 2008.

 

The Revolving Facility is secured bysubstantially all of the Company’s assets. The Revolving Facility provides forcertain restrictions, including, but not limited to, limitations on additionalborrowings, sales of oil and natural gas properties or other collateral, andengaging in merger or consolidation transactions. The Revolving Facilityrestricts dividends and certain distributions of cash or properties and certainliens and also contains financial covenants including, without limitation, thefollowing:

 

·                  AnEBITDAX to interest expense ratio requires that as of the last day of eachfiscal quarter the ratio of (a) Edge’s consolidated EBITDAX (defined asEBITDA plus similar non-cash items and exploration and abandonment expenses forsuch period) to (b) Edge’s consolidated interest expense, not be less than2.5 to 1.0, calculated on a cumulative quarterly basis for the first 12 monthsafter the closing of the Revolving Facility and then on a rolling four quarterbasis.

 

·                  Acurrent ratio requires that as of the last day of each fiscal quarter the ratioof Edge’s consolidated current assets to Edge’s consolidated currentliabilities, as defined in the Revolving Facility, be at least 1.0 to 1.0.

 

·                  Amaximum leverage ratio requires that as of the last day of each fiscal quarterthe ratio of (a) Total Indebtedness (as defined in the Agreement) to (b) anamount equal to consolidated EBITDAX be not greater than 3.0 to 1.0, calculatedon a cumulative quarterly basis for the first 12 months after the closing ofthe Revolving Facility and then on a rolling four quarter basis.

 

Consolidated EBITDAX is acomponent of negotiated covenants with our lender and is discussed here as partof the Company’s disclosure of its covenant obligations. The Revolving Facilityincludes other covenants and events of default that are customary for similarfacilities. It is an event of default under the Revolving Facility if theCompany undergoes a change in control.  “Changein control,” as defined in the Revolving Facility, means any of the followingevents: (a) any “person” or “group” (within the meaning of Section 13(d) or14(d) of the Exchange Act) has become, directly or indirectly, the “beneficialowner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, exceptthat a person shall be deemed to have “beneficial ownership” of all such sharesthat any such person has the right to acquire, whether such right isexercisable immediately or only after the passage of time, by way of merger,consolidation or otherwise), of a majority or more of the common stock of theCompany on a fully-diluted basis, after giving effect to the conversion andexercise of all outstanding warrants, options and other securities of theCompany (whether or not such securities are then currently convertible orexercisable), (b) during any period of two consecutive calendar quarters,individuals who at the beginning of such period were members of the Company’sBoard of Directors cease for any reason to constitute a majority of thedirectors then in office unless (i) such new directors were elected by amajority of the directors of the Company who constituted the Board of Directorsat the beginning of such period (or by directors so elected) or (ii) thereason for such directors failing to 

 

11

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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.

** **

**3.   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 andpricing of the offering of securities issued under the shelf registrationstatement will be determined at the time of the offerings. The shelfregistration statement does not provide assurance that the Company will orcould sell any such securities. The Company’s ability to utilize the shelfregistration statement for the purpose of issuing, from time to time, anycombination of debt securities, preferred stock, common stock or warrants fordebt securities or equity securities will depend upon, among other things,market conditions and the existence of investors who wish to purchase theCompany’s securities at prices acceptable to the Company.  As of May 12, 2008, the Company had $500million available under its shelf registration statement.

 

**4.   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.

 

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 orinvoluntary liquidation, winding-up or dissolution, each holder of ConvertiblePreferred Stock will be entitled to receive and to be paid out of the Company’sassets available 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 commonstock and to all of the Company’s other capital stock issued in the futureunless the terms of such capital stock expressly provide that it ranks seniorto, or on a parity with, shares of the Convertible Preferred Stock;

 

·                  on a parity with all of the Company’sother capital stock issued in the future, the terms of which expressly providethat it will rank on a parity with the shares of the Convertible PreferredStock; and

 

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·                  junior to all of the Company’s existingand future debt obligations and to all shares of its capital stock issued inthe future, the terms of which expressly provide that such shares will ranksenior to 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 at theapplicable conversion rate, but only if the closing sale price of its commonstock for 20 trading days within a period of 30 consecutive trading days endingon the trading day immediately preceding the date the Company gives theconversion notice equals or exceeds 130% of the conversion price in effect oneach 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 herein), 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 inconnection with certain fundamental changes, the Company will in certaincircumstances increase the conversion rate for such Convertible PreferredStock. Upon a conversion in connection with a fundamental change, the holderwill be entitled to receive a cash payment for all accumulated and unpaiddividends.

 

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 the person or group has becomethe direct or indirect ultimate “beneficial owner” of the Company’s commonequity representing more than 50% of the voting power of its common equityother than a filing with a disclosure relating to a transaction which complieswith the proviso in subsection 2 below;

 

2. consummation of anyshare exchange, consolidation or merger of the Company pursuant to which itscommon stock will be converted into cash, securities or other property or anysale, lease or other transfer in one transaction or a series of transactions ofall or substantially all of the consolidated assets of the Company and itssubsidiaries, taken as a whole, to any person other than one of itssubsidiaries; provided, however, that a transaction where the holders of morethan 50% of all classes of its common equity 

 

13

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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. the Company isliquidated or dissolved or holders of its capital stock approve any plan orproposal for its liquidation or dissolution; or

 

4. the Company’s commonstock is neither listed on a national securities exchange nor listed norapproved 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*. 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 theauthorized amount of, or issue or authorize any obligation or securityconvertible into or evidencing a right to purchase, any senior stock; or

 

·                  reclassify any of our authorized stockinto any senior stock of any class, or any obligation or security convertibleinto or evidencing a right to purchase any senior stock.

 

**5.   EARNINGS PER SHARE**

 

The Company accounts forearnings per share in accordance with SFAS No. 128, *Earnings per Share*, which establishes therequirements for presenting earnings per share (“EPS”).  SFAS No. 128 requires the 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 and warrants having exercise prices less than the average market priceof the common stock during the periods, using the treasury stock method. When aloss from continuing operations exists, as in the three months ended March 31,2008 and 2007, potential common shares are excluded in the computation ofdiluted EPS because it would result in an anti-dilutive effect on per shareamounts.

 

Diluted EPS also includesthe 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 shares are included in the denominator of theEPS calculation.  In applying theif-converted method, conversion is not assumed for purposes of computingdiluted EPS if the effect would be anti-dilutive. During 2008 and 2007,conversion of the convertible preferred stock is not assumed because the effectwould be anti-dilutive. The following tables present the computations of EPSfor the periods indicated:

 

14

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| ** **                      | ** ** | **Three Months Ended March 31, 2008** | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|---------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                      | ** ** | **Loss   (Numerator)**                                    | ** ** | **Shares   (Denominator)(1)**                             | ** ** | **Per   Share   Amount** | ** ** | **Loss   (Numerator)** | ** ** | **Shares   (Denominator)(2)** | ** ** | **Per   Share   Amount** | ** ** |
| * *                        | * *   | **(in  thousands, except per share amounts)**                  | * *   |
| Net loss                        |       | $                                                              | (16,179    | )                                                              |       |   |   |   | $ | (5,768 | ) |   |   |   |   |
| Preferred stock dividends       |       | (2,066                                                         | )          |                                                           |       |   |   | (1,381 | ) |   |   |   |   |
|                            |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                   |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders |       | (18,245                                                        | )          | 28,566                                                         |       | $ | (0.64 | ) | (7,149 | ) | 24,867 |   | $ | (0.29 | ) |
| Effect of dilutive securities:  |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Restricted stock units          |       | —                                                         |       | —                                                         |       | — |   | — |   | — |   | — |   |
| Common stock options            |       | —                                                         |       | —                                                         |       | — |   | — |   | — |   | — |   |
| Convertible preferred stock     |       | —                                                         |       | —                                                         |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                 |       |                                                           |       |                                                           |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders |       | $                                                              | (18,245    | )                                                              | 28,566     |   | $ | (0.64 | ) | $ | (7,149 | ) | 24,867 |   | $ | (0.29 | ) |

 

----

(1)   In thecalculation of diluted EPS for the quarter ended March 31, 2008, the 8.7million shares of common stock resulting from an assumed conversion of theCompany’s Convertible Preferred Stock and 69,531 equivalent shares of theCompany’s restricted stock units and common stock options were excluded becausethe conversion would be anti-dilutive.

(2)   In thecalculation of diluted EPS for the quarter ended March 31, 2007, the 8.7million shares of common stock resulting from an assumed conversion of theCompany’s Convertible Preferred Stock and 303,552 equivalent shares of theCompany’s restricted stock units and common stock options were excluded becausethe conversion would be anti-dilutive.

 

**6.   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.

 

The Company currentlyestimates that its effective tax rate for the year ending December 31,2008 will be approximately 35%.  An incometax benefit of $8.6 million (34.83% of pre-tax income) was reported for thethree months ended March 31, 2008. An income tax benefit of $2.9 million (34.95% of pre-tax loss) wasreported for the three months ended March 31, 2007. The Company’s incometax provision in 2008 is primarily non-cash as the Company has NOLcarryforwards available that were generated from drilling activity.  Currently, the Company anticipates that itwill incur federal alternative minimum tax for the year ended 2008. An overpaymentof approximately $229,000 is anticipated from the prior tax year, resulting inno required payments at March 31, 2008.

 

The Company also accounts for income taxes under the provisions ofFIN 48, which clarifies the accounting for uncertainty in income taxesrecognized in accordance with SFAS No. 109*,*and FSP FIN 48-1, which provides that a company’s tax position will beconsidered settled if the taxing authority has completed its examination, thecompany does not plan to appeal, and it is remote that the taxing authoritywould reexamine the tax position in the future. FIN 48 prescribes abenefit recognition model with a two-step approach, a more-likely-than-notrecognition criterion and a measurement attribute that measures the position asthe largest amount of tax benefit that is greater than 50% likely of beingultimately realized upon ultimate settlement. If it is not more likely than notthat the benefit will be sustained on its technical merits, no benefit will berecorded. FIN 48 also requires that the amount of interest expense to berecognized related to uncertain tax positions be computed by applying theapplicable statutory rate of interest to the difference between the taxposition recognized in accordance with FIN 48 and the amount previously takenor expected to be taken in a tax return. The Company recognizes interest andpenalties related to unrecognized tax benefits in tax expense. However, theCompany has accrued no interest or 

 

15

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penalties at March 31,2008. The Company files income tax returns in the United States and variousstate jurisdictions. The Company’s tax returns for 2005 and 2006 remain openfor examination by the taxing authorities in the respective jurisdictions wherethose returns were filed. The calculation of the net operating losscarryforwards from years prior to 2005 also remain open for examination.

 

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

 

The Company considers allhighly liquid debt instruments purchased with an original maturity of threemonths or less to be cash equivalents. A summary of non-cash investing andfinancing activities is presented below:

 
| **Description**                                                                                           | ** ** | **Number of   Shares Issued** | ** ** | **Fair Market Value** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|---------------------------------|------------|
| * *                                                                                                  | * *   | **(in  thousands)**                          | * *   |
| **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        |   |
| **Three months ended March 31, 2007:**                                                               |       |                                         |       |                            |       |
| Shares issued to satisfy restricted stock grants                                                          |       | 70                                           |       | $                               | 1,416      |   |
| Shares issued to fund the Company’s matching contribution under the  Company’s 401(k) plan |       | 6                                            |       | $                               | 87         |   |

 

For the three monthsended March 31, 2008 and 2007, the non-cash portion of Asset RetirementCosts was $0.7 million and $(0.9) million, respectively. Dividends declared butnot yet paid were $2.1 million, of which $1.7 million was accrued at March 31,2008, and for the same prior year period dividends declared but not yet paidwere $1.7 million, of which $1.4 million was accrued at March 31, 2007. Asupplemental disclosure of cash flow information is presented below:

 
| ** **                           | ** ** | **For the Three Months Ended   March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                                 | ** ** | **2007** | ** ** |
| * *                             | * *   | **(in  thousands)**                                                      | * *   |
| Cash paid during the period for:     |       |                                                                     |       |   |   |
| Interest, net of amounts capitalized |       | $                                                                        | 4,023      |   | $ | 551 |   |
|                                      |            |                                                                          |            |  |  |  |  |

 

**8.   HEDGING AND DERIVATIVE ACTIVITIES**

 

Due to the volatility ofoil and natural gas prices, the Company periodically enters into price-riskmanagement transactions (e.g. swaps, collars and floors) for a portion of itsexpected oil and natural gas production to seek to achieve a more predictablecash flow, as well as to reduce exposure from commodity pricefluctuations.  While the use of thesearrangements may limit the Company’s ability to benefit from increases in theprice of oil and natural gas, it is also intended to reduce the Company’spotential exposure to significant price declines. As a result of changes to theCompany’s forecasted 2008 production and the impact of certain divestitures,both of which have reduced expected production as compared to that expected atthe time the Company entered into the derivative contracts, the Companycurrently has approximately 110% and 150% of its anticipated 2008 natural gasand crude oil production, respectively, covered by derivative contracts.  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, butmay be deemed as such because of the decrease in the Company’s expected 2008production. These derivative transactions are generally placed with majorfinancial institutions that the Company believes are minimal credit risks. On aquarterly basis, the Company’s management sets all of the Company’s price-riskmanagement 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 monitors the Company’spolicies and trades monthly.

 

16

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All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with SFAS No. 133(as amended)*.* Thesederivative instruments are intended to hedge the Company’s price risk and maybe considered hedges for economic purposes, but certain of these transactionsmay not qualify for cash flow hedge accounting. All derivative instrumentcontracts are recorded on the balance sheet at fair value and the cash flowsresulting 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 cashflows. For those derivatives in which mark-to-market accounting treatment isapplied, the changes in fair value are not deferred through other comprehensiveincome on the balance sheet. Rather they are immediately recorded in totalrevenue on the statement of operations. While the contract is outstanding, theunrealized gain or loss may increase or decrease until settlement of thecontract depending on the fair value at the measurement dates. The Companyevaluates the terms of new contracts entered into to determine whether cashflow hedge accounting treatment or mark-to-market accounting treatment will beapplied. The Company has applied mark-to-market accounting treatment to alloutstanding contracts since January 1, 2006.

 

The following tablereflects the realized and unrealized gains and losses included in revenue onthe statement of operations:

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| * *                                               | * *   | **(in  thousands)**                                  | * *   |
| Natural gas derivative realized settlements            |       | $                                                    | 363        |   | $ | 569 |   |
| Crude oil derivative realized settlements              |       | (4,362                                               | )          | 843 |   |
| Natural gas derivative unrealized change in fair value |       | (25,564                                              | )          | (15,472 | ) |
| Crude oil derivative unrealized change in fair value   |       | 204                                                  |       | (2,271 | ) |
| Loss on derivatives                                    |       | $                                                    | (29,359    | ) | $ | (16,331 | ) |

 

The fair value ofoutstanding derivative contracts reflected on the balance sheet were asfollows:

 
| ** **              | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **            | ** **   | ** **           | ** **   | **Fair Value of Outstanding   Derivative Contracts as of** | ** ** |
|-------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|-----------------------|--------------|----------------------|--------------|-----------------------------------------------------------------------------------------------|------------|
| **Transaction****Date** | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price****Per Unit** | ** **   | **Volumes  Per Day** | ** **   | **March 31,    2008**                                                                    | ** ** | **December 31,  2007** | ** ** |
| ** **              | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **            | ** **   | ** **           | ** **   | **(in  thousands****)**                                                                       | ** ** |
| ***Natural  Gas (1):*** |       |                  |       |          |       |       |       |                  |         |                 |         |                                                                                          |       |   |   |
| 01/07                   |       | Collar                |       | 01/01/2008    |       | 12/31/2008 |       | $                     | 7.50-$9.00   |                 | 20,000 MMBtu |                                                                                          | $          | (8,514 | ) | $ | 1,096 |   |
| 01/07                   |       | Collar                |       | 01/01/2008    |       | 12/31/2008 |       | $                     | 7.50-$9.00   |                 | 10,000 MMBtu |                                                                                          | (4,163     | ) | 619 |   |
| 01/07                   |       | Collar                |       | 01/01/2008    |       | 12/31/2008 |       | $                     | 7.50-$9.02   |                 | 10,000 MMBtu |                                                                                          | (4,208     | ) | 599 |   |
| 04/07                   |       | Collar                |       | 01/01/2009    |       | 12/31/2009 |       | $                     | 7.75-$10.00  |                 | 10,000 MMBtu |                                                                                          | (3,077     | ) | 125 |   |
| 10/07                   |       | Collar                |       | 01/01/2009    |       | 12/31/2009 |       | $                     | 7.75-$10.08  |                 | 10,000 MMBtu |                                                                                          | (2,976     | ) | 187 |   |
|                    |       |                  |       |          |       |       |       |                  |         |                 |         |                                                                                          |       |   |   |
| ***Crude Oil (2):***    |       |                  |       |          |       |       |       |                  |         |                 |         |                                                                                          |       |   |   |
| 12/06                   |       | Swap                  |       | 01/01/2008    |       | 12/31/2008 |       | $                     | 66.00        |                 | 1,500 Bbl    |                                                                                          | (13,694    | ) | (14,541 | ) |
| 10/07                   |       | Collar                |       | 01/01/2009    |       | 12/31/2009 |       | $                     | 70.00-$93.55 |                 | 300 Bbl      |                                                                                          | (1,057     | ) | (414 | ) |
|                    |       |                  |       |          |       |       |       |                  |         |                 |         | $                                                                                             | (37,689    | ) | $ | (12,329 | ) |

 

----

(1)   The Company’snatural gas collars were entered into on a per MMBtu delivered price basis,using the NYMEX Natural Gas Index. Mark-to-market accounting treatment isapplied to these contracts and the change in fair value is reflected in totalrevenue.

 

(2)   The Company’scrude oil collars were entered into on a per barrel delivered price basis,using the West Texas Intermediate Light Sweet Crude Oil Index. Mark-to-marketaccounting treatment is applied to these contracts and the change in fair valueis reflected in total revenue.

 

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**9.     FAIR VALUE 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:

 

·                  Market Approach*.* Market approach valuation techniques useprices and other relevant information from market transactions involvingidentical or comparable assets or liabilities.

 

·                  Income Approach*.*Income approach valuation techniquesconvert future amounts, such as cash flows or earnings, to a single presentamount, or a discounted amount. These techniques rely on current marketexpectations 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 Company aims to utilize valuation techniques thatmaximize the use of observable inputs and minimize the use of unobservableinputs.

 

*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 highestpriority to unadjusted quoted prices in active markets for identical assets orliabilities (Level 1 measurement) and the lowest priority to unobservable inputs(Level 3 measurement). The three levels of the fair value hierarchy defined bySFAS 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 LevelI) are either directly or indirectly observable for the asset or liabilitythrough correlation with market data at the measurement date and for theduration of the instrument’s anticipated life. Level 2 includes those financialinstruments that are valued using models or other valuation methodologies,which consider various assumptions, including quoted forward prices forcommodities, time value, volatility factors, and current market and contractualprices for the underlying instruments, as well as other relevant economicmeasures.

 

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

 

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*FairValue on a Recurring Basis*

 

Thefollowing table sets forth by level within the fair value hierarchy the Company’sfinancial assets and liabilities that were accounted for at fair value on arecurring basis as of March 31, 2008. As required by SFAS No. 157,financial assets and liabilities are classified in their entirety based on thelowest level of input that is significant to the fair value measurement. TheCompany’s assessment of the significance of a particular input to the fairvalue measurement requires judgment, and may affect the valuation of fair valueassets and liabilities and their placement within the fair value hierarchylevels.

 
| ** **             | ** **   | ** **          | ** **   | **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 |         | $                   | —       |                                              | $          | — |   | $ | — |   | $ | — |   |
|                   |         |                |         |                                              |       |   |   |   |   |
| Liabilities:           |         |                |         |                                              |       |   |   |   |   |
| Derivative instruments |         | $                   | (37,689      | )                                                 | $          | — |   | $ | — |   | $ | (37,689 | ) |

 

Thefollowing table sets forth a reconciliation of changes in the fair value of theCompany’s derivative instruments classified as Level 3 in the fair valuehierarchy.

 
| ** **                                                                                              | ** ** | **Three months ended March 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                                              | ** ** | **Assets**                                                     | ** ** | **Liabilities** | ** ** |
| ** **                                                                                              | ** ** | **(in thousands)**                                        | ** ** |
| Balance as of December 31, 2007                                                                    |       | $                                                              | —     |   | $ | (12,329 | ) |
| Realized and unrealized gains (losses)  included in earnings                                            |       | —                                                         |       | (21,361 | ) |
| Realized and unrealized gains (losses)  included in other comprehensive income                          |       | —                                                         |       | — |   |
| Settlements                                                                                             |       | —                                                         |       | (3,999 | ) |
| Transfers in and/or out of Level 3                                                                      |       | —                                                         |       | — |   |
| Balance as of March 31, 2008                                                                       |       | $                                                              | —     |   | $ | (37,689 | ) |
|                                                                                                    |       |                                                           |       |   |   |
| Change in unrealized gains (losses)  relating to instruments still  held as of March 31, 2008 |       | $                                                              | —     |   | $ | (25,029 | ) |

 

Gainsand losses (realized and unrealized) for Level 3 recurring items are includedin total revenues on the Consolidated Statements of Operations. Settlementsrepresent cash settlements of contracts during the period, which are includedin total revenues on the Consolidated Statements of Operations.

 

Transfersin and/or out represent existing assets or liabilities that were eitherpreviously categorized as a higher level for which the inputs to the modelbecame unobservable or assets and liabilities that were previously classifiedas Level 3 for which the lowest significant input became observable during theperiod. There were no transfers in or out of Level 3 during the period.

 

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*FairValue on a Nonrecurring Basis*

 

InFebruary 2008, the FASB issued FSP 157-2, which postpones the effectivedate of SFAS No. 157 for non-financial assets and liabilities. Therefore,the Company has not adopted the provisions of SFAS No. 157 for its assetretirement obligations (“ARO”). The Company uses fair value measurements on anonrecurring basis in its AROs. These liabilities are recorded at fair valueinitially and assessed for revisions periodically thereafter. The lowest levelof significant inputs for fair value measurements for ARO liabilities are Level3. A reconciliation of the beginning and ending balances of the Company’s AROis presented in Note 1, in accordance with SFAS No. 143, and the Companyexpects to expand its disclosures regarding its ARO upon complete adoption ofSFAS No. 157.

 

**10.  DIVESTITURES**

 

Duringthe first quarter of 2008, the Company completed the sale of certain non-coreassets, which included approximately 100 properties in Texas, to various buyersfor aggregate proceeds of approximately $12.2 million.

 

**11.  COMMITMENTSAND CONTINGENCIES**

 

Fromtime to time the Company is a party to various legal proceedings arising in theordinary course of business.  While theoutcome of lawsuits cannot be predicted with certainty, the Company is notcurrently a party to any proceeding that it believes, if determined in a manneradverse to the Company, could have a material adverse effect on its financialcondition, results of operations or cash flows, except as set forth below.

 

**David Blake, et al. v. Edge Petroleum Corporation** – On September 19, 2005, David Blakeand David Blake, Trustee of the David and Nita Blake 1992 Children’s Trustfiled suit against the Company in state district court in Goliad County, Texasalleging breach of contract for failure and refusal to transfer overridingroyalty interests to plaintiffs in several leases in Goliad County, Texasand failure and refusal to pay monies to Blake pursuant to such overridingroyalty interests for wells completed on the leases. The plaintiffs seek reliefof (1) specific performance of the alleged agreement, including grantingof overriding royalty interests by the Company 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 tortuous interference; and (5) attorneys’ fees and courtcosts. Venue of the case was transferred to Harris County, Texas by agreementof the litigants.  The Company has served plaintiffs with discovery andhas filed a counterclaim and an amended counterclaim joining various relatedentities that are controlled by plaintiffs.  In addition, plaintiffs havefiled an amended complaint alleging claims of slander of title and tortuousinterference related to its alleged right to receive an overriding royaltyinterest from a third party.  Plaintiffs currently have on file an amendedmotion for summary judgment, to which the Company has filed a response. In addition, the Company has filed a motion for summary judgment on theplaintiffs’ case.  In December 2006, the court denied the Company’smotion for summary judgment.  The court has not ruled on Blake’smotion.  In November 2007, the Company filed a separate motion forsummary judgment based on the statute of frauds; the court has not ruled onthis separate motion.  The trial,originally scheduled to begin September 10, 2007, and reset for March 3,2008, has been continued until August 20, 2008.  Discovery in thecase has commenced and is continuing. The Company has responded aggressively tothis lawsuit, and believes it has meritorious defenses and counterclaims.

 

**Diana Reyes, et al. v. EdgePetroleum Operating Company, Inc., et al. **On January 8,2008, the Company was served with a wrongful death action filed in Hidalgo County,Texas.  Plaintiffs allege negligence andgross negligence resulting from a fatality accident at the State B-12 wellsite, on the Company’s Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minorchildren of Mr. Reyes, who was killed in a one-car fatality accident on August 5,2007.   Mr. Reyes was an employee ofa vendor of the Company, Payzone Logging.  No specific amount of damages has been alleged to date; plaintiffs areasserting damages from loss of companionship, pecuniary loss, pain and mentalanguish, loss of inheritance and funeral and burial expenses.  The Company may have insurance coverage forall or part of this claim.  The Company’sinsurance carrier has retained 

 

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localcounsel to represent the Company in this matter.  The Company filed an answer on January 30,2008 denying plaintiffs’ allegations and asserting defenses and trial has beenset for February 16, 2009.  TheCompany has not established a reserve with respect to this claim and it is notpossible to determine what, if any, the Company’s ultimate exposure might be inthis matter.  The Company will continueto respond aggressively to this lawsuit, and believes that it has meritoriousdefenses.

 

**Lexington Insurance Company v. Edge Petroleum Exploration Company, etal.** - On March 13,2008, Lexington Insurance Company (“Lexington”) filed a declaratory judgmentaction in the 125th Judicial District Court of Harris County,Texas.  Lexington seeks a judgment thatit is not obligated to pay any claims of the Company and the SfondriniPartnerships (as defined below) in connection with a consolidated suit thatCompany and the Sfondrini Partnerships settled with the all of the plaintiffsin 2007.  The suit that was settled,** **Wade and Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al.,consolidated with Rolland L. Broussard, et al., v. Edge Petroleum Corp ofTexas, et al., and thesettlement thereof, is described in detail in Item 3. Legal Proceedings of theCompany’s Annual Report on Form 10-K for the year ended December 31,2007.  In general, the action was aconsolidated suit by mineral/royalty owners under two wells, who claimed thatthe third party operator of the wells had failed to “block squeeze” thesections of one of the wells, as a prudent operator, according to theirallegations, would have done, to protect the gas reservoir from being floodedwith water from adjacent underground formations, and was negligent in notcreating a field-wide unit to protect their interests.  The Company and the Sfondrini Partnershipswere defendants in the suit as working interest owners in the wells, owning2.8% and 14.7%, respectively, at the time of the alleged acts or omissions.  In the case of the settlements with some, butnot all, of the plaintiffs, two other insurers covered the settlement amountsin exchange for mutual releases.  TheCompany and the Sfondrini Partnerships bore the costs of the settlements withthe remaining plaintiffs in accordance with their proportionate interests.  The Sfondrini Partnerships are partnershipsthat are directly or indirectly controlled by John Sfondrini, a director of theCompany.  Vincent Andrews, also adirector of the Company, owns a minority interest in the corporate generalpartner one of the partnerships.

 

Lexington asserts that it is not obligated topay any claims of the Company and the Sfondrini Partnerships under itscommercial, general liability insurance policy as related to the lawsuit thatwas settled because there was no “occurrence,” under the terms of their policy,of physical injury to or destruction of tangible property and otherreasons.  The Company’s position is thatthe damages to the reservoir and attendant losses incurred by the defendantswere losses covered by Lexington’s policy, for which Lexington is legallyobligated to pay.  By agreement of theparties, an answer is due 30 days from notice of termination of settlementdiscussions.  Because the Company hasalready settled the underlying claims and has not recognized any amount forpossible future recoveries against Lexington, it does not, in any event, expectthe declaratory judgment action by Lexington to have a material adverse affecton the Company.

 

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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 our financialposition and operating results during the periods included in the accompanyingunaudited condensed consolidated financial statements. The following MD&A is intended to helpthe reader understand Edge Petroleum Corporation (“Edge”). This discussion shouldbe read in conjunction with the accompanying unaudited condensed consolidatedfinancial statements included elsewhere in this Form 10-Q and withMD&A of Financial Condition and Results of Operations and our auditedconsolidated financial statements included in our annual report on Form 10-Kfor the year ended December 31, 2007 (“2007 Annual Report”).

 

### **FORWARD LOOKING STATEMENTS**

###  

Certain of the statements contained in all parts ofthis document, including, but not limited to, those relating to our drillingplans (including scheduled and budgeted wells), the effect of changes instrategy and business discipline, future tax matters, our 3-D projectportfolio, future general and administrative expenses on a per unit ofproduction basis, changes in wells operated and reserves, future growth andexpansion, future exploration, future seismic data (including timing andresults), the ongoing assessment of strategic alternatives, expansion ofoperation, our ability to generate additional prospects, review of outsidegenerated prospects and acquisitions, additional reserves and reserveincreases, our ability to replace production and manage our asset base,enhancement of visualization and interpretation strengths, expansion andimprovement of capabilities, integration of new technology into operations,credit facilities, redetermination of our borrowing base, attraction of newmembers to the technical team, future compensation programs, new focus on coreareas, new prospects and drilling locations, new alliances, future capitalexpenditures (or funding thereof) and working capital, sufficiency of futureworking capital, borrowings and capital resources and liquidity, projectedrates of return, retained earnings and dividend policies, projected cash flowsfrom operations, future commodity price environment, expectation or timing ofreaching payout, the outcome, effects or timing of any legal proceedings orcontingencies, the impact of any change in accounting policies on our financialstatements, the number, timing or results of any wells, the plans for timing,interpretation and results of new or existing seismic surveys or seismic data,future production or reserves, future acquisition of leases, lease options orother land rights, any other statements regarding future operations, financialresults, opportunities, growth, business plans and strategy and otherstatements that are not historical facts are forward-looking statements. Theseforward-looking statements reflect our current view of future events andfinancial performance. When used in this document, the words “budgeted,” “anticipate,”“estimate,” “expect,” “may,” “project,” “believe,” “intend,” “plan,” “potential,”“forecast,” “might,” “predict,” “should” and similar expressions are intendedto be among the expressions that identify forward-looking statements. Theseforward-looking statements speak only as of their dates and should not beunduly relied upon. We undertake no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents, or otherwise. Such statements involve risks and uncertainties,including, but not limited to, those set forth under “ITEM 1A. RISK FACTORS” ofour 2007 Annual Report, the ongoing assessment of strategic alternatives, andother factors detailed in this document and our other filings with theSecurities and Exchange Commission (the “SEC”). Should one or more of theserisks or uncertainties materialize, or should underlying assumptions proveincorrect, actual outcomes may vary materially from those indicated. Allsubsequent written and oral forward-looking statements attributable to us or topersons acting on our behalf are expressly qualified in their entirety byreference to these risks and uncertainties.

 

## **GENERAL OVERVIEW**

## ** **

Edge Petroleum Corporation (“Edge”,“we” or the “Company”) is a Houston-based independent energy company thatfocuses its exploration, development, production, acquisition and marketingactivities in selected onshore basins of the United States. In late 1998, webegan a shift in strategy from pure exploration, which focused more on prospectgeneration, to our current strategy which focuses on a balanced program ofexploration, exploitation and development and acquisition of oil and naturalgas properties. We generate revenues, income and cash flows by producing andmarketing oil and natural gas produced from our oil and natural gas properties.We make significant capital expenditures in our exploration, development, andproduction activities that allow us to 

 

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continue generating revenue,income and cash flows. We have also spent considerable efforts on acquisitions,including both corporate and asset acquisitions, which have contributed to ourgrowth in recent years.

 

Thisoverview provides our perspective on the individual sections of MD&A. OurMD&A includes the following sections:

 

·                  **Industry and Economic Factors** – a general description of value drivers ofour business as well as opportunities, challenges and risks related to the oiland gas industry.

 

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

 

·                  **Acquisitions and Divestitures** – information about significant changes inour business structure.

 

·                  **Assessment of StrategicAlternatives –** information about our strategic assessment process.

 

·                  **Outlook** – discussion relating to management’s outlook to the future of ourbusiness.

 

·                  **Critical Accounting Policies and Estimates** – a discussion of certain accountingpolicies that require critical judgments and estimates.

 

·                  **Results of Operations** – an analysis of our consolidated resultsfor the periods presented in our financial statements.

 

·                  **Liquidity and Capital Resources**–****ananalysis of cash flows, sources and uses of cash, and contractual obligations.

 

·                  **Fair Value Measurements –**supplementarydiscussion regarding fair value measurements and implementation of SFAS No. 157,*Fair Value Measurements.*

 

·                  **Risk Management Activities – Derivatives &Hedging**–****supplementary information regarding ourprice-risk management activities.

 

·                  **Tax Matters** – supplementary discussion of income tax matters.

 

·                  **Recently Issued Accounting Pronouncements** – a discussion of certain recently issuedaccounting pronouncements that may impact our future results.

 

# **Industry and Economic Factors**

# ** **

Inmanaging our business, we must deal with many factors inherent in ourindustry.  First and foremost is thefluctuation of oil and natural gas prices. Historically, oil and natural gas markets have been cyclical andvolatile, which makes future price movements difficult to predict.  While our revenues are a function of bothproduction and prices, wide swings in commodity prices have most often had thegreatest impact on our results of operations. We have little ability to predictthose prices or to control them without losing some advantage of the upsidepotential.

 

Althoughcertain of our costs and expenses are affected by general inflation, inflationdoes not normally have a significant effect on our business. Our costs andexpenses tend to react to activity levels in our industry and commodity pricemovements.

 

Ouroperations entail significant complexities. Advanced technologies requiringhighly trained personnel are utilized in both exploration and production.  Even when the technology is properly used, wemay still not know conclusively if hydrocarbons will be present or the rate atwhich they will be produced.  Explorationis a high-risk activity, often times resulting in no commercially productivereserves being discovered.  Thesefactors, together with 

 

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increaseddemand for rigs, equipment, supplies and services, have made it difficult attimes for us to further our growth, and made timely execution of our plannedactivities difficult.

 

Ourbusiness, as with other extractive businesses, is a depleting one in which eachgas equivalent produced must be replaced or our asset base and capacity togenerate revenues in the future will shrink.

 

Theoil and gas industry is highly competitive. We compete with major anddiversified energy companies, independent oil and gas businesses and individualoperators in exploration, production, marketing and acquisitionactivities.  In addition, the industry asa whole competes with other businesses that supply energy to industrial andcommercial end users.

 

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

 

# **Approach to the Business**

# ** **

Profitablegrowth of our business will largely depend upon our ability to successfullyfind and develop new proved reserves of oil and natural gas in a cost-effectivemanner.  In order to achieve an overallacceptable rate of growth, we seek to maintain a prudent blend of low, moderateand higher risk exploration and development projects.  We have chosen to seek geologic andgeographic diversification by operating in multiple basins in order to mitigaterisk in our operations. In recent years, we have also made selectedacquisitions of oil and natural gas properties to augment our growth andprovide future drilling opportunities.

 

Wenormally hedge our exposure to volatile oil and natural gas prices on a portionof our expected production to reduce price risk. As a result of changes to ourforecasted 2008 production and the impact of certain asset divestitures, bothof which have reduced expected production as compared to that expected at thetime we entered into the derivative contracts, we currently have approximately110% and 150% of our anticipated 2008 natural gas and crude oil production,respectively, covered by derivative contracts. This overhedged position exposesus to greater risk of commodity price increases because we will not have thephysical production cash inflows to offset any potential losses incurred on theportion of the contracts that are overhedged. As of March 31, 2008, wealso had derivative contracts in place for a portion of our expected 2009 oiland natural gas production.

 

Generally, our goal is to fund ongoing exploration anddevelopment projects with cash flow provided by operating activities, occasionallysupplemented with external sources of capital. As a result of the ongoingstrategic assessment process (see discussion below), our Board has approved aninterim capital expenditure budget for 2008 of approximately $50 to $60million, while we continue to assess the potential sale or merger of theCompany. Based on current expectations for production volumes and commodityprices, we expect to fund those capital expenditures from internally generatedcash from operating activities supplemented by modest borrowings on our creditfacility. Any decision to expand our drilling program will depend in large parton the developments and results of our strategic assessment process that iscurrently underway (see “Outlook” section below). Our long-term debt balance asof March 31, 2008 was $250 million and our debt-to-total capital ratio was37.5%. In early May 2008, our Revolving Facility’s borrowing base wasredetermined by our banks and set at $250 million. It is scheduled to beredetermined again on or before June 30, 2008. As of May 12, 2008, wehad unused borrowing capacity of $5 million.

 

**Acquisitions and Divestitures**

 

*Acquisitions -*We have become increasingly active inacquisitions in recent years. We have looked to acquisitions to enable us toachieve our growth objectives. Acquisitions add meaningful incrementalincreases in reserves and production and may range in size from acquiring aworking interest in non-operated producing property to acquiring an entirefield of wells or a company. Unlike drilling capital, which is planned andbudgeted, acquisition capital is neither budgeted nor allocated, because thespecific timing or size of acquisitions cannot be predicted.  Any such 

 

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acquisitioncould involve the payment by us of a substantial amount of cash or the issuanceof a substantial number of additional shares or other securities. In today’shigh-price environment, where production is providing greater cash flow andearnings to most companies in our industry, identifying quality opportunitiesis difficult.

 

*Divestitures-*We regularlyreview our asset base for the purpose of identifying non-core assets, thedisposition of which would increase capital resources available for otheractivities and create organizational and operational efficiencies. While wegenerally do not dispose of assets solely for the purpose of reducing debt,such dispositions can have the result of furthering our objective of financialflexibility through reduced debt levels. During the first quarter of 2008, wecompleted the sale of certain working interests in approximately 100 propertieslocated in Texas to various buyers for aggregate proceeds of approximately$12.2 million.

 

**Assessmentof Strategic Alternatives**

 

On December 18, 2007, we announced thehiring of a financial advisor to assist our Board of Directors with anassessment of strategic alternatives. On February 7, 2008, we provided anupdate on the strategic assessment process, which includes a thorough reviewand assessment of our strengths and weaknesses, competitive position and assetbase, reporting that after careful analysis, management and our Board ofDirectors believed that the best route to maximizing stockholder value at thattime was to focus on an assessment of a potential merger or sale of Edge. Thatprocess is ongoing.  A decision on any particular course of actionhas not been made and there can be no assurance that our Board of Directorswill authorize any transaction. While that process is continuing, weintend to operate Edge in a manner designed to capture the most value possiblefor our stockholders.

 

**Outlook**

 

·                  Duringthe three months ended March 31, 2008, we drilled 8 wells, all apparentsuccesses. Given the backdrop of the ongoingstrategic assessment process, we are operating under an interim capitalspending budget while we continue to assess the potential merger or sale of theCompany. This interim program, which could be supplemented quickly, calls forthe drilling of 18 to 22 wells (7 to 9, net) during 2008, primarily in southTexas, and to a lesser extent in southeast New Mexico, and complemented by selectedexpenditures for land and seismic. The interim program provides for totalcapital spending in the range of $50 to $60 million.

·                  Duringthe first quarter of 2008, we completed the sale of some non-core properties tovarious buyers for aggregate proceeds of approximately $12.2 million. Wecompleted another small sale of non-core assets during the second quarter of2008 for proceeds of approximately $5.1 million received in April 2008.The properties sold consist of various working interests in approximately 100wells and related equipment and gathering lines located in Texas. We expect toclose another small sale later in the second quarter.

·                  Weapply mark-to-market accounting treatment to our outstanding derivativecontracts, rather than cash flow hedge accounting treatment, and thereforesignificant volatility from the changes in fair value of those outstandingcontracts have impacted our earnings in 2008 (see Note 8 to our consolidatedfinancial statements). See “Approach to the Business” above for informationregarding our current derivatives position in light of recent changes inexpected production and dispositions.

 

             Our outlook and the expectedresults described above are both subject to change based upon factors thatinclude, but are not limited to, drilling results, commodity prices, theresults of our strategic assessment process, access to capital, theacquisitions market and factors referred to in “Forward Looking Statements.”

 

**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, revenues, expenses, contingent assets andliabilities and the related disclosures in the accompanying financialstatements.  Changes in these estimatesand assumptions could materially affect our financial position, results ofoperations or cash flows. Management considers an accounting estimate to becritical if:

 

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•                  it requires assumptions to be made that were uncertain at the time theestimate was made, and

 

•                  changes in the estimate or different estimates that could have beenselected could have a material impact on our consolidated results of operationsor 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.

 

*Nature of 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. Theaccuracy of any reserve estimate is a function of the quality of availabledata, engineering and geological interpretation, and judgment, as well asprices and cost levels at that point in time. Any significant variance in theseassumptions could materially affect the estimated quantity and value of our reserves.Despite the inherent imprecision in these engineering estimates, our reservesare used throughout our financial statements.

 

*Assumptions/ApproachUsed:*Units-of-productionmethod to amortize our oil and natural gas properties - The quantity of reserves is used incalculating depletion expense and could significantly impact our depletionexpense.

 

“Ceiling” Test - The full-cost method of accounting for oiland natural 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 prices increase subsequent to the balance sheetdate, but before the filing date, SEC guidelines allow a company to use thesubsequent date’s higher prices in calculating the full-cost ceiling. We madethis election for the third and fourth quarters of 2007. To the extent that ourcapitalized costs (net of accumulated depletion and deferred taxes) exceed theceiling, the excess must be written off to expense. Once incurred, thisimpairment of oil and natural gas properties is not reversible at a later dateeven if oil and natural gas prices increase. A ceiling test impairment couldresult in a significant loss for a reporting period; however, future depletionexpense would be correspondingly reduced. Our average oil and natural gasprices at the balance sheet date of March 31, 2008 were $101.58 per barreland $9.37 per MMBtu. As a result, no ceiling test impairment was required forthe three months ended March 31, 2008. No such impairment was required inthe three months ended March 31, 2007.

 

*Effect if Different AssumptionsUsed:*Units-of-productionmethod to amortize our oil and natural gas properties - A 10% increase or decrease in reserveswould have decreased or increased, respectively, our depletion expense for theyear by approximately 10%.

 

“Ceiling”limitation test -Factors that contribute to a ceiling test impairment include the price used tocalculate the reserve limitation threshold and reserve quantities. A reductionin prices at a measurement date could trigger a full-cost ceiling impairment. We had acushion of $75.9 million, net of tax, at March 31, 2008. A 10% increase ordecrease in prices would have increased or decreased our cushion (i.e. theexcess of the ceiling over our capitalized costs) by approximately 80%, net oftax, respectively. Although our hedging program is intended to mitigate the economic impact of anysignificant price decline, it did not impact our ceiling test at March 31,2008 because we do not apply cash flow hedge accounting to our derivativecontracts. Had we applied cash flow hedge accounting to our outstandingderivative contracts, the cushion at March 31, 2008 would have been 16%lower. A 10% increase or decrease in reserve volume would have increased ordecreased the cushion calculated at March 31, 2008 by approximately 60%.

 

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*Nature of 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. Priorto the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 143,*Accounting for Asset Retirement Obligations,*costs associated with this activity were capitalized to the full-cost pool asthey were incurred and charged to income through depletion expense. SFAS No. 143significantly changed the method of accruing for costs which an entity islegally obligated to incur related to the retirement of fixed assets (“assetretirement obligations” or “ARO”). Primarily, SFAS No. 143 requires us toestimate asset retirement costs for all of our assets upon acquisition of theasset, 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 thefuture asset removal costs is difficult and requires management to makeestimates and judgments because most of the removal obligations are many yearsin the future, and contracts and regulations often have vague descriptions ofwhat constitutes removal. Asset removal technologies and costs are constantlychanging, as are regulatory, political, environmental, safety and publicrelations considerations. Inherent in the estimate of the present valuecalculation of our AROs are numerous assumptions and judgments including theultimate settlement amounts, inflation factors,credit-adjusted-risk-free-rates, timing of settlement, and changes in thelegal, regulatory, environmental and political environments.

 

*Assumptions/ApproachUsed:*  Since there are so many variables inestimating AROs, we attempt to limit the impact of management’s judgment oncertain of these variables by using input of qualified third parties. We engageindependent engineering firms to evaluate our properties annually. We use theremaining estimated useful life from the period-end reserve reports prepared byour independent reserve engineers in estimating when abandonment could beexpected for each property. We utilize a three-year average rate for inflationto diminish any significant volatility that may be present in the short term.We have developed a standard cost estimate based on historical costs, industryquotes and depth of wells. Unless we expect a well’s plugging to besignificantly different than a normal abandonment, we use this estimate.

 

*Effect if Different AssumptionsUsed:* We expect tosee our calculations impacted significantly if interest rates rise, as thecredit-adjusted-risk-free rate is one of the variables used on a quarterlybasis. We also expect that significant changes to the cost of retiring assetsor the reserve life of our assets would have significant impact on ourestimated ARO. The resulting estimate, after application of a discount factorand some significant calculations, could differ from actual results, despiteall our efforts to make an accurate estimate.

 

*Nature of 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, thelargest of which are deferred liabilities attributable to book basis in excessof tax basis in oil and natural gas properties and the impact of net operatingloss (“NOL”) carryforwards. We routinely assess our ability to use all of ourNOL carryforwards that resulted from substantial income tax deductions, prioryear losses and acquisitions. We consider future taxable income in making suchassessments. If we conclude that it is more likely than not that some portionor all of the deferred tax assets will not be realized under

 

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accounting standards,it is reduced 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 $0.5 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/ApproachUsed:*Numerousjudgments and assumptions are inherent in the determination of future taxableincome and tax return filing positions that we take, including factors such asfuture operating conditions (particularly as related to prevailing oil andnatural gas prices). We are not currently required to pay any federal incometaxes because of an anticipated loss generated during the current year.

 

*Effect ifDifferent Assumptions Used:* Our in-house tax department, along with consultation from anindependent public accounting firm used in tax consultation, continuallyevaluate complicated tax law requirements and their effect on our current andfuture tax liability and our tax filing positions. 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 estimate that some or all of our NOLcarryforwards are more likely than not going to expire or otherwise not beutilized to reduce future tax, we would record a valuation allowance to removethe benefit of those NOL carryforwards from our financial statements. Ourliability for uncertain tax positions is dependent upon our judgment on theamount of financial statement benefit that an uncertain tax position willrealize upon ultimate settlement and on the probabilities of the outcomes thatcould be realized upon ultimate settlement of an uncertain tax position usingthe facts, circumstances and information available at the reporting date toestablish the appropriate amount of financial statement benefit. To the extentthat a valuation allowance or uncertain tax position is established orincreased or decreased during a period, we may be required to include anexpense or benefit within tax expense in the statement of operations.

 

*Nature ofCritical Estimate Item:*Derivative and Hedging Activities**-**Dueto the instability of oil and natural gas prices, we may enter into, from timeto time, price-risk management transactions (e.g. swaps, collars and floors)related to our expected oil and natural gas production to seek to achieve amore predictable cash flow, as well as to reduce exposure from commodity pricefluctuations. While these transactions are intended to be economic hedges ofprice risk, different accounting treatment may apply depending on if theyqualify for cash flow hedge accounting. In accordance with SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities (as amended),*all derivatives, other than those that meetthe normal purchases and sales exception, are recorded on the balance sheet atfair value.

 

CashFlow Hedge Accounting- For transactions accounted for under cash flow hedge accounting treatment,the effective portion of the change in fair value of outstanding derivativecontracts is deferred through other comprehensive income (“OCI”) on the balancesheet, rather than recorded immediately in total revenue on the statement ofoperations. Ineffective portions of the changes in the fair value of thederivative contracts are recognized in revenue as they occur. The cash flowsresulting from settlement of these hedge transactions are included in cashflows from operating activities on the statement of cash flows. While the hedgecontract is outstanding, the fair value may increase or decrease untilsettlement of the contract.

 

Mark-to-MarketAccounting - Fortransactions accounted for using mark-to-market accounting treatment, until thecontract settles, the entire change in the fair value of the outstandingderivative contract is

 

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recorded in totalrevenue immediately, and not deferred through OCI, and there is no measurementof effectiveness. Since January 1, 2006, we have applied mark-to-marketaccounting treatment to all outstanding derivative contracts.

 

*Assumptions/Approach Used:*Estimating the fair values of derivativeinstruments requires complex calculations, including the use of a discountedcash flow technique, estimates of risk and volatility, and subjective judgmentin selecting an appropriate discount rate. In addition, the calculations usefuture market commodity prices, which although posted for trading purposes, aremerely the market consensus of forecasted price trends. The results of the fairvalue calculations cannot be expected to represent exactly the fair value ofour commodity derivatives. We currently obtain the fair value of our positionsfrom our counterparties. Our practice of relying on our counterparties who aremore specialized and knowledgeable in preparing these complex calculationsreduces our management’s input. It also approximates the fair value of thecontracts as that would be the cost to us to terminate a contract at that pointin time, as well as the potential inflows or outflows of cash for theexpiration of the contracts. Due to the fact that we apply mark-to-marketaccounting treatment, the offset to the balance sheet asset or liability, orthe change in fair value of the contracts, is included in total revenue on thestatement of operations rather than deferred in OCI on the balance sheet.

 

*Effect if Different AssumptionsUsed:* At March 31,2008, a 10% change in the commodity price per unit would cause the fair valuetotal of our derivative financial instruments to increase or decrease byapproximately $3.6 million. Had we applied cash flow hedge accounting treatmentto all of our derivative contracts outstanding at March 31, 2008, our netloss to common stockholders for the three months would have been approximately$1.7 million, or $0.06 per basic and diluted loss per share, assuming that allhedges were fully effective.

 

# **Resultsof Operations**

# ** **

Thissection includes discussion of our results of operations for the three monthsended March 31, 2008 as compared to the same period of the prior year. Weare an independent oil and natural gas company engaged in the exploration,development, acquisition and production of crude oil and natural gas propertiesin the United States. Our resources and assets are managed and our resultsreported as one operating segment. We conduct our operations primarily alongthe onshore United States Gulf Coast, with our primary emphasis in Texas,Mississippi, New Mexico and Louisiana.

 

**FirstQuarter 2008 Compared to the First Quarter 2007**

 

**Revenueand Production**

 

Total revenue decreased 23% from the first quarter of2007 to the comparable 2008 period. Excluding the effects of derivativeactivity, revenues increased 20% from the first quarter of 2007 to the comparable2008 period. For the three months ended March 31, 2008 and 2007, ourproduct mix contributed the following percentages of revenues and productionvolumes:

 
| ** **               | ** ** | **REVENUES (1)**                                | ** ** | **PRODUCTION VOLUMES  (MCFE)** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **Three months ended March 31,** | ** ** |
| ** **               | ** ** | **2008**                                             | ** ** | **2007**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Natural gas              |       | 20                                                   | %          | 67                                  | %          | 69 | % | 78 | % |
| Natural gas liquids      |       | 55                                                   | %          | 11                                  | %          | 21 | % | 10 | % |
| Crude oil and condensate |       | 25                                                   | %          | 22                                  | %          | 10 | % | 12 | % |
|                     |       |                                                 |       |                                |       |   |   |   |   |
| Total                    |       | 100                                                  | %          | 100                                 | %          | 100 | % | 100 | % |

 

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(1)          Includes effect of derivativetransactions.

 

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The following table summarizes volume and priceinformation with respect to our oil and natural gas production:

 
| ** **                             | ** ** | ** **                                                                 | ** ** | ** **      | ** ** | **2008 Period Compared  to 2007 Period** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                             | ** ** | **Three Months Ended  March 31,**                           | ** ** | **$  Increase** | ** ** | **%  Increase**                                              | ** ** |
| ** **                             | ** ** | **2008**                                                                   | ** ** | **2007**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| ** **                             | ** ** | **(in thousands, except prices and percentages)** | ** ** | ** **      | ** ** |
| **Production Volumes:**                | * *   | * *                                                                   |       |            |       |                                                         |       |   |   |
| Natural gas (MMcf)                     |       | 3,773                                                                      |       | 4,465           |       | (692                                                         | )          | (15 | )% |
| Natural gas liquids (MBbls)            |       | 191                                                                        |       | 99              |       | 92                                                           |       | 93 | % |
| Crude oil and condensate (MBbls)       |       | 85                                                                         |       | 111             |       | (26                                                          | )          | (23 | )% |
| Natural gas equivalent (MMcfe)         |       | 5,429                                                                      |       | 5,721           |       | (292                                                         | )          | (5 | )% |
| **Average Sales Price(1):**            |       |                                                                       |       |            |       |                                                         |       |   |   |
| Natural gas ($per Mcf)(2)              |       | $                                                                          | 7.62       |            | $          | 6.78                                                         |       | $ | 0.84 |   | 12 | % |
| Natural gas liquids ($per Bbl)         |       | 50.51                                                                      |       | 26.13           |       | 24.38                                                        |       | 93 | % |
| Crude oil and condensate ($per Bbl)(2) |       | 101.07                                                                     |       | 57.50           |       | 43.57                                                        |       | 76 | % |
| Natural gas equivalent ($per Mcfe)(2)  |       | 8.66                                                                       |       | 6.85            |       | 1.81                                                         |       | 26 | % |
| Natural gas equivalent ($per Mcfe)(3)  |       | 3.25                                                                       |       | 4.00            |       | (0.75                                                        | )          | (19 | )% |
| **Operating Revenue:**                 |       |                                                                       |       |            |       |                                                         |       |   |   |
| Natural gas (2)                        |       | $                                                                          | 28,744     |            | $          | 30,267                                                       |       | $ | (1,523 | ) | (5 | )% |
| Natural gas liquids                    |       | 9,628                                                                      |       | 2,574           |       | 7,054                                                        |       | 274 | % |
| Crude oil and condensate (2)           |       | 8,644                                                                      |       | 6,373           |       | 2,271                                                        |       | 36 | % |
| Loss on derivatives                    |       | (29,359                                                                    | )          | (16,331         | )          | (13,028                                                      | )          | 80 | % |
| Total revenue                          |       | $                                                                          | 17,657     |            | $          | 22,883                                                       |       | $ | (5,226 | ) | (23 | )% |

 

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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.

 

**Average sales price**– Our sales revenue is sensitive to the changes in prices received for ourproducts. A substantial portionof our production is sold at prevailing market prices, which fluctuate inresponse to many factors that are outside of our control. Imbalances in thesupply and demand for oil and natural gas can have a dramatic effect on theprices we receive for our production. Political instability and availability ofalternative fuels could impact worldwide supply, while the economy, weather andother factors outside of our control could impact demand.

 

**Natural gas revenue** - For the three months ended March 31,2008, natural gas revenue, excluding derivative activity, decreased 5% over thesame period in 2007 due primarily to 15% lower production volumes. The overalldecrease in production compared to the prior year period resulted in a decreasein revenue of approximately $4.7 million (based on 2007 comparable periodpre-hedge prices). The decrease in production was primarily the result ofnormal production declines and asset sales completed during the first quarterof 2008. The increase in average price received resulted in increased revenueof approximately $3.2 million (based on current period production). See belowfor a discussion of the impact of natural gas derivatives on prices andrevenue.

 

**Natural gas liquids (“NGL”)revenue**- Forthe three months ended March 31, 2008, NGL revenue increased 274% over thesame period in 2007 due to increases in prices realized and production volumes.The price increase resulted in an increase in revenue of approximately $4.6million (based on current period production). The increase in NGL productionincreased revenue by approximately $2.4 million (based on 2007 comparableperiod average prices). NGL volumes were also higher during the three monthsended March 31, 2008 as compared to the same period in 2007 as a result ofnew natural gas processing agreements for our Chapman Ranch production and ournon-operated Queen City production in Jim Hogg County, Texas.

 

**Crude oil and condensate revenue**- For the three months ended March 31,2008, oil and condensate sales revenue, excluding derivative activity,increased 36% from the comparable period in 2007, due to the 76% increase

 

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in prices realized as a result of increasing crude oilprices in the market. The increased average realized price for oil andcondensate for the three months ended March 31, 2008 resulted in anincrease in revenue of approximately $3.7 million (based on current periodproduction). Partially offsetting the increase in revenue due to increasedprices was a decrease in oil and condensate production resulting in a decreasein revenue of approximately $1.4 million (based on 2007 comparable periodpre-hedge prices). Production volumes for oil and condensate decreased for thethree months ended March 31, 2008 compared to the same prior year perioddue to normal production declines and asset sales completed during the firstquarter of 2008. See below for a discussion of the impact of crude oilderivatives on prices and revenue.

 

**Derivatives**– For the three months ended March 31,2008 and 2007, we recorded a net loss on derivative contracts. The volume andprice contract terms vary from period to period and therefore interactdifferently with the changing pricing environment, which makes thecomparability of the results for each period difficult. In both periods, weapplied mark-to-market accounting treatment to our derivative contracts;therefore the full volatility of the non-cash change in fair value of ouroutstanding contracts is reflected in revenue and will continue to affectrevenue until the contracts expire. Since these gains/losses are not a functionof the operating performance of our oil and natural assets, excluding theirimpact from the above discussions helps isolate the operating performance ofthose assets. The following table summarizes the various components of thetotal loss on derivatives and the impact each component had on our realizedprices:

 
| ** **                                                                                                 | ** ** | **Three Months Ended March 31,**                | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                                                                                 | ** ** | **$**                                                               | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit(1)** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands, except per unit prices)** | ** ** |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Natural gas derivative contract settlements  (Mcf)                                                         |       | $                                                                   | 363        |   | $ | 0.10 |   | $ | 569 |   | $ | 0.13 |   |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Crude oil derivative contract settlements  (Bbl)                                                           |       | (4,362                                                              | )          | (51.00 | ) | 843 |   | 7.61 |   |
| Mark-to-market reversal of prior period  unrealized change in fair value of gas derivative contracts (Mcf) |       | (2,626                                                              | )          | (0.70 | ) | (4,686 | ) | (1.05 | ) |
| Mark-to-market unrealized change in fair  value of gas derivative contracts (Mcf)                          |       | (22,938                                                             | )          | (6.08 | ) | (10,786 | ) | (2.42 | ) |
| Mark-to-market reversal of prior period  unrealized change in fair value of oil derivative contracts (Bbl) |       | 14,955                                                              |       | 174.85 |   | (501 | ) | (4.52 | ) |
| Mark-to-market unrealized change in fair  value of oil derivative contracts (Bbl)                          |       | (14,751                                                             | )          | (172.47 | ) | (1,770 | ) | (15.97 | ) |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Loss on derivatives (Mcfe)                                                                                 |       | $                                                                   | (29,359    | ) | $ | (5.41 | ) | $ | (16,331 | ) | $ | (2.85 | ) |

 

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(1) Pricesper unit are calculated based on whole numbers, not rounded numbers.

 

**Should crude oil or natural gas prices increase or decreasefrom the current levels, it could materially impact our revenues. Our physicalsales of these commodities are vulnerable to the volatility of market pricemovements. Therefore, we enter into contracts covering our anticipatedproduction to ensure certain cash flows that we expect will allow us to planour business activities. In a high price environment, hedged positions couldresult in lost opportunities if there is a cap in place, thus lowering oureffective realized prices on hedged production, but in an environment offalling prices, these transactions offer some pricing protection for hedgedproduction. Our current derivative position exceeds our 2008 expectedproduction, therefore we could incur realized cash losses if oil and naturalgas commodity prices continue to increase in the coming months, see “Approachto the Business” above.**

 

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**Costsand Operating Expenses**

 

The table below details our expenses:

 
| ** **                                            | ** ** | ** **                                             | ** ** | ** **      | ** ** | **2008 Period Compared  to 2007 Period** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Three Months Ended  March  31,** | ** ** | **$  Increase** | ** ** | **%  Increase**                                              | ** ** |
| ** **                                            | ** ** | **2008**                                               | ** ** | **2007**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)**  | ** ** |
| Oil and natural gas operating expenses                |       | $                                                      | 4,472      |            | $          | 3,380                                                        |       | $ | 1,092 |   | 32 | % |
| Severance and ad valorem taxes                        |       | 2,185                                                  |       | 2,311           |       | (126                                                         | )          | (5 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                                   |       |            |       |                                                         |       |   |   |
| Oil and gas property and equipment                    |       | 27,088                                                 |       | 18,370          |       | 8,718                                                        |       | 47 | % |
| Other assets                                          |       | 193                                                    |       | 108             |       | 85                                                           |       | 79 | % |
| ARO accretion                                         |       | 90                                                     |       | 64              |       | 26                                                           |       | 41 | % |
| General and administrative expenses                   |       | 4,060                                                  |       | 4,395           |       | (335                                                         | )          | (8 | )% |
| Total operating expenses                              |       | $                                                      | 38,088     |            | $          | 28,628                                                       |       | $ | 9,460 |   | 33 | % |
|                                                  |       |                                                   |       |            |       |                                                         |       |   |   |
| Other income and expense, net                         |       | 4,394                                                  |       | 2,958           |       | 1,436                                                        |       | 49 | % |
| Income tax benefit                                    |       | 8,646                                                  |       | 2,935           |       | 5,711                                                        |       | 195 | % |
| Preferred stock dividends                             |       | 2,066                                                  |       | 1,381           |       | 685                                                          |       | 50 | % |

 

**Oil and natural gas operatingexpenses** -For the three months ended March 31, 2008, operating expenses increaseddue to increased expensed workovers and higher costs for compressor rent, gasprocessing, and salt-water disposal as well as overall cost inflation in ourindustry. Additionally, the properties acquired in January 2007 impactedonly two months of the quarter as compared to a full quarter in 2008. Averageoil and natural gas operating expenses were $0.82 per Mcfe and $0.59 per Mcfefor the three months ended March 31, 2008 and 2007, respectively.

 

**Severance and ad valorem taxes** - Severance tax expense for the three monthsended March 31, 2008 was 96% higher than the prior year period as a resultof abatements received on the Chapman Ranch field during the first quarter of2007 that related to prior year periods, which lowered the 2007 expense. Ourseverance tax expense is levied on our oil and natural gas revenue (excludingderivative activity). For the three months ended March 31, 2008, severancetax expense was approximately 5.5% of revenue subject to severance taxescompared to 3.3% of revenue subject to severance taxes for the first quarter of2007. Ad valorem tax expense for the first quarter of 2008 was significantlylower than the prior year period due to realized ad valorem taxes on propertiesacquired in January 2007 coming in much lower than anticipated. On anequivalent basis, severance and ad valorem taxes averaged $0.40 per Mcfe forthe three months ended March 31, 2008 and 2007.

 

**Depletion, depreciation, andamortization (“DD&A”) and accretion**- Full-cost depletion on our oil and naturalgas properties has increased as a result of an increase in our depletion rate,partially offset by 5% lower production volumes. Our depletion rate for the threemonths ended March 31, 2008 was $4.99 per Mcfe, a 3% increase sinceyear-end 2007 and a 55% increase as compared to $3.21 per Mcfe in the firstquarter of 2007. The depletion rate has increased over the past year due tosignificant property costs for both drilling and exploration activities as wellas our acquisition program without a corresponding increase in reserves.Additionally, negative revisions to our proved reserves at year-end 2007increased our depletion rate. Depreciation of other assets for the firstquarter of 2008 increased as a result of our office expansion that occurredduring 2007. Accretion expense associated with our ARO for the three monthsended March 31, 2008 increased due to revisions made in the ARO balancesduring the fourth quarter of 2007 and additions of properties throughout 2007,partially offset by over 100 properties retired from our ARO as a result of thesales completed during the first quarter of 2008.

 

**General and administrative (“G&A”)expenses** –G&A expense remained comparable between the three months ended March 31,2008 and 2007 despite growth in our staffing levels of 10%, which typicallycomprise

 

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approximately70-80% of our G&A expense. Compensation costs related to staffing increasedin the area of health benefits and salaries, but decreased in the area ofbonuses. These increases were partially offset by decreases in legal expenses,franchise taxes and board of director compensation. Capitalized G&A costsfor first quarter 2008 and 2007 were comparable at approximately $1.0 million.G&A on a unit-of-production basis for the three months ended March 31,2008 was $0.75 per Mcfe compared to $0.77 per Mcfe for the comparable 2007period. G&A, excluding non-cash share-based compensation costs, for thethree months ended March 31, 2008 averaged $0.61 per Mcfe compared to$0.65 per Mcfe in the same period in 2007.

 

**Other income and expense** - During the three months ended March 31,2008, our other income and expense increased primarily due to an increase ingross interest expense resulting from higher outstanding debt balances. For thefirst quarter of 2008, we capitalized much less interest due to a 64% lowerunproved property base on which we calculate interest expense subject tocapitalization.

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(in thousands)**                              | ** ** |
| Gross interest expense     |       | $                                                    | 5,015      |   | $ | 4,859 |   |
| Less: capitalized interest |       | (791                                                 | )          | (2,097 | ) |
| Interest expense, net      |       | $                                                    | 4,224      |   | $ | 2,762 |   |
|                       |       |                                                 |       |   |   |
| Weighted average debt      |       | $                                                    | 257,253    |   | $ | 198,511 |   |

 

We recorded amortizationof deferred loan costs related to our Revolving Facility during the threemonths ended March 31, 2008 and 2007. These costs were comparable in bothperiods. During the three months ended March 31, 2008, we recorded a gainon ARO settlements of approximately $9,400, as compared to none in thecomparable 2007 period.

 

**Income tax benefit** - We are subject to state and federalincome taxes and although we were recently generating taxable income forfinancial reporting purposes, we are not in a federal income tax payingposition as a result of deducting intangible drilling costs (“IDC”) that reduceour taxable income for income tax purposes and NOL carryforwards that offsetany remaining taxable income. Income tax benefits were recorded during thethree months ended March 31, 2008 and 2007 as a result of the lossrecorded. In both periods the main reason for the loss was unrealized losses onderivatives. There has not been a substantial change to our effective incometax rate since the first quarter of 2007.

 

**Preferred stock dividends** – Our Board of Directors declaredquarterly dividends on our 5.75% Series A cumulative convertible perpetualpreferred stock in December 2007 and March 2008. Dividend expense forthe three months ended March 31, 2007 is lower than the three months endedMarch 31, 2008 because the preferred stock was issued on January 30,2007, therefore dividends were accrued for a partial period in 2007 as comparedto a full period in 2008.

 

**Loss per share** – We reported a net loss for the quarters ended March 31,2008 and 2007, primarily as a result of unrealized derivatives losses in bothperiods. Basic weighted average shares outstanding for the three months ended March 31,2008 increased 15% as compared to the same period in 2007 as a result ofoptions exercised and vesting of restricted stock during each of these periods.Additionally, the stock issued in the concurrent public offerings at January 30,2007 did not impact basic weighted average shares outstanding for the entirequarter as they did in 2008. At March 31, 2008 and 2007, 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 earnings per share.

 

## **Liquidityand Capital Resources**

## ** **

Our primary ongoing source of capital is the cashflow generated from our operating activities supplemented by borrowings underour credit facility. Net cash generated from operating activities is a functionof production

 

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volumes and commodity prices,both of which are inherently volatile and unpredictable, as well as operatingefficiency and costs. Our business, as with other extractive businesses, is adepleting one in which each gas equivalent unit produced must be replaced orour asset base and capacity to generate revenues in the future will shrink. Ouroverall expected future production decline is estimated to be approximately 27%per year. Less predictable than production declines from our proved reserves isthe impact of constantly changing oil and natural gas prices on cash flows.  We attempt to mitigate the price risk withour hedging program. Reserves and production volumes are influenced, in part,by the amount of future capital expenditures. In turn, capital expenditures areinfluenced by many factors including drilling results, oil and natural gasprices, industry conditions, availability and cost of goods and services andthe extent to which oil and natural gas properties are acquired.

 

Our primary cash requirements are for exploration,development and acquisition of oil and natural gas properties, payment ofpreferred stock dividends and the repayment of principal and interest onoutstanding debt. We attempt to fund our exploration and development activitiesprimarily through internally generated cash flows and budget capital expendituresbased largely on projected cash flows. We routinely adjust capital expendituresin response to changes in oil and natural gas prices, drilling and acquisitioncosts, and cash flow. We typically have funded acquisitions from borrowingsunder our credit facility, cash flow from operations and sales of common stockand preferred stock.

 

We have received significant funds through equity transactions in thepast, including through offerings of our common stock and preferred stock andthe exercise of warrants and stock options. We typically do not, however, relyon proceeds from the exercise of warrants and stock options to sustain ourbusiness, as the timing of those proceeds is unpredictable.

 

Significant changes to working capital may affectour liquidity in the short term. Quarterly dividends on our preferred stock arean ongoing use of our cash. The increase in our derivative instrument liabilityis indicative of potential future cash settlement outflows on our outstandingoil and natural gas derivative positions, which are scheduled to settle infuture months. The fair market value represents the potential settlement forthose contracts if the market prices remain unchanged, but should commodityprices increase or decrease, the fair value of those outstanding contractswould change and the settlements at maturity would also change. When ourderivatives result in cash settlement outflows, we receive higher cash inflowson the sale of unhedged production at those higher market prices, thus providingus with additional funds with which to cover at least a portion of anyderivative payments that may come due in the future. This will not be true,however, for the portion of our 2008 production that is overhedged. Currentlywe expect to have 110% of our anticipated natural gas production and 150% ofour anticipated crude oil production hedged in 2008 as a result of a decreasein expected future production since the time we entered into our 2008derivative positions. We have no derivatives covering our substantialproduction of NGLs, which have historically received a price of approximately50% to 60% of our realized crude oil price. As a result, even though we do notbenefit from increases in oil prices and might suffer increased losses as oilprices increase, those increased losses may be partially offset by increases inour NGL revenues.  See “Approach to theBusiness” above.

 

We had $250 million of total borrowings outstanding under our RevolvingFacility at March 31, 2008. Our Revolving Facility matures on January 31,2011. We havehistorically used our credit facility to supplement any deficiencies betweenoperating cash flow and capital expenditures. Our outstanding debt balance at May 12,2008 was $245 million. We typically do not rely on the sale of assets as asource of cash, but realized approximately $12.2 million related to the sale ofapproximately 100 properties in Texas to various buyers during the firstquarter of 2008, and we used the proceeds to reduce outstanding debt and fundongoing capital spending.

 

We have reducedour planned capital spending for 2008 as compared to recent years. As a resultof the ongoing strategic assessment process, our Board of Directors hasapproved an interim capital budget. Initially that budget is expected to be approximately$50 to $60 million and is expected to be less than our cash flow from operatingactivities, thereby allowing us to further reduce outstanding debt as we movethrough the year.

 

At March 31,2008, we had $5.5 million in cash and cash equivalents as compared to $7.2million at December 31, 2007.  Ourworking capital deficit was $8.6 million at March 31, 2008, as compared toa working capitalsurplus of $2.3 million at December 31, 2007. Our sources and uses of cashwere as follows:

 

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| ** **                                             | ** ** | **For the Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                                               | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                                                | ** ** |
| *Net Cash Provided By Operating Activities*            |       | $                                                                      | 21,350     |   | $ | 14,908 |   |
| *Net Cash Used In Investing Activities*                |       | (10,992                                                                | )          | (396,970 | ) |
| *Net Cash Provided by (Used In) Financing  Activities* |       | (12,066                                                                | )          | 384,008 |   |
|                                                        |            |                                                                        |            |  |  |  |  |

 

**NetCash Provided By Operating Activities***-*The increase in cash flows provided byoperating activities for the first three months of 2008 as compared to the sameperiod in 2007 is primarily a result of the net timing effects of receipts ofaccounts receivable, payments of accrued liabilities and accounts payables.Cash flows provided by operating activities before changes in working capitalwere comparable to 2007 and the changes in working capital for 2007 were muchlarger than 2008 as a result of the January 2007 acquisition.

 

**NetCash Used In Investing Activities***-*We reinvest a substantial portion of our cash flows in our drilling,acquisition, land and geophysical activities. During the first three months of 2008, we spent $20.9 million on ourdrilling and operating program. We drilled 8 wells in the first quarter of2008, all of which were apparent successes. Leasehold and geological and geophysical activities accounted forexpenditures of $1.3 million through March 31, 2008. Proceeds from thesale of certain non-core properties in Texas to various buyers totaledapproximately $12.2 million. This limited program compares to the prior year inwhich our largest expenditure was the January 2007 acquisition. During thethree months ended March 31, 2007, we also spent $12.3 million on ourdrilling and operating program and $4.6 million on leasehold and geological andgeophysical activities. The remaining capital expenditures were associated withcomputer hardware, office equipment and other miscellaneous capital charges.Proceeds from the sale of an interest in one of our Louisiana oil and gasproperties totaled $1.1 million.

 

**A new item within cash used ininvesting activities relates to our derivative program. Due to the overhedgedposition in 2008, the cash settlements related to the overhedge are reflectedin investing 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.**For further discussionof our overhedged position, see “Approach to the Business” above.

** **

We are operating under aninterim capital spending budget in 2008 while we continue to assess thepotential sale or merger of the Company. This interim program, which could besupplemented quickly, calls for the drilling of 18 to 22 wells (7 to 9, net)during 2008, primarily in south Texas, and to a lesser extent in southeast NewMexico, complemented by selected expenditures for land and seismic. The interimprogram is estimated to have total capital spending in the range of $50 to $60million.

 

**NetCash Provided By (Used In) Financing Activities***-*During the three months ended March 31,2008, we repaid $10.0 million under our Revolving Facility (as defined below)using proceeds from our asset sales. We also paid quarterly dividends on ourpreferred stock in January 2008.

 

Our Revolving Facility had $5 million ofavailability at May 12, 2008 to supplement timing differences in ourprojected cash inflows and outflows. We believe we will be able to generatecapital resources and liquidity sufficient to meet our financial obligations asthey come due, especially during the short term as we have curtailed much ofour spending in light of the ongoing strategic assessment process.

 

*Revolving Facility*

 

On January 30, 2007, we entered into a FourthAmended and Restated Credit Agreement (the “Agreement”) for a new revolvingcredit facility with Union Bank of California (“UBOC”), as administrative agentand issuing lender, and the other lenders party thereto. Pursuant  to theAgreement, UBOC acts as the administrative agent for a senior, first liensecured borrowing base revolving credit facility (the “Revolving Facility”) infavor of the Company and certain of its wholly-owned subsidiaries in an amountequal to $750 million, of which only $250 million is available under theborrowing base currently in effect. The Revolving Facility has a letter ofcredit sub-limit of $20 million.

 

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The Revolving Facility matures on January 31,2011 and bears interest at LIBOR plus an applicable margin ranging from 1.25%to 2.5% or Prime plus a margin of up to 0.25%, with an unused commitment feeranging from 0.50% to 0.25%.  At March 31,2008, the interest rates applied to our outstanding Prime and LIBOR borrowingswere 5.50% and 6.99%, respectively.  Asof March 31, 2008, $250 million in total borrowings were outstanding underthe Revolving Facility. Our available borrowing capacity under the RevolvingFacility was $50 million at March 31, 2008. The borrowing base was reducedfrom $320 million to $300 million during the fourth quarter of 2007. In early May 2008,our Revolving Facility’s borrowing base was redetermined by our banks and setat $250 million, by which time we also repaid $5 million of outstandingborrowings, leaving availability of $5 million at May 12, 2008. It wasreduced primarily as a result of the sale of certain non-core assets during thefirst quarter of 2008 and the reduction of total proved reserves as reported inthe year-end reserve reports of our independent reserve engineers. It isscheduled to be redetermined again on or before June 30, 2008.

 

The Revolving Facility is secured by substantiallyall of our assets. The Revolving Facility provides for certain restrictions,including, but not limited to, limitations on additional borrowings, sales ofoil and natural gas properties or other collateral, and engaging in merger orconsolidation transactions. The Revolving Facility restricts common stock dividendsand certain distributions of cash or properties and certain liens and alsocontains financial covenants including, without limitation, the following:

 

·      An EBITDAX to interest expense ratiorequires that as of the last day of each fiscal quarter the ratio of (a) ourconsolidated EBITDAX (defined as EBITDA plus similar non-cash items andexploration and abandonment expenses for such period) to (b) ourconsolidated interest expense, not be less than 2.5 to 1.0, calculated on acumulative quarterly basis for the first 12 months after the closing of theRevolving Facility and then on a rolling four quarter basis.

 

·      A current ratio requires that as of thelast day of each fiscal quarter the ratio of our consolidated current assets toour consolidated current liabilities, as defined in the Revolving Facility, beat least 1.0 to 1.0.

 

·      A maximum leverage ratio requires that asof the last day of each fiscal quarter the ratio of (a) Total Indebtedness(as defined in the Agreement) to (b) an amount equal to consolidatedEBITDAX be not greater than 3.0 to 1.0, calculated on a cumulative quarterlybasis for the first 12 months after the closing of the Revolving Facility andthen on a rolling four quarter basis.

 

Consolidated EBITDAX is a component of negotiatedcovenants with our lender and is discussed here as part of the Company’sdisclosure of its covenant obligations. The Revolving Facility includes othercovenants and events of default that are customary for similar facilities. Itis an event of default under the Revolving Facility if we undergo a change incontrol.  “Change in control,” as definedin the 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 ouroutstanding warrants, options and other securities (whether or not suchsecurities are then currently convertible or exercisable), (b) during anyperiod of two consecutive calendar quarters, individuals who at the beginningof such period were members of our Board of Directors cease for any reason toconstitute a majority of the directors then in office unless (i) such newdirectors were elected by a majority of our directors who constituted the Boardof Directors 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.

 

*ShelfRegistration Statement & Offerings*

 

Duringthe second quarter 2007, we filed a registration statement with the SEC which,as amended in a third quarter filing, registered securities of up to $500million of any combination of debt securities, preferred stock, common stock,warrants for debt securities or equity securities of the Company and guaranteesof debt securities by our subsidiaries. Net proceeds, terms and pricing of theoffering of securities issued under the shelf registration

 

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statement will be determined atthe time of the offerings. The shelf registration statement does not provideassurance that we will or could sell any such securities. Our ability toutilize our 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 purchaseour securities at prices acceptable to us.

 

*Convertible Preferred Stock*

 

We completed the publicoffering of 2,875,000 shares of 5.75% Series A cumulative convertibleperpetual preferred stock (“Convertible Preferred Stock”) in January 2007.  We used the $138.4 million in net proceedsfrom this offering, along with the proceeds from the concurrent common stockoffering and borrowings under our Revolving Facility, to finance the January 2007Acquisition and to refinance our then-existing credit facility.

 

*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 anauthorized committee of our board declares a dividend payable, we will paydividends in cash, every quarter.  Thefirst payment was made on April 15, 2007.

 

No dividends or otherdistributions (other than a dividend payable solely in shares of a like orjunior ranking) may be paid or set apart for payment upon any shares rankingequally with the Convertible Preferred Stock (“parity shares”) or sharesranking junior to the Convertible Preferred Stock (“junior shares”), nor mayany parity shares or junior shares be redeemed or acquired for anyconsideration by us (except by conversion into or exchange for shares of a likeor junior ranking) unless all accumulated and unpaid dividends have been paidor funds therefor have been set apart on the Convertible Preferred Stock andany 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:

 

·      seniorto all of the shares of our common stock and to all of our other capital stockissued in the future unless the terms of such capital stock expressly providethat it ranks senior to, or on a parity with, shares of our ConvertiblePreferred Stock;

 

·      ona parity with all of our other capital stock issued in the future, the terms ofwhich expressly provide that it will rank on a parity with the shares of ourConvertible Preferred Stock; and

 

·      juniorto all of our existing and future debt obligations and to all shares of ourcapital stock issued in the future, the terms of which expressly provide thatsuch shares will rank senior to the shares 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 at the applicableconversion rate, but only if the closing sale price of our common stock for 20trading days within a period of 30 consecutive trading days ending on the tradingday immediately preceding the date we give the conversion notice equals orexceeds 130% of the conversion 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, 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

 

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unpaid dividends, if any, on ashare 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 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, theholder will not receive any cash payment representing accumulated and unpaiddividends on the Convertible Preferred Stock, whether or not in arrears, exceptin limited circumstances. The conversion rate is equal to $50.00 divided by theconversion price at the time. The conversion price is subject to adjustmentupon the occurrence of certain events. The conversion price on the conversiondate and the number of shares of our common stock, as applicable, to bedelivered upon conversion 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, to the date ofthe purchase. We will have the option to pay the purchase price in cash, sharesof common stock or a combination of cash and shares. Our ability to purchaseall or 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 afundamental change*. If a holderelects 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 have occurred 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 our common equity representing morethan 50% of the voting power of our common equity other than a filing with adisclosure relating to a transaction which complies with the proviso insubsection 2 below;

 

2. consummation of any share exchange, consolidationor merger of us pursuant to which our common stock will be converted into cash,securities or other property or any sale, lease or other transfer in onetransaction or a series of transactions of all or substantially all of theconsolidated assets of us and our subsidiaries, taken as a whole, to any personother than one of our subsidiaries; provided, however, that a transaction wherethe holders of more than 50% of all classes of our common equity immediatelyprior to the transaction own, directly or indirectly, more than 50% of allclasses of common equity of the continuing or surviving corporation ortransferee immediately after the event shall not be a fundamental change;

 

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

 

4. our common stock is neither listed on a nationalsecurities exchange nor listed nor approved for quotation on anover-the-counter market in the United States.

 

However, a fundamentalchange will not be deemed to have occurred in the case of a share exchange,merger or consolidation, or in an exchange offer having the result described insubsection 1 above, if 90% or more of the consideration in the aggregate paidfor common stock (and excluding cash payments for fractional shares and cashpayments pursuant to dissenters’ appraisal rights) in the share exchange,merger or consolidation or exchange offer consists of common stock of a UnitedStates company traded on a national securities exchange (or which will be sotraded or quoted when issued or exchanged in connection with such transaction).

 

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*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 maygenerally not, without the approval of the holders of at least 66 2/3% of theshares of our Convertible Preferred Stock then outstanding:

 

·      amendour restated certificate of incorporation, as amended, by merger or otherwise,if the amendment would alter or change the powers, preferences, privileges orrights of the holders of shares of our Convertible Preferred Stock so as toadversely affect them;

 

·      issue,authorize or increase the authorized amount of, or issue or authorize anyobligation or security convertible into or evidencing a right to purchase, anysenior stock; or

 

·      reclassifyany of our authorized stock into any senior stock of any class, or anyobligation or security convertible into or evidencing a right to purchase anysenior stock.

 

*OffBalance Sheet Arrangements*

 

Wecurrently do not have any off balance sheet arrangements.

 

**Fair Value Measurements**

 

Effective January 1,2008, we partially adopted SFAS No. 157, *FairValue Measurements* which provides a common definition of fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements, but does not require any new fair value measurements.The partial adoption of SFAS No. 157 had no impact on our financialstatements, but it did result in additional required disclosures as set forthin Note 9 to our consolidated financial statements. In February 2008, theFASB issued FSP 157-2, *Effective Date of FASBStatement No. 157*, which delays the effective date of SFAS No. 157for all non-financial assets and non-financial liabilities, except those thatare recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). Accordingly, we have not yet applied theprovisions of SFAS No. 157 to our AROs.

 

SFAS No. 157 definesfair value as the price that would be received to sell an asset or transfer aliability in an orderly transaction between market participants at themeasurement date. Currently the only fair value measurements we utilize arerelated to our AROs and derivative instruments. While our derivativeinstruments are executed in liquid markets where price transparency exists, weare not involved in the monthly calculation of fair value. We utilizevaluations provided by our counterparties, which include inputs such ascommodity exchange prices, over-the-counter quotes, volatility, historicalcorrelations of pricing data and LIBOR and other liquid money market instrumentrates. Our counterparties utilize internally developed basis curves thatincorporate observable and unobservable market data. Although we believe thesevaluations are the best estimates of the fair value of the derivative contractswe have executed, the ultimate market prices realized could differ from theseestimates, and the differences could be material.

 

SFAS No. 157establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value based on observable and unobservable dataand categorizes the inputs into three levels, with the highest priority givento Level 1 and the lowest priority given to Level 3. The three levels of thefair value hierarchy defined by SFAS No. 157 are as follows:

 

·      Level1 – Inputs are unadjusted, quoted prices in active markets for identicalassets or liabilities.

 

·      Level2 – Significant observable pricing inputs other than quoted prices includedwithin Level 1 that are either directly or indirectly observable as of thereporting date. Essentially, inputs that are derived principally from orcorroborated by observable market data.

 

39

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·                  Level 3 – Generally, inputs are unobservable, developed based on the bestinformation available and reflect management’s best estimate of what marketparticipants would use in pricing the asset or liability at the measurementdate.

 

Determiningthe appropriate classification of our fair value measurements within the fairvalue hierarchy requires management’s judgment regarding the degree to whichmarket data is observable or corroborated by observable marketdata. Currently we have categorized derivative instruments’ fair valuemeasurements as Level 3 and expect to categorize our AROs’ fair valuemeasurements as Level 3 upon full adoption of SFAS No. 157. Asinterpretations of SFAS No. 157 evolve, our classification of certaininstruments within the hierarchy may be revised. See “Critical Accounting Policies and Estimates – Derivative and HedgingActivities” above, “Risk Management Activities - Derivatives &Hedging” below and Note 8 to our consolidated financial statements foradditional discussion of our derivative instruments.

 

In conjunction with the adoption of SFAS No. 157,we also adopted SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities – Including anAmendment of FASB Statement No. 115,*effective January 1, 2008. SFAS No. 159 allows acompany the option to value its financial assets and liabilities, on aninstrument by instrument basis, at fair value, and include the change in fairvalue of such assets and liabilities in its results of operations. The Companydid not elect to apply the provisions of SFAS No. 159 to any of itsfinancial assets or liabilities. Accordingly, there was no impact to theCompany’s financial statements resulting from the adoption of SFAS No. 159.

 

**RiskManagement Activities – Derivatives & Hedging**

 

Dueto the volatility of oil and natural gas prices, we may enter into, from timeto time, price-risk management transactions (e.g., swaps, collars and floors)related to our expected oil and natural gas production to seek to achieve amore predictable cash flow, as well as to reduce exposure to commodity pricefluctuations.  While the use of thesearrangements may limit our ability to benefit from increases in the prices ofoil and natural gas, it is also intended to reduce our potential exposure toadverse price movements.  See “Approachto the Business” for a discussion of our current level of derivative contractsas it relates to expected production. Our arrangements, to the extent we enterinto any, are intended to apply to only a portion of our expected production,and thereby provide only partial price protection against declines in oil andnatural gas prices. None of these instruments are, at the time of theirexecution, intended to be used for trading or speculative purposes, but may bedeemed as such because of the expected decrease in our anticipated 2008production. The use of derivative instruments involves some credit risk, butgenerally we place our derivative transactions with major financialinstitutions that we believe are minimal credit risks.  On a quarterly basis, our management sets allof our price-risk management policies, including volumes, types of instrumentsand counterparties. 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.  Our Board of Directors monitors the Company’sprice-risk management policies and trades on a monthly 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 discussion of these accounting treatments, see Note8 to our consolidated financial statements. We currently apply mark-to-marketaccounting treatment to all of our derivative contracts. All derivatives arerecorded on the balance sheet at fair value and the changes in fair value arepresented in total revenue on the statement of operations. Cash flows from resultingderivative settlements are included in operating activities and investingactivities on the statement of cash flows. The following table providesadditional information regarding our various derivative transactions that wererecorded at fair value on the balance sheet as of March 31, 2008.

 
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Fair value of contracts outstanding at  December 31, 2007                          |       | $                       | (12,329    | ) |
| Contracts realized or otherwise settled  during the period                              |       | (3,999                  | )          |
| Fair value at March 31, 2008 of new  contracts entered into during 2008:           |       |                    |       |
| Asset                                                                                   |       | —                  |       |
| Liability                                                                               |       | —                  |       |
| Changes in fair values attributable to  changes in valuation techniques and assumptions |       | —                  |       |
| Other changes in fair values                                                            |       | (21,361                 | )          |
| Fair values of contracts outstanding at  March 31, 2008                            |       | $                       | (37,689    | ) |

 

40

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The following table detailsthe fair value of our commodity-based derivative contracts by year of maturityand valuation methodology as of March 31, 2008.

 
| ** **                                           | ** ** | **Fair Value of Contracts at March 31, 2008** | ** ** |
|------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **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                                                |       | (34,246                                                                          | )          | (3,443 | ) | — |   | — |   | (37,689 | ) |
| Liability                                            |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Prices based on models and other valuation  methods: |       | —                                                                           |       | — |   | — |   | — |   | — |   |
| Total                                                |       | $                                                                                | (34,246    | ) | $ | (3,443 | ) | $ | — |   | $ | — |   | $ | (37,689 | ) |
|                                                      |            |                                                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**TaxMatters**

 

At March 31, 2008, we had cumulative netoperating loss carryforwards (“NOLs”) for federal income tax purposes ofapproximately $114.6 million that expire beginning in 2012. We also had stateNOL carryforwards at March 31, 2008 of approximately $16 million, withoutconsideration of valuation allowances, which will expire in varying amountsbetween 2008 and 2027. These estimated NOLs assume that certain items,primarily intangible drilling costs, have been written off for tax purposes inthe current year. However, we have not made a final determination if anelection will be made to capitalize all or part of these items for tax purposesin the future. Our ability to utilize federal NOL carryforwards in cases wherethe NOL was acquired in a reorganization may be subject to limitations under Section 382of the Internal Revenue Code of 1986, as amended (“Section 382”) if weundergo a 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. If wewere to undergo a majority ownership change, we would be required to record areserve for some or all of the asset currently recorded on our balance sheet.During 2007, we believe that there may have been an additional change ofownership pursuant to Section 382 as a result of the concurrent publicofferings of our common and preferred stock that occurred in January 2007.We cannot make assurances that we will not undergo a majority ownership changein the future because an ownership change for federal tax purposes can occurbased on trades among our existing stockholders. Whether we undergo a majorityownership change may be a matter beyond our control. Further, in light of the ongoing strategic assessment process, wecannot provide any assurance that a potential sale or merger will not reducethe availability of our NOL carryforward and other federal income taxattributes, which may be significantly limited or possibly eliminated.

 

In 2007, we adopted FIN 48, which clarifies the accounting foruncertainty in income taxes recognized in accordance with SFAS No. 109,*Accounting for Income Taxes*.   As a result of the adoption of FIN 48 on January 1,

 

41

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2007, werecognized a liability of $534,035 which reduced the January 1, 2007retained earnings balance.  The amountrecorded did not include interest as the anticipated adjustments more likelythan not will result in no current tax due as a result of NOL carryovers.  All of the amounts of unrecognized taxbenefits reported affect the effective tax rate through deferred taxaccounting. We also adopted FSP FIN 48-1 during 2007, which provides that acompany’s tax position will be considered settled if the taxing authority hascompleted its examination, the company does not plan to appeal, and it isremote that the taxing authority would reexamine the tax position in thefuture. We had no accrued liabilities prior to adoption at January 1,2007. We recognize interest and penalties related to unrecognized tax benefitsin tax expense as a period cost. However, we accrued no interest or penaltiesat March 31, 2008.

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2007, the FASB issued SFAS No. 141(R),*Business Combinations* (“SFAS No. 141(R)”).SFAS No. 141(R) expands the definition of transactions and eventsthat qualify as business combinations; requires that the acquired assets andliabilities, including contingencies, be recorded at the fair value determinedon the acquisition date and changes thereafter reflected in revenue, notgoodwill; changes the recognition timing for restructuring costs; and requiresacquisition costs to be expensed as incurred. Adoption of SFAS No. 141(R) isrequired for combinations after December 15, 2008. Early adoption andretroactive application of SFAS No. 141(R) to fiscal years precedingthe effective date are not permitted. However, accounting for changes invaluation allowances for acquired deferred tax assets and the resolution ofuncertain tax positions for prior business combinations will impact tax expenseinstead of impacting the prior business combination accounting starting January 1,2009. We are currently evaluating the changes provided in SFAS No. 141(R) andbelieve it could have a material impact on our consolidated financialstatements if we were to undertake a significant acquisition or businesscombination.

 

*** ***In December 2007, the FASB issued SFAS No. 160, *Noncontrolling Interest in Consolidated FinancialStatements*(“SFAS No. 160”). SFAS No. 160 re-characterizesminority interests in consolidated subsidiaries as non-controlling interestsand requires the classification of minority interests as a component of equity.Under SFAS No. 160, a change in control will be measured at fair value,with any gain or loss recognized in earnings. The effective date for SFAS No. 160is for annual periods beginning on or after December 15, 2008. Earlyadoption and retroactive application of SFAS No. 160 to fiscal yearspreceding the effective date are not permitted. We currently do not expectadoption of this statement to have an impact on our consolidated financialstatements.

 

In March 2008, the FASB issued SFAS No. 161,*Disclosures about Derivative Instruments andHedging Activities – an amendment of FASB Statement No. 133*(“SFAS No. 161”). SFAS No. 161requires entities to provide enhanced disclosures about (a) how and why anentity uses derivative instruments, (b) how derivative instruments andrelated hedged items are accounted for under SFAS No. 133 and its relatedinterpretations, and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows. SFAS No. 161 is effective for annual periods beginning on or after November 15,2008. Early application of SFAS No. 161 is encouraged, as are comparativedisclosures for earlier periods at initial adoption. We will adopt SFAS No. 161on January 1, 2009 and do not expect adoption of this statement to impactour consolidated financial statements, but we do expect it to impactdisclosures made in our future quarterly and annual filings.

 

**ITEM 3.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Weare exposed to market risk from changes in interest rates and commodityprices.  We use a Revolving Facility witha floating 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, 2008 outstanding borrowings and interest rates of 5.50% and6.99% applied to various borrowings, a 10% change in interest rates wouldresult in an increase or decrease of interest expense of approximately $1.6million on an annual basis.

 

Inthe normal course of business, we enter into derivative transactions, includingcommodity price collars, swaps and floors to mitigate our exposure to commodityprice movements. They are not intended for trading or speculativepurposes.  While the use of thesearrangements may limit the benefit to us of increases in the prices of 

 

42

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oiland natural gas, it also limits the downside risk of adverse pricemovements.  During early 2007, we put inplace several natural gas and crude oil collars to hedge our expected 2008 and2009 production to achieve a more predictable cash flow. As a result of recentchanges to our forecasted 2008 production and the impact of certain assetdivestitures, both of which have reduced expected production as compared tothat expected at the time we entered into the derivative contracts, wecurrently have approximately 110% and 150% of our anticipated 2008 natural gasand crude oil production, respectively, covered by derivative contracts. Thisoverhedged position exposes us to greater risk of commodity price increasesbecause we will not have the physical production cash inflows to offset anypotential losses incurred on the portion of the contracts that are overhedged.Please refer to Note 8 to our consolidated financial statements for adiscussion of these contracts. The following is a list of contracts outstandingat March 31, 2008:

 
| **Transaction  Date**  | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  March 31, 2008** | ** ** |
|------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|--------------------------|------------|---------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **             | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **               | ** ** | ** **                | ** ** | **(in thousands)**                                                    | ** ** |
| ***Natural Gas (1):*** | * *   | * *              | * *   | * *      | * *   | * *   | * *   | * *                 | * *   | * *                  | * *   | * *                                                                   | * *   |
|                   |       |                  |       |          |       |       |       |                     |       |                      |       |                                                                       |       |   |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $ 7.50-$9.00        |       | 20,000 MMBtu              |       | $                                                                          | (8,514     | ) |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $ 7.50-$9.00        |       | 10,000 MMBtu              |       | (4,163                                                                     | )          |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $ 7.50-$9.02        |       | 10,000 MMBtu              |       | (4,208                                                                     | )          |
| 04/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $ 7.75-$10.00       |       | 10,000 MMBtu              |       | (3,077                                                                     | )          |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $ 7.75-$10.08       |       | 10,000 MMBtu              |       | (2,976                                                                     | )          |
|                   |       |                  |       |          |       |       |       |                     |       |                      |       |                                                                       |       |
| ***Crude Oil (2):***   |       |                  |       |          |       |       |       |                     |       |                      |       |                                                                       |       |
|                   |       |                  |       |          |       |       |       |                     |       |                      |       |                                                                       |       |
| 12/06                  |       | Swap                  |       | 01/01/08      |       | 12/31/08   |       | $ 66.00             |       | 1,500 Bbl                 |       | (13,694                                                                    | )          |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $ 70.00-$93.55      |       | 300 Bbl                   |       | (1,057                                                                     | )          |
|                   |       |                  |       |          |       |       |       |                     |       |                      |       | $                                                                          | (37,689    | ) |

 

----

(1)          Our natural gas collars were entered into on a per MMBtu delivered pricebasis, using the NYMEX Natural Gas Index. Mark-to-market accounting treatmentis applied to these contracts and the change in fair value is reflected intotal revenue.

 

(2)          Our crude oil contracts were entered into on a per barrel deliveredprice basis, using the West Texas Intermediate Light Sweet Crude Oil Index.Mark-to-market accounting treatment is applied to these contracts and thechange in fair value is reflected in total revenue.

 

At March 31, 2008, thefair value of the outstanding derivatives was a net liability of approximately$37.7 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 byapproximately $3.6 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, 2008 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 been no change inour internal controls over financial reporting that occurred during the threemonths ended March 31, 2008 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

43

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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.

 

**David Blake, et al. v. Edge Petroleum Corporation** – On September 19, 2005, David Blakeand David Blake, Trustee of the David and Nita Blake 1992 Children’s Trustfiled 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 Goliad County, Texas andfailure and refusal to pay monies to Blake pursuant to such overriding royaltyinterests for wells completed on the leases. The plaintiffs seek relief of (1) specificperformance of the alleged agreement, including granting of overriding royaltyinterests by the Company to Blake; (2) monetary damages for failure togrant the overriding royalty interests; (3) exemplary damages for hisclaims of business disparagement and slander; (4) monetary damages fortortuous interference; and (5) attorneys’ fees and court costs. Venue ofthe case was transferred to Harris County, Texas by agreement of thelitigants.  We have served plaintiffs with discovery and have filed acounterclaim and an amended counterclaim joining various related entities thatare controlled by plaintiffs.  In addition, plaintiffs have filed an amendedcomplaint alleging claims of slander of title and tortuous interference relatedto its alleged right to receive an overriding royalty interest from a thirdparty.  Plaintiffs currently have on file an amended motion for summaryjudgment, to which we have filed a response.  In addition, we have filed amotion for summary judgment on the plaintiffs’ case.  In December 2006,the court denied our motion for summary judgment.  The court has not ruledon Blake’s motion.  In November 2007, we filed a separate motion forsummary judgment based on the statute of frauds; the court has not ruled onthis separate motion. The trial, originally scheduled to begin September 10,2007, and reset for March 3, 2008, has been continued until August 20,2008.  Discovery in the case has commenced and is continuing.  We have responded aggressively to thislawsuit, and believe we have meritorious defenses and counterclaims.

 

**Diana Reyes, et al. v. Edge Petroleum Operating Company, Inc., etal. **On January 8, 2008, we were served witha wrongful death action filed in Hidalgo County, Texas.  Plaintiffs allege negligence and grossnegligence resulting from a fatality accident at the State B-12 well site, onour Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minorchildren of Mr. Reyes, who was killed in a one-car fatality accident on August 5,2007.   Mr. Reyes was an employee ofour vendor, Payzone Logging.  No specificamount of damages has been alleged to date; plaintiffs are asserting damagesfrom loss of companionship, pecuniary loss, pain and mental anguish, loss ofinheritance and funeral and burial expenses. We may have insurance coverage for all or part of this claim.  Our insurance carrier has retained localcounsel to represent us in this matter. We filed an answer on January 30, 2008 denying plaintiffs’allegations and asserting defenses and trial has been set for February 16,2009.  We have not established a reservewith respect to this claim and it is not possible to determine what, if any,our ultimate exposure might be in this matter. We will continue to respond aggressively to this lawsuit, and believe wehave meritorious defenses.

 

**Lexington Insurance Company v. Edge Petroleum Exploration Company, etal.** - On March 13,2008, Lexington Insurance Company (“Lexington”) filed a declaratory judgmentaction in the 125th Judicial District Court of Harris County,Texas.  Lexington seeks a judgment thatit is not obligated to pay any of our claims nor those of the Sfondrini Partnerships (as defined below) inconnection with a consolidated suit that we and the Sfondrini Partnershipssettled with the all of the plaintiffs in 2007. The suit that was settled,** **Wade and Joyce Montet, et al., v. EdgePetroleum Corp of Texas, et al., consolidated with Rolland L. Broussard, etal., v. Edge Petroleum Corp of Texas, et al., and the settlement thereof, is described in detail in Item 3. LegalProceedings of our Annual Report on Form 10-K for the year ended December 31,2007.  In general, the action was aconsolidated suit by mineral/royalty owners under two wells, who claimed thatthe third party operator of the wells had failed to “block squeeze” thesections of one of the wells, as a prudent operator, according to theirallegations, would have done, to protect the gas reservoir from being floodedwith water from adjacent underground formations, and was negligent in notcreating a field-wide unit to protect their interests. We, along with theSfondrini Partnerships, were defendants in the suit as 

 

44

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working interest owners in the wells, owning 2.8%and 14.7%, respectively, at the time of the alleged acts or omissions.  In the case of the settlements with some, butnot all, of the plaintiffs, two other insurers covered the settlement amountsin exchange for mutual releases. We, along with the Sfondrini Partnerships,bore the costs of the settlements with the remaining plaintiffs in accordancewith their proportionate interests.  TheSfondrini Partnerships are partnerships that are directly or indirectlycontrolled by John Sfondrini, a director of ours.  Vincent Andrews, also a director of ours,owns a minority interest in the corporate general partner one of thepartnerships.

 

Lexingtonasserts that it is not obligated to pay any claims of ours or the SfondriniPartnerships under its commercial, general liability insurance policy asrelated to the lawsuit that was settled because there was no “occurrence,”under the terms of their policy, of physical injury to or destruction oftangible property and other reasons.  Ourposition is that the damages to the reservoir and attendant losses incurred bythe defendants were losses covered by Lexington’s policy, for which Lexingtonis legally obligated to pay.  Byagreement of the parties, an answer is due 30 days from notice of terminationof settlement discussions.  Because wehave already settled the underlying claims and have not recognized any amountfor possible future recoveries against Lexington, we do not, in any event, expectthe declaratory judgment action by Lexington to have a material adverse affecton us.

 

 **Item 1A - Risk Factors**

 

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, “Item 1A. Risk Factors” in our 2007 Annual Report on Form 10-K,which could materially affect our business, financial condition or futureresults.  The risks described in our 2007Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

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

 

**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 exhibit 2.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-17269)). |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.2  — |       | Agreement  and Plan of Merger dated as of May 28, 2003 among Edge Petroleum  Corporation, Edge Delaware Sub Inc. and Miller Exploration Company (“Miller”)  (Incorporated by reference from Annex A to the Joint Proxy  Statement/Prospectus contained in the Company’s Registration Statement on  Form S-4/A filed on October 31, 2003 (Registration No. 333-106484)).                                                             |
|                  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 2.3  — |       | Asset  Purchase Agreement by and among Contango STEP, L.P., Contango Oil &  Gas Company, Edge Petroleum Exploration Company and Edge Petroleum  Corporation, dated 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).                                                                                                                               |

 

45

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| 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. |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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 Edge’s  Current Report on Form 8-K filed January 30, 2007).                                                                                                                                                                                                                                                                                            |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1  — |   | Third  Amended and Restated Credit Agreement dated December 31, 2003 among Edge  Petroleum Corporation, Edge Petroleum Exploration Company, Edge Petroleum  Operating Company, Inc., Miller Oil Corporation and Miller Exploration  Company, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as Agent (Incorporated by reference  from Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended March 31, 2004).                             |
|                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2  — |   | Agreement and Amendment  No. 1 to Third Amended and Restated Credit Agreement dated May 31,  2005 among Edge Petroleum Corporation, Edge Petroleum Exploration Company,  Edge Petroleum Operating Company, Inc., Miller Exploration Company and  Miller Oil Corporation, as borrowers, the                                                                                                                                                                                                                                                           |

 

46

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|                         |   | lenders thereto and Union  Bank of California, N.A., a national banking association, as agent for the  lenders (Incorporated by reference from exhibit 4.2 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2005 (File  No. 000-22149)).                                                                                                                                                                                                                                                                                         |
|------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3  —        |   | Agreement  and Amendment No. 2 to the Third Amended and Restated Credit Agreement  dated November 30, 2005 among Edge Petroleum Corporation, Edge Petroleum  Exploration Company, Edge Petroleum Operating Company, Inc., Miller Oil  Corporation, Miller Exploration Company, and Cinco Energy Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from exhibit 4.3 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005). |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4  —        |   | Miller  Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from exhibit 10.1(a) to Miller Exploration  Company’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.5  —        |   | Amendment  No. 1 to the Miller Exploration Company Stock Option and Restricted  Stock Plan of 1997 (Incorporated by reference to Exhibit 4.2 from Miller  Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.6  —        |   | Amendment  No. 2 to the Miller Exploration Company Stock Option and Restricted  Stock Plan of 1997 (Incorporated by reference from Exhibit 4.3 to Miller  Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                     |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7  —        |   | Form of  Miller Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.8  —        |   | 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 Edge’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                                                                          |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.9  —       |   | Amendments No. 1, 2 and 3 to the 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.                                                                                                                                                                                                                                                                                                           |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| †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 six  months ended 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                                                                                                                                                                                                                                                                                                                                                                                  |

 

47

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|                          |   | 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  —  |   | Severance  Agreements by and between Edge Petroleum Corporation and the Officers of the  Company named therein (Incorporated by reference from exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999 (File No. 000-22149)).     |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.8  —  |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                           |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.9  —  |   | Form of  Employee Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999 (File No. 000-22149)).     |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.10  — |   | Edge  Petroleum Corporation Amended and Restated Elias Stock Incentive Plan.  (Incorporated by reference from exhibit 4.5 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                                         |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.11  — |   | Form of  Edge Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                          |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.12  — |   | Summary of Compensation of  Non-Employee Directors (Incorporated by reference from exhibit 10.12 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                                          |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.13         |   | Salaries and Certain Other  Compensation of Executive Officers (Incorporated by reference from exhibit  10.13 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                              |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.14  — |   | 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).                                                                                                             |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| †10.15  — |   | 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).                                                                                            |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| 10.16  —       |   | 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 10.1 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| 10.17  —       |   | 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 Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| 10.18  —       |   | 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 Edge’s Current Report on  Form 8-K filed January 16, 2007). |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| 10.19  —       |   | 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 Edge’s Current Report on  Form 8-K filed January 19, 2007). |
|                          |   |                                                                                                                                                                                                                                                                                                          |
| 10.20  —       |   | 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 Edge’s Current Report on  Form 8-K filed January 19, 2007).  |

 

48

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| 10.21  —       |   | 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 Edge’s Current Report on  Form 8-K filed February 5, 2007). |
|-------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                          |   |                                                                                                                                                                                                                                                                                                         |
| †10.22  — |   | 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).                                                                                                                                |
|                          |   |                                                                                                                                                                                                                                                                                                         |
| *31.1  —       |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                   |
|                          |   |                                                                                                                                                                                                                                                                                                         |
| *31.2  —       |   | Certification  by Michael G. Long , Chief Financial and Accounting 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 Michael G. Long, Chief Financial and Accounting Officer, pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |

 

----

*Filed herewith.

†Denotes management or compensatory contract, arrangement or agreement.

 

49

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## **SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                                     |   |   | EDGE PETROLEUM CORPORATION,          |
|------------------------------------------|--------|--------|--------------------------------------|
|                                     |   |   | A  DELAWARE CORPORATION              |
|                                     |   |   | (REGISTRANT)                         |
|                                     |   |   |                                 |
|                                     |   |   |                                 |
| Date   May 12,  2008 |   |   | /s/ John W. Elias                    |
|                                     |   |   | John W. Elias                        |
|                                     |   |   | Chairman of the Board, President and |
|                                     |   |   | Chief Executive Officer              |
|                                     |   |   |                                 |
|                                     |   |   |                                 |
| Date   May 12,  2008 |   |   | /s/ Michael G. Long                  |
|                                     |   |   | Michael  G. Long                     |
|                                     |   |   | Executive Vice President and         |
|                                     |   |   | Chief Financial Officer              |

 

50

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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 exhibit 2.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-17269)).                                                                                              |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.2   — |       | Agreement  and Plan of Merger dated as of May 28, 2003 among Edge Petroleum  Corporation, Edge Delaware Sub Inc. and Miller Exploration Company (“Miller”)  (Incorporated by reference from Annex A to the Joint Proxy Statement/Prospectus  contained in the Company’s Registration Statement on Form S-4/A filed on  October 31, 2003 (Registration No. 333-106484)).                                                                                                                                                          |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.3   — |       | Asset  Purchase Agreement by and among Contango STEP, L.P., Contango Oil &  Gas Company, Edge Petroleum Exploration Company and Edge Petroleum  Corporation, dated 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. |
|                        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 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).                                                                                                                                                                                                                                                                                                                                          |

 

51

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| 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 Edge’s  Current Report on Form 8-K filed January 30, 2007).                                                                                                                                                                                                                                                                                                                                     |
|------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.1   —        |   | Third  Amended and Restated Credit Agreement dated December 31, 2003 among Edge  Petroleum Corporation, Edge Petroleum Exploration Company, Edge Petroleum  Operating Company, Inc., Miller Oil Corporation and Miller Exploration  Company, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as Agent (Incorporated by reference  from Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended March 31, 2004).                                                                      |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.2   —        |   | Agreement and Amendment  No. 1 to Third Amended and Restated Credit Agreement dated May 31,  2005 among Edge Petroleum Corporation, Edge Petroleum Exploration Company,  Edge Petroleum Operating Company, Inc., Miller Exploration Company and  Miller Oil Corporation, as borrowers, the lenders thereto and Union Bank of  California, N.A., a national banking association, as agent for the lenders  (Incorporated by reference from exhibit 4.2 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended June 30, 2005 (File No. 000-22149)). |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.3   —        |   | Agreement  and Amendment No. 2 to the Third Amended and Restated Credit Agreement  dated November 30, 2005 among Edge Petroleum Corporation, Edge Petroleum  Exploration Company, Edge Petroleum Operating Company, Inc., Miller Oil  Corporation, Miller Exploration Company, and Cinco Energy Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from exhibit 4.3 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005).                 |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.4   —        |   | Miller  Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from exhibit 10.1(a) to Miller Exploration  Company’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.5   —        |   | Amendment  No. 1 to the Miller Exploration Company Stock Option and Restricted  Stock Plan of 1997 (Incorporated by reference to Exhibit 4.2 from Miller  Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.6   —        |   | Amendment  No. 2 to the Miller Exploration Company Stock Option and Restricted Stock  Plan of 1997 (Incorporated by reference from Exhibit 4.3 to Miller  Exploration Company’s Registration Statement on Form S-8 filed on  April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                     |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.7   —        |   | Form of  Miller Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                                |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| 4.8   —        |   | 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 Edge’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                                                                                          |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *4.9   —       |   | Amendment No. 1, 2 and 3 to the 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.                                                                                                                                                                                                                                                                                                                            |
|                               |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| †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)).                                                                                                                                                                                                                                                                                                                                                                                      |

 

52

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| †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 six  months ended 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   —  |   | Severance  Agreements by and between Edge Petroleum Corporation and the Officers of the  Company named therein (Incorporated by reference from exhibit 10.4 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999 (File No. 000-22149)).                                                                   |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.8   —  |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                         |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.9   —  |   | Form of  Employee Restricted Stock Award Agreement under the Incentive Plan of Edge  Petroleum Corporation (Incorporated by reference from exhibit 10.15 to the  Company’s Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999 (File No. 000-22149)).                                                                   |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.10   — |   | Edge  Petroleum Corporation Amended and Restated Elias Stock Incentive Plan.  (Incorporated by reference from exhibit 4.5 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                                                                                                       |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.11   — |   | Form of  Edge Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                                                                                        |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.12   — |   | Summary of Compensation of  Non-Employee Directors (Incorporated by reference from exhibit 10.12 to the  Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                                                                                                        |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.13                         |   | Salaries and Certain Other  Compensation of Executive Officers (Incorporated by reference from exhibit  10.13 to the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                                                                                            |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.14   — |   | 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).                                                                                                                                                                           |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.15   — |   | 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).                                                                                                                                                          |
|                                |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 10.16    —      |   | 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 10.1 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                                                                                  |

 

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| 10.17   —       |   | 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 Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|-------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |   |                                                                                                                                                                                                                                                                                                          |
| 10.18   —       |   | 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 Edge’s Current Report on  Form 8-K filed January 16, 2007). |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| 10.19   —       |   | 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 Edge’s Current Report on  Form 8-K filed January 19, 2007). |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| 10.20   —       |   | 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 Edge’s Current Report on  Form 8-K filed January 19, 2007).  |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| 10.21   —       |   | 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 Edge’s Current Report on  Form 8-K filed February 5, 2007).  |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| †10.22   — |   | 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).                                                                                                                                 |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| *31.1   —       |   | Certification  by John W. Elias, Chief Executive Officer, pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                    |
|                                |   |                                                                                                                                                                                                                                                                                                          |
| *31.2   —       |   | Certification  by Michael G. Long , Chief Financial and Accounting 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 Michael G. Long, Chief Financial and Accounting 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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