**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 the  quarterly period ended June 30, 2007** |
| ** **                                        |
| **OR**                                            |
| ** **                                        |
| **o**                                             | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                  to                  **

**Commission file number 0-22149**

**EDGE PETROLEUM CORPORATION**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                                     | ** ** | **76-0511037**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  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) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

xYes o No

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

o Large accelerated filer                                               xAccelerated filer                                            o Non-accelerated filer

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). o Yes x No

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.
| Class        | ** ** | **Outstanding at August 7, 2007** |
|--------------|------------|-----------------------------------|
| Common Stock |       | 28,521,805                        |

 

 

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**EDGEPETROLEUM CORPORATION**

**Table ofContents**
|                                                                                                                            | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------|
| Part I. Financial  Information                                                                                             |       |       |
| Item 1. Financial  Statements:                                                                                             |       |       |
| Consolidated Balance  Sheets as of June 30, 2007 and December 31, 2006                                                     |       |       |
| Consolidated  Statements of Operations for the Three and Six Months Ended June 30, 2007 and  June 30, 2006                 |       |       |
| Consolidated  Statements of Other Comprehensive Income for the Three and Six Months Ended  June 30, 2007 and June 30, 2006 |       |       |
| Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2007 and June 30,  2006                           |       |       |
| Consolidated  Statement of Stockholders’ Equity for the Six Months ended June 30, 2007                                |       |       |
| Notes to  the Consolidated Financial Statements                                                                            |       |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                       |       |       |
| Item 3.  Qualitative and Quantitative Disclosures About Market Risk                                                        |       |       |
| Item 4. Controls  and Procedures                                                                                           |       |       |
| Part II. Other  Information                                                                                                |       |       |
| Item 1. Legal  Proceedings                                                                                                 |       |       |
| Item 1A. Risk Factors                                                                                                      |       |       |
| Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds                                                        |       |       |
| Item 3.  Defaults Upon Senior Securities                                                                                   |       |       |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                               |       |       |
| Item 5. Other  Information                                                                                                 |       |       |
| Item 6. Exhibits                                                                                                           |       |       |
| Signatures                                                                                                                 |       |       |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

** EDGEPETROLEUM CORPORATION**

** CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                 | ** ** | **June 30,  2007**                                   | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                 | ** ** | **(Unaudited)**                                           | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | **(in thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| ** **                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| CURRENT ASSETS:                                                                                                                                                                                                            |       |                                                      |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                 |       | $                                                         | 8,674      |                        | $          | 2,081 |   |
| Accounts  receivable, trade, net of allowance                                                                                                                                                                              |       | 24,124                                                    |       | 17,738                      |       |
| Accounts  receivable, joint interest owners, net of allowance                                                                                                                                                              |       | 6,447                                                     |       | 2,217                       |       |
| Deferred tax  asset                                                                                                                                                                                                        |       | 7,735                                                     |       | —                      |       |
| Derivative  financial instruments                                                                                                                                                                                          |       | 262                                                       |       | 5,945                       |       |
| Other current  assets                                                                                                                                                                                                      |       | 4,687                                                     |       | 3,959                       |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| Total current  assets                                                                                                                                                                                                      |       | 51,929                                                    |       | 31,940                      |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| PROPERTY AND EQUIPMENT,  net – full cost method of accounting for oil and natural gas properties  (including unproved costs of $95.0 million and $57.6 million at June 30, 2007  and December 31, 2006, respectively) |       | 682,126                                                   |       | 289,457                     |       |
| OTHER ASSETS                                                                                                                                                                                                               |       | 3,687                                                     |       | 260                         |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| TOTAL ASSETS                                                                                                                                                                                                               |       | $                                                         | 737,742    |                        | $          | 321,657 |   |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                | ** ** | ** **                  | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                             | ** ** | ** **                                                | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                 | ** ** | ** **                                                | ** ** | ** **                  | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| Accounts  payable, trade                                                                                                                                                                                                   |       | $                                                         | 2,066      |                        | $          | 3,953 |   |
| Accrued  liabilities                                                                                                                                                                                                       |       | 34,224                                                    |       | 16,638                      |       |
| Accrued interest  payable                                                                                                                                                                                                  |       | 2,610                                                     |       | 541                         |       |
| Deferred tax  liability                                                                                                                                                                                                    |       | —                                                    |       | 433                         |       |
| Asset retirement  obligation – current                                                                                                                                                                                |       | 328                                                       |       | 213                         |       |
| Derivative  financial instruments                                                                                                                                                                                          |       | 2,788                                                     |       | —                      |       |
| Total current  liabilities                                                                                                                                                                                                 |       | 42,016                                                    |       | 21,778                      |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| ASSET RETIREMENT  OBLIGATION – long-term                                                                                                                                                                              |       | 4,067                                                     |       | 3,158                       |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| DERIVATIVE FINANCIAL  INSTRUMENTS                                                                                                                                                                                          |       | 3,749                                                     |       | 758                         |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| DEFERRED TAX LIABILITY                                                                                                                                                                                                     |       | 21,963                                                    |       | 10,911                      |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| OTHER NON-CURRENT  LIABILITIES                                                                                                                                                                                             |       | 534                                                       |       | —                      |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| LONG-TERM DEBT                                                                                                                                                                                                             |       | 230,000                                                   |       | 129,000                     |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| Total  liabilities                                                                                                                                                                                                         |       | 302,329                                                   |       | 165,605                     |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| 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 June 30, 2007 and none at December 31, 2006                                                                           |       | 29                                                        |       | —                      |       |
| Common stock,  $0.01 par value; 60,000,000 shares authorized; 28,497,926 and 17,442,229  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively                                               |       | 285                                                       |       | 174                         |       |
| Additional  paid-in capital                                                                                                                                                                                                |       | 420,035                                                   |       | 141,685                     |       |
| Retained  earnings                                                                                                                                                                                                         |       | 15,064                                                    |       | 14,193                      |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| Total  stockholders’ equity                                                                                                                                                                                           |       | 435,413                                                   |       | 156,052                     |       |
|                                                                                                                                                                                                                       |       |                                                      |       |                        |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                           |       | $                                                         | 737,742    |                        | $          | 321,657 |   |

 

See accompanying notes toconsolidated financial statements.

3

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 **EDGE PETROLEUM CORPORATION**

** CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**
| ** **                                                    | ** **   | **Three Months Ended June 30,**                   | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|--------------|-----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** **   | **2007**                                                              | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                    | *** *** | **(in thousands, except per share amounts)** | ** ** |
| OIL AND NATURAL  GAS REVENUE                                  |         |                                                                  |       |                                              |       |   |   |   |   |
| Oil and natural gas sales                                     |         | $                                                                     | 47,386     |                                              | $          | 31,199 |   | $ | 86,600 |   | $ | 64,094 |   |
| Gain (loss) on derivatives                                    |         | 6,516                                                                 |       | 2,679                                             |       | (9,815 | ) | 4,778 |   |
| Total revenue                                                 |         | 53,902                                                                |       | 33,878                                            |       | 76,785 |   | 68,872 |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| OPERATING  EXPENSES:                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| Oil and natural gas operating expenses                        |         | 4,048                                                                 |       | 2,260                                             |       | 7,428 |   | 4,449 |   |
| Severance and ad valorem taxes                                |         | 3,885                                                                 |       | 2,236                                             |       | 6,196 |   | 4,825 |   |
| Depletion, depreciation, amortization and accretion           |         | 21,064                                                                |       | 16,545                                            |       | 39,606 |   | 32,338 |   |
| General and administrative expenses                           |         | 5,053                                                                 |       | 3,348                                             |       | 9,448 |   | 6,472 |   |
| Bad debt expense                                              |         | 482                                                                   |       | —                                            |       | 482 |   | — |   |
| Total operating expenses                                      |         | 34,532                                                                |       | 24,389                                            |       | 63,160 |   | 48,084 |   |
| OPERATING INCOME                                              |         | 19,370                                                                |       | 9,489                                             |       | 13,625 |   | 20,788 |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| OTHER INCOME AND  EXPENSE:                                    |         |                                                                  |       |                                              |       |   |   |   |   |
| Interest income                                               |         | 122                                                                   |       | 32                                                |       | 179 |   | 70 |   |
| Interest expense, net of amounts capitalized                  |         | (2,928                                                                | )          | (545                                              | )          | (5,690 | ) | (1,213 | ) |
| Amortization of deferred loan costs                           |         | (243                                                                  | )          | (41                                               | )          | (496 | ) | (83 | ) |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| INCOME BEFORE  INCOME TAXES                                   |         | 16,321                                                                |       | 8,935                                             |       | 7,618 |   | 19,562 |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| INCOME TAX  EXPENSE                                           |         | (5,704                                                                | )          | (3,140                                            | )          | (2,769 | ) | (6,875 | ) |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| NET INCOME                                                    |         | 10,617                                                                |       | 5,795                                             |       | 4,849 |   | 12,687 |   |
| Preferred Stock Dividends                                     |         | (2,063                                                                | )          | —                                            |       | (3,444 | ) | — |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| NET INCOME  AVAILABLE TO COMMON STOCKHOLDERS                  |         | $                                                                     | 8,554      |                                              | $          | 5,795 |   | $ | 1,405 |   | $ | 12,687 |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| BASIC EARNINGS  PER SHARE                                     |         | $                                                                     | 0.30       |                                              | $          | 0.33 |   | $ | 0.05 |   | $ | 0.73 |   |
| DILUTED EARNINGS  PER SHARE                                   |         | $                                                                     | 0.28       |                                              | $          | 0.32 |   | $ | 0.05 |   | $ | 0.70 |   |
| PREFERRED STOCK  DIVIDENDS PER BASIC SHARE                    |         | $                                                                     | 0.07       |                                              | $          | — |   | $ | 0.13 |   | $ | — |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| BASIC WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING   |         | 28,470                                                                |       | 17,372                                            |       | 26,679 |   | 17,306 |   |
|                                                          |         |                                                                  |       |                                              |       |   |   |   |   |
| DILUTED WEIGHTED  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |         | 37,509                                                                |       | 18,105                                            |       | 27,015 |   | 18,043 |   |

 

See accompanying notes to consolidated financialstatements.

4

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**EDGEPETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OTHER COMPREHENSIVE INCOME (Unaudited)**
| ** **                                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                             | ** ** |
| NET INCOME                                   |       | $                                                   | 10,617     |                                              | $          | 5,795 |   | $ | 4,849 |   | $ | 12,687 |   |
| Preferred  Stock Dividends                   |       | (2,063                                              | )          | —                                            |       | (3,444 | ) | — |   |
| NET  INCOME AVAILABLE TO COMMON STOCKHOLDERS |       | 8,554                                               |       | 5,795                                             |       | 1,405 |   | 12,687 |   |
|                                         |       |                                                |       |                                              |       |   |   |   |   |
| OTHER COMPREHENSIVE  INCOME, net of tax:     |       |                                                |       |                                              |       |   |   |   |   |
| Reclassification of derivative losses (1)    |       | —                                              |       | —                                            |       | —- |   | 1,713 |   |
| Other comprehensive income                   |       | —                                              |       | —                                            |       | —- |   | 1,713 |   |
| COMPREHENSIVE  INCOME                        |       | $                                                   | 8,554      |                                              | $          | 5,795 |   | $ | 1,405 |   | $ | 14,400 |   |

 

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| (1) net of income taxes  of |   | $ | — |   | $ | — |   | $ | — |   | $ | 922 |   |
|-----------------------------|--------|---|--------|--------|---|--------|--------|---|--------|--------|---|-----|--------|

 

See accompanying notes to the consolidated financialstatements**.**

5

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**EDGEPETROLEUM CORPORATION**

**CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)**
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                           | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                 | 4,849      |   | $ | 12,687 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                              |       |   |   |
| Unrealized (gain) loss on the fair value of  derivatives                           |       | 11,462                                            |       | (2,817 | ) |
| Deferred income taxes                                                              |       | 2,715                                             |       | 6,824 |   |
| Depletion, depreciation, amortization and accretion                                |       | 39,606                                            |       | 32,338 |   |
| Amortization of deferred loan costs                                                |       | 496                                               |       | 83 |   |
| Bad debt expense                                                                   |       | 482                                               |       | — |   |
| Stock based compensation costs                                                     |       | 2,105                                             |       | 633 |   |
| Changes in  assets and liabilities:                                                |       |                                              |       |   |   |
| Decrease (increase) in accounts receivable, trade                                  |       | (6,868                                            | )          | 8,675 |   |
| Increase in accounts receivable, joint interest  owners                            |       | (4,230                                            | )          | (2,258 | ) |
| Increase in other assets                                                           |       | (1,223                                            | )          | (533 | ) |
| Decrease in accounts payable, trade                                                |       | (1,887                                            | )          | (3,058 | ) |
| (Decrease) increase in accrued liabilities                                         |       | 15,864                                            |       | (6,809 | ) |
| Increase in accrued interest payable                                               |       | 2,069                                             |       | 605 |   |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by operating activities                                          |       | 65,440                                            |       | 46,370 |   |
|                                                                               |       |                                              |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Oil and natural gas property and equipment additions                               |       | (53,046                                           | )          | (67,897 | ) |
| Acquisition of Smith assets                                                        |       | (379,508                                          | )          | — |   |
| Decrease in drilling advances                                                      |       | 220                                               |       | 2,071 |   |
| Proceeds from the sale of oil and natural gas  properties                          |       | 1,302                                             |       | 600 |   |
|                                                                               |       |                                              |       |   |   |
| Net cash used in investing activities                                              |       | (431,032                                          | )          | (65,226 | ) |
|                                                                               |       |                                              |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Borrowings of long-term debt                                                       |       | 245,000                                           |       | 28,000 |   |
| Repayments of long-term debt                                                       |       | (144,000                                          | )          | (8,000 | ) |
| Preferred dividends paid                                                           |       | (1,722                                            | )          | — |   |
| Proceeds of preferred stock offering                                               |       | 143,750                                           |       | — |   |
| Costs of preferred stock offering                                                  |       | (5,308                                            | )          | — |   |
| Proceeds of common stock offering                                                  |       | 144,756                                           |       | — |   |
| Costs of common stock offering                                                     |       | (6,658                                            | )          | — |   |
| Net proceeds from issuance of common stock                                         |       | 15                                                |       | 576 |   |
| Deferred loan costs                                                                |       | (3,648                                            | )          | (6 | ) |
|                                                                               |       |                                              |       |   |   |
| Net cash provided by financing activities                                          |       | 372,185                                           |       | 20,570 |   |
|                                                                               |       |                                              |       |   |   |
| **NET  INCREASE IN CASH AND CASH EQUIVALENTS**                                     |       | 6,593                                             |       | 1,714 |   |
| ** **                                                                         |       |                                              |       |   |   |
| **CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD**                                |       | 2,081                                             |       | 666 |   |
| ** **                                                                         |       |                                              |       |   |   |
| **CASH  AND CASH EQUIVALENTS, END OF PERIOD**                                      |       | $                                                 | 8,674      |   | $ | 2,380 |   |

 

See accompanying notes to consolidated financialstatements

6

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**EDGE PETROLEUM CORPORATION**

CONSOLIDATED                STATEMENTOF STOCKHOLDERS’ EQUITY (Unaudited)
| ** **                                                           | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional **              | ** ** | ** **   | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|-----------------------------------|------------|--------------|------------|------------|------------|
| ** **                                                           | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Total Stockholders’** | ** ** |
| ** **                                                           | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**                       | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**  | ** ** |
| BALANCE,  DECEMBER 31, 2006                                          |       | —                   |       | $                     | —     |        | 17,442     |         | $          | 174                               |       | $            | 141,685    |       | $          | 14,193 |   | $ | 156,052 |   |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Issuance of  preferred stock                                         |       | 2,875                    |       | 29                    |       | —      |       | —       |       | 143,721                           |       | —       |       | 143,750    |       |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Costs of  preferred stock offering                                   |       | —                   |       | —                |       | —      |       | —       |       | (5,308                            | )          | —       |       | (5,308     | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Issuance of  common stock                                            |       | —                   |       | —                |       | 10,925      |       | 109          |       | 144,647                           |       | —       |       | 144,756    |       |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Costs of common  stock offering                                      |       | —                   |       | —                |       | —      |       | —       |       | (6,658                            | )          | —       |       | (6,658     | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Issuance of  common stock                                            |       | —                   |       | —                |       | 131         |       | 2            |       | 615                               |       | —       |       | 617        |       |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Stock based  compensation costs                                      |       | —                   |       | —                |       | —      |       | —       |       | 1,503                             |       | —       |       | 1,503      |       |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Tax benefit  associated with exercise of non-qualified stock options |       | —                   |       | —                |       | —      |       | —       |       | (170                              | )          | —       |       | (170       | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Adoption of FIN  48                                                  |       | —                   |       | —                |       | —      |       | —       |       | —                            |       | (534         | )          | (534       | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Preferred stock  dividends                                           |       | —                   |       | —                |       | —      |       | —       |       | —                            |       | (3,444       | )          | (3,444     | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| Net income                                                           |       | —                   |       | —                |       | —      |       | —       |       | —                            |       | 4,849        |       | 4,849      |       |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                              |       |         |       |       |       |
| BALANCE,JUNE 30,  2007                                               |       | 2,875                    |       | $                     | 29         |        | 28,498     |         | $          | 285                               |       | $            | 420,035    |       | $          | 15,064 |   | $ | 435,413 |   |

 

See accompanying notes toconsolidated financial statements

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**EDGEPETROLEUM CORPORATION**

** NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

**1.     SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

The financial statements included herein have beenprepared by Edge Petroleum Corporation, a Delaware corporation (“we”, “our”, “us”or the “Company”), without audit pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”), and reflect all adjustments whichare, in the opinion of management, necessary to present a fair statement of theresults for the interim periods on a basis consistent with the annual auditedconsolidated financial statements.  Allsuch adjustments are of a normal recurring nature.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for anentire year.  Certain information,accounting policies and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted pursuant to such rules andregulations, although we believe that the disclosures are adequate to make theinformation presented not misleading. These financial statements should be readin conjunction with our audited consolidated financial statements included inour Annual Report on Form 10-K for the year ended December 31, 2006.

***Oil and Natural Gas Properties*****-**    Investmentsin oil and natural gas properties are accounted for using the full-cost methodof accounting. The accounting for our business is subject to special accountingrules that are unique to the oil and gas industry.  There are two allowable methods of accountingfor oil and gas business activities:  thesuccessful-efforts method and the full-cost method. There are severalsignificant differences between these methods. Among these differences is that,under the successful-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 themeasurement of impairment of oil and gas properties, the successful-effortsmethod follows the guidance provided in Statement of Financial AccountingStandards (“SFAS”) No. 144, *Accounting forthe Impairment or Disposal of Long-Lived Assets*, where the firstmeasurement for impairment is to compare the net book value of the relatedasset to its undiscounted future cash flows using commodity prices consistentwith management expectations. The full-cost method follows guidance provided inSEC Regulation S-X Rule 4-10, where impairment is determined by the “ceilingtest,” whereby to the extent that such capitalized costs subject toamortization in the full-cost pool (net of accumulated depletion, depreciationand amortization, and related tax effects) exceed the present value (using a10% discount rate) of estimated future net after-tax cash flows from proved oiland natural gas reserves, such excess costs are charged to expense.  Once incurred, an impairment of oil andnatural gas properties is not reversible at a later date.  A ceiling test impairment could result in asignificant loss for a reporting period; however, future depletion expensewould be correspondingly reduced. Impairment of oil and natural gas propertiesis assessed on a quarterly basis in conjunction with the Company’s quarterlyand annual SEC filings.  No ceiling testimpairment was required during the quarters ended June 30, 2007 or 2006.

Inaccordance with SEC Staff Accounting Bulletin (“SAB”) No. 103, *Update of Codification of Staff Accounting Bulletins*,derivative instruments 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 9), therefore the ceiling testat June 30, 2007 and 2006 was not impacted by the value of our derivatives.

Oiland natural gas properties are amortized based on a unit-of-production methodusing estimates of proved reserve quantities. Oil and natural gas liquids (“NGL”s)are converted to a gas equivalent basis (“Mcfe”) at the rate of one barrelequals six Mcf. In accordance with SAB No. 106, *Interaction of Statement 143 and the Full Cost Rules,*theamortizable base includes estimated future development and dismantlement costs,and restoration

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and abandonmentcosts, net of estimated salvage values. Investments in unproved properties arenot amortized until proved reserves associated with the prospects can bedetermined or until impairment occurs. Unproved properties are evaluatedquarterly, and as needed, for impairment on a property-by-property basis. Ifthe results of an assessment indicate that an unproved property is impaired,the amount of impairment is added to the proved oil and natural gas propertycosts to be amortized. Oil and natural gas properties included costs of $95.0million and $57.6 million at June 30, 2007 and December 31, 2006, respectively,related to unproved property, which were excluded from capitalized costs beingamortized.

Salesof proved and unproved properties are accounted for as adjustments ofcapitalized costs with no gain or loss recognized, unless such adjustmentswould significantly alter the relationship between capitalized costs and provedreserves.

***AccountsReceivable and Allowance for Doubtful Accounts*** - The Companyroutinely assesses the recoverability of all material trade and otherreceivables to determine its ability to collect the receivables in full. AccountsReceivable, Trade includes an “allowance” for doubtful accounts of $0.2 millionand $0.5 million at June 30, 2007 and December 31, 2006, respectively.  Accounts Receivable, Joint Interest Ownersincludes an “allowance” for doubtful accounts of $3,200 at both June 30, 2007and December 31, 2006.

***Inventories –***Inventories consist principally of tubulargoods and production equipment for wells and facilities. They are stated at thelower of weighted-average cost or market and are included in Other Current Assetson the consolidated balance sheet.

***Asset Retirement Obligations –***TheCompany records a liability for legal obligations associated with theretirement of tangible long-lived assets in the period in which they areincurred in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations.* 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 six months ended June 30, 2007 and 2006 are as follows:

|                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(in thousands)**                           | ** ** |
| ARO, Beginning  of Period                   |       | $                                                 | 3,371      |   | $ | 2,767 |   |
| Liabilities  incurred in the current period |       | 916                                               |       | 287 |   |
| Liabilities  settled in the current period  |       | (26                                               | )          | (129 | ) |
| Accretion  expense                          |       | 134                                               |       | 89 |   |
| Revisions                                   |       | —                                            |       | — |   |
| ARO, End of  Period                         |       | $                                                 | 4,395      |   | $ | 3,014 |   |
|                                        |       |                                              |       |   |   |
| Current Portion                             |       | $                                                 | 328        |   | $ | 166 |   |
| Long-Term Portion                           |       | $                                                 | 4,067      |   | $ | 2,848 |   |

 

During the six months ended June 30, 2007, AROliabilities incurred include 178 new well obligations, including the newlyacquired properties from Smith Production Inc. (see Note 10) and liabilitiessettled include four wells that were plugged.

***Share-Based Compensation***–TheCompany accounts for share-based compensation in accordance with the provisionsof SFAS No. 123R, *Share-Based Payment,* whichrequires that the compensation cost relating to share-based paymenttransactions be recognized in financial statements. Share-based compensationfor the six months ended June 30, 2007 was approximately $1.5 million, of which$1.2 million is included in general and

9

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administrativeexpenses (“G&A”) and $295,300 is capitalized to oil and natural gasproperties.  Share-based compensation forthe six months ended June 30, 2006 was approximately $633,300, of which$463,400 was included in G&A and $169,900 was capitalized to oil andnatural gas properties.

During the six months ended June 30, 2007, 259,400restricted stock units (“RSUs”) were granted. At June 30, 2007, 586,500 RSUswere outstanding, all of which are classified as equity instruments.  No options were granted during the six monthsended June 30, 2007.  During the firsthalf of 2007, 2,000 options were exercised, resulting in 648,700 optionsoutstanding at period end.

***Income Taxes -***Effective January 1, 2007, the Company adopted FASB Interpretation No. 48 *Accounting for Uncertainty in Income Taxes (an interpretation of FASBStatement No. 109)*(“FIN 48”). This interpretation clarified the accounting for uncertainty in incometaxes recognized in the financial statements by prescribing a recognitionthreshold and measurement attribute for a tax position taken or expected to betake in a tax return.  FIN 48 alsoprovides guidance on de-recognitions, classification, interest and penalties,accounting in interim periods, disclosure and transition.  The Company also adopted FASB Staff PositionNo. FIN 48-1, *Definition of Settlement in FASBInterpretation No. 48* (“FSP FIN 48-1”) 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 7).

***Accounting Pronouncements***– InFebruary 2007, the FASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities — Including anAmendment of FAS Statement No. 115*. SFAS No. 159gives companies the option of applying at specified election dates fair valueaccounting to certain financial instruments and other items that are notcurrently required to be measured at fair value. If a company chooses to recordeligible items at fair value, the company must report unrealized gains andlosses on those items in earnings at each subsequent reporting date.SFAS No. 159 also prescribes presentation and disclosure requirementsfor assets and liabilities that are measured at fair value pursuant to thisstandard and pursuant to the guidance in SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities (asamended)*. SFAS No. 159 will be effective for fiscal year2008. As the provisions of SFAS No. 159 are applied prospectively,the impact on the Company will depend on the instruments selected for fairvalue measurement at the time of implementation.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements,* which provides guidance for usingfair value to measure assets and liabilities. The standard also gives expanded information about the extent to whichcompanies measure assets and liabilities at fair value, the information used tomeasure fair value, and the effect of fair value measurements on earnings. SFASNo. 157 does not expand the use of fair value in any new circumstances.  SFAS No. 157 establishes a fair valuehierarchy that prioritizes the information used to develop fair valueassumptions.  SFAS No. 157 is effectivefor financial statements issued for fiscal years beginning after November 15,2007.  Early adoption is encouraged.  The Company is currently assessing theimpact, if any, that SFAS No. 157 will have on its financial statements.

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

**2.     LONG-TERM DEBT**

On January 30, 2007, the Company terminated its ThirdAmended and Restated Credit Agreement (the “Prior Credit Facility”), which ithad originally entered into in March 2004 (effective December 31, 2003). ThePrior Credit Facility was scheduled to mature on March 31, 2008 and had aborrowing base of $140.0 million, of which $129.0 million was outstanding as ofJanuary 30, 2007.

OnJanuary 30, 2007, the Company entered into a Fourth Amended and Restated CreditAgreement (the “Agreement”) for a new Revolving Credit Facility with Union Bankof California (“UBOC”), as administrative agent and issuing lender, and theother lenders party thereto. Pursuant  to the Agreement, UBOC acts as theadministrative agent for a senior, first lien secured borrowing base revolvingcredit facility (the “Revolving Facility”) in favor of the Company and certainof its wholly-owned subsidiaries in an amount equal to $750 million,

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of which only $320million is available under the borrowing base established at the closing. TheRevolving Facility has a letter of credit sub-limit of $20 million. Inconnection with the Revolving Facility, the Company paid the lenders fees in anamount equal to 1.00% of the initial borrowing base established under theRevolving Facility, or $3.2 million, on January 31, 2007.  The Companyalso paid approximately $0.6 million for certain other administrative fees,legal fees, fronting fees and work fees in connection with the RevolvingFacility. The aggregate fees of $3.8 million (of which $0.1 million was paid inDecember 2006) were recorded to deferred loan costs and are being amortizedover the maturity of the Revolving Facility.

The Revolving Facility matures on January 31, 2011 andbears interest at LIBOR plus an applicable margin ranging from 1.25% to 2.5% orPrime plus a margin of up to 0.25%, with an unused commitment fee ranging from0.50% to 0.25%. At June 30, 2007, all of the Company’s outstanding borrowingswere LIBOR based, consisting of two tranches of borrowings at interest rates of7.10% and 7.09%. As of June 30, 2007, $230 million in total borrowings wereoutstanding under the Revolving Facility. The Company’s available borrowingcapacity under the Revolving Facility was $90 million at June 30, 2007.  The borrowing base of $320 million wasreconfirmed by the lenders during the second quarter of 2007.

TheRevolving Facility is secured by substantially all of the Company’s assets. TheRevolving Facility provides for certain restrictions, including, but notlimited to, limitations on additional borrowings, sales of oil and natural gasproperties or other collateral, and engaging in merger or consolidationtransactions. The Revolving Facility restricts dividends and certain distributionsof cash or properties and certain liens and also contains financial covenantsincluding, without limitation, the following:

·                  An EBITDAXto interest expense ratio requires that as of the last day of each fiscalquarter the ratio of (a) Edge’s consolidated EBITDAX (defined as EBITDA plussimilar non-cash items and exploration and abandonment expenses for suchperiod) to (b) Edge’s consolidated interest expense, not be less than 2.5 to1.0, calculated on a cumulative quarterly basis for the first 12 months afterthe closing of the Revolving Facility and then on a rolling four quarter basis.

·                  A currentratio requires that as of the last day of each fiscal quarter the ratio of Edge’sconsolidated current assets to Edge’s consolidated current liabilities, asdefined in the Revolving Facility, be at least 1.0 to 1.0.

·                  A maximumleverage ratio requires that as of the last day of each fiscal quarter theratio of (a) Total Indebtedness (as defined in the Agreement) to (b) an amountequal to consolidated EBITDAX be not greater than 3.0 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.

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.

In December 2006, UBOC provided the Company acommitment letter for a $250 million senior, second lien secured bridge loanfacility (the “Bridge Loan Facility”). The Bridge Loan Facility, along with theRevolving Facility, were intended to replace the Company’s Prior CreditFacility and to fund the closing of the Smith Acquisition (see Note 10) if theCompany was unable to complete one or both of its intended public offerings.Due to the successful completion of the public offering of common stock and5.75% Series A cumulative convertible perpetual preferred stock on January 30,2007, the Company did not enter into the Bridge Loan Facility. The Company paidan amount equal to 0.50% of the commitment under the Bridge Loan Facility, or$1.3 million, on January 31, 2007, which is included in interest expense.

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**3.     SHELF REGISTRATIONSTATEMENT**

Duringthe second quarter 2005, the Company filed a registration statement with theSEC which registered securities of up to $390 million of any combination ofdebt securities, preferred stock, common stock or warrants for debt securitiesor equity securities of the Company. Net proceeds, terms and pricing of theoffering of securities issued under the shelf registration statement will bedetermined at the time of the offerings. The shelf registration statement doesnot provide assurance that the Company will or could sell any such securities.The Company’s ability to utilize the shelf registration statement for thepurpose of issuing, from time to time, any combination of debt securities,preferred stock, common stock or warrants for debt securities or equitysecurities will depend upon, among other things, market conditions and theexistence of investors who wish to purchase the Company’s securities at pricesacceptable to the Company.  In July 2007,the Company replaced this shelf registration statement with a new shelfregistration statement, which registered offerings of up to $500 million ofsecurities (see Note 4).

In January 2007,the Company completed an offering of 10.925 million shares of its common stockand 2.875 million shares of 5.75% Series A cumulative convertible perpetualpreferred stock. The shares were offered to the public at a price of $13.25 pershare of common stock and $50.00 per share of preferred stock. The Companyreceived net proceeds of approximately $276.5 million from the offerings($138.1 million from the common offering and $138.4 from the preferredoffering), after deducting underwriting discounts and commissions and theexpenses of the offerings.

|                          | ** ** | **Common Stock   Offering**                      | ** ** | **Preferred Stock  Offering** | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|------------------------------------|------------|
| ** **               | ** ** | **(in thousands, except issue price)** | ** ** |
| Gross Proceeds           |       | $                                                          | 144,756    |                               | $          | 143,750 |   |
|                     |       |                                                       |       |                               |       |
| Underwriting  discount   |       | (6,152                                                     | )          | (4,672                             | )          |
|                     |       |                                                       |       |                               |       |
| Other costs of  offering |       | (506                                                       | )          | (636                               | )          |
|                     |       |                                                       |       |                               |       |
| Net Proceeds             |       | $                                                          | 138,098    |                               | $          | 138,442 |   |
|                     |       |                                                       |       |                               |       |
| Shares issued            |       | 10,925                                                     |       | 2,875                              |       |
|                     |       |                                                       |       |                               |       |
| Issue price              |       | $                                                          | 13.25      |                               | $          | 50.00 |   |

 

**4.     SUBSEQUENT EVENT**

OnJuly 12, 2007, the Company filed an amendment to a registration statement filedwith the SEC in the second quarter of 2007 that registered securities of up to$500 million of any combination of debt securities, preferred stock, commonstock or warrants for debt securities or equity securities of the Company andguarantees of debt securities by the Company’s subsidiaries.  The shelf registration statement replaces aprevious shelf registration statement, which registered offerings of up to $390million of securities, as discussed in Note 3. Net proceeds, terms and pricing of the offering of securities issuedunder the shelf registration statement will be determined at the time of theofferings. The shelf registration statement does not provide assurance that theCompany will or could sell any such securities. The Company’s ability toutilize the shelf registration statement for the purpose of issuing, from timeto time, any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities will depend upon, among otherthings, market conditions and the existence of investors who wish to purchasethe Company’s securities at prices acceptable to the Company.  As of August 9, 2007, the Company had $500million available under its current shelf registration statement.

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**5.     PREFERRED STOCK**

TheCompany completed the public offering of 2,875,000 shares of its 5.75% Series Acumulative convertible perpetual preferred stock (“Convertible Preferred Stock”)in January 2007.

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by the Company’s debt agreements,assets are legally available to pay dividends and the board of directors or anauthorized committee of its board declares a dividend payable, the Company willpay dividends in cash, every quarter. The first payment was made on April 15,2007 for the partial period from issuance through April 15, 2007, and thesecond payment, which was the first full quarterly dividend, was paid on July16, 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 therefore have beenset apart 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 ofthe shares of common stock and to all of the Company’s 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 the ConvertiblePreferred Stock;

·                  on a parity withall of the Company’s other capital stock issued in the future the terms ofwhich expressly provide that it will rank on a parity with the shares of theConvertible Preferred Stock; and

·                  junior to all ofthe Company’s existing and future debt obligations and to all shares of itscapital stock issued in the future, the terms of which expressly provide thatsuch shares will rank senior to the shares of the Convertible Preferred Stock.

*Mandatory conversion*. On orafter January 20, 2010, the Company may, at its option, cause shares of itsConvertible Preferred Stock to be automatically converted at the applicableconversion rate, but only if the closing sale price of its common stock for 20trading days within a period of 30 consecutive trading days ending on thetrading day immediately preceding the date the Company gives the conversionnotice equals or exceeds 130% of the conversion price in effect on each suchtrading day.

*Optional redemption*. If fewerthan 15% of the shares of Convertible Preferred Stock issued in the ConvertiblePreferred Stock offering (including any additional shares issued pursuant tothe underwriters’ over-allotment option) are outstanding, the Company may, atany time on or after January 20, 2010, at its option, redeem for cash allsuch Convertible Preferred Stock at a redemption price equal to the liquidationpreference of $50.00 plus any accrued and unpaid dividends, if any, on a shareof Convertible Preferred Stock to, but excluding, the redemption date, for eachshare of Convertible Preferred Stock.

*Conversion rights*. Each shareof Convertible Preferred Stock may be converted at any time, at the option of theholder, into approximately 3.0193 shares of the Company’s common stock (whichis based on an initial

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conversionprice of $16.56 per share of common stock, subject to adjustment) plus cash inlieu of fractional shares, subject to the Company’s right to settle all or aportion of any such conversion in cash or shares of its common stock. If theCompany elects to settle all or any portion of its conversion obligation incash, the conversion value and the number of shares of its common stock theCompany will deliver upon conversion (if any) will be based upon a 20 tradingday 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*. If aholder 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, disclosing 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 provision 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 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).

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*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 therestated certificate of incorporation, as amended, by merger or otherwise, ifthe amendment would alter or change the powers, preferences, privileges orrights of the holders of shares of the Convertible Preferred Stock so as toadversely affect them;

·                  issue, authorizeor increase the authorized amount of, or issue or authorize any obligation orsecurity convertible into or evidencing a right to purchase, any senior stock;or

·                  reclassify anyof our authorized stock into any senior stock of any class, or any obligationor security convertible into or evidencing a right to purchase any seniorstock.

**6.     EARNINGS PER SHARE**

The Company accounts for earnings per share inaccordance with SFAS No. 128, *Earnings perShare*, which establishes the requirements for presenting earningsper share (“EPS”).  SFAS No. 128 requiresthe presentation of “basic” and “diluted” EPS on the face of the statement ofoperations.  Basic EPS amounts arecalculated using the weighted average number of common shares outstandingduring each period.  Diluted EPS assumesthe exercise of all stock options and warrants having exercise prices less thanthe average market price of the common stock during the periods, using the treasurystock method.

Diluted EPS also includes the effect of convertiblesecurities by application of the “if-converted” method.  Under this method, if an entity hasconvertible preferred stock outstanding, the preferred dividends applicable tothe 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 the if-convertedmethod, conversion is not assumed for purposes of computing diluted EPS if theeffect would be anti-dilutive. The following tables present the computations ofEPS for the periods indicated:

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| ** **                                                            | ** ** | **Three Months Ended June 30, 2007**         | ** ** | **Three Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Income  (Numerator)**                                               | ** ** | **Shares  (Denominator)**                                     | ** ** | **Per  Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income                                                            |       | $                                                                     | 10,617     |                                                          |       |   |   |   | $ | 5,795 |   |   |   |   |   |
| Less: Preferred  stock dividends                                      |       | (2,063                                                                | )          |                                                          |       |   |   | — |   |   |   |   |   |
| ** **                                                            | ** ** | ** **                                                            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  EPS**                                                        | ** ** | ** **                                                            | ** ** | ** **                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  available to common stockholders                          |       | 8,554                                                                 |       | 28,470                                                        |       | $ | 0.30 |   | 5,795 |   | 17,372 |   | $ | 0.33 |   |
| Effect of  dilutive securities:                                       |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Restricted stock  units                                               |       | —                                                                |       | 53                                                            |       | — |   | — |   | 254 |   | — |   |
| Common stock  options                                                 |       | —                                                                |       | 306                                                           |       | — |   | — |   | 479 |   | (0.01 | ) |
| Convertible  preferred stock                                          |       | 2,063                                                                 |       | 8,680                                                         |       | (0.02 | ) | — |   | — |   | — |   |
| **Diluted  EPS**                                                      |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income available to  common stockholders plus assumed conversions |       | $                                                                     | 10,617     |                                                          | 37,509     |   | $ | 0.28 |   | $ | 5,795 |   | 18,105 |   | $ | 0.32 |   |

 
| ** **                                                            | ** ** | **Six Months Ended June 30, 2007**           | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                            | ** ** | **Income**

**(Numerator)**                                           | ** ** | **Shares  (Denominator)**                                   | ** ** | **Per  Share  Amount** | ** ** | **Income  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income                                                            |       | $                                                                     | 4,849      |                                                        |       |   |   |   | $ | 12,687 |   |   |   |   |   |
| Less: Preferred  stock dividends                                      |       | (3,444                                                                | )          |                                                        |       |   |   | — |   |   |   |   |   |
| ** **                                                            | ** ** | ** **                                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  EPS**                                                        | ** ** | ** **                                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  available to common stockholders                          |       | 1,405                                                                 |       | 26,679                                                      |       | $ | 0.05 |   | 12,687 |   | 17,306 |   | $ | 0.73 |   |
| Effect of  dilutive securities:                                       |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Restricted stock  units                                               |       | —                                                                |       | 31                                                          |       | — |   | — |   | 238 |   | (0.01 | ) |
| Common stock  options                                                 |       | —                                                                |       | 305                                                         |       | — |   | — |   | 499 |   | (0.02 | ) |
| Convertible  preferred stock                                          |       | —                                                                |       | —                                                      |       | — |   | — |   | — |   | — |   |
| **Diluted  EPS**                                                      |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net income available to  common stockholders plus assumed conversions |       | $                                                                     | 1,405      |                                                        | 27,015     |   | $ | 0.05 |   | $ | 12,687 |   | 18,043 |   | $ | 0.70 |   |

 

16

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In the calculationof diluted EPS for the six months ended June 30, 2007, the Company’s 5.75%Series A cumulative convertible perpetual preferred stock has been excludedfrom the computation, because if-converted, the resulting 8.7 million sharesare anti-dilutive.

**7.     INCOME TAXES**

TheCompany accounts for income 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.

TheCompany currently estimates that its effective tax rate for the year endingDecember 31, 2007 will be approximately 36.34%. A provision for income taxes of $2.8 million (36.34% of pre-tax income)and $6.9 million (35.1% of pre-tax income) were reported for the six monthsended June 30, 2007 and 2006, respectively. The Company’s income tax provisionsare primarily non-cash as the Company has NOL carryforwards available that weregenerated from drilling activity. Currently the Company anticipates that it willpay a small amount of federal alternative minimum and current state income taxin 2007. The Company was required to pay federal alternative minimum taxes of$94,100 in the first six months of 2006.

In June 2006, the FASB issued FIN 48, *Accounting for Uncertainty in Income Taxes, an Interpretation of FASBStatement No. 109*, which clarifies the accounting foruncertainty in income taxes recognized in accordance withSFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 prescribes a benefit recognition model with atwo-step approach, a more-likely-than-not recognition criterion and ameasurement attribute that measures the position as the largest amount of taxbenefit that is greater than 50% likely of being ultimately realized uponultimate settlement. If it is not more likely than not that the benefit will besustained on its technical merits, no benefit will be recorded. FIN 48also requires that the amount of interest expense to be recognized related touncertain tax positions be computed by applying the applicable statutory rateof interest to the difference between the tax position recognized in accordancewith FIN 48 and the amount previously taken or expected to be taken in atax return. The Company also adopted FSP FIN 48-1 as of January 1, 2007, which providesthat a company’s tax position will be considered settled if the taxingauthority has completed its examination, the company does not plan to appeal,and it is remote that the taxing authority would reexamine the tax position inthe future. At January 1, 2007, the Company recorded the cumulative effect ofthe change in accounting principle as a $534,035 decrease in the openingbalance of retained earnings. The Company had no reserves prior to adoption atJanuary 1, 2007. The Company recognizes interest and penalties related tounrecognized tax benefits in tax expense. However, the Company has accrued nointerest or penalties at June 30, 2007.

**8.     SUPPLEMENTAL DISCLOSURE OFCASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING ACTIVITIES**

The Company considers all highly liquid debtinstruments purchased with an original maturity of three months or less to becash equivalents. A summary of non-cash investing and financing activities ispresented below:
| Description                                                                                          | ** ** | **Number of  Shares  Issued** | ** ** | **Fair Market  Value** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                           | ** ** | **(in thousands)**            | ** ** |
| **Six months ended June 30, 2007:**                                                                  | ** ** | ** **                         | ** ** | ** **                  | ** ** |
| Shares issued to satisfy restricted stock grants                                                     |       | 114                                |       | $                           | 2,055      |   |
| Shares issued to fund the Company’s matching  contribution under the Company’s 401(k) plan |       | 15                                 |       | $                           | 202        |   |
| **Six months ended June 30, 2006:**                                                                  | ** ** | ** **                         | ** ** | ** **                  | ** ** |
| Shares issued to satisfy restricted stock grants                                                     |       | 73                                 |       | $                           | 911        |   |
| Shares issued to  fund the Company’s matching contribution under the Company’s 401(k) plan |       | 5                                  |       | $                           | 138        |   |

 

17

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For the six months endedJune 30, 2007 and 2006, the non-cash portion of Asset Retirement Costs was $0.9million and $0.2 million, respectively. Dividends declared but not yet paidwere $1.7 million for the six months ended June 30, 2007, and none for the sameprior year period.  A supplementaldisclosure of cash flow information is presented below:

|                                           | ** ** | **For the Six Months Ended  June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                                        | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**                                         | ** ** |
| Cash paid during  the period for:         |       |                                                            |       |   |   |
| Interest                                  |       | $                                                               | 7,187      |   | $ | 2,959 |   |
| Federal  alternative minimum tax payments |       | —                                                          |       | 94 |   |
|                                           |            |                                                                 |            |  |  |  |  |

 

**9.     HEDGING AND DERIVATIVE ACTIVITIES**

Due tothe volatility of oil and natural gas prices, the Company periodically entersinto price-risk management transactions (e.g. swaps, collars and floors) for aportion of its oil and natural gas production to achieve a more predictablecash flow, as well as to reduce exposure from commodity pricefluctuations.  While the use of thesearrangements limits the Company’s ability to benefit from increases in theprice of oil and natural gas, it also reduces the Company’s potential exposureto adverse price movements.  The Company’sarrangements, to the extent it enters into any, apply to only a portion of itsproduction and provide only partial price protection against declines in oiland natural gas prices and limit the Company’s potential gains from increasesin prices. None of these instruments are used for trading purposes. The use ofderivative instruments involves the risk that the counterparties to suchinstruments will be unable to meet the financial obligations of suchcontracts.  On a quarterly basis, theCompany’s management reviews all of the Company’s price-risk managementpolicies, including volumes, types of instruments and counterparties. Thesepolicies are implemented by management through the execution of trades by theChief Financial Officer after consultation and concurrence by the President andChairman of the Board.  The Board ofDirectors monitors the Company’s price-risk management policies and trades on amonthly basis.

All of these price-risk management transactions areconsidered derivative instruments and accounted for in accordance with SFAS No.133 (as amended)*.* These derivative instruments areintended to hedge the Company’s price risk and may be considered hedges foreconomic purposes, but certain of these transactions may not qualify for cashflow hedge accounting. All derivative instrument contracts are recorded on thebalance sheet at fair value and the cash flows resulting from settlement ofthese derivative transactions are classified in operating activities on thestatement of cash flows. For those derivatives in which mark-to-marketaccounting treatment is applied, the changes in fair value are not deferredthrough other comprehensive income on the balance sheet. Rather they are immediatelyrecorded in total revenue on the statement of operations. For those derivativesthat are designated and qualify for cash flow hedge accounting, the effectiveportion of the changes in the fair value of the contracts is recorded in othercomprehensive income on the balance sheet and the ineffective portion of thechanges in the fair value of the contracts is recorded in total revenue on thestatement of operations as they occur. When the hedged production is sold, therealized gains and losses on the contracts are removed from other comprehensiveincome and recorded in revenue. While the contract is outstanding, theunrealized and ineffective gain or loss may increase or decrease untilsettlement of the contract depending on the fair value at the measurementdates. The Company evaluates the terms of new contracts entered into todetermine whether cash flow hedge accounting treatment or mark-to-marketaccounting treatment will be applied. The Company has applied mark-to-marketaccounting treatment to all outstanding contracts since January 1, 2006.

18

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The following table reflects the realized andunrealized gains and losses included in revenue on the statement of operations:
|                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                           | ** ** |
| Natural gas  derivative realized settlements            |       | $                                                 | 569        |   | $ | 1,961 |   |
| Crude oil  derivative realized settlements              |       | 1,078                                             |       | — |   |
| Natural gas  derivative unrealized change in fair value |       | (7,272                                            | )          | 3,124 |   |
| Crude oil  derivative unrealized change in fair value   |       | (4,190                                            | )          | (307 | ) |
| Gain (loss) on  derivatives                             |       | $                                                 | (9,815     | ) | $ | 4,778 |   |

 

The fair value ofoutstanding derivative contracts reflected on the balance sheet were asfollows:
| ** **                       | ** **   | ** **      | ** **   | ** **    | ** **   | ** **   | ** **   | ** **        | ** **   | ** **       | ** **   | **Fair Value of Outstanding  Derivative Contracts as of** | ** **   |
|----------------------------------|--------------|-----------------|--------------|---------------|--------------|--------------|--------------|-------------------|--------------|------------------|--------------|-----------------------------------------------------------------------------------------|--------------|
| **Transaction**                  | ** **   | **Transaction** | ** **   | ** **    | ** **   | ** **   | ** **   | **Price**         | ** **   | **Volumes**      | ** **   | **June 30,**                                                                       | ** **   | **December 31,** | ** ** |
| **Date**                         | ** **   | **Type**        | ** **   | **Beginning** | ** **   | **Ending**   | ** **   | **Per Unit** | ** **   | **Per Day** | ** **   | **2007**                                                                                | ** **   | **2006** | ** ** |
| ** **                       | ** **   | ** **      | ** **   | ** **    | ** **   | ** **   | ** **   | ** **        | ** **   | ** **       | ** **   | **(in thousands)**                                                                 | ** **   |
| ***Natural Gas (1):*** |         |            |         |          |         |         |         |              |         |             |         |                                                                                    |         |   |   |
| 08/06                            |         | Collar          | (3)          | 01/01/2007    |         | 12/31/2007   |         | $7.50-$11.50      |         | 5,000 MMbtu      |         | $                                                                                       | —       |   | $ | 2,301 |   |
| 08/06                            |         | Collar          | (3)          | 01/01/2007    |         | 12/31/2007   |         | $7.50-$12.00      |         | 5,000 MMbtu      |         | —                                                                                  |         | 2,385 |   |
| 01/07                            |         | Collar          | (3)          | 02/01/2007    |         | 12/31/2007   |         | $7.02-$9.00       |         | 15,000 MMbtu     |         | 483                                                                                     |         | — |   |
| 01/07                            |         | Collar          | (3)          | 02/01/2007    |         | 12/31/2007   |         | $7.00-$9.00       |         | 15,000 MMbtu     |         | 473                                                                                     |         | — |   |
| 01/07                            |         | Collar          |         | 02/01/2007    |         | 12/31/2007   |         | $7.00-$9.00       |         | 10,000 MMbtu     |         | 285                                                                                     |         | — |   |
| 01/07                            |         | Collar          |         | 01/01/2008    |         | 12/31/2008   |         | $7.50-$9.00       |         | 20,000 MMbtu     |         | (1,947                                                                                  | )            | — |   |
| 01/07                            |         | Collar          |         | 01/01/2008    |         | 12/31/2008   |         | $7.50-$9.00       |         | 10,000 MMbtu     |         | (885                                                                                    | )            | — |   |
| 01/07                            |         | Collar          |         | 01/01/2008    |         | 12/31/2008   |         | $7.50-$9.02       |         | 10,000 MMbtu     |         | (951                                                                                    | )            | — |   |
| 04/07                            |         | Collar          |         | 01/01/2009    |         | 12/31/2009   |         | $7.75-$10.00      |         | 10,000 MMbtu     |         | (44                                                                                     | )            | — |   |
| *** ***                     | *** *** | *** ***    | *** *** | *** ***  | *** *** | *** *** | *** *** | *** ***      | *** *** | *** ***     | *** *** | *** ***                                                                            | *** *** | *** *** | *** *** |
| ***Crude  Oil (2):***            | *** *** | *** ***    | *** *** | *** ***  | *** *** | *** *** | *** *** | *** ***      | *** *** | *** ***     | *** *** | *** ***                                                                            | *** *** | *** *** | *** *** |
| 08/06                            |         | Collar          |         | 01/01/2007    |         | 12/31/2007   |         | $70.00-$87.50     |         | 400 Bbl          |         | 212                                                                                     |         | 1,047 |   |
| 12/06                            |         | Swap            |         | 01/01/2007    |         | 12/31/2007   |         | $66.00            |         | 600 Bbl          |         | (597                                                                                    | )            | 212 |   |
| 12/06                            |         | Swap            |         | 01/01/2008    |         | 12/31/2008   |         | $66.00            |         | 1,500 Bbl        |         | (3,304                                                                                  | )            | (758 | ) |
|                             |         |            |         |          |         |         |         |              |         |             |         | $                                                                                       | (6,275       | ) | $ | 5,187 |   |

 

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(1)          TheCompany’s 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)          The Company’s crude oil collars were enteredinto on a per barrel delivered price basis, using the West Texas IntermediateLight Sweet Crude Oil Index. Mark-to-market accounting treatment is applied tothese contracts and the change in fair value is reflected in total revenue.

(3)          Subsequent to December 31, 2006, the twonatural gas collars entered into in August 2006 covering a portion of our 2007estimated production were terminated at no cost to the Company and replacedwith the new collars entered into January 2007.

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**10.  ACQUISITIONS & DIVESTITURES**

**SmithAcquisition** - On November 16, 2006, the Company entered intotwo separate purchase and sale agreements (both of which were subsequentlyamended) with Smith Production Inc. (“Smith”) for (A) (i) ownership interestsin certain oil and gas properties located in 13 counties in southeast and southTexas, consisting of approximately 150 gross (74 net) producing wells fromSmith and eight other owners who transferred their interests to Smith prior tothe closing, (ii) an ownership interest in approximately 17,000 gross (12,250net) developed acres and 56,000 gross (16,000 net) undeveloped acres ofleasehold, (iii) 25% of Smith’s option and leasehold rights and exploration anddevelopment rights in an approximate 95 square mile exploration project areaknown as the Mission project area, also in south Texas, and (iv) certaingathering facilities and ownership of approximately 13 miles of natural gasgathering pipelines and related infrastructure serving certain producing assetsin southeast Texas ((i) through (iv) collectively referred to as the “SmithProperties”); and (B) working interest, option and leasehold rights in twoexploration ventures in separate areas, primarily in Texas, from Smith (the “SmithVentures” and collectively with the Smith Properties, the “Properties”).  The combined cash purchase price paid atclosing on January 31, 2007 was approximately $379.8 million for the SmithProperties and $10.0 million for the Smith Ventures (which includes the depositpaid in December 2006).  The purchaseprice for the Smith Properties was adjusted from the base purchase price of$385 million for, among other things, the results of operations of the SmithProperties between the January 1, 2007 effective date and the January 31, 2007closing date.   Accordingly, theCompany's consolidated results of operations include the Smith Propertiesbeginning February 1, 2007.  The Companyexpects further adjustments to the purchase price pursuant to the post-closingadjustment provisions of the amended purchase and sale agreements. The Companyfinanced the purchase price of the Smith Acquisition through public offeringsof common and preferred stock (see Note 3) and borrowings under its RevolvingFacility (see Note 2). The Company also capitalized approximately $0.7 millionin other direct costs resulting from the acquisition and assumed AROliabilities of $0.9 million.

Thefollowing unaudited pro forma results for the three and six months ended June30, 2006 show the effect on the Company's consolidated results of operations asif the Smith Acquisition had occurred on January 1, 2006.  The unaudited pro forma results for the sixmonths ended June 30, 2007 show the effect on the Company’s consolidatedresults of operations as if the Smith Acquisition had occurred on January 1,2007. The pro forma results for the 2006 and 2007 periods presented are theresult of combining the statement of income for the Company with the revenuesand direct operating expenses of the Smith properties acquired adjusted for (1)assumption of ARO liabilities and accretion expense for the propertiesacquired, (2) depletion expense applied to the adjusted basis of the propertiesacquired using the purchase method of accounting, (3) depreciation expense forother non-oil and gas assets acquired, (4) interest expense on added borrowingsnecessary to finance the acquisition, (5) amortization of deferred loan costsfor new loan costs related to the financing of the acquisition, (6) dividendspayable on the Convertible Preferred Stock, (7) the related income tax effectsof these adjustments based on the applicable statutory rates, and (8) theimpact of common and preferred shares issued in public offerings completed topartially finance the Smith Acquisition. The pro forma information is basedupon numerous assumptions, and is not necessarily indicative of future resultsof operations: 
|                                              | ** ** | **For the Three  Months Ended**                        | ** ** | **For the Six  Months Ended** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2006**                                           | ** ** |
| ** **                                   | ** ** | **(unaudited)**                                                       | ** ** |
| ** **                                   | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Total revenue                                |       | $                                                                     | 52,647     |                                         | $          | 107,573 |   |
| Net income                                   |       | 10,052                                                                |       | 21,742                                       |       |
| Net income  available to common stockholders |       | 7,992                                                                 |       | 17,643                                       |       |
| Net income per  common share:                |       |                                                                  |       |                                         |       |
| Basic                                        |       | $                                                                     | 0.28       |                                         | $          | 0.62 |   |
| Diluted                                      |       | $                                                                     | 0.27       |                                         | $          | 0.58 |   |

 

20

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|                                              | ** ** | **For the Six  Months Ended**                  | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                   | ** ** | **June 30, 2007**                                   | ** ** |
| ** **                                   | ** ** | **(unaudited)**                                               | ** ** |
| ** **                                   | ** ** | **(in thousands,  except per share  amounts)** | ** ** |
| Total revenue                                |       | $                                                             | 82,622     |   |
| Net income                                   |       | 6,401                                                         |       |
| Net income  available to common stockholders |       | 2,300                                                         |       |
| Net income per  common share:                |       |                                                          |       |
| Basic                                        |       | $                                                             | 0.08       |   |
| Diluted                                      |       | $                                                             | 0.08       |   |

 

**ChapmanRanch Field Acquisition in 2006 -**On December 12, 2006, theCompany executed an agreement to acquire certain working interests in theChapman Ranch Field in Nueces County, Texas from Kerr-McGee Oil & Gas OnshoreLP (“Kerr-McGee”), a wholly-owned subsidiary of Anadarko PetroleumCorporation.  In late 2005, the Companyacquired non-operated working interests in certain wells in this field. Uponthe closing of the Kerr-McGee acquisition on December 28, 2006, the Companyassumed the role of operator of the Chapman Ranch Field.  The base purchase price of the acquisitionwas $26.0 million. The purchase price was preliminarily adjusted at closing toapproximately $25.0 million (including a previously paid deposit of $2.6million) as a result of adjustments to the purchase price for the results ofoperations between the December 1, 2006 effective date and the December 28,2006 closing date, and other purchase price adjustments.  There may be post-closing adjustments to thepurchase price for results of operations between the effective date and closingdate as further information becomes available. The Company financed thepurchase price of the Kerr-McGee acquisition through $24.0 million inborrowings under its Prior Credit Facility.

**Divestitures-**During January 2007, the Company divested a portion of itsinterest in a Louisiana well for a sales price of $1.1 million.

**11.  COMMITMENTS AND CONTINGENCIES**

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

**Wadeand Joyce Montet, et al., v. Edge Petroleum Corp of Texas, et al., consolidatedwith Rolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al****.** - This is a consolidated suit, filed instate court in Vermilion Parish, Louisiana in September 2003. Plaintiffs aremineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg TexReservoir C, Sand Unit A (Edge’s old Bayou Vermilion Prospect).  Theyclaim the operator at the time, Norcen Explorer, now Anadarko E&P Company (“Anadarko”),failed to “block squeeze” the sections of the No. 2 well, as a prudentoperator, according to their allegations, would have done, to protect the gasreservoir from being flooded with water from adjacent underground formations.Plaintiffs further allege Norcen was negligent in not creating a field-wideunit to protect their interests.  The allegations relate to actions takenbeginning in the early 1990’s. Plaintiffs have named the Company and otherworking interest owners in the leases as defendants, including Norcen Explorer’ssuccessors in interest, Anadarko. Plaintiffs originally sought unspecifieddamages for lost royalties and damages due to alleged devaluation of theirmineral and property interests, plus interest and attorneys’ fees. In early2005, the Company filed a motion for summary judgment in the case asserting,among other defenses, that:  (i) there has been no breach of contract,(ii) there is no express or implied duty imposed on the Company to blocksqueeze the well or form a field-wide unit, (iii) the units were properlyformed by the Conservation Commissioner in accordance with the statutory schemein Louisiana, (iv) plaintiffs’ claims are barred

21

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by limitations,and (v) other defenses. Along with the other defendants, the Company also fileda special peremptory challenge of no cause of action under the leases and theLouisiana Mineral Code for failure to exhaust administrative remedies and dueto lack of a demand. In May and June 2005, the court ruled against the Companyon the motion for summary judgment and the peremptory challenges. Of the 18.75%after-payout working interest that was originally reserved in the leases, theCompany owned a 2.8% working interest at the time of the alleged acts oromissions. On September 6, 2005, the Company filed a third-party demand to jointhe other working interest owners who hold the remainder of the 18.75% workinginterest as third-party defendants in this case. These third-parties consist,for the most part, of partnerships that are directly or indirectly controlledby John Sfondrini, a director of the Company, and hold an aggregate 14.7%working interest (the “Sfondrini Partnerships”). Vincent Andrews, also adirector of the Company, owns a minority interest in the corporate generalpartner of one of the partnerships.  The Sfondrini Partnerships consist of(1) Edge Group Partnership, a general partnership composed of limitedpartnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondriniare general partners; (2) (A) Edge Option I Limited Partnership, (B) EdgeOption II Limited Partnership and (C) Edge Option III Limited Partnership,limited partnerships of which Mr. Sfondrini and a company controlled by Mr.Sfondrini are general partners; and (3) BV Partners Limited Partnership, alimited partnership of which a company controlled by Messrs. Sfondrini andAndrews is general partner and of which Mr. Sfondrini is manager (and of which companyMr. Andrews is an officer).  These partnerships were among the third partydefendants that the Company has sought to join in the case, and thesepartnerships have for the most part filed answers denying any liability to theCompany. The Company participated for its 2.8% share of the well costs andrevenues for the Broussard No. 2 well, as did the other defendants for theirshare, including the third-party defendant partnerships who participated for14.7%. The Company strongly believes the parties should only be liable fortheir proportionate share of any damages awarded should a finding of liabilityoccur in the case. The Company intends to vigorously contest the plaintiffs’claims.

As of the date of this report, it is not possible todetermine what, if any, the Company’s ultimate exposure might be in thismatter. Prior to the settlement described below, plaintiffs had asserteddamages, including interest, to be as high as $63 million.  The plaintiffs’expert witness, in his December 2005 deposition, offered his theory thatplaintiffs’ gross damages are in the range of $19 to $22 million. That numberis based on his theory that the alleged failure to block squeeze the wellresulted in the under-production of gas worth $300 million. Plaintiffs’ royaltyshare of that figure yields the $19 to $22 million range of alleged damages.Based on the expert’s testimony, damages attributable to the full 18.75%interest would be in the range of $3.75 million gross or net to our 2.8% sharewould be in the range of $560,000 (excluding interest and attorneys’ fees).Along with the other defendants, the Company hired its own expert witnesses whohave refuted these claims, particularly the expert’s assertions that failure toblock squeeze the well caused any damages to the reservoir. The deposition of aNorcen engineer who prepared the completion plan for the Broussard No. 2 welland supervised the completion operations, taken in April 2006, confirms thetestimony of the defense experts as to why the well was not block squeezed. The plaintiffs have also retained a damages expert who has given a report thatthe damages in this case are in the range of $30 million, excluding interestand attorneys’ fees.  The Company’s share of that amount based on the full18.75% would be approximately $5.6 million and net to our 2.8% share would beapproximately $840,000. The Company participated in mediation of this lawsuiton July 18, 2006 but the parties failed to reach an agreement.  In July2006, the plaintiffs’ attorney sent a demand to the defendants for totaldamages claimed by plaintiffs, with legal interest, totaling $63 million. The Company’s share of that amount based on the full 18.75% interest would beapproximately $12.2 million and net to our 2.8% interest would be approximately$1.8 million. On July 31, 2006, the Judge granted the defendant groups’ motionfor partial summary judgment dismissing plaintiffs’ tort-based claims. Also onthe same date, the Judge granted the defendant groups’ motion for partialsummary judgment seeking to deny the plaintiffs an award of attorneys’ fees andalso to dismiss any claim of plaintiffs that defendants had an obligation toform a field-wide unit.

On December 19, 2006, the Company, along with theother defendants in this suit, reached a settlement agreement with theBroussard Plaintiffs in full settlement of their 72% of the total claims madein this consolidated action. This settlement was finalized in January2007.  The Company’s share of this settlement totaled approximately$208,000, which was recorded in December 2006, and the Sfondrini Partnerships’share totaled $1,109,759.  The settlement with the Broussard Plaintiffswas finalized on February 1, 2007, and the defendants and the third-partydefendants including the Sfondrini Partnerships were released from all claimsby the Broussard Plaintiffs.

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The Company and the other oil company defendantsparticipated in a mediation regarding the remaining claims in this lawsuit withthe Montet plaintiffs on May 10, 2007. All remaining claims were settled for a total agreed payment to theMontet plaintiffs of $3.5 million.  TheCompany’s and the Sfondrini Partnerships’ share of the settlement amount were$118,333 and $502,917, respectively, for a total of $621,250, which amountswere paid by insurance.  As part of thesettlement, Mid-Continent Casualty Company and one other insurer agreed tocover and pay the full share of the Montet settlement amount attributable tothe Company and the Sfondrini Partnerships in return for mutual releases underthe policies involved and for a joint dismissal of all claims asserted by theparties in the suit for declaratory judgment filed by Mid-Continent against theCompany and the Sfondrini Partnerships in federal district court in Houston.  Also as part of the settlement, the Companyreimbursed the Sfondrini Partnerships for certain attorneys’ fees in the amountof $62,500.  The settlement with theMontet plaintiffs was finalized in writing in June 2007, all defendants havepaid their respective shares of the amounts owed, and the plaintiffs anddefendants filed a joint motion to dismiss with the court on August 3, 2007.

**David Blake, et al. v. Edge Petroleum Corporation**– On September 19, 2005, David Blake and David Blake, Trustee of the David andNita Blake 1992 Children’s Trust filed suit against the Company in statedistrict court in Goliad County, Texas alleging breach of contract for failureand refusal to transfer overriding royalty interests to plaintiffs in at leastfive leases in Goliad County, Texas and failure and refusal to pay monies toBlake pursuant to such overriding royalty interests for wells completed on theleases. The plaintiffs seek relief of (1) specific performance of the allegedagreement, including granting of overriding royalty interests by the Company toBlake; (2) monetary damages for failure to grant the overriding royaltyinterests; (3) exemplary damages for his claims of business disparagement andslander; (4) monetary damages for tortuous interference; and (5) attorneys’fees and court costs. Venue of the case was transferred to Harris County, Texasby agreement of the litigants.  The Company has served plaintiffs withdiscovery and has filed a counterclaim and an amended counterclaim joiningvarious related entities that are controlled by plaintiffs.  In addition,plaintiffs have filed an amended complaint alleging claims of slander of titleand tortuous interference related to its alleged right to receive an overridingroyalty interest from a third party.  Plaintiffs currently have on file anamended motion for summary judgment, to which the Company has filed aresponse.  In addition, the Company has filed a motion for summaryjudgment on the plaintiffs’ case.  In December 2006, the court denied theCompany’s motion for summary judgment.  The court has not ruled on Blake’smotion.  The trial was scheduled to begin September 10, 2007, but has beenpassed and the new trial has been set for March 3, 2008.  Discovery in thecase has commenced and is continuing. The Company has responded aggressively tothis lawsuit, and believes it has meritorious defenses and counterclaims.

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

The following is Management’s Discussion and Analysis (“MD&A”) ofsignificant factors that have affected certain aspects of our financialposition and operating results during the periods included in the accompanyingunaudited condensed consolidated financial statements. The followingMD&A is intended to help the reader understand Edge Petroleum Corporation (“Edge”).This discussion should be read inconjunction with the accompanying unaudited condensed consolidated financialstatements included elsewhere in this Form 10-Q and with MD&A of FinancialCondition and Results of Operations and our audited consolidated financialstatements included in our annual report on Form 10-K for the year endedDecember 31, 2006 (“2006 Annual Report”).

### **FORWARD LOOKING STATEMENTS**

Certainof the statements contained in all parts of this document, including, but notlimited to, those relating to our drilling plans (including scheduled andbudgeted wells), the effect of changes in strategy and business discipline,future tax matters, our 3-D project portfolio, future general andadministrative expenses on a per unit of production basis, changes in wellsoperated and reserves, future growth and expansion, future exploration, futureseismic data (including timing and results), expansion of operation, ourability to generate additional prospects, our review of outside prospects andacquisitions, additional reserves and reserve increases, our ability to replaceproduction and manage our asset base, enhancement of visualization andinterpretation strengths, expansion and improvement of capabilities, integrationof new technology into operations, credit facilities, redetermination of ourborrowing base, attraction of new members to the technical team, futurecompensation programs, new focus on core areas, new prospects and drillinglocations, new alliances, future capital expenditures (or funding thereof) andworking capital, sufficiency of future working capital, borrowings and capitalresources and liquidity, projected rates of return, retained earnings anddividend policies, projected cash flows from operations, future commodity priceenvironment, expectation or timing of reaching payout, the outcome, effects ortiming of any legal proceedings or contingencies, the impact of any change inaccounting policies on our financial statements, the number, timing or resultsof any wells, the plans for timing, interpretation and results of new orexisting seismic surveys or seismic data, future production or reserves, futureacquisition of leases, lease options or other land rights, any other statementsregarding future operations, financial results, opportunities, growth, businessplans and strategy and other statements that are not historical facts areforward-looking statements. These forward-looking statements reflect ourcurrent view of future events and financial performance. When used in thisdocument, the words “budgeted,” “anticipate,” “estimate,” “expect,” “may,” “project,”“believe,” “intend,” “plan,” “potential,” “forecast,” “might,” “predict,” “should”and similar expressions are intended to be among the expressions that identifyforward-looking statements. These forward-looking statements speak only as oftheir dates and should not be unduly relied upon. We undertake no obligation topublicly update or revise any forward-looking statement, whether as a result ofnew information, future events, or otherwise. Such statements involve risks anduncertainties, including, but not limited to, those set forth under “ITEM 1A.RISK FACTORS” of our 2006 Annual Report and other factors detailed in thisdocument and our other filings with the Securities and Exchange Commission (the“SEC”). Should one or more of these risks or uncertainties materialize, orshould underlying assumptions prove incorrect, actual outcomes may varymaterially from those indicated. All subsequent written and oralforward-looking statements attributable to us or to persons acting on ourbehalf are expressly qualified in their entirety by reference to these risksand uncertainties.

## **GENERAL OVERVIEW**

Edge PetroleumCorporation (“Edge”, “we” or the “Company”) is a Houston-based independentenergy company that focuses its exploration, development, production,acquisition and marketing activities in selected onshore basins of the UnitedStates. In late 1998, we undertook a top-level management change and began ashift 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 gasproperties. 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 continue generating revenue, income andcash flows.  We have also spentconsiderable

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efforts on acquisitions,including both corporate and asset acquisitions, which have contributed to ourgrowth in recent years.

This overview provides our perspective on theindividual sections of MD&A. Our MD&A includes the following sections:

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

·                  **Approach to the Business** – informationregarding our approach and strategy.

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

·                  **Outlook** – discussion relating to management’soutlook to the future of our business.

·                  **Critical Accounting Policies and Estimates** –a discussion of certain accounting policies that require critical judgments andestimates.

·                  **Results of Operations** – an analysis of ourconsolidated results for the periods presented in our financial statements.

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

·                  **Risk Management Activities – Derivatives & Hedging**–****supplementaryinformation regarding our price-risk management activities.

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

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

# **Industry and Economic Factors**

In managing our business, we must deal with manyfactors inherent in our industry.  Firstand foremost is the fluctuation of oil and natural gas prices. Historically,oil and gas markets have been cyclical and volatile, which makes future pricemovements 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.

Our operationsentail significant complexities. Advanced technologies requiring highly trainedpersonnel are utilized in both exploration and production.  Even when the technology is properly used, wemay still not know conclusively if hydrocarbons will be present or the rate atwhich they will be produced.  Explorationis a high-risk activity, often times resulting in no commercially productivereserves being discovered. Moreover, costs associated with operating within ourindustry are substantial.  The highcommodity price environment in 2005 led to increased demand for oilfieldequipment and services and increased costs in our industry, and in 2006, we sawnatural gas prices decline while operating costs continued to increase.  These factors have made it difficult at timesfor us to further our growth, and made timely execution of our plannedactivities difficult.  Since late 2006,costs for drilling rigs in our core areas have decreased and the availabilityof services, including rigs, has increased.

Our business, as with other extractive businesses, isa depleting one in which each gas equivalent produced must be replaced or ourasset base and capacity to generate revenues in the future, will shrink.

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

Extensive federal, state and local regulation of theindustry significantly affects our operations. In particular, our activities are subject to stringent operational andenvironmental regulations.  Theseregulations have increased the costs of planning, designing, drilling,installing, operating and abandoning oil and gas wells and relatedfacilities.  These regulations may becomemore demanding in the future.

# **Approach to the Business**

Profitable growth of our business will largely dependupon our ability to successfully find and develop new proved reserves of oiland natural gas in a cost-effective manner. In order to achieve an overall acceptable rate of growth, we seek tomaintain a prudent blend of low, moderate and higher risk exploration anddevelopment projects.  We have chosen toseek geologic and geographic diversification by operating in multiple basins inorder to mitigate risk in our operations. We also attempt to make selected acquisitionsof oil and gas properties to augment our growth and provide future drillingopportunities.

We periodically hedge our exposure to volatile oil andnatural gas prices on a portion of our production to reduce price risk. As ofJune 30, 2007, we had derivative contracts in place covering approximately 59%of our remaining expected 2007 natural gas production and 65% of our remainingexpected 2007 crude oil production.  Asof June 30, 2007, approximately 53% of total remaining 2007 estimated productionon an Mcfe basis (including natural gas liquids) was hedged with derivativecontracts. As of June 30, 2007, we also had derivative contracts in placecovering approximately 46% and 75% of our anticipated 2008 natural gas andcrude oil production, respectively, while less than 10% of our total expected2009 natural gas production and none of our expected 2009 crude oil productionwas hedged. All of such estimated production is before any new acquisitionsthat may occur.

Generally,our goal is to fund ongoing exploration and development projects with cash flowprovided by operating activities, occasionally supplemented with externalsources of capital. During the first quarter of 2007, our Board approved a 2007capital budget of approximately $140 million. Based upon current expectationsfor production volumes and commodity prices, we expect to fund our capitalprogram with internally-generated cash from operating activities and borrowingsunder our Revolving Facility (as defined below). We do not typically includeacquisitions in our budgeted capital expenditures, but expect to utilize eitherborrowings under our Revolving Facility, proceeds from offerings of commonstock or other securities under our shelf registration statement or othersources to fund those potential acquisitions.

Ourlong-term debt balance as of June 30, 2007 was $230 million and ourdebt-to-total capital ratio was 34.6%.

**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 and we expect acquisitions will continue to playa significant role in our future plans for growth. Acquisitions add meaningfulincremental increases in reserves and production and may range in size fromacquiring a working interest in non-operated producing property to acquiring anentire field of wells or a company. Unlike drilling capital, which is plannedand budgeted, acquisition capital is neither budgeted nor allocated, because thespecific timing or size of acquisitions cannot be predicted. Although weconsider a wide variety of acquisitions, a significant part of our growthstrategy is expected to be focused toward producing property acquisitions,which we believe have exploitable potential. We try to maintain enoughfinancial flexibility such that we are positioned to take advantage ofproducing property acquisition opportunities as they may arise.  We believe through hard work, technical abilityand creative thinking of our people, we will continue to grow through bothacquisitions and drilling. Any such acquisition could involve the payment by usof a substantial amount of cash or the issuance of a substantial number ofadditional shares or other securities.

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Smith Acquisition - During the firstquarter of 2007, we completed the largest acquisition in our history. Weacquired oil and natural gas properties, exploration rights, leasehold acreage,gathering facilities and gathering pipelines from Smith Production Inc. for acash purchase price of approximately $389.8 million. Pursuant to closingadjustment provisions in the agreements, the purchase price is subject toadjustment for the results of operations between the January 1, 2007 effectivedate and the January 31, 2007 closing date. We have agreed to extend thedeadline for the adjustment, which we expect to finalize in the third quarterof 2007. The properties acquired are located in south and southeast Texas,which we consider to be our main core area of operations. This acquisition hada substantial impact to our reserves, production revenues, operating costs, andproperty base. We have increased staffing levels to manage the growth and helpwith the integration of these assets into our operations.

Chapman Ranch Acquisition - Duringthe fourth quarter of 2006, we completed the acquisition of additional workinginterests in the Chapman Ranch Field, in which we also acquired interests fromtwo other companies during the fourth quarter of 2005. We also assumed the roleof operator of these properties as a result of this acquisition. Thepreliminary adjusted purchase price was approximately $25.0 million. Pursuantto closing adjustment provisions in the agreements, the purchase price issubject to further adjustment for the results of operations between theDecember 1, 2006 effective date and the December 28, 2006 closing date, whichwe expect to finalize in the third quarter of 2007. The properties acquired arelocated in Nueces County, Texas and consisted of nine producing wells and anownership in approximately 1,200 net acres of developed and undevelopedleasehold.

*Divestitures-*We regularlyreview our asset base for the purpose of identifying non-core assets, thedisposition of which would increase capital resources available for otheractivities and create organizational and operational efficiencies. While 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 half of 2007, wedivested a portion of our interest in one of our Louisiana properties for asales price of approximately $1.1 million.

**Outlook**

·                  During the sixmonths ended June 30, 2007, a total of 19 wells were logged with 17 apparentsuccesses, for an overall success rate of approximately 89%.

·                  We expect to spud between 70 and 80 gross wells intotal for the calendar year 2007 and we estimate capital spending for the yearto be approximately $140 million. Our ability to materially increase thenumber of wells to be drilled is heavily dependent upon the timely access tooilfield services, particularly drilling rigs.

·                  We have and willspend a considerable effort in 2007 integrating the assets acquired in theSmith Acquisition, which had the largest impact of any acquisition on ourcompany. This will include continuing to add to our staff levels to manage therecent and anticipated future growth.

·                  We will continueto spend considerable effort in 2007 finding and evaluating acquisitionopportunities, as we seek to further our growth.

·                  In the firstquarter of 2007, we issued preferred stock. We declared dividend payments to preferred stockholders in March andJune 2007. We expect to continue to pay preferred stock dividends on aquarterly basis.

·                  To help protectagainst the possibility of downward commodity price movements and lost revenue,we have several derivatives in place to hedge a portion of our expected naturalgas and crude oil production streams for 2007 through 2009. We applymark-to-market accounting treatment, rather than cash flow hedge accountingtreatment, and therefore significant volatility from the changes in fair valueof those outstanding contracts have and will impact our earnings in 2007 (seeNote 9 to our consolidated financial statements).

Our outlook and the expected results described aboveare both subject to change based upon factors that include, but are not limitedto, drilling results, commodity prices, access to capital, the acquisitionsmarket and factors referred to in “Forward Looking Statements.”

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**Critical Accounting Policies and Estimates**

Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect the reported amounts of assets,liabilities, revenues, expenses, contingent assets and liabilities and therelated disclosures in the accompanying financial statements.  Changes in these estimates and assumptionscould materially affect our financial position, results of operations or cashflows. Management considers an accounting estimate to be critical if:

·                  it requires assumptions to be made that were uncertainat the time the estimate was made, and

·                  changes in the estimate or different estimates thatcould have been selected could have a material impact on our consolidatedresults of operations or financial condition.

Allother significant accounting policies that we employ are presented in the notesto the consolidated financial statements. The following discussion presentsinformation about the nature of our most critical accounting estimates, ourassumptions or approach used and the effects of hypothetical changes in thematerial 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 gas which geological and engineering datademonstrate, with reasonable certainty, to be recoverable in future years fromknown reservoirs under existing economic and operating conditions.  The accuracy of any reserve estimate is afunction of the quality of available data, engineering and geologicalinterpretation, and judgment, as well as prices and cost levels at that pointin time. Any significant variance in these assumptions could materially affectthe estimated quantity and value of our reserves. Despite the inherentimprecision in these engineering estimates, our reserves are used throughoutour financial statements.

*Assumptions/Approach Used:*Units-of-productionmethod to amortize our oil and natural gas properties - The quantity ofreserves is used in calculating depletion expense and could significantlyimpact our depletion expense.

* *“Ceiling” Test - Thefull-cost method of accounting for oil and gas properties requires a quarterlycalculation of a limitation on capitalized costs, often referred to as afull-cost ceiling test. The ceiling is the discounted present value of ourestimated total proved reserves (using a 10% discount rate) adjusted for taxesand the impact of cash flow hedges on pricing, if cash flow hedge accounting isapplied. The ceiling test calculation dictates that prices and costs in effectas of the last day of the period are to be used in calculating the discountedpresent value of our estimated total proved reserves. Oil and natural gasprices used in the reserve valuation at June 30, 2007 were $70.68 per barreland $6.80 per MMBtu. To the extent that our capitalized costs (net ofaccumulated depletion and deferred taxes) exceed the ceiling, the excess mustbe written off to expense. Once incurred, this impairment of oil and naturalgas properties is not reversible at a later date even if oil and natural gasprices increase. A ceiling test impairment could result in a significant lossfor a reporting period; however, future depletion expense would becorrespondingly reduced. No such impairment was required in the six monthsended June 30, 2006 or 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 -The most likely factor to contribute to a ceiling test impairment is the priceused to calculate the reserve limitation threshold. A reduction in prices at ameasurement date could trigger a full-cost ceiling impairment. We had a cushionof $42.2 million, net of tax, at June 30, 2007. A 10% increase or decrease inprices used would have increased or decreased our cushion (i.e. the excess ofthe ceiling over our capitalized costs) by approximately 130%, net of tax, respectively.  Thus, a less than 10% decrease in the priceused in the ceiling test would have triggered a full-cost ceiling impairment asof June 30, 2007. Our hedging program would serve to mitigate some of theeconomic impact of any price decline.

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However,since we do not apply cash flow hedge accounting to our derivative contracts,our hedging program did not have an impact on the ceiling test at June 30,2007. Had we applied cash flow hedge accounting to our outstanding derivativecontracts, the cushion would have increased by 21%. Another likely factor tocontribute to a ceiling test impairment is a revised estimate of reservevolume. A 10% increase or decrease in reserve volume would have increased ordecreased our cushion by approximately 93%, net of tax, respectively.  As noted above, we used pricing and costs asof the last day of the period to determine our ceiling test. Should commodityprices continue to decrease in 2007, the possibility of a ceiling test impairmentat a future date exists.  Also, theeffects of the Smith Acquisition in 2007 could increase the possibility that wewill be required to record a ceiling test impairment, particularly if commodityprices decline below the effective levels paid for in the Smith Acquisition.

*Nature of Critical Estimate Item:*Unproved Property Impairment****- We have elected to use the full-costmethod to account for our oil and gas activities. Investments in unprovedproperties are not amortized until proved reserves associated with theprospects can be determined or until impairment occurs. Unproved properties areevaluated quarterly, and as needed, for impairment on a property-by-propertybasis.  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.

*Assumptions/Approach Used:*At June 30, 2007, we had $95.0 millionallocated to unproved property. This allocation is based on costs to date thatare associated with potential attributable reserves.

*Effect if Different AssumptionsUsed:* A 10%increase or decrease in the unproved property balance (i.e., transfer tofull-cost pool) would have decreased or increased, respectively, our depletionexpense by approximately 1% for the three months ended June 30, 2007.

*Nature of Critical Estimate Item:*Asset Retirement Obligations**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and gas production operations. Our removal and restoration obligations are primarily associated withplugging and abandoning wells. Prior to the adoption of Statement of FinancialAccounting Standards (“SFAS”) No. 143, *Accountingfor Asset Retirement Obligations,* costs associated with thisactivity were capitalized to the full-cost pool as they were incurred andcharged to income through depletion expense. SFAS No. 143 significantly changedthe method of accruing for costs which an entity is legally obligated to incurrelated to the retirement of fixed assets (“asset retirement 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.

Estimatingthe future 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 removaltechnologies and costs are constantly changing, as are regulatory, political,environmental, safety and public relations considerations. Inherent in theestimate of the present value calculation of our AROs are numerous assumptionsand judgments including the ultimate settlement amounts, inflation factors,credit-adjusted-risk-free-rates, timing of settlement, and changes in thelegal, regulatory, environmental and political environments.

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*Assumptions/ApproachUsed:*  Since there areso many variables in estimating AROs, we attempt to limit the impact ofmanagement’s judgment on certain of these variables by using input of qualifiedthird parties. We engage independent engineering firms to evaluate ourproperties annually. We use the remaining estimated useful life from theperiod-end reserve reports prepared by our independent reserve engineers inestimating when abandonment could be expected for each property. We utilize athree-year average rate for inflation to diminish any significant volatilitythat may be present in the short term. We have developed a standard cost estimatebased on historical costs, industry quotes and depth of wells. Unless we expecta well’s plugging to be significantly different than a normal abandonment, weuse this estimate.

*Effect if Different AssumptionsUsed:* We expectto see 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 of events that have been recognized in ourfinancial statements and our tax returns. There are several items that resultin deferred tax asset and liability impact to the balance sheet, but thelargest of which are income taxes and the impact of net operating loss (“NOL”)carryforwards. We routinely assess our ability to use all of our NOLcarryforwards that resulted from substantial income tax deductions, prior yearlosses and acquisitions. We consider future taxable income in making suchassessments.  If we conclude that it is morelikely than not that some portion or all of the deferred tax assets will not berealized under accounting standards, it is reduced by a valuation allowance toremove the benefit of those NOL carryforwards from our financial statements.

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

*Effectif Different Assumptions Used:* We have engaged an independentpublic accounting firm to assist us in applying the numerous and complicatedtax law requirements. However, despite our attempt to make an accurateestimate, the ultimate utilization of our NOL carryforwards is highly dependentupon our actual production and the realization of taxable income in futureperiods.  If we estimate that some or allof our NOL carryforwards are more likely than not going to expire or otherwisenot be utilized to reduce future tax, we would record a valuation allowance toremove the benefit of those NOL carryforwards from our financial statements.

*Natureof Critical Estimate Item:*Derivative and HedgingActivities**-**Due to theinstability of oil and natural gas prices, we may enter into, from time totime, price-risk management transactions (e.g. swaps, collars and floors) for aportion of our oil and natural gas production to achieve a more predictablerevenue, as well as to reduce exposure from commodity price fluctuations. Whileall of these transactions are economic hedges of price risk, differentaccounting treatment may apply depending on if they qualify for cash flow hedgeaccounting. In accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities (as amended),*alltransactions are recorded on the balance sheet at fair value.

Cash Flow HedgeAccounting - For transactions accounted for under cash flowhedge accounting treatment, the effective portion of the change in fair valueof outstanding derivative contracts is deferred through other comprehensiveincome (“OCI”) on the balance sheet, rather than recorded immediately inrevenue on the income statement. Ineffective portions of the changes in thefair value of the derivative

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contracts are recognizedin revenue as they occur. The cash flows resulting from settlement of thesehedge transactions are included in cash flows from operating activities on thestatement of cash flows. While the hedge contract is outstanding, the fairvalue may increase or decrease until settlement of the contract. 

Mark-to-MarketAccounting - Fortransactions accounted for using mark-to-market accounting treatment, theentire change in the fair value of the outstanding derivative contract isrecorded in revenue immediately, and not deferred through OCI, and there is nomeasurement of effectiveness. Since January 1, 2006, we have appliedmark-to-market accounting treatment to all outstanding derivative contracts.

*Assumptions/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. Due to the fact that we apply mark-to-market accounting treatment, theoffset to the balance sheet asset or liability, or the change in fair value ofthe contracts, is included in revenue on the income statement rather than inOCI on the balance sheet.

*Effect if Different AssumptionsUsed:* At June 30,2007, a 10% change in the commodity price per unit would cause the fair valuetotal of our derivative financial instruments to increase or decrease byapproximately $0.9 million. Had we applied cash flow hedge accounting treatmentto all of our derivative contracts outstanding at June 30, 2007, our net incomefor the six months would have been approximately $17.0 million, or $0.64 perbasic and $0.57 per diluted earnings per share, assuming that all hedges werefully effective.

# **Results of Operations**

This section includesdiscussion of our results of operations for the three and six months ended June30, 2007 as compared to the same period of the prior year.  We are an independent energy company engagedin the exploration, development, acquisition and production of oil and naturalgas.  Our resources and assets aremanaged and our results reported as one operating segment.  We conduct our operations primarily along theonshore United States Gulf Coast, with our emphasis in south and southeastTexas, Louisiana, Mississippi and southeast New Mexico. We completed one acquisition in thefourth quarter of 2006 and one in the first quarter of 2007, whichsignificantly impacted revenues, production and costs for the first half of2007 and affects the comparability of periods presented.

**Second Quarter 2007 Compared tothe Second Quarter 2006**

**Revenue and Production**

Total revenue increased59% from the second quarter of 2006 to the comparable 2007 period. Excludingthe effects of derivative activity, revenues increased 52% from the secondquarter of 2006 to the comparable 2007 period. Our product mix contributed the following percentages of revenues andproduction volumes:

31

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|                           | ** ** | **REVENUES (1)**                               | ** ** | **PRODUCTION VOLUMES  (MCFE)** | ** ** |
|---------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **Three months ended June 30,** | ** ** |
| ** **                | ** ** | **2007**                                            | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Natural gas               |       | 80                                                  | %          | 79                                  | %          | 75 | % | 80 | % |
| Natural gas  liquids      |       | 10                                                  | %          | 4                                   | %          | 14 | % | 9 | % |
| Crude oil and  condensate |       | 10                                                  | %          | 17                                  | %          | 11 | % | 11 | % |
|                      |       |                                                |       |                                |       |   |   |   |   |
| Total                     |       | 100                                                 | %          | 100                                 | %          | 100 | % | 100 | % |

 

----

(1) Includes effect ofderivative transactions.

The following tablesummarizes volume and price information with respect to our oil and natural gasproduction for the three months ended June 30, 2007 and 2006:
| ** **                                    | ** **   | **Three Months Ended**                                           | ** ** | **2007 Period Compared  to 2006 Period** | ** ** |
|-----------------------------------------------|--------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                                    | ** **   | **June 30,**                                                          | ** ** | **Increase  (Decrease)**                                     | ** ** | **% Increase  (Decrease)** | ** ** |
| ** **                                    | ** **   | **2007**                                                                   | ** ** | **2006**                                                     | ** ** | ** ** | ** ** |
| **Production Volumes:**                  | *** *** | **(in thousands, except prices and percentages)** | ** ** |
| Natural gas  (MMcf)                           |         | 4,793                                                                      |       | 3,578                                                        |       | 1,215 |   | 34 | % |
| Natural gas  liquids (MBbls)                  |         | 147                                                                        |       | 65                                                           |       | 82 |   | 126 | % |
| Crude oil and  condensate (MBbls)             |         | 115                                                                        |       | 85                                                           |       | 30 |   | 35 | % |
| Natural gas  equivalent (MMcfe)               |         | 6,370                                                                      |       | 4,478                                                        |       | 1,892 |   | 42 | % |
| **Average Sales Price(1):**                   | ** **   | ** **                                                                 | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas ($ per Mcf)(2)               |         | $                                                                          | 7.26       |                                                         | $          | 6.68 |   | $ | 0.58 |   | 9 | % |
| Natural gas  liquids ($ per Bbl)         |         | 37.07                                                                      |       | 23.14                                                        |       | 13.93 |   | 60 | % |
| Crude oil and  condensate ($ per Bbl)(2) |         | 61.54                                                                      |       | 68.65                                                        |       | (7.11 | ) | (10 | )% |
| Natural gas  equivalent ($ per Mcfe)(2)  |         | 7.44                                                                       |       | 6.97                                                         |       | 0.47 |   | 7 | % |
| Natural gas  equivalent ($ per Mcfe)(3)  |         | 8.46                                                                       |       | 7.57                                                         |       | 0.89 |   | 12 | % |
| **Operating Revenue:**                        | ** **   | ** **                                                                 | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas(2)                                |         | $                                                                          | 34,811     |                                                         | $          | 23,881 |   | $ | 10,930 |   | 46 | % |
| Natural gas  liquids                          |         | 5,467                                                                      |       | 1,512                                                        |       | 3,955 |   | 262 | % |
| Crude oil and  condensate(2)                  |         | 7,108                                                                      |       | 5,806                                                        |       | 1,302 |   | 22 | % |
| Gain on  derivatives                          |         | 6,516                                                                      |       | 2,679                                                        |       | 3,837 |   | 143 | % |
| Total revenue                                 |         | $                                                                          | 53,902     |                                                         | $          | 33,878 |   | $ | 20,024 |   | 59 | % |

 

----

(1)Prices are calculated based on whole numbers, notrounded numbers.

(2)Excludes the effect of derivative transactions.

(3)Includes the effect of derivative transactions.

**Average sales price**— Our sales revenue is sensitive to the volatility of commodity prices.  Asubstantial portion of our production is sold at prevailing market prices,which fluctuate in response to many factors that are outside of our control.Imbalances in the supply and demand for oil and natural gas can have a dramaticeffect on the prices we receive for our production. Political instability andavailability of alternative fuels could impact worldwide supply, while theeconomy, weather and other factors outside of our control could impact demand.

**Natural gas revenue** - For the three months ended June 30,2007, natural gas revenue, excluding derivative activity, increased 46% overthe same period in 2006 due to 34% higher production volumes and 9% highercommodity prices. The overall increase in production compared to the prior yearperiod resulted in an increase in revenue of approximately $8.1 million (basedon 2006 comparable period pre-hedge prices). The increase in production wasprimarily the result of new wells drilled and acquired during 2006 (includingthe additional interest in our Chapman Ranch Field acquired late in 2006) andthe acquisition of the Smith assets on January 31, 2007. The increase inaverage price received resulted in increased revenue of approximately $2.8million (based on current period production).

32

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**Naturalgas liquids (“NGL”) revenue**- For the three months ended June 30, 2007, NGLrevenue increased 262% over the same period in 2006 due to increases in bothrealized prices and production volumes. The price increase resulted in anincrease in revenue of approximately $2.1 million (based on current periodproduction).  NGL volumes were alsohigher during the three months ended June 30, 2007 as compared to the sameperiod in 2006 as a result of new wells drilled and acquired during 2006(including the additional interest in our Chapman Ranch Field acquired late in2006) and the acquisition of the Smith assets on January 31, 2007. The increasein NGL production increased revenue by approximately $1.9 million (based on2006 comparable period average prices). 

 

**Crude oiland condensate revenue**- For the three months ended June 30, 2007, oil andcondensate sales revenue, excluding derivative activity, increased 22% from thecomparable period in 2006, due to a 35% increase in volume, partially offset bya 10% decline in prices realized. Production volumes for oil and condensateincreased for the three months ended June 30, 2007 compared to the same prioryear period, due primarily to new wells drilled and acquired during 2006(including the additional interest in our Chapman Ranch Field acquired late in2006) and the acquisition of the Smith assets on January 31, 2007. The increasein oil and condensate production resulted in an increase in revenue ofapproximately $2.1 million (based on 2006 comparable period pre-hedge prices).The decreased average realized price for oil and condensate for the threemonths ended June 30, 2007 resulted in a decrease in revenue of approximately$0.8 million (based on current period production).  

 

**Derivatives**– For boththree month periods ended June 30, 2007 and 2006, we recorded net gains onderivative contracts. The volume and price contract terms vary from period toperiod and therefore interact differently with the changing pricingenvironment, which may affect the comparability of the results for each period.While we are unable to predict the market prices, we enter into contracts thatwe expect will protect us in the event of significant downturns in the market,which proved to be a benefit to us in the first half of 2007, with decliningnatural gas prices resulting in cash settlement inflows from our hedgecounterparties to offset the lower prices received for our physical production.In both periods, we applied mark-to-market accounting treatment to ourderivative contracts; therefore the full volatility of the non-cash change infair value of our outstanding contracts is reflected in revenue. The followingtable summarizes the various components of the total gain/(loss) on derivativesand the impact each component had on our realized prices.

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,**                 | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **$**                                                               | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit (1)** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per unit prices)** | ** ** |
| Natural gas derivative  contract settlements (Mcf)                                |       | $                                                                   | —     |   | $ | — |   | $ | 1,642 |   | $ | 0.46 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Crude oil derivative  contract settlements (Bbl)                                  |       | 235                                                                 |       | 2.04 |   | — |   | — |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  unrealized change in fair value of gas derivative contracts (Mcf) |       | 8,200                                                               |       | 1.71 |   | 1,114 |   | 0.31 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  unrealized change in fair value of oil derivative contracts (Bbl) |       | (1,919                                                              | )          | (16.62 | ) | (77 | ) | (0.90 | ) |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Gain  on derivatives (Mcfe)                                                       |       | $                                                                   | 6,516      |   | $ | 1.02 |   | $ | 2,679 |   | $ | 0.61 |   |

 

----

(1)Prices per unit are calculated based on whole numbers, not roundednumbers

Should commodityprices decrease from the current levels, our unhedged revenues could bematerially affected.

33

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**Costsand Operating Expenses**

The table below details our expenses for therespective three-month periods:

|                                                       | ** ** | ** **                                            | ** ** | ** **                  | ** ** | **2007 Period Compared   to 2006 Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Three Months Ended  June 30,**       | ** ** | **$  Increase  (Decrease)** | ** ** | **%  Increase  (Decrease)**                                        | ** ** |
| ** **                                            | ** ** | **2007**                                              | ** ** | **2006**                    | ** ** | ** **                                                         | ** ** |
| ** **                                            | ** ** | ** **                                            | ** ** | ** **                  | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)** | ** ** |
| Oil and natural  gas operating expenses               |       | $                                                     | 4,048      |                        | $          | 2,260                                                              |       | $ | 1,788 |   | 79 | % |
| Severance and ad  valorem taxes                       |       | 3,885                                                 |       | 2,236                       |       | 1,649                                                              |       | 74 | % |
| Depletion,  depreciation, amortization and accretion: |       |                                                  |       |                        |       |                                                               |       |   |   |
| Oil and gas property and equipment                    |       | 20,854                                                |       | 16,339                      |       | 4,515                                                              |       | 28 | % |
| Other assets                                          |       | 140                                                   |       | 160                         |       | (20                                                                | )          | (13 | )% |
| ARO accretion                                         |       | 70                                                    |       | 46                          |       | 24                                                                 |       | 52 | % |
| General and  administrative expenses                  |       | 5,053                                                 |       | 3,348                       |       | 1,705                                                              |       | 51 | % |
| Bad debt expense                                      |       | 482                                                   |       | —                      |       | 482                                                                |       |   | * |
| Total operating expenses                              |       | $                                                     | 34,532     |                        | $          | 24,389                                                             |       | $ | 10,143 |   | 42 | % |
|                                                  |       |                                                  |       |                        |       |                                                               |       |   |   |
| Other expense,  net                                   |       | $                                                     | 3,049      |                        | $          | 554                                                                |       | $ | 2,495 |   |   | * |
| Income tax  expense                                   |       | 5,704                                                 |       | 3,140                       |       | 2,564                                                              |       | 82 | % |
| Preferred stock  dividends                            |       | 2,063                                                 |       | —                      |       | 2,063                                                              |       |   | * |

 

----

*Not meaningful.

 

**Oil andnatural gas operating expenses** - For the three months ended June 30, 2007, operatingexpenses increased 79% from the same period of 2006.  The acquisition of the Smith assets onJanuary 31, 2007 accounted for approximately 44% of the increase in costs. Wealso had added costs in 2007 for the new wells drilled and acquired during2006, including the Chapman Ranch Field properties acquired in December 2006.Average oil and natural gas operating expenses were $0.64 per Mcfe and $0.50per Mcfe for the three months ended June 30, 2007 and 2006, respectively. 

 

**Severance and ad valorem taxes**- For the three months ended June 30, 2007, severance and ad valorem taxesincreased 74% compared to the second quarter of 2006.  Severance tax expense for the three monthsended June 30, 2007 was 70% higher than the prior year period due to theacquisition of the Smith assets on January 31, 2007.  Our severance tax expense is levied on ouroil and natural gas revenue (excluding derivative activity). For the threemonths ended June 30, 2007, severance tax expense was approximately 5.6% ofrevenue subject to severance taxes compared to 5.0% of revenue subject toseverance taxes for the second quarter of 2006. Ad valorem tax expense for thesecond quarter of 2007 was impacted by the addition of the Chapman Ranchproperties acquired in December 2006 and the Smith assets acquired in January2007, as well as increases in estimated costs from the taxing authorities. Onan equivalent basis, severance and ad valorem taxes averaged $0.61 per Mcfe and$0.50 per Mcfe for the three months ended June 30, 2007 and 2006, respectively.

 

**Depletion, depreciation, and amortization(“DD&A”) and accretion**- DD&A and accretionexpense for the three months ended June 30, 2007 totaled $21.1 million comparedto $16.5 million for the same period in 2006. Depletion expense on our oil andnatural gas properties continues to increase due to increases in productionvolumes. The increase in depletion expense from the higher production levels inthe second quarter of 2007 as compared to the same period of 2006 resulted inan increase in expense of approximately $6.9 million. Our depletion rate hasincreased since year-end 2006 due to the addition of the Smith assets duringthe first quarter of 2007, but the depletion rate decreased from $3.65 per Mcfein the second quarter 2006 to $3.27 per Mcfe in the second quarter of 2007,resulting in a $2.4 million decrease in depletion expense. The rate decreasedas a result of the full cost ceiling test impairment reported during the thirdquarter of 2006. Depreciation of furniture and fixtures for the second quarterof 2007 was 13% lower than depreciation expense for the same period of 2006, asthe second quarter of 2006 included additional expense taken on assets deemedto be fully depreciated.  Accretionexpense

34

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associated with our assetretirement obligations for the three months ended June 30, 2007 increased 52%over the second quarter of 2006 for the new obligations incurred from the wellsdrilled and acquired since June 30, 2006 and the acquisition of the Smithassets in the first quarter of 2007.

 

**General and administrative (“G&A”) expenses**– Approximately 47% of the 51% increase in G&A expense from the secondquarter of 2006 to the second quarter of 2007 is primarily the result ofincreasing our staffing levels since June 30, 2006. We have added 15 newemployees since year end 2006 as a result of our continued growth.Approximately 17% of the increase in G&A expense is attributable to amortizationrelated to restricted stock awards granted over the past three years, which hasincreased from $0.5 million in the second quarter of 2006 to $0.8 million inthe second quarter of 2007 as a result of new grants that have occurred sincethe second quarter of 2006. Another 17% of the increase in G&A expense isattributed to increased professional fees paid for consultation on our reservereport and outstanding litigation matters. Other cost increases occurred forgeneral office expenses, charitable contributions and regulatory filingfees.  These increased costs werepartially offset by increased capitalized G&A and overhead reimbursementfees (which reduce total G&A costs). Capitalized G&A costs for secondquarter 2007 were $1.2 million as compared to $0.9 million for the comparableprior year period. G&A on a unit-of-production basis for the three monthsended June 30, 2007 was $0.79 per Mcfe compared to $0.75 per Mcfe for thecomparable 2006 period. G&A, excluding non-cash share-based compensationcosts, for the three months ended June 30, 2007 averaged $0.67 per Mcfecompared to $0.70 per Mcfe in the same period in 2006.

 

**Bad debt expense**– Duringthe second quarter of 2007, we recorded approximately $0.5 million in bad debtexpense related to a receivable recorded for an outstanding litigation matterwhich was deemed to be uncollectible.

 

**Otherexpense** -During the three months ended June 30, 2007, other expense increased primarilydue to an increase in gross interest expense, which was partially offset by anincrease in interest income and capitalized interest. For the second quarter of2007, 33% of our gross interest expense was capitalized, as compared to 72% inthe same 2006 period. We calculate the amount of interest we can capitalizebased on the comparison of our unproved property costs and our weighted averagedebt balance. We also incurred higher gross interest costs for the three monthsended June 30, 2007 than for the same period of 2006 due to higher outstandingdebt balances.

 
|                             | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in thousands)**                             | ** ** |
| Gross interest  expense     |       | $                                                   | 4,398      |   | $ | 1,974 |   |
| Less:  capitalized interest |       | (1,470                                              | )          | (1,429 | ) |
| Interest  expense, net      |       | $                                                   | 2,928      |   | $ | 545 |   |
|                        |       |                                                |       |   |   |
| Weighted average debt       |       | $                                                   | 232,055    |   | $ | 105,253 |   |

 

We also recordedamortization of deferred loan costs related to our Revolving Facility duringthe three months ended June 30, 2007. These costs were higher than 2006 due tothe higher costs associated with the new Revolving Facility compared to thePrior Credit Facility. Interest income earned on our outstanding daily cashbalances during the three months ended June 30, 2007 was significantly higherthan in 2006 due to increased cash balances and minor changes to the interestrate earned.  

 

**Incometax expense** –Income tax expense of $5.7 million and $3.1 million was recorded for the threemonths ended June 30, 2007 and 2006, respectively. The increase in income taxexpense from the second quarter of 2006 to 2007 is primarily the result ofincreased pre-tax income.  There was nota substantial difference in our effective income tax rate for the twoperiods.  

 

**Preferredstock dividends**– Our Board of Directors declared dividends on our 5.75% Series A cumulativeconvertible perpetual preferred stock in March and June 2007.  The preferred stock was issued in connectionwith a public offering in January 2007, therefore no comparable dividends werepaid in 2006.

35

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**Earnings per share** - For thethree months ended June 30, 2007, earnings per share decreased in comparison tothe same period in 2006, mainly as a result of an increase in the number ofoutstanding shares. Basic weighted average shares outstanding for the threemonths ended June 30, 2007 increased significantly as a result of the publicoffering of common stock that was completed in January 2007. We issuedapproximately 10.9 million shares of common stock. We also issued approximately2.9 million shares of 5.75% Series A cumulative convertible perpetual preferredstock, which when converted, have a dilutive effect of approximately 8.7million shares of common stock that are included in the calculation of dilutedearnings per share for the second quarter of 2007.

**SixMonths Ended June 30, 2007 Compared to the Six Months Ended June 30, 2006**

** **

**Revenue and Production**

 

Total revenueincreased 11% from the first six months of 2006 to the comparable 2007period.  Excluding the effects ofderivative activity, revenues increased 35% from the first six months of 2006to the comparable 2007 period.  Ourproduct mix contributed the following percentages of revenues and productionvolumes:

 
|                           | ** ** | **REVENUES (1)**                             | ** ** | **PRODUCTION VOLUMES  (MCFE)** | ** ** |
|---------------------------|------------|---------------------------------------------------|------------|-------------------------------------|------------|
| ** **                | ** ** | **Six Months Ended June 30,** | ** ** |
| ** **                | ** ** | **2007**                                          | ** ** | **2006**                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Natural gas               |       | 76                                                | %          | 80                                  | %          | 77 | % | 80 | % |
| Natural gas  liquids      |       | 10                                                | %          | 4                                   | %          | 12 | % | 9 | % |
| Crude oil and  condensate |       | 14                                                | %          | 16                                  | %          | 11 | % | 11 | % |
|                      |       |                                              |       |                                |       |   |   |   |   |
| Total                     |       | 100                                               | %          | 100                                 | %          | 100 | % | 100 | % |

 

----

(1)Includes effectof derivative transactions.

 

The followingtable summarizes volume and price information with respect to our oil andnatural gas production for the six months ended June 30, 2007 and 2006:

 
| ** **                                   | ** **   | ** **                                                                 | ** ** | ** **      | ** ** | **2007 Period Compared  to 2006 Period** | ** ** |
|----------------------------------------------|--------------|----------------------------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                                   | ** **   | **Six Months Ended  June 30,**                              | ** ** | **$  Increase** | ** ** | **%  Increase**                                              | ** ** |
| ** **                                   | ** **   | **2007**                                                                   | ** ** | **2006**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| **Production Volumes:**                 | *** *** | **(in thousands, except prices and percentages)** | ** ** |
| Natural gas (MMcf)                           |         | 9,258                                                                      |       | 7,007           |       | 2,251                                                        |       | 32 | % |
| Natural gas liquids (MBbls)                  |         | 246                                                                        |       | 126             |       | 120                                                          |       | 95 | % |
| Crude oil and condensate (MBbls)             |         | 226                                                                        |       | 172             |       | 54                                                           |       | 31 | % |
| Natural gas equivalent (MMcfe)               |         | 12,091                                                                     |       | 8,792           |       | 3,299                                                        |       | 38 | % |
| **Average  Sales Price****(1):**             | ** **   | ** **                                                                 | ** ** | ** **      | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
| Natural gas ($ per Mcf)(2)              |         | $                                                                          | 7.03       |            | $          | 7.19                                                         |       | $ | (0.16 | ) | (2 | )% |
| Natural gas liquids ($ per Bbl)         |         | 32.69                                                                      |       | 21.90           |       | 10.79                                                        |       | 49 | % |
| Crude oil and condensate ($ per Bbl)(2) |         | 59.56                                                                      |       | 64.02           |       | (4.46                                                        | )          | (7 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |         | 7.16                                                                       |       | 7.29            |       | (0.13                                                        | )          | (2 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |         | 6.35                                                                       |       | 7.83            |       | (1.48                                                        | )          | (19 | )% |
| **Operating  Revenue:**                      | ** **   | ** **                                                                 | ** ** | ** **      | ** ** | ** **                                                   | ** ** | ** ** | ** ** |
| Natural gas (2)                              |         | $                                                                          | 65,079     |            | $          | 50,354                                                       |       | $ | 14,725 |   | 29 | % |
| Natural gas liquids                          |         | 8,041                                                                      |       | 2,757           |       | 5,284                                                        |       | 192 | % |
| Crude oil and condensate(2)                  |         | 13,480                                                                     |       | 10,983          |       | 2,497                                                        |       | 23 | % |
| Gain (loss) on derivatives                   |         | (9,815                                                                     | )          | 4,778           |       | (14,593                                                      | )          | (305 | )% |
| Total revenue                                |         | $                                                                          | 76,785     |            | $          | 68,872                                                       |       | $ | 7,913 |   | 11 | % |

 

36

----

----

(1)Prices are calculated based on whole numbers, notrounded numbers.

(2)Excludes the effect of derivative transactions.

(3)Includes the effect of derivative transactions.

** **

**AverageSales Price**–Our sales revenue is sensitive to thevolatility of commodity prices.  A substantial portion of our production issold at prevailing market prices, which fluctuate in response to many factorsthat are outside of our control. Imbalances in the supply and demand for oiland natural gas can have a dramatic effect on the prices we receive for ourproduction. Political instability and availability of alternative fuels couldimpact worldwide supply, while the economy, weather and other factors outsideof our control could impact demand.

** **

**Naturalgas revenue** -For the first half of 2007, natural gas revenue, excluding derivative activity,increased 29% over the same period in 2006 due to 32% higher production volumesoffset slightly by 2% lower realized prices. The increase in production volumescompared to the prior year period resulted in increased revenue ofapproximately $16.2 million (based on 2006 comparable period pre-hedge prices).The increase in production was primarily the result of new wells drilled andacquired during 2006 (including the additional interest in our Chapman RanchField acquired late in 2006) and the acquisition of the Smith assets on January31, 2007. The decrease in average price received resulted in decreased revenueof approximately $1.5 million (based on current period production). 

 

**NGLrevenue**- Forthe six months ended June 30, 2007, NGL sales revenue increased 192% over thesame period in 2006 as a result of 95% higher production volumes and 49% higheraverage realized prices.  Upon becomingoperator of the Chapman Ranch field after acquiring additional workinginterests in late 2006, we began processing NGLs in the area, thus contributingto the increase in NGL production in 2007 as compared to 2006.  Increased NGL production volumes led toincreased revenue of approximately $2.6 million (based on 2006 comparableperiod pre-hedge prices). Higher average realized NGL prices for the six monthsended June 30, 2007 resulted in increased revenue of approximately $2.7 million(based on current period production).  

 

**Crude oiland condensate revenue**- For the six months ended June 30, 2007, oil andcondensate sales revenue, excluding derivative activity, increased 23% ascompared to the same period in 2006, due to 31% higher production offset by 7%lower realized prices. The increase in oil and condensate production resultedin an increase in revenue of approximately $3.5 million (based on 2006comparable period pre-hedge prices).  Productionvolumes for oil and condensate increased for the six months ended June 30, 2007compared to the same prior year period, due primarily to new wells drilled andacquired during 2006 (including the additional interest in our Chapman RanchField acquired late in 2006) and the acquisition of the Smith assets on January31, 2007.  Lower average realized pricesresulted in decreased revenue of approximately $1.0 million (based on currentperiod production).  

 

**Derivatives**– For the sixmonths ended June 30, 2007 we recorded a net loss, as compared to a net gain inthe first half of 2006, on our outstanding derivative contracts. The volume andprice contract terms vary from period to period and therefore interactdifferently with the changing pricing environment, which may affect thecomparability of the results for each period. While we are unable to predictthe market prices, we enter into contracts that we expect will protect us inthe event of significant downturns in the market, which proved to be a benefitto us in the first half of 2007 with cash settlement inflows from our hedgecounterparties to offset the lower prices received for our physicalproduction.  The following tablesummarizes the various components of the total gain/(loss) on derivatives andthe impact each component had on our realized prices.

37

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| ** **                                                                        | ** ** | **Six Months Ended June 30,**                   | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **$**                                                               | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit (1)** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per unit prices)** | ** ** |
| Natural gas  contract settlements (Mcf)                                           |       | $                                                                   | 569        |   | $ | 0.06 |   | $ | 1,961 |   | $ | 0.28 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Crude oil  contract settlements (Bbl)                                             |       | 1,078                                                               |       | 4.77 |   | — |   | — |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  reversal of prior period unrealized change in fair value (Mcf)    |       | (4,686                                                              | )          | (0.51 | ) | — |   | — |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  unrealized change in fair value of gas derivative contracts (Mcf) |       | (2,586                                                              | )          | (0.28 | ) | 3,124 |   | 0.45 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  reversal of prior period unrealized change in fair value (Bbl)    |       | (501                                                                | )          | (2.21 | ) | (156 | ) | (0.91 | ) |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market  unrealized change in fair value of oil derivative contracts (Bbl) |       | (3,689                                                              | )          | (16.30 | ) | (151 | ) | (0.88 | ) |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Gain (loss) on  derivatives (Mcfe)                                                |       | $                                                                   | (9,815     | ) | $ | (0.81 | ) | $ | 4,778 |   | $ | 0.54 |   |

 

----

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

 

Should commodityprices decrease from the current levels, our unhedged revenues could bematerially affected.

** **

**Costsand Operating Expenses**

 

The table below details our expenses:
| ** **                                            | ** ** | ** **                                            | ** ** | ** **                  | ** ** | **2007 Period Compared   to 2006 Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Six Months Ended  June 30,**         | ** ** | **$  Increase  (Decrease)** | ** ** | **%  Increase  (Decrease)**                                        | ** ** |
| ** **                                            | ** ** | **2007**                                              | ** ** | **2006**                    | ** ** | ** **                                                         | ** ** |
| ** **                                            | ** ** | ** **                                            | ** ** | ** **                  | ** ** | ** **                                                         | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)** | ** ** |
| Oil and natural  gas operating expenses               |       | $                                                     | 7,428      |                        | $          | 4,449                                                              |       | $ | 2,979 |   | 67 | % |
| Severance and ad  valorem taxes                       |       | 6,196                                                 |       | 4,825                       |       | 1,371                                                              |       | 28 | % |
| Depletion,  depreciation, amortization and accretion: |       |                                                  |       |                        |       |                                                               |       |   |   |
| Oil and gas property and equipment                    |       | 39,224                                                |       | 32,015                      |       | 7,209                                                              |       | 23 | % |
| Other assets                                          |       | 248                                                   |       | 234                         |       | 14                                                                 |       | 6 | % |
| ARO accretion                                         |       | 134                                                   |       | 89                          |       | 45                                                                 |       | 51 | % |
| General and  administrative expenses                  |       | 9,448                                                 |       | 6,472                       |       | 2,976                                                              |       | 46 | % |
| Bad debt expense                                      |       | 482                                                   |       | —                      |       | 482                                                                |       |   | * |
| Total operating  expenses                             |       | $                                                     | 63,160     |                        | $          | 48,084                                                             |       | $ | 15,076 |   | 31 | % |
|                                                  |       |                                                  |       |                        |       |                                                               |       |   |   |
| Other expense,  net                                   |       | $                                                     | 6,007      |                        | $          | 1,226                                                              |       | $ | 4,781 |   |   | * |
| Income tax  expense                                   |       | 2,769                                                 |       | 6,875                       |       | (4,106                                                             | )          | (60 | )% |
| Preferred stock  dividends                            |       | 3,444                                                 |       | —                      |       | 3,444                                                              |       |   | * |

 

----

*Not meaningful.

38

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**                Oil and natural gas operatingexpenses** - For the six months ended June 30, 2007,operating expenses increased 67% from the same period of 2006. The acquisitionof the Smith assets on January 31, 2007 accounted for approximately 61% of theincrease in costs.  We also had addedcosts in 2007 for the new wells drilled and acquired during 2006, including theChapman Ranch Field properties acquired in December 2006.  Average oil and natural gas operatingexpenses were $0.61 per Mcfe and $0.51 per Mcfe for the six months ended June 30,2007 and 2006, respectively. 

**Severance and ad valorem taxes**- For the six months ended June 30, 2007, severance and ad valorem taxesincreased 28% from the first half of 2006. Severance tax expense for the six months ended June 30, 2007 was 15%higher than the prior year period due to the acquisition of the Smith assets onJanuary 31, 2007, which was partially offset by significant abatements receivedin the first quarter of 2007.  Ourseverance tax expense is levied on our oil and natural gas revenue (excludingderivative activity). For the six months ended June 30, 2007, severance taxexpense was approximately 4.6% of revenue subject to severance taxes comparedto 5.4% of revenue subject to severance taxes for the first half of 2006. Advalorem tax expense for the first half of 2007 was impacted by the addition ofthe Chapman Ranch properties acquired in December 2006 and the Smith assetsacquired in January 2007, as well as increases in estimated costs from thetaxing authorities. On an equivalent basis, severance and ad valorem taxesaveraged $0.51 per Mcfe and $0.55 per Mcfe for the six months ended June 30,2007 and 2006, respectively.

 

**DD&A and accretion**-Depletion on our oil and natural gas properties increased 23% for the firsthalf of 2007 compared to the same period of 2006 due to an increase in ourproduction levels offset by a decrease in our unit-of-production depletionrate. The increase in production in 2007 attributed to an increase of $12.0million in depletion expense.  Thedepletion rate decreased from $3.64 per Mcfe in the first half of 2006 to $3.24per Mcfe in the first half of 2007, lowering depletion expense by $4.8million.  Depreciation of furniture andfixtures increased 6% compared to the prior year first half due to additionalcomputer equipment and leasehold improvements added in 2007 associated with anincreased number of employees and office space. Accretion expense associated with our asset retirement obligations forthe six months ended June 30, 2007 increased 51% over the first half of 2006for the new obligations incurred from the wells drilled and acquired since June30, 2006 and the acquisition of the Smith assets in the first quarter of 2007.

 

**Total G&A** - Over half ofthe 46% increase in total G&A expense from the first half of 2006 to thefirst half of 2007 is primarily the result of increasing our staffing levelssince June 30, 2006. We have added 15 new employees since year end 2006 as aresult of our continued growth. Approximately 22% of the increase in G&Aexpense is attributable to amortization related to restricted stock awardsgranted over the past three years, which has increased from $0.9 million in thefirst half of 2006 to $1.5 million in the first half of 2007 as a result of newgrants that have occurred since June 30, 2006. Another 20% of the increase inG&A expense is attributed to increased professional fees paid forconsultation on our reserve report and outstanding litigation matters. Othercost increases occurred for general office expenses, charitable contributions,regulatory filing fees and franchise taxes. These increased costs were partially offset by a 36% increase incapitalized G&A and a 66% increase in overhead reimbursement fees (whichreduce total G&A costs). Capitalized G&A costs for the first half of2007 were $2.2 million as compared to $1.6 million for the comparable prioryear period. G&A on a unit-of-production basis for the six months endedJune 30, 2007 was $0.78 per Mcfe compared to $0.74 per Mcfe for the comparable2006 period. G&A, excluding non-cash share-based compensation costs, forthe six months ended June 30, 2007 and 2006 averaged $0.66 per Mcfe.

 

**Bad debt expense**– Duringthe second quarter of 2007, we recorded approximately $0.5 million in bad debtexpense related to a receivable recorded for an outstanding litigation matterwhich was deemed to be uncollectible.

 

**Other expense** - During the six months ended June 30, 2007, otherexpense increased primarily due to an increase in gross interest expense, whichwas partially offset by an increase in interest income and capitalizedinterest. For the first half of 2007, 39% of our gross interest expense wascapitalized, as compared to 66% in the same 2006 period. We calculate theamount of interest we can capitalize based on the comparison of our unprovedproperty costs and our weighted average debt balance. We also incurred highergross interest costs for the six months ended June 30, 2007 than for the sameperiod of 2006 due to higher outstanding debt balances and

39

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commitment fees of $1.3million paid to our lender for the unused bridge loan facility (see Note 2 toour consolidated financial statements).

 
|                             | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in thousands)**                                             | ** ** |
| Gross interest  expense     |       | $                                                                   | 9,256      |   | $ | 3,582 |   |
| Less:  capitalized interest |       | (3,566                                                              | )          | (2,369 | ) |
| Interest  expense, net      |       | $                                                                   | 5,690      |   | $ | 1,213 |   |
|                        |       |                                                                |       |   |   |
| Weighted average debt       |       | $                                                                   | 215,376    |   | $ | 99,359 |   |

 

We also recordedamortization of deferred loan costs related to our Prior Credit Facility andRevolving Facility during the six months ended June 30, 2007. These costs werehigher than 2006 due to the termination of the Prior Credit Facility and thehigher costs associated with the new Revolving Facility compared to the PriorCredit Facility. Interest income earned on our outstanding daily cash balancesduring the six months ended June 30, 2007 was significantly higher than in 2006due to increased cash balances and minor changes to the interest rateearned.  

 

**Incometax expense** -An income tax provision was recorded for the six months ended June 30, 2007 and2006 of $2.8 million and $6.9 million, respectively. The decrease resulted fromlower pre-tax income in 2007 as compared to 2006. There was not a substantialdifference in our effective income tax rate for the two periods.

 

**Preferredstock dividends**– Our Board of Directors declared dividends on our 5.75% Series A cumulativeconvertible perpetual preferred stock in March and June 2007.  The preferred stock was issued in connectionwith a public offering in January 2007, therefore no comparable dividends werepaid in 2006.

 

**                Earningsper share** -For the first half of 2007, earnings per share decreased in comparison to thesame period in 2006 mainly as a result of decreased net income and an increasednumber of shares outstanding. Basic weighted average shares outstanding for thesix months ended June 30, 2007 increased significantly as a result of thepublic offering of common stock that was completed in January 2007. We issuedapproximately 10.9 million shares of common stock. We also issued approximately2.9 million shares of 5.75% Series A cumulative convertible perpetual preferredstock, which when converted, have an anti-dilutive effect of approximately 8.7million shares of common stock; and therefore, are not included in thecalculation of diluted earnings per share for the six months ended June 30,2007.

 

##  

## **Liquidity and Capital Resources**

 

Ourprimary ongoing source of capital is the cash flow generated from our operatingactivities supplemented by borrowings under our credit facility. Net cashgenerated from operating activities is a function of production volumes andcommodity prices, both of which are inherently volatile and unpredictable, aswell as operating efficiency and costs. Our business, as with other extractivebusinesses, is a depleting one in which each gas equivalent unit produced mustbe replaced or our asset base and capacity to generate revenues in the futurewill shrink. Our overall expected future production decline is estimated to beapproximately 22% per year. Less predictable than production declines from ourproved reserves is the impact of constantly changing oil and natural gas priceson cash flows.  We attempt to mitigatethe price risk with our hedging program. Reserves and production volumes areinfluenced, in part, by the amount of future capital expenditures. In turn,capital expenditures are influenced by many factors including drilling results,oil and natural gas prices, industry conditions, prices, availability of goods andservices and the extent to which oil and gas properties are acquired.

 

Ourprimary cash requirements are for exploration, development and acquisition ofoil and gas properties, 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 capitalexpenditures based on projected cash flows. We routinely adjust capitalexpenditures in response to changes in oil and natural gas prices, drilling andacquisition costs, and cash flow. We have historically used our credit facilityto supplement any

40

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deficiencies betweenoperating cash flow and capital expenditures. We typically have fundedacquisitions from borrowings under our credit facility, cash flow fromoperations and sales of common stock and preferred stock. 

 

We had$230.0 million of total borrowings outstanding under our Revolving Facility atJune 30, 2007. Our Revolving Facility matures on January 31, 2011. We havereceived significant funds through equity transactions in the past, includingthrough offerings of our common stock and preferred stock and the exercise ofwarrants and stock options. We typically do not, however, rely on proceeds fromthe exercise of warrants and stock options to sustain our business, as thetiming of those proceeds is unpredictable.

Significantchanges to working capital may affect our liquidity in the short term. Priceincreases since year-end 2006 and the acquisition of the Smith assetscontributed to the large increase in Accounts Receivable, Trade. We also had asignificant increase in outstanding debt which resulted in the increase ininterest payable at June 30, 2007. The Smith Acquisition was the largest in ourhistory and therefore has had and will continue to have a significant impact onour liquidity. The change in fair market value of our derivative instrumentsfrom a net asset at December 31, 2006 to a net liability at June 30, 2007 isindicative of potential future cash payments on our outstanding derivativepositions, which are scheduled to settle in future months. When our derivativefinancial instruments require us to pay a cash settlement, we are receivinghigher cash inflows on the sale of unhedged production at higher prices, providingus with funds needed to cover settlements when they come due.

 

After consideringthe impact of these working capital changes and our forecasts of future resultsof operations, we believe that cash flows from operating activities, assupplemented by borrowings under our Revolving Facility, combined with ourability to control the timing of certain of our future exploration anddevelopment requirements, will provide us with the flexibility and liquidity tomeet our planned capital requirements for 2007. As of June 30, 2007, we have $90.0 million in unused borrowing capacityunder our Revolving Facility.

 

We had cash and cash equivalents at June 30, 2007 of$8.7 million consisting primarily of short-term money market investments, ascompared to $2.1 million at December 31, 2006. Working capital was $9.9 million as of June 30, 2007, as compared to$10.2 million at December 31, 2006. Our sources and uses of cash were asfollows:
|                                              | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                                            | ** ** | **2006** | ** ** |
| ** **                                   | ** ** | **(in thousands)**                                             | ** ** |
| *Net  Cash Provided By Operating Activities* |       | $                                                                   | 65,440     |   | $ | 46,370 |   |
| * *                                     |       |                                                                |       |   |   |
| *Net  Cash Used In Investing Activities*     |       | (431,032                                                            | )          | (65,226 | ) |
| * *                                     |       |                                                                |       |   |   |
| *Net Cash Provided By Financing  Activities* |       | 372,185                                                             |       | 20,570 |   |
|                                              |            |                                                                     |            |  |  |  |  |

 

**Net Cash Provided ByOperating Activities***-*The increase in cash flows provided by operating activities for thefirst half of 2007 as compared the same period in 2006 is primarily a result ofhigher cash revenues.  The increase incash flows provided by operating activities is also attributable to changes inour working capital. The most significant is the increase in accruedliabilities due to increased activity from acquiring the Smith assets.

***               ***

**Net Cash Used In Investing Activities***-*We reinvest a substantial portion of our cash flowsin our drilling, acquisition, land and geophysical activities.  During the first half of 2007, our largestexpenditure was the Smith Acquisition. We also spent $42.6 million on ourdrilling and operating program during the first half of 2007.  We logged 19 wells thus far in 2007, 17 ofwhich were apparent successes.  Leaseholdand geological and geophysical activities accounted for expenditures of $9.7million in the first half of 2007. The remaining capital expenditures wereassociated with computer hardware, office equipment and other miscellaneouscapital charges. Proceeds from the sale of an interest in one of our Louisianaoil and gas properties totaled $1.1 million. During the first half of 2006, wespent $60.1 million on our drilling and operating program. In addition todrilling that was in progress at year-end 2005, we drilled 35 gross wellsduring the six months ended June 30, 2006, all but seven of which were apparentsuccesses. Leasehold acquisitions, including seismic data and other geologicaland geophysical expenditures totaled $7.7 million for the six months ended June30, 2006. The remaining capital expenditures were associated with computerhardware and office equipment and other miscellaneous capital charges. Proceedsfrom the sale of oil and gas properties totaled $0.6 million during the sixmonths ended June 30, 2006, which represents the divestiture of our Buckeyeproperties which closed in April 2006.

 

41

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Due to our active exploration,development and acquisition activities, we have experienced, and expect tocontinue to experience, substantial working capital requirements. We currentlyanticipate capital expenditures in 2007 to be approximately $140 million.Approximately $111.0 million is allocated to our expected drilling andproduction activities; $21.0 million is allocated to land, legal and seismicactivities; and $8.0 million relates to capitalized interest, G&A andother. We intend to fund these capital expenditures, and other commitments andworking capital requirements with expected cash flow from operations and, tothe extent necessary, other sources. Should there be a change in our pricing orproduction assumptions, we believe that we have sufficient financialflexibility from other financing sources to meet our financial obligations asthey come due, and we would recommend to our Board an adjustment to our capitalexpenditures program accordingly so as to avoid unnecessary incrementalborrowings that may be needed for acquisitions. We do not explicitly budget foracquisitions; however, we do expect to spend considerable effort evaluatingacquisition opportunities. We expect to fund acquisitions through traditionalreserve-based bank debt and/or the issuance of equity and, if required, throughadditional debt and equity financings.

* *

**Net Cash Provided ByFinancing Activities***-*During the six months ended June 30, 2007, our net borrowings underour Revolving Facility (as defined below) were $101.0 million due to theclosing of the Smith Acquisition. We also incurred deferred loan costs relatedto the Revolving Facility. We received $276.5 million in net proceeds from theissuance of common stock and preferred stock in our public offerings completedto partially finance the Smith Acquisition. 

 

Weexpect to utilize our Revolving Facility to supplement timing differences inour projected cash inflows and outflows and smaller acquisitions. As of June30, 2007, we also had approximately $101.5 million available under ourthen-existing shelf registration statement for the issuance of securities toraise cash for larger acquisitions. In July 2007, subsequent to quarter-end, wereplaced this shelf registration statement, and registered up to $500 millionin securities for future offerings under a new shelf registration statement(see Note 4 to our consolidated financial statements).  We believe we will be able to generatecapital resources and liquidity sufficient to meet our financial obligations asthey come due. 

* *

*Prior Credit Facility & Revolving Facility*

* *

OnJanuary 30, 2007, we terminated our Third Amended and Restated Credit Agreement(the “Prior Credit Facility”), which we had originally entered into in March2004 (effective December 31, 2003). The Prior Credit Facility was scheduled tomature on March 31, 2008 and had a borrowing base of $140.0 million, of which$129.0 million was outstanding as of January 30, 2007. 

 

OnJanuary 30, 2007, we also entered into a Fourth Amended and Restated CreditAgreement (the “Agreement”) for a new Revolving Credit Facility with Union Bankof California (“UBOC”), as administrative agent and issuing lender, and theother lenders party thereto. Pursuant  to the Agreement, UBOC will act asthe administrative agent for a senior, first lien secured borrowing baserevolving credit facility (the “Revolving Facility”) in favor of the Companyand certain of its wholly-owned subsidiaries in an amount equal to $750million, of which only $320 million was available under the borrowing baseestablished at the closing. The Revolving Facility has a letter of credit sub-limitof $20 million. In connection with the Revolving Facility, we paid the lendersfees in an amount equal to 1.00% of the initial borrowing base establishedunder the Revolving Facility, or $3.2 million, on January 31, 2007.  Wealso paid approximately $0.6 million for certain other administrative fees,legal fees, fronting fees and work fees in connection with the RevolvingFacility. The aggregate fees of $3.8 million (of which $0.1 million was paid inDecember 2006) were recorded to deferred loan costs and are being amortizedover the maturity of the Revolving Facility.

 

TheRevolving Facility matures on January 31, 2011 and bears interest at LIBOR plusan applicable margin ranging from 1.25% to 2.5% or Prime plus a margin of up to0.25%, with an unused commitment fee ranging from 0.50% to 0.25%. At June 30,2007, all of our outstanding borrowings were LIBOR based, consisting of twotranches of borrowings at interest rates of 7.09% and 7.10%. As of June 30,2007, $230 million in total borrowings were outstanding under the RevolvingFacility. Our available borrowing capacity under the Revolving Facility was $90million at June 30, 2007.  The borrowingbase of $320 million was reconfirmed by our lenders during the second quarterof 2007.  

 

42

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TheRevolving Facility is secured by substantially all of our assets. The RevolvingFacility provides for certain restrictions, including, but not limited to,limitations on additional borrowings, sales of oil and natural gas propertiesor other collateral, and engaging in merger or consolidation transactions. TheRevolving Facility restricts dividends and certain distributions of cash orproperties and certain liens and also contains financial covenants including,without limitation, the following:

 

·                  An EBITDAXto interest expense ratio requires that as of the last day of each fiscalquarter the ratio of (a) Edge’s consolidated EBITDAX (defined as EBITDA plussimilar non-cash items and exploration and abandonment expenses for suchperiod) to (b) Edge’s consolidated interest expense, not be less than 2.5 to1.0, calculated on a cumulative quarterly basis for the first 12 months afterthe closing of the Revolving Facility and then on a rolling four quarter basis.

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

·                  A maximumleverage ratio requires that as of the last day of each fiscal quarter theratio of (a) Total Indebtedness (as defined in the Agreement) to (b) an amountequal to consolidated EBITDAX be not greater than 3.0 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.

ConsolidatedEBITDAX is a component of negotiated covenants with our lender and is discussedhere as part of the Company’s disclosure of its covenant obligations. TheRevolving Facility includes other covenants and events of default that arecustomary for similar facilities.

 

InDecember 2006, UBOC provided us a commitment letter for a $250 million senior,second lien secured bridge loan facility (the “Bridge Loan Facility”). TheBridge Loan Facility, along with the Revolving Facility, were intended toreplace our Prior Credit Facility and to fund the closing of the SmithAcquisition (see Note 10) if we were unable to complete one or both of ourintended public offerings. Due to the successful completion of the public offeringof common stock and 5.75% Series A cumulative convertible perpetual preferredstock on January 30, 2007, we did not enter into the Bridge Loan Facility. Wepaid an amount equal to 0.50% of the commitment under the Bridge Loan Facility,or $1.3 million, on January 31, 2007, which is included in interest expense.

 

*Shelf Registration 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 orwarrants for debt securities or equity securities of the Company and guaranteesof debt securities by the Company’s subsidiaries. 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 we will or could sellany such securities. Our ability to utilize our shelf registration statementfor the purpose of issuing, from time to time, any combination of debtsecurities, preferred stock, common stock or warrants for debt securities orequity securities will depend upon, among other things, market conditions andthe existence of investors who wish to purchase our securities at pricesacceptable to us.  The shelf registrationstatement replaces a previous shelf registration statement, which registeredofferings of up to $390 million of securities.

InJanuary 2007, we completed an offering of 10.925 million shares of our commonstock and 2.875 million shares of 5.75% Series A cumulative convertibleperpetual preferred stock. The shares were offered to the public at a price of$13.25 per share of common stock and $50.00 per share of preferred stock. Wereceived net proceeds of approximately $276.5 million from the offerings($138.1 million from the common offering and $138.4 million from the preferredoffering), after deducting underwriting discounts and commissions and theexpenses of the offerings. 

43

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*Convertible Preferred Stock*

 

As noted above, wecompleted the public offering of 2,875,000 shares of our 5.75% Series Acumulative convertible perpetual preferred stock (“Convertible PreferredStock”) in January 2007.  We used the$138.4 million in net proceeds from this offering, along with the proceeds fromthe concurrent common stock offering and along with borrowings under ourRevolving Facility, to finance the Smith Acquisition and to refinance our PriorCredit 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 for the partial period from issuancethrough April 15, 2007, and the second payment, which was the first fullquarterly dividend, was made on July 16, 2007.

Nodividends or other distributions (other than a dividend payable solely inshares of a like or junior ranking) may be paid or set apart for payment uponany shares ranking equally with the Convertible Preferred Stock (“parityshares”) or shares ranking junior to the Convertible Preferred Stock (“juniorshares”), nor may any parity shares or junior shares be redeemed or acquired forany consideration by us (except by conversion into or exchange for shares of alike or junior ranking) unless all accumulated and unpaid dividends have beenpaid or funds therefore have been set apart on the Convertible Preferred Stockand any parity shares. 

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

*Ranking*.  Our Convertible Preferred Stock ranks: 

·        senior to all of the shares of ourcommon stock and to all of our other capital stock issued in the future unlessthe terms of such capital stock expressly provide that it ranks senior to, oron a parity with, shares of our Convertible Preferred Stock; 

 

·        on a parity with all of our othercapital stock issued in the future the terms of which expressly provide that itwill rank on a parity with the shares of our Convertible Preferred Stock; and 

 

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

*Mandatoryconversion*. On or after January20, 2010, we may, at our option, cause shares of our Convertible PreferredStock to be automatically converted at the applicable conversion rate, but onlyif the closing sale price of our common stock for 20 trading days within aperiod of 30 consecutive trading days ending on the trading day immediatelypreceding the date we give the conversion notice equals or exceeds 130% of theconversion price in effect on each such trading day. 

*Optionalredemption*. If fewer than 15% ofthe shares of Convertible Preferred Stock issued in the Convertible PreferredStock offering (including any additional shares issued pursuant to theunderwriters' over-allotment option) are outstanding, we may, at any time on orafter January 20, 2010, at our option, redeem for cash all suchConvertible Preferred Stock at a redemption price equal to the liquidationpreference of $50.00 plus any accrued and unpaid dividends, if any, on a shareof Convertible Preferred Stock to, but excluding, the redemption date, for eachshare 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

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of $16.56 per share ofcommon stock, subject to adjustment) plus cash in lieu of fractional shares,subject to our right to settle all or a portion of any such conversion in cashor shares 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. 

Uponany conversion, the holder will not receive any cash payment representingaccumulated and unpaid dividends on the Convertible Preferred Stock, whether ornot in arrears, except in limited circumstances. The conversion rate is equalto $50.00 divided by the conversion price at the time. The conversion price issubject to adjustment upon the occurrence of certain events. The conversionprice on the conversion date and the number of shares of our common stock, asapplicable, to be delivered upon conversion may be adjusted if certain eventsoccur. 

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

A“fundamental change” will be deemed to have occurred upon the occurrence of anyof the following: 

1. a “person” or “group” subjectto specified exceptions, disclosing that the person or group has become thedirect or indirect ultimate “beneficial owner” of our common equityrepresenting more than 50% of the voting power of our common equity other thana filing with a disclosure relating to a transaction which complies with theprovision in subsection 2 below;

2. consummation of anyshare exchange, consolidation or merger of us pursuant to which our commonstock will be converted into cash, securities or other property or any sale,lease or other transfer in one transaction or a series of transactions of allor substantially all of the consolidated assets of us and our subsidiaries,taken as a whole, to any person other than one of our subsidiaries; provided,however, that a transaction where the holders of more than 50% of all classesof our common equity immediately prior to the transaction own, directly orindirectly, more than 50% of all classes of common equity of the continuing orsurviving corporation or transferee immediately after the event shall not be afundamental change; 

3. we are liquidated or dissolvedor holders of our capital stock approve any plan or proposal for ourliquidation or dissolution; or 

4. our common stock isneither listed on a national securities exchange nor listed nor approved forquotation on an over-the-counter market in the United States. 

However,a fundamental change will not be deemed to have occurred in the case of a shareexchange, merger or consolidation, or in an exchange offer having the resultdescribed in subsection 1 above, if 90% or more of the consideration in theaggregate paid for common stock (and excluding cash payments for fractionalshares and cash payments pursuant to dissenters’ appraisal rights) inthe share exchange, merger or consolidation or exchange offer consists ofcommon stock of a United States company traded on a national securitiesexchange (or which will be so traded or quoted when issued or exchanged inconnection with such transaction). 

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

Inaddition, we may generally not, without the approval of the holders of at least66 2/3% of the shares of our Convertible Preferred Stock then outstanding: 

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·      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.

*Off Balance Sheet Arrangements*

Wecurrently do not have any off balance sheet arrangements.

**RiskManagement Activities – Derivatives & Hedging**

Due to the volatility of oil and natural gas prices,we periodically enter into price-risk management transactions (e.g. swaps,collars and floors) for a portion of our oil and natural gas production toachieve a more predictable cash flow, as well as to reduce exposure fromcommodity price fluctuations.  While theuse of these arrangements limits our ability to benefit from increases in theprice of oil and natural gas, it also reduces our potential exposure to adverseprice movements. Our arrangements, to the extent we enter into any, apply toonly a portion of our production, provide only partial price protection againstdeclines in oil and natural gas prices and limit our potential gains fromfuture increases in prices. None of these instruments are used for tradingpurposes. The use of derivative instruments involves the risk that thecounterparties to such instruments will be unable to meet the financialobligations of such contracts. On a quarterly basis, our management reviews 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 ourprice-risk management policies and trades on a monthly basis. 

All of these price-risk management transactions areconsidered derivative instruments and accounted for in accordance with SFAS No.133, *Accounting for Derivative Instrumentsand Hedging Activities*(asamended)*.* These derivativeinstruments are intended to hedge our price risk and may be considered hedgesfor economic purposes. There are two types of accounting treatments forderivatives, (i) mark-to-market accounting and (ii) cash flow hedge accounting.For discussion of these accounting treatments, see Note 9 to our consolidatedfinancial statements.  We currently applymark-to-market accounting treatment to all of our derivative contracts. Thefollowing table provides additional information regarding our variousderivative transactions that were recorded at fair value on the balance sheetas of June 30, 2007. 

|                                                                                         | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Fair value of  contracts outstanding at December 31, 2006                               |       | $                       | 5,187      |   |
| Contracts  realized or otherwise settled during the period                              |       | 1,647                   |       |
| Fair value at  June 30, 2007 of new contracts entered into during 2007:                 |       |                    |       |
| Asset                                                                                   |       | 285                     |       |
| Liabilit                                                                                |       | (7,557                  | )          |
| Changes in fair  values attributable to changes in valuation techniques and assumptions |       | —                  |       |
| Other changes in  fair values                                                           |       | (5,837                  | )          |
| Fair values of  contracts outstanding at June 30, 2007                                  |       | $                       | (6,275     | ) |

 

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The following table details the fair value of ourcommodity-based derivative contracts by year of maturity and valuationmethodology as of June 30, 2007.
| ** **                                           | ** ** | **Fair Value of Contracts at June 30, 2007** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **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                                                |       | 262                                                                             |       | — |   | — |   | — |   | 262 |   |
| Liability                                            |       | (2,788                                                                          | )          | (3,749 | ) |   |   | — |   | (6,537 | ) |
| Prices based on  models and other valuation methods: |       | —                                                                          |       | — |   | — |   |   |   | — |   |
| Total                                                |       | $                                                                               | (2,526     | ) | $ | (3,749 | ) | $ | — |   | $ | — |   | $ | (6,275 | ) |
|                                                      |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**TaxMatters**

At June30, 2007, we had cumulative net operating loss carryforwards (“NOLs”) forfederal income tax purposes of approximately $61.0 million. The estimated NOLspresented herein assume that certain items, primarily intangible drillingcosts, have been written off for tax purposes in the current year. However, wehave not made a final determination if an election will be made to capitalizeall or part of these items for tax purposes in the future.  

In June 2006, the FASB issued FIN 48,*Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109*, which clarifies the accountingfor uncertainty in income taxes recognized in accordance withSFAS No. 109, *Accounting for IncomeTaxes*. FIN 48 prescribes a benefit recognition model with atwo-step approach, a more-likely-than-not recognition criterion and ameasurement attribute that measures the position as the largest amount of taxbenefit that is greater than 50% likely of being ultimately realized uponultimate settlement. If it is not more likely than not that the benefit will besustained on its technical merits, no benefit will be recorded. FIN 48also requires that the amount of interest expense to be recognized related touncertain tax positions be computed by applying the applicable statutory rateof interest to the difference between the tax position recognized in accordancewith FIN 48 and the amount previously taken or expected to be taken in atax return. We also adopted FASB Staff Position No. FIN 48-1, *Definition of Settlement in FASB Interpretation No. 48* (“FSPFIN 48-1”) as of January 1, 2007, which provides that a company’s tax positionwill 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.  At January 1, 2007 we recorded thecumulative effect of the change in accounting principle as a $534,035 decreasein the opening balance of retained earnings. We had no reserves prior toadoption at January 1, 2007.  Werecognize interest and penalties related to unrecognized tax benefits in taxexpense. However, we had not accrued interest or penalties at June 30, 2007.

**RecentlyIssued Accounting Pronouncements**

In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment ofFAS Statement No. 115*. SFAS No. 159 givescompanies the option of applying at specified election dates fair valueaccounting to certain financial instruments and other items that are notcurrently required to be measured at fair value. If a company chooses to recordeligible items at fair value, the company must report unrealized gains andlosses on those items in earnings at each subsequent reporting date.SFAS No. 159 also prescribes presentation and disclosure requirementsfor assets and liabilities that are measured at fair value pursuant to thisstandard and pursuant to the guidance in SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities (asamended)*. SFAS No. 159 will be effective for fiscal year 2008.As the provisions of SFAS No. 159 are applied prospectively, theimpact to the Registrants will depend on the instruments selected for fairvalue measurement at the time of implementation.

In September 2006, the FASB issued SFAS No. 157, *Fair Value Measurements,* which provides guidance for usingfair value to measure assets and liabilities. The standard also gives expanded information about theextent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the

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effectof fair value measurements on earnings. SFAS No. 157 does not expand the use offair value in any new circumstances. SFAS No. 157 establishes a fair value hierarchy that prioritizesthe information used to develop fair value assumptions.  SFAS No. 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007.  Early adoption is encouraged.  We are currently assessing the impact, ifany, that SFAS No. 157 will have on our financial statements.

***ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK***

We are exposed to market risk from changes in interestrates and commodity prices.  We use aRevolving Facility with a floating interest rate. We are not subject to fairvalue risk resulting from changes in our floating interest rates.  The use of floating rate debt instrumentsprovides a benefit due to downward interest rate movements but does not limitus to exposure from future increases in interest rates.  Based on the June 30, 2007 outstandingborrowings and interest rates of 7.09% and 7.10% applied to various borrowings,a 10% change in interest rates would result in an increase or decrease ofinterest expense of approximately $1.6 million on an annual basis.  

In thenormal course of business, we enter into hedging transactions, includingcommodity price collars, swaps and floors, to mitigate our exposure tocommodity price movements, but not for trading or speculative purposes.  Please refer to Note 9 to our consolidatedfinancial statements. While the use of these arrangements may limit the benefitto us of increases in the price of oil and natural gas, it also limits thedownside risk of adverse price movements. The use of derivative instruments also involves the risk that thecounterparties to such instruments will be unable to meet the financialobligations of such contracts.  Thefollowing is a list of contracts outstanding as of June 30 2007:
| **Transaction Date** | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price   Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  June 30, 2007** | ** ** |
|---------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|--------------------------------|------------|---------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                | ** ** | ** **            | ** ** | ** **    | ** ** | ** ** | ** ** | ** **                     | ** ** | ** **                | ** ** | **(in thousands)**                                                   | ** ** |
| ***Natural  Gas (1):***   |       |                  |       |          |       |       |       |                           | * *   | * *                  | * *   | * *                                                                  | * *   |
| 01/07                     |       | Collar                |       | 02/01/07      |       | 12/31/07   |       | $7.02-$9.00                    |       | 15,000  MMbtu             |       | $                                                                         | 483        |   |
| 01/07                     |       | Collar                |       | 02/01/07      |       | 12/31/07   |       | $7.00-$9.00                    |       | 15,000  MMbtu             |       | 473                                                                       |       |
| 01/07                     |       | Collar                |       | 02/01/07      |       | 12/31/07   |       | $7.00-$9.00                    |       | 10,000  MMbtu             |       | 285                                                                       |       |
| 01/07                     |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.00                    |       | 20,000  MMbtu             |       | (1,947                                                                    | )          |
| 01/07                     |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.00                    |       | 10,000  MMbtu             |       | (885                                                                      | )          |
| 01/07                     |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.02                    |       | 10,000  MMbtu             |       | (951                                                                      | )          |
| 04/07                     |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.00                   |       | 10,000  MMbtu             |       | (44                                                                       | )          |
| ***Crude  Oil (2):***     |       |                  |       |          |       |       |       |                           |       |                      |       |                                                                      |       |
| 08/06                     |       | Collar                |       | 01/01/07      |       | 12/31/07   |       | $70.00-$87.50                  |       | 400  Bbl                  |       | 212                                                                       |       |
| 12/06                     |       | Swap                  |       | 01/01/07      |       | 12/31/07   |       | $66.00                         |       | 600  Bbl                  |       | (597                                                                      | )          |
| 12/06                     |       | Swap                  |       | 01/01/08      |       | 12/31/08   |       | $66.00                         |       | 1,500  Bbl                |       | (3,304                                                                    | )          |
|                      |       |                  |       |          |       |       |       |                           |       |                      |       | $                                                                         | (6,275     | ) |

 

(1)   The Company’s natural gas collars wereentered into on a per MMbtu delivered price basis, using the NYMEX Natural GasIndex. Mark-to-market accounting treatment is applied to these contracts andthe change in fair value is reflected in total revenue.

(2)   The Company’s crude oil contracts wereentered into on a per barrel delivered price basis, using the West TexasIntermediate Light Sweet Crude Oil Index. Mark-to-market accounting treatment isapplied to these contracts and the change in fair value is reflected in totalrevenue.

At June 30, 2007, the fair value of the outstandingderivatives was a net liability of approximately $6.3 million. A 10% change inthe commodity priceperunit, as long as the price is either above the ceiling or below the floorprice, would cause the fair value total of the derivative instruments toincrease or decrease by approximately $0.9 million.

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

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures as of the end of theperiod covered by this report.  Based onthat evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective as of June30, 2007 to provide reasonable assurance that information required to bedisclosed in our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

Therehas been no change in our internal controls over financial reporting thatoccurred during the three months ended June 30, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

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**PART II - OTHER INFORMATION**

**Item 1 - Legal Proceedings**

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

**Wade and Joyce Montet, et al., v. Edge Petroleum Corp ofTexas, et al., consolidated with Rolland L. Broussard, et al., v. EdgePetroleum Corp of Texas, et al****.** - This is a consolidated suit, filed in state courtin Vermilion Parish, Louisiana in September 2003. Plaintiffs aremineral/royalty owners under the Norcen-Broussard No. 1 and 2 wells, Marg TexReservoir C, Sand Unit A (Edge’s old Bayou Vermilion Prospect).  Theyclaim the operator at the time, Norcen Explorer, now Anadarko E&P Company (“Anadarko”),failed to “block squeeze” the sections of the No. 2 well, as a prudentoperator, according to their allegations, would have done, to protect the gasreservoir from being flooded with water from adjacent underground formations.Plaintiffs further allege Norcen was negligent in not creating a field-wideunit to protect their interests.  The allegations relate to actions takenbeginning in the early 1990’s. Plaintiffs have named us and other workinginterest owners in the leases as defendants, including Norcen Explorer’ssuccessors in interest, Anadarko. Plaintiffs originally sought unspecifieddamages for lost royalties and damages due to alleged devaluation of theirmineral and property interests, plus interest and attorneys’ fees. In early2005, we filed a motion for summary judgment in the case asserting, among otherdefenses, that:  (i) there has been no breach of contract, (ii) there isno express or implied duty imposed on us to block squeeze the well or form afield-wide unit, (iii) the units were properly formed by the ConservationCommissioner in accordance with the statutory scheme in Louisiana, (iv)plaintiffs’ claims are barred by limitations, and (v) other defenses. Alongwith the other defendants, we also filed a special peremptory challenge of nocause of action under the leases and the Louisiana Mineral Code for failure toexhaust administrative remedies and due to lack of a demand. In May and June2005, the court ruled against us on the motion for summary judgment and theperemptory challenges. Of the 18.75% after-payout working interest that wasoriginally reserved in the leases, we owned a 2.8% working interest at the timeof the alleged acts or omissions. On September 6, 2005, we filed a third-partydemand to join the other working interest owners who hold the remainder of the18.75% working interest as third-party defendants in this case. Thesethird-parties consist, for the most part, of partnerships that are directly orindirectly controlled by John Sfondrini, a director of ours, and hold anaggregate 14.7% working interest (the “Sfondrini Partnerships”). VincentAndrews, also a director of ours, owns a minority interest in the corporategeneral partner of one of the partnerships.  The Sfondrini Partnershipsconsist of (1) Edge Group Partnership, a general partnership composed oflimited partnerships of which Mr. Sfondrini and a company controlled by Mr.Sfondrini are general partners; (2) (A) Edge Option I Limited Partnership, (B)Edge Option II Limited Partnership and (C) Edge Option III Limited Partnership,limited partnerships of which Mr. Sfondrini and a company controlled by Mr. Sfondriniare general partners; and (3) BV Partners Limited Partnership, a limitedpartnership of which a company controlled by Messrs. Sfondrini and Andrews isgeneral partner and of which Mr. Sfondrini is manager (and of which company Mr.Andrews is an officer).  These partnerships were among the third partydefendants that we have sought to join in the case, and these partnerships havefor the most part filed answers denying any liability to us. We participatedfor our 2.8% share of the well costs and revenues for the Broussard No. 2 well,as did the other defendants for their share, including the third-partydefendant partnerships who participated for 14.7%. We strongly believe theparties should only be liable for their proportionate share of any damagesawarded should a finding of liability occur in the case. We intend tovigorously contest the plaintiffs’ claims.

As of the date of this report, it is not possible todetermine what, if any, our ultimate exposure might be in this matter. Prior tothe settlement described below, plaintiffs had asserted damages, includinginterest, to be as high as $63 million.  The plaintiffs’ expert witness,in his December 2005 deposition, offered his theory that plaintiffs’ grossdamages are in the range of $19 to $22 million. That number is based on histheory that the alleged failure to block squeeze the well resulted in theunder-production of gas worth $300 million. Plaintiffs’ royalty share of thatfigure yields the $19 to $22 million range of alleged damages. Based on theexpert’s testimony, damages attributable to the full 18.75% interest would bein the range of $3.75 million gross or net to our 2.8% share would be in therange of $560,000 (excluding interest and attorneys’ fees). Along with theother defendants, we hired our own

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expertwitnesses who have refuted these claims, particularly the expert’s assertionsthat failure to block squeeze the well caused any damages to the reservoir. Thedeposition of a Norcen engineer who prepared the completion plan for the BroussardNo. 2 well and supervised the completion operations, taken in April 2006,confirms the testimony of the defense experts as to why the well was not blocksqueezed.  The plaintiffs have also retained a damages expert who hasgiven a report that the damages in this case are in the range of $30 million,excluding interest and attorneys’ fees.  Our share of that amount based onthe full 18.75% would be approximately $5.6 million and net to our 2.8% sharewould be approximately $840,000. We participated in mediation of this lawsuiton July 18, 2006 but the parties failed to reach an agreement.  In July2006, the plaintiffs’ attorney sent a demand to the defendants for totaldamages claimed by plaintiffs, with legal interest, totaling $63 million. Our share of that amount based on the full 18.75% interest would beapproximately $12.2 million and net to our 2.8% interest would be approximately$1.8 million. On July 31, 2006, the Judge granted the defendant groups’ motionfor partial summary judgment dismissing plaintiffs’ tort-based claims. Also onthe same date, the Judge granted the defendant groups’ motion for partialsummary judgment seeking to deny the plaintiffs an award of attorneys’ fees andalso to dismiss any claim of plaintiffs that defendants had an obligation toform a field-wide unit.

On December 19, 2006, we, along with the otherdefendants in this suit, reached a settlement agreement with the BroussardPlaintiffs in full settlement of their 72% of the total claims made in thisconsolidated action. This settlement was finalized in January 2007.  Ourshare of this settlement totaled approximately $208,000, which was recorded inDecember 2006, and the Sfondrini Partnerships’ share totaled $1,109,759. The settlement with the Broussard Plaintiffs was finalized on February 1, 2007,and the defendants and the third-party defendants including the SfondriniPartnerships were released from all claims by the Broussard Plaintiffs.

We and the other oil company defendants participatedin a mediation regarding the remaining claims in this lawsuit with the Montetplaintiffs on May 10, 2007.  Allremaining claims were settled for a total agreed payment to the Montetplaintiffs of $3.5 million.  Ours and theSfondrini Partnerships’ share of the settlement amount were $118,333 and$502,917, respectively, for a total of $621,250, which amounts were paid byinsurance.  As part of the settlement,Mid-Continent Casualty Company and one other insurer agreed to cover and paythe full share of the Montet settlement amount attributable to us and theSfondrini Partnerships in return for mutual releases under the policiesinvolved and for a joint dismissal of all claims asserted by the parties in thesuit for declaratory judgment filed by Mid-Continent against us and the SfondriniPartnerships in federal district court in Houston.  Also as part of the settlement, we reimbursedthe Sfondrini Partnerships for certain attorneys’ fees in the amount of$62,500.  The settlement with the Montetplaintiffs was finalized in writing in June 2007, all defendants have paidtheir respective shares of the amounts owed, and the plaintiffs and defendantsfiled a joint motion to dismiss with the court on August 3, 2007.

**David Blake, et al. v. Edge PetroleumCorporation** – On September 19, 2005, David Blake andDavid Blake, Trustee of the David and Nita Blake 1992 Children’s Trust filedsuit against us in state district court in Goliad County, Texas alleging breachof contract for failure and refusal to transfer overriding royalty interests toplaintiffs in at least five leases in Goliad County, Texas and failure andrefusal to pay monies to Blake pursuant to such overriding royalty interestsfor wells completed on the leases. The plaintiffs seek relief of (1) specificperformance of the alleged agreement, including granting of overriding royaltyinterests by us to Blake; (2) monetary damages for failure to grant theoverriding royalty interests; (3) exemplary damages for his claims of businessdisparagement and slander; (4) monetary damages for tortuous interference; and(5) attorneys’ fees and court costs. Venue of the case was transferred toHarris County, Texas by agreement of the litigants.  We have servedplaintiffs with discovery and have filed a counterclaim and an amendedcounterclaim joining various related entities that are controlled byplaintiffs.  In addition, plaintiffs have filed an amended complaintalleging claims of slander of title and tortuous interference related to itsalleged right to receive an overriding royalty interest from a third party. Plaintiffs currently have on file an amended motion for summary judgment,to which we have filed a response.  In addition, we have filed a motionfor summary judgment on the plaintiffs’ case.  In December 2006, the courtdenied our motion for summary judgment.  The court has not ruled on Blake’smotion.  The trial was scheduled to begin September 10, 2007, but has beenpassed and the new trial has been set for March 3, 2008.  Discovery in thecase has commenced and is continuing. We have responded aggressively to thislawsuit, and believe it has meritorious defenses and counterclaims.

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**Item 1A – Risk Factors**

Inaddition to the other information set forth in this report, you shouldcarefully consider the factors discussed in Part I, “Item 1A. Risk Factors” inour 2006 Annual Report on Form 10-K, which could materially affect ourbusiness, financial condition or future results.  The risks described in our 2006 Annual Reporton 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**

Our stockholders voted onthe following matters at the Annual Meeting of Stockholders on May 23, 2007:
| ** **                                                                                                                               | ** ** | **For**    | ** ** | **Against** | ** ** | **Withheld** | ** ** | **Abstain** | ** ** | **Broker Non-  Votes** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|--------------|------------|-------------|------------|-----------------------------|------------|
| (A)     Election  of Directors:                                                                                      |       |       |       |        |       |         |       |        |       |                        |       |
| Robert W. Shower                                                                                                                         |       | 25,887,827 |       | —      |       | 686,885      |       | —      |       | —                      |       |
| David F. Work                                                                                                                            |       | 25,327,756 |       | —      |       | 1,246,956    |       | —      |       | —                      |       |
| (B)     Approval  of the Appointment of BDO Seidman, LLP as Independent Registered Public  Accounting Firm for 2007. |       | 26,424,402 |       | 102,955     |       | —       |       | 47,355      |       | —                      |       |

 

In addition to theelection of the directors indicated above, the following directors continued asdirectors following the meeting: Thurmon M. Andress, Vincent S. Andrews,Jonathan M. Clarkson, Michael A. Creel, John W. Elias and John Sfondrini.
| **Item 5 - Other Information** | None |
|--------------------------------|------|

**Item 6 - Exhibits**

The following exhibits are filed as partof this report:

52

----

# **INDEX TO EXHIBITS**

| Exhibit No. | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | —     |       | Amended and Restated  Combination Agreement by and among (i) Edge Group II Limited Partnership,  (ii) Gulfedge Limited Partnership, (iii) Edge Group Partnership, (iv) Edge  Petroleum Corporation, (v) Edge Mergeco, Inc. and (vi) the Company,  dated as of January 13, 1997 (Incorporated by reference from exhibit 2.1  to the Company’s Registration Statement on Form S-4 (Registration No.  333-17269)).                                                                                                            |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.2         |       | —     |       | Agreement and Plan of  Merger dated as of May 28, 2003 among Edge Petroleum Corporation, Edge Delaware  Sub Inc. and Miller Exploration Company (“Miller”) (Incorporated by reference  from Annex A to the Joint Proxy Statement/Prospectus contained in the  Company’s Registration Statement on Form S-4/A filed on October 31, 2003  (Registration No. 333-106484)).                                                                                                                                                    |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.3         |       | —     |       | Asset Purchase  Agreement by and among Contango STEP, L.P., Contango Oil & Gas Company, Edge  Petroleum Exploration Company and Edge Petroleum Corporation dated October 7,  2004 (Incorporated by reference from exhibit 2.1 to the Company’s Current  Report on Form 8-K filed October 12, 2004).                                                                                                                                                                                                                              |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.4         |       | —     |       | Purchase and Sale  Agreement, dated as of September 21, 2005 among Pearl Energy Partners, Ltd., and  Cibola Exploration Partners, L.P., as Sellers; and Edge Petroleum Exploration  Company as Buyer and Edge Petroleum Corporation as Guarantor (Incorporated by  reference from exhibit 2.01 to the Company’s Current Report on Form 8-K filed  October 19, 2005).                                                                                                                                                                 |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.5         |       | —     |       | Stock Purchase  Agreement by and among Jon L. Glass, Craig D. Pollard, Leigh T. Prieto,  Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P., Cinco  Energy Corporation, and Edge Petroleum Exploration Company and Edge Petroleum  Corporation dated September 21, 2005 (Incorporated by reference from exhibit  2.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly period  ended September 30, 2005).                                                                                            |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.6         |       | —     |       | Letter Agreement dated  November 18, 2005 by and among Edge Petroleum Exploration Company, Cinco  Energy Corporation and Sellers (Incorporated by reference from exhibit 2.02  to the Company’s Current Report on Form 8-K filed December 6, 2005). Pursuant  to Item 601(b)(2) of Regulation S-K, the Company had omitted certain  Schedules to the Letter Agreement (all of which are listed therein) from this  Exhibit 2.6. It hereby agrees to furnish a supplemental copy of any such  omitted item to the SEC on its request. |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1         |       | —     |       | Restated Certificate of  Incorporation of the Company effective January 27, 1997 (Incorporated by reference  from exhibit 3.1 to the Company’s Current Report on Form 8-K filed April 29,  2005).                                                                                                                                                                                                                                                                                                                                    |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2         |       | —     |       | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective January 31, 1997 (Incorporated by reference from exhibit 3.2 to the  Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                    |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3         |       | —     |       | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective April 27, 2005 (Incorporated by reference from exhibit 3.3 to the  Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                      |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.4         |       | —     |       | Bylaws of the Company  (Incorporated by Reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999).                                                                                                                                                                                                                                                                                                                                                               |

 

53

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| 3.5        |   | — |   | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by Reference from  exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 1999).                                                                                                                                                                                                                                                                                                                                              |
|------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.6        |   | — |   | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from exhibit  3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period  ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                        |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.1        |   | — |   | Third Amended and  Restated Credit Agreement dated December 31, 2003 among Edge Petroleum Corporation,  Edge Petroleum Exploration Company, Edge Petroleum Operating Company, Inc., Miller  Oil Corporation and Miller Exploration Company, as borrowers, the lenders  thereto and Union Bank of California, N.A., a national banking association,  as Agent (Incorporated by reference from Exhibit 4.1 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004).                                                      |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.2        |   | — |   | Agreement and Amendment  No. 1 to Third Amended and Restated Credit Agreement dated May 31, 2005 among  Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge  Petroleum Operating Company, Inc., Miller Exploration Company and Miller Oil  Corporation, as borrowers, the lenders thereto and Union Bank of California,  N.A., a national banking association, as agent for the lenders (Incorporated  by reference from Exhibit 4.2 to the Company’s Quarterly Report on Form 10- Q  for the quarterly period ended June 30, 2005).         |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.3        |   | — |   | Agreement and Amendment  No. 2 to the Third Amended and Restated Credit Agreement dated November 30,  2005 among Edge Petroleum Corporation, Edge Petroleum Exploration Company, Edge  Petroleum Operating Company, Inc., Miller Oil Corporation, Miller Exploration  Company, and Cinco Energy Corporation, as borrowers, the lenders thereto and  Union Bank of California, N.A., a national banking association, as Agent  (Incorporated by reference from exhibit 4.3 to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2005). |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.4        |   | — |   | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by reference  from exhibit 10.1(a) to Miller Exploration Company’s Annual Report on Form  10-K for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                           |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.5        |   | — |   | Amendment No. 1 to the  Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller Exploration Company’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                                                                                    |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.6        |   | — |   | Amendment No. 2 to the  Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller Exploration Company’s  Registration Statement on Form S-8 filed on April 11, 2001 (Registration No.  333-58678)).                                                                                                                                                                                                                                                                                    |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 4.7        |   | — |   | Form of Miller Stock  Option Agreement (Incorporated by reference from exhibit 10.1(b) to Miller Exploration  Company’s Annual Report on Form 10-K for the year ended December 31, 1997  (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                               |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 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).                                                                                                                                                                                          |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| †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)).                                                                                                                                                                                                                                                                                                                                            |

 

54

----

 

 
| †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).                                                                                              |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †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).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.6  |   | — |   | Edge Petroleum  Corporation Incentive Plan “Director Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Directors named therein  (Incorporated by reference from exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30, 1999). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.7  |   | — |   | Severance Agreements by  and between Edge Petroleum Corporation and the Officers of the Company named  therein (Incorporated by reference from exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended September 30,  1999).                                                                  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.8  |   | — |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum Corporation  (Incorporated by reference from exhibit 10.12 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended June 30, 2004).                                                                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.9  |   | — |   | Form of Employee  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum Corporation  (Incorporated by reference from exhibit 10.15 to the Company’s Quarterly  Report on Form 10-Q/A for the quarterly period ended March 31, 1999).                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.10 |   | — |   | Edge Petroleum  Corporation Amended and Restated Elias Stock Incentive Plan. (Incorporated by  reference from exhibit 4.5 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                                  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.11 |   | — |   | Form of Edge Petroleum  Corporation John W. Elias Non-Qualified Stock Option Agreement (Incorporated  by reference from exhibit 4.6 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.12 |   | — |   | Summary of Compensation  of Non-Employee Directors (Incorporated by reference from Exhibit 10.12 to  the Company’s Annual Report on Form 10-K for the year ended December 31,  2006).                                                                                                                                             |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †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, 2006).                                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †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).                                                                                                                               |

 

55

----

 
| 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).                                                                |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 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       |   | — |   | 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).                                                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.23       |   | — |   | Purchase and Sale Agreement between Kerr-McGee Oil  & Gas Onshore, L.P., as Seller, and Edge Petroleum Production Company, as  Purchaser, and Edge Petroleum Corporation, as Additional Purchaser dated  December 12, 2006 (Incorporated by reference from exhibit 2.1 to the  Company’s Current Report on Form 8-K filed December 18, 2006). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| †10.24 |   | — |   | 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 Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *31.2       |   | — |   | Certification by Michael G. Long, Chief Financial  Officer, pursuant to Rule 13a-14(a) or Rule 15d- 14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                                  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *32.1       |   | — |   | Certification by John W. Elias, Chief Executive Officer,  pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (Subsections (a)  and (b) of Section 1350, Chapter 63 of Title 18, United States Code).                                                                                                                                           |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                   |
| *32.2       |   | — |   | Certification by Michael G. Long, Chief Financial  and Accounting Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                                                                                                                          |

 

----

* Filed herewith.

† Denotes management or compensatory contract,arrangement or agreement.

56

----

## **SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.
|        | EDGE PETROLEUM CORPORATION,           |
|--------|---------------------------------------|
|   | A DELAWARE CORPORATION                |
|   | (REGISTRANT)                          |
|   |                                  |
|   |
| Date   |                                  | August 9, 2007 |   | /s/ John W.  Elias |   |
|   | John W. Elias                         |   |
|   | Chairman of the  Board,               |   |
|   | President and Chief Executive Officer |   |
|   |                                  |
|   |                                  |
| Date   |                                  | August 9, 2007 |   | /s/ Michael G.  Long |   |
|   | Michael G. Long                       |   |
|   | Executive Vice  President and         |   |
|   | Chief Financial Officer               |   |

57

----

# **INDEX TO EXHIBITS**

| Exhibit No. | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1         |       | —     |       | Amended and Restated Combination Agreement by and  among (i) Edge Group II Limited Partnership, (ii) Gulfedge Limited  Partnership, (iii) Edge Group Partnership, (iv) Edge Petroleum Corporation,  (v) Edge Mergeco, Inc. and (vi) the Company, dated as of  January 13, 1997 (Incorporated by reference from exhibit 2.1 to the  Company’s Registration Statement on Form S-4 (Registration No. 333-17269)).                                                                                                             |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.2         |       | —     |       | Agreement and Plan of Merger dated as of May 28,  2003 among Edge Petroleum Corporation, Edge Delaware Sub Inc. and Miller  Exploration Company (“Miller”) (Incorporated by reference from Annex A to the  Joint Proxy Statement/Prospectus contained in the Company’s Registration  Statement on Form S-4/A filed on October 31, 2003 (Registration No.  333-106484)).                                                                                                                                                    |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.3         |       | —     |       | Asset Purchase Agreement by and among Contango STEP,  L.P., Contango Oil & Gas Company, Edge Petroleum Exploration Company and  Edge Petroleum Corporation dated October 7, 2004 (Incorporated by reference  from exhibit 2.1 to the Company’s Current Report on Form 8-K filed October  12, 2004).                                                                                                                                                                                                                              |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.4         |       | —     |       | Purchase and Sale Agreement, dated as of September  21, 2005 among Pearl Energy Partners, Ltd., and Cibola Exploration Partners,  L.P., as Sellers; and Edge Petroleum Exploration Company as Buyer and Edge  Petroleum Corporation as Guarantor (Incorporated by reference from exhibit  2.01 to the Company’s Current Report on Form 8-K filed October 19, 2005).                                                                                                                                                                  |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.5         |       | —     |       | Stock Purchase Agreement by and among Jon L. Glass,  Craig D. Pollard, Leigh T. Prieto, Yorktown

Energy Partners V, L.P., Yorktown Energy Partners  VI, L.P., Cinco Energy Corporation, and Edge Petroleum Exploration Company  and Edge Petroleum Corporation dated September 21, 2005 (Incorporated by  reference from exhibit 2.5 to the Company’s Quarterly Report on Form 10-Q for  the quarterly period ended September 30, 2005).                                                                                            |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.6         |       | —     |       | Letter Agreement dated November 18, 2005 by and  among Edge Petroleum Exploration Company, Cinco Energy Corporation and  Sellers (Incorporated by reference from exhibit 2.02 to the Company’s Current  Report on Form 8-K filed December 6, 2005). Pursuant to Item 601(b)(2) of  Regulation S-K, the Company had omitted certain Schedules to the Letter  Agreement (all of which are listed therein) from this Exhibit 2.6. It hereby  agrees to furnish a supplemental copy of any such omitted item to the SEC on  its request. |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1         |       | —     |       | Restated Certificate of Incorporation of the Company  effective January 27, 1997 (Incorporated by reference from exhibit 3.1 to the  Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                                                     |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2         |       | —     |       | Certificate of Amendment to the Restated Certificate  of Incorporation of the Company effective January 31, 1997 (Incorporated by  reference from exhibit 3.2 to the Company’s Current Report on Form 8-K filed  April 29, 2005).                                                                                                                                                                                                                                                                                                    |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3         |       | —     |       | Certificate of Amendment to the Restated Certificate  of Incorporation of the Company effective April 27, 2005 (Incorporated by  reference from exhibit 3.3 to the Company’s Current Report on Form 8-K filed  April 29, 2005).                                                                                                                                                                                                                                                                                                      |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.4         |       | —     |       | Bylaws of the Company (Incorporated by Reference  from exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 1999).                                                                                                                                                                                                                                                                                                                                                               |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.5         |       | —     |       | First Amendment to Bylaws of the Company on  September 28, 1999 (Incorporated by Reference from exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ended September  30, 1999).                                                                                                                                                                                                                                                                                                                     |
|        |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.6         |       | —     |       | Second Amendment to Bylaws of the Company on May 7,  2003 (Incorporated by reference from exhibit 3.4 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended March

31, 2003).                                                                                                                                                                                                                                                                                                                               |

 

58

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

lenders thereto and Union Bank of California, N.A.,  a national banking association, as agent for the

lenders (Incorporated by reference from Exhibit 4.2  to the Company’s Quarterly Report on Form 10- Q for the quarterly period  ended June 30, 2005).         |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3        |   | — |   | Agreement and Amendment No. 2 to the Third Amended  and Restated Credit Agreement dated

November 30, 2005 among Edge Petroleum Corporation,  Edge Petroleum Exploration Company,

Edge Petroleum Operating Company, Inc., Miller Oil  Corporation, Miller Exploration Company, and Cinco Energy Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from exhibit 4.3 to  the Company’s Annual Report on Form 10-K for the year ended December 31,  2005). |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4        |   | — |   | Miller Exploration Company Stock Option and  Restricted Stock Plan of 1997 (Incorporated by reference from exhibit 10.1(a)  to Miller Exploration Company’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                             |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5        |   | — |   | Amendment No. 1 to the Miller Exploration Company  Stock Option and Restricted Stock Plan of 1997 (Incorporated by reference to  Exhibit 4.2 from Miller Exploration Company’s Registration

Statement on Form S-8 filed on April 11, 2001  (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                      |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6        |   | — |   | Amendment No. 2 to the Miller Exploration Company  Stock Option and Restricted Stock Plan of 1997 (Incorporated by reference  from Exhibit 4.3 to Miller Exploration Company’s Registration Statement on  Form S-8 filed on April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                       |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7        |   | — |   | Form of Miller Stock Option Agreement (Incorporated  by reference from exhibit 10.1(b) to Miller Exploration Company’s Annual  Report on Form 10-K for the year ended December 31, 1997 (File No.  000-23431)).                                                                                                                                                                                                                                                                                                                                                 |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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).                                                                                                                                                                                                |
|       |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| †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).                                                                                                                                                                                                                                                                                                                            |

 

59

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| †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).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.6  |   | — |   | Edge Petroleum Corporation Incentive Plan “Director  Non-Qualified Stock Option Agreement” by and between Edge Petroleum  Corporation and the Directors named therein (Incorporated by reference from  exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 1999). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.7  |   | — |   | Severance Agreements by and between Edge Petroleum  Corporation and the Officers of the Company named therein (Incorporated by  reference from exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended September 30, 1999).                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.8  |   | — |   | Form of Director’s Restricted Stock Award Agreement  under the Incentive Plan of Edge Petroleum Corporation (Incorporated by  reference from exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q  for the quarterly period ended June 30, 2004).                                                                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.9  |   | — |   | Form of Employee Restricted Stock Award Agreement  under the Incentive Plan of Edge Petroleum Corporation (Incorporated by  reference from exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q/A  for the quarterly period ended March 31, 1999).                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.10 |   | — |   | Edge Petroleum Corporation Amended and Restated  Elias Stock Incentive Plan. (Incorporated by reference from exhibit 4.5 to  the Company’s Registration Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                                                                                  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.11 |   | — |   | Form of Edge Petroleum Corporation John W. Elias  Non-Qualified Stock Option Agreement (Incorporated by reference from exhibit  4.6 to the Company’s Registration Statement on Form S-8 filed May 30, 2001  (Registration No. 333-61890)).                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †10.12 |   | — |   | Summary of Compensation of Non-Employee Directors  (Incorporated by reference from Exhibit 10.12 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 2006).                                                                                                                                              |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †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, 2006).                                                                                                                                  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                   |
| †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).                                                                  |

 

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* Filed herewith.

† Denotes management or compensatory contract,arrangement or agreement.

60

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| 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       |   | — |                                                                                                                                                                                                                                                                                    | 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).                                                                                                   |   |
|        |   |   |                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                   |   |
| 10.23       |   | — |                                                                                                                                                                                                                                                                                    | Purchase and Sale Agreement between Kerr-McGee Oil  & Gas Onshore, L.P., as Seller, and Edge Petroleum Production Company, as  Purchaser, and Edge Petroleum Corporation, as Additional Purchaser dated  December 12, 2006 (Incorporated by reference from exhibit 2.1 to the  Company’s Current Report on Form 8-K filed December 18, 2006). |   |
|        |   |   |                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                   |   |
| †10.24 |   | — |                                                                                                                                                                                                                                                                                    | 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 Rule 13a-14(a) or Rule 15d-14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                                     |   |
|        |   |   |                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                   |   |
| *31.2       |   | — |                                                                                                                                                                                                                                                                                    | Certification by Michael G. Long, Chief Financial  Officer, pursuant to Rule 13a-14(a) or Rule 15d- 14(a) under the Securities  Exchange Act of 1934.                                                                                                                                                                                                  |   |
|        |   |   |                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                   |   |
| *32.1       |   | — |                                                                                                                                                                                                                                                                                    | Certification by John W. Elias, Chief Executive  Officer, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002  (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                                                                                                                                          |   |
|        |   |   |                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                   |   |
| *32.2       |   | — |                                                                                                                                                                                                                                                                                    | Certification by Michael G. Long, Chief Financial  and Accounting Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United  States Code).                                                                                                                          |   |

 

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* Filed herewith.

† Denotes management or compensatory contract,arrangement or agreement.

61

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