Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2008**

 

**OR**

 

**o**** TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE**

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from             to              **

** **

**Commission file number 0-22149**

 

 

**EDGEPETROLEUM CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

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

 

**(713) 654-8960**

(Registrant’s telephone number, including area code)

 

Indicateby checkmark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.

x Yes o No

 

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  o Yes x No

 

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

 

| **Class**    | ** ** | **Outstanding at August 8, 2008** |
|--------------|------------|----------------------------------------|
| Common Stock |       | 28,694,672                             |

 

 

 

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**EDGE PETROLEUM CORPORATION**

 

**Table of Contents**

** **
| ** **                                                                                            | **Page No.** |
|-------------------------------------------------------------------------------------------------------|-------------------|
| Part I. Financial Information                                                                    |              |
| Item 1. Financial Statements (Unaudited):                                                             |              |
| Consolidated Balance Sheets as of June 30, 2008  and December 31, 2007                      | 3                 |
| Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2008 and 2007 | 4                 |
| Consolidated Statements of Cash Flows for the Six  Months Ended June 30, 2008 and 2007           | 5                 |
| Consolidated Statement of Stockholders’ Equity for the  Six Months Ended June 30, 2008      | 6                 |
| Notes to the Consolidated Financial Statements                                                        | 7                 |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations   | 25                |
| Item 3. Qualitative and Quantitative Disclosures About  Market Risk                                   | 52                |
| Item 4. Controls and Procedures                                                                       | 53                |
| Part II.  Other Information                                                                      |              |
| Item 1. Legal Proceedings                                                                             | 54                |
| Item 1A. Risk Factors                                                                                 | 55                |
| Item 2. Unregistered Sale of Equity Securities and Use  of Proceeds                                   | 58                |
| Item 3. Defaults Upon Senior Securities                                                               | 58                |
| Item 4. Submission of Matters to a Vote of Security  Holders                                          | 58                |
| Item 5.  Other Information                                                                            | 58                |
| Item 6. Exhibits                                                                                      | 59                |
| Signatures                                                                                            | 64                |

 

2

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**EDGE PETROLEUM CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                           | ** ** | **June 30,  2008**                                   | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                           | ** ** | **(Unaudited)**                                           | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                                                                                                           | ** ** | **(in thousands, except share data)** | ** ** |
| **ASSETS**                                                                                                                                                                                                                           |       |                                                      |       |                        |       |
| CURRENT ASSETS:                                                                                                                                                                                                                      |       |                                                      |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                            |       | $                                                         | 12,455     |                        | $          | 7,163 |   |
| Accounts receivable, trade, net of  allowance                                                                                                                                                                                        |       | 23,275                                                    |       | 21,845                      |       |
| Accounts receivable, joint interest owners,  net of allowance                                                                                                                                                                        |       | 7,067                                                     |       | 14,460                      |       |
| Deferred tax asset                                                                                                                                                                                                                   |       | 24,978                                                    |       | 5,818                       |       |
| Derivative financial instruments                                                                                                                                                                                                     |       | —                                                    |       | 619                         |       |
| Other current assets                                                                                                                                                                                                                 |       | 3,696                                                     |       | 4,079                       |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| Total current assets                                                                                                                                                                                                                 |       | 71,471                                                    |       | 53,984                      |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| PROPERTY AND EQUIPMENT, net – full cost  method of accounting for oil and natural gas properties (including unproved  costs of $26.8 million and $34.9 million at June 30, 2008 and  December 31, 2007, respectively) |       | 686,571                                                   |       | 717,290                     |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| OTHER ASSETS                                                                                                                                                                                                                         |       | 2,753                                                     |       | 3,231                       |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| TOTAL ASSETS                                                                                                                                                                                                                         |       | $                                                         | 760,795    |                        | $          | 774,505 |   |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                        |       |                                                      |       |                        |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| Accounts payable, trade                                                                                                                                                                                                              |       | $                                                         | 3,132      |                        | $          | 7,665 |   |
| Accrued liabilities                                                                                                                                                                                                                  |       | 27,304                                                    |       | 29,616                      |       |
| Accrued interest payable                                                                                                                                                                                                             |       | 619                                                       |       | 1,006                       |       |
| Asset retirement obligation                                                                                                                                                                                                          |       | 431                                                       |       | 589                         |       |
| Derivative financial instruments                                                                                                                                                                                                     |       | 67,981                                                    |       | 12,846                      |       |
| Total current liabilities                                                                                                                                                                                                            |       | 99,467                                                    |       | 51,722                      |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| ASSET RETIREMENT OBLIGATION – long-term                                                                                                                                                                                         |       | 5,892                                                     |       | 6,045                       |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| DERIVATIVE FINANCIAL INSTRUMENTS –  long-term                                                                                                                                                                                   |       | 11,657                                                    |       | 102                         |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| DEFERRED TAX LIABILITY – long-term                                                                                                                                                                                              |       | 15,703                                                    |       | 21,326                      |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| OTHER NON-CURRENT LIABILITIES                                                                                                                                                                                                        |       | 102                                                       |       | 534                         |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| LONG-TERM DEBT                                                                                                                                                                                                                       |       | 240,000                                                   |       | 260,000                     |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| Total liabilities                                                                                                                                                                                                                    |       | 372,821                                                   |       | 339,729                     |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| COMMITMENTS AND CONTINGENCIES (NOTE 13)                                                                                                                                                                                              |       |                                                      |       |                        |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                                                           |       |                                                      |       |                        |       |
| Preferred stock, $0.01 par value; 5,000,000  shares authorized; 2,875,000 issued and outstanding at June 30, 2008 and  December 31, 2007                                                                                   |       | 29                                                        |       | 29                          |       |
| Common stock, $0.01 par value; 60,000,000  shares authorized; 28,657,122 and 28,544,160 shares issued and outstanding at  June 30, 2008 and December 31, 2007, respectively                                                |       | 286                                                       |       | 285                         |       |
| Additional paid-in capital                                                                                                                                                                                                           |       | 423,140                                                   |       | 421,808                     |       |
| Retained earnings (deficit)                                                                                                                                                                                                          |       | (35,481                                                   | )          | 12,654                      |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| Total stockholders’ equity                                                                                                                                                                                                      |       | 387,974                                                   |       | 434,776                     |       |
|                                                                                                                                                                                                                                 |       |                                                      |       |                        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                      |       | $                                                         | 760,795    |                        | $          | 774,505 |   |

 

See accompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended June 30,**                   | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008**                                                              | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share amounts)** | ** ** |
| OIL AND NATURAL GAS REVENUE:                                  |       |                                                                  |       |                                              |       |   |   |   |   |
| Oil and natural gas sales                                     |       | $                                                                     | 49,060     |                                              | $          | 47,386 |   | $ | 96,076 |   | $ | 86,600 |   |
| Gain (loss) on derivatives                                    |       | (56,598                                                               | )          | 6,516                                             |       | (85,957 | ) | (9,815 | ) |
| Total revenue                                                 |       | (7,538                                                                | )          | 53,902                                            |       | 10,119 |   | 76,785 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| OPERATING EXPENSES:                                           |       |                                                                  |       |                                              |       |   |   |   |   |
| Oil and natural gas operating expenses                        |       | 3,941                                                                 |       | 4,048                                             |       | 8,413 |   | 7,428 |   |
| Severance and ad valorem taxes                                |       | 3,297                                                                 |       | 3,885                                             |       | 5,482 |   | 6,196 |   |
| Depletion, depreciation, amortization and  accretion          |       | 21,522                                                                |       | 21,064                                            |       | 48,893 |   | 39,606 |   |
| General and administrative expenses                           |       | 5,152                                                                 |       | 5,535                                             |       | 9,212 |   | 9,930 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| Total operating expenses                                      |       | 33,912                                                                |       | 34,532                                            |       | 72,000 |   | 63,160 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| OPERATING INCOME (LOSS)                                       |       | (41,450                                                               | )          | 19,370                                            |       | (61,881 | ) | 13,625 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| OTHER INCOME AND EXPENSE:                                     |       |                                                                  |       |                                              |       |   |   |   |   |
| Interest income                                               |       | 32                                                                    |       | 122                                               |       | 92 |   | 179 |   |
| Interest expense, net of amounts  capitalized                 |       | (2,284                                                                | )          | (2,928                                            | )          | (6,508 | ) | (5,690 | ) |
| Gain on ARO settlement                                        |       | —                                                                |       | —                                            |       | 9 |   | — |   |
| Amortization of deferred loan costs                           |       | (239                                                                  | )          | (243                                              | )          | (478 | ) | (496 | ) |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES                             |       | (43,941                                                               | )          | 16,321                                            |       | (68,766 | ) | 7,618 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| INCOME TAX BENEFIT (EXPENSE)                                  |       | 16,118                                                                |       | (5,704                                            | )          | 24,764 |   | (2,769 | ) |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| NET INCOME (LOSS)                                             |       | (27,823                                                               | )          | 10,617                                            |       | (44,002 | ) | 4,849 |   |
| Preferred Stock Dividends                                     |       | (2,067                                                                | )          | (2,063                                            | )          | (4,133 | ) | (3,444 | ) |
| NET INCOME (LOSS) AVAILABLE TO COMMON  STOCKHOLDERS           |       | $                                                                     | (29,890    | )                                                 | $          | 8,554 |   | $ | (48,135 | ) | $ | 1,405 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| BASIC EARNINGS (LOSS) PER SHARE                               |       | $                                                                     | (1.04      | )                                                 | $          | 0.30 |   | $ | (1.68 | ) | $ | 0.05 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| DILUTED EARNINGS (LOSS) PER SHARE                             |       | $                                                                     | (1.04      | )                                                 | $          | 0.28 |   | $ | (1.68 | ) | $ | 0.05 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING   |       | 28,652                                                                |       | 28,470                                            |       | 28,609 |   | 26,679 |   |
|                                                          |       |                                                                  |       |                                              |       |   |   |   |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON  SHARES OUTSTANDING |       | 28,652                                                                |       | 37,509                                            |       | 28,609 |   | 27,015 |   |

 

See accompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                                                                | ** ** | **(in thousands)**                           | ** ** |
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                                 | (44,002    | ) | $ | 4,849 |   |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                              |       |   |   |
| Unrealized loss on the fair value of  derivatives                                         |       | 67,309                                            |       | 11,462 |   |
| Loss on property                                                                          |       | 34                                                |       | — |   |
| Deferred income taxes                                                                     |       | (25,092                                           | )          | 2,715 |   |
| Depletion, depreciation, amortization and  accretion                                      |       | 48,893                                            |       | 39,606 |   |
| Gain on ARO settlement                                                                    |       | (9                                                | )          | — |   |
| Amortization of deferred loan costs                                                       |       | 478                                               |       | 496 |   |
| Bad debt expense                                                                          |       | 90                                                |       | 482 |   |
| Stock based compensation costs                                                            |       | 1,636                                             |       | 2,105 |   |
| Changes in assets and liabilities:                                                        |       |                                              |       |   |   |
| Increase in accounts receivable, trade                                                    |       | (1,508                                            | )          | (6,868 | ) |
| Decrease (increase) in accounts receivable,  joint interest owners                        |       | 7,381                                             |       | (4,230 | ) |
| Increase in other assets                                                                  |       | (355                                              | )          | (1,223 | ) |
| Decrease in accounts payable, trade                                                       |       | (4,533                                            | )          | (1,887 | ) |
| Increase in accrued liabilities                                                           |       | 3,505                                             |       | 15,864 |   |
| Increase (decrease) in accrued interest payable                                           |       | (387                                              | )          | 2,069 |   |
|                                                                                      |       |                                              |       |   |   |
| Net cash provided by operating activities                                                 |       | 53,440                                            |       | 65,440 |   |
|                                                                                      |       |                                              |       |   |   |
| **CASH FLOWS FROM INVESTING ACTIVITIES:**                                                 |       |                                              |       |   |   |
| Oil and natural gas property and equipment  additions                                     |       | (36,646                                           | )          | (53,046 | ) |
| January 2007 acquisition                                                             |       | —                                            |       | (379,508 | ) |
| Decrease in drilling advances                                                             |       | 708                                               |       | 220 |   |
| Proceeds from the sale of oil and natural  gas properties                                 |       | 18,172                                            |       | 1,302 |   |
| Overhedge derivative settlements                                                          |       | (6,249                                            | )          | — |   |
|                                                                                      |       |                                              |       |   |   |
| Net cash used in investing activities                                                     |       | (24,015                                           | )          | (431,032 | ) |
|                                                                                      |       |                                              |       |   |   |
| **CASH FLOWS FROM FINANCING ACTIVITIES:**                                                 |       |                                              |       |   |   |
| Borrowings of long-term debt                                                              |       | —                                            |       | 245,000 |   |
| Repayments of long-term debt                                                              |       | (20,000                                           | )          | (144,000 | ) |
| Preferred dividends paid                                                                  |       | (4,133                                            | )          | (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 |   |
| Deferred loan costs                                                                       |       | —                                            |       | (3,648 | ) |
|                                                                                      |       |                                              |       |   |   |
| Net cash provided by (used in) financing  activities                                      |       | (24,133                                           | )          | 372,185 |   |
|                                                                                      |       |                                              |       |   |   |
| **NET INCREASE IN CASH AND CASH EQUIVALENTS**                                             |       | 5,292                                             |       | 6,593 |   |
| ** **                                                                                |       |                                              |       |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING OF  PERIOD**                                       |       | 7,163                                             |       | 2,081 |   |
| ** **                                                                                |       |                                              |       |   |   |
| **CASH AND CASH EQUIVALENTS, END OF PERIOD**                                              |       | $                                                 | 12,455     |   | $ | 8,674 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**EDGE PETROLEUM CORPORATION**

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

 
| ** **                                                           | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**         | ** ** | **Retained**  | ** ** | **Total**  | ** ** |
|----------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|--------------|------------|------------------------|------------|---------------|------------|------------|------------|
| ** **                                                           | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Earnings** | ** ** | **Stockholders’** | ** ** |
| ** **                                                           | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **(Deficit)** | ** ** | **Equity** | ** ** |
| ** **                                                           | ** ** | **(in thousands)**  | ** ** |
| BALANCE, DECEMBER 31, 2007                                           |       | 2,875                    |       | $                     | 29         |        | 28,544     |         | $          | 285                    |       | $             | 421,808    |       | $          | 12,654 |   | $ | 434,776 |   |
| Issuance of common stock                                             |       | —                   |       | —                |       | 113         |       | 1            |       | 323                    |       | —        |       | 324        |       |
| Stock based compensation costs                                       |       | —                   |       | —                |       | —      |       | —       |       | 1,312                  |       | —        |       | 1,312      |       |
| Tax benefit associated with exercise of  non-qualified stock options |       | —                   |       | —                |       | —      |       | —       |       | (303                   | )          | —        |       | (303       | )          |
| Preferred stock dividends ($0.71875 per  share)                      |       | —                   |       | —                |       | —      |       | —       |       | —                 |       | (4,133        | )          | (4,133     | )          |
| Net loss                                                             |       | —                   |       | —                |       | —      |       | —       |       | —                 |       | (44,002       | )          | (44,002    | )          |
|                                                                 |       |                     |       |                  |       |        |       |         |       |                   |       |          |       |       |       |
| BALANCE, June 30, 2008                                          |       | 2,875                    |       | $                     | 29         |        | 28,657     |         | $          | 286                    |       | $             | 423,140    |       | $          | (35,481 | ) | $ | 387,974 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

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**EDGEPETROLEUM CORPORATION**

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.****             ****SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

 

Thefinancial statements included herein have been prepared by Edge PetroleumCorporation, a Delaware corporation (“we”, “our”, “us” or the “Company”),without audit pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), and reflect all adjustments which are, in theopinion of management, necessary to present a fair statement of the results forthe interim periods on a basis consistent with the annual audited consolidatedfinancial statements.  All suchadjustments are of a normal recurring nature. The results of operations for the interim periods are not necessarilyindicative of the results to be expected for an entire year.  Certain information, accounting policies andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been omitted pursuant to such rules and regulations,although we believe that the disclosures are adequate to make the informationpresented not misleading. These financial statements should be read inconjunction with our audited consolidated financial statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2007.

 

***Strategic Alternative Process andProposed Merger*** -In late 2007, the Company announced the hiring of a financial advisor to assistits Board of Directors with an assessment of strategic alternatives. On February 7,2008, the Company provided an update on the strategic alternative process andannounced publicly that it would implement a process to explore a merger orsale of the Company. As a result of the strategic alternative process, on July 15,2008, Chaparral Energy, Inc. (“Chaparral”), a privately held company,together with the Company, announced that they had entered into a definitive mergeragreement that provides for Chaparral to acquire the Company in an all-stocktransaction (see Note 11). Through the merger, Chaparral will become a publiclytraded company.

 

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

 

Inthe measurement of impairment of oil and gas properties, the successful-effortsmethod follows the guidance provided in Statement of Financial AccountingStandards (“SFAS”) No. 144, *Accountingfor the 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 test impairment was required during thequarters ended June 30, 2008 or 2007.

 

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

 

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limitation on capitalizedcosts.  Since January 1, 2006, theCompany has not applied cash flow hedge accounting to any derivative contracts(see Note 8), therefore the ceiling tests at June 30, 2008 and 2007 werenot 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 and abandonment costs, net of estimated salvage values.Investments in unproved properties are not amortized until proved reservesassociated with the prospects can be determined or until impairment occurs.Unproved properties are evaluated quarterly, and as needed, for impairment on aproperty-by-property basis. If the results of an assessment indicate that anunproved property is impaired, the amount of impairment is added to the provedoil and natural gas property costs to be amortized. 

 

Costsexcluded from amortization related to unproved properties were $26.8 millionand $34.9 million at June 30, 2008 and December 31, 2007,respectively.

 

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.

 

***Revenue Recognition and GasBalancing -*** TheCompany recognizes oil and natural gas revenue from its interests in producingwells as oil and natural gas is produced and sold from those wells. Oil andnatural gas sold by the Company is typically not significantly different fromthe Company’s share of production. But gas imbalances can occur when sales aremore or less than the Company’s entitled ownership percentage of total gasproduction. Gas imbalances may be accounted for under either the (1) entitlementsmethod, whereby revenue is recorded on the company’s interest in the gasproduction actually sold or (2) sales method, whereby revenue is recordedon the basis of total gas actually sold by the Company. The Company uses thesales method of accounting for gas balancing and an asset or a liability isrecognized to the extent that there is a material imbalance in excess of theremaining gas reserves on the underlying properties.  As of June 30,2008 and December 31, 2007, our gas production was materially in balance,i.e., our cumulative portion of gas production taken and sold from wells inwhich we have an interest was not materially different from our entitledinterest in gas production from those wells.

 

***Delivery Commitments –***During 2007, the Company executed a gasgathering and compression services agreement with Frontier Midstream, LLC (“Frontier”).Following execution of such agreement, Frontier expedited the installation ofthe Rose Bud system in White County, Arkansas, including the high and lowpressure gathering lines, dehydration, compression and the interconnect withOzark, in order to accommodate the Company’s desire to be able to delivernatural gas as soon as its wells were completed. At the time of signing thecontract, the Company had completed and tested two productive wells in theMoorefield shale in Arkansas. The Rose Bud system was installed, operationaland ready to receive the Company’s production in June 2007. The contractminimum commitment to Frontier is 2.7 Bcf over a three year period for thepipeline interconnect. This line carries a $0.29 per Mcf deficiency rate, for atotal commitment for the pipeline of approximately $0.8 million. The Companyhas delivered approximately $52,400 of this commitment through June 30,2008. In addition to the pipeline, Frontier also built and installed lateralgathering lines to eight locations. The remaining commitment on these lateralsis approximately $1.3 million, for a total potential liability of approximately$2.0 million to be paid by June 2010 if the minimum volumes are notdelivered. We currently have not recorded a liability for these commitments.The Company is taking steps aimed at increasing its production in this area,but if it is unable to do so and if the Company were to cease efforts todevelop the area, it may not be able to meet the minimum physical deliverybased on estimated future production and thus would record a liability for theremaining amount of the commitment.

 

Thesecontracts are not considered derivatives, but have been designated as annualsales contracts under Statement ofFinancial Accounting Standards (“SFAS”) No. 133, *Accounting for Derivative Instruments and HedgingActivities* (as amended).

 

***Accounts Receivable and Allowancefor Doubtful Accounts*** - The Company routinely assesses the recoverability of all materialtrade and other receivables to determine its ability to collect the receivablesin full. Accounts Receivable, Joint Interest Owners included an “allowance” fordoubtful accounts of $15,300 and $3,200 at

 

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June 30, 2008 and December 31,2007, respectively. Accounts Receivable, Trade included an “allowance” fordoubtful accounts of $64,500 at June 30, 2008 and none at December 31,2007.

 

***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 –***The Company records a liability for legalobligations associated with the retirement of tangible long-lived assets in theperiod in which they are incurred in accordance with SFAS No. 143, *Accounting for Asset Retirement Obligations.*Under SFAS No. 143, when liabilities for dismantlement and abandonmentcosts, excluding salvage values, are initially recorded, the carrying amount ofthe related oil and gas properties is increased. Accretion of the liability isrecognized each period using the interest method of allocation, and thecapitalized cost is depleted over the useful life of the related asset. Thechanges to the Asset Retirement Obligations (“ARO”) for oil and natural gasproperties and related equipment during the six months ended June 30, 2008and 2007 are as follows:

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                           | ** ** |
| ARO, Beginning of Period                        |       | $                                                 | 6,634      |   | $ | 3,371 |   |
| Liabilities incurred in the current period      |       | 490                                               |       | 916 |   |
| Liabilities settled/sold in the current  period |       | (1,143                                            | )          | (26 | ) |
| Accretion expense                               |       | 191                                               |       | 134 |   |
| Revisions                                       |       | 151                                               |       | — |   |
|                                            |       |                                              |       |   |   |
| ARO, End of Period                              |       | $                                                 | 6,323      |   | $ | 4,395 |   |
|                                            |       |                                              |       |   |   |
| Current Portion                                 |       | $                                                 | 431        |   | $ | 328 |   |
| Long-Term Portion                               |       | $                                                 | 5,892      |   | $ | 4,067 |   |

 

Duringthe six months ended June 30, 2008, ARO liabilities were recorded for 38new obligations and liabilities settled include six properties that wereplugged and abandoned and 104 properties that were sold. We also recorded a netgain of approximately $9,400 related to ARO settlements and revisions tovarious properties’ balances for changes in anticipated timing of ultimateabandonment.

 

***Share-Based Compensation -*** The Company accounts for share-basedcompensation in accordance with the provisions of SFAS No. 123R, *Share-Based Payment,* which requires thatthe compensation cost relating to share-based payment transactions berecognized in financial statements. Share-based compensation for the six monthsended June 30, 2008 was approximately $1.3 million, of which $1.1 millionwas included in general and administrative expenses (“G&A”) and $0.2million was capitalized to oil and natural gas properties. Share-basedcompensation for the six months ended June 30, 2007 was approximately $1.5million, of which $1.2 million is included in general and administrativeexpenses (“G&A”) and $0.3 million is capitalized to oil and natural gasproperties.

 

Duringthe six months ended June 30, 2008, 1,600 restricted stock units (“RSUs”)were granted. At June 30, 2008, 460,120 RSUs were outstanding, all ofwhich are classified as equity instruments. No options were granted during the six months ended June 30, 2008,and at period end, 643,600 vested unexercised options were outstanding.

 

***Income Taxes -*** Effective January 1, 2007, the Companyadopted FASB Interpretation No. 48 *Accountingfor Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)*(“FIN 48”).  Thisinterpretation clarified the accounting for uncertainty in income taxesrecognized in the financial statements by prescribing a recognition thresholdand measurement attribute for a tax position taken or expected to be taken in atax return.  FIN 48 also providesguidance on de-recognitions, classification, interest and penalties, accountingin interim periods, disclosure and transition. The Company also adopted FASBStaff Position (“FSP”) No. FIN 48-1, *Definitionof*

 

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*Settlement in FASB Interpretation No. 48* as of January 1, 2007.  FSP FIN 48-1 provides that a company’s taxposition will be considered settled if the taxing authority has completed itsexamination, the company does not plan to appeal, and it is remote that thetaxing authority would reexamine the tax position in the future (see Note 6).

 

***Other Comprehensive Income (Loss) –*** For the periods presented, othercomprehensive income (loss) consisted of:

 

| ** **                                     | ** ** | **Three Months Ended June 30,** | ** ** | **Six months Ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | **(in thousands)**                                  | ** ** |
| Net Income (Loss)                              |       | $                                                   | (27,823    | )                                                 | $          | 10,617 |   | $ | (44,002 | ) | $ | 4,849 |   |
| Preferred Dividends                            |       | (2,067                                              | )          | (2,063                                            | )          | (4,133 | ) | (3,444 | ) |
| Net Income (Loss) to Common Stockholders       |       | (29,890                                             | )          | 8,554                                             |       | (48,135 | ) | 1,405 |   |
|                                           |       |                                                |       |                                              |       |   |   |   |   |
| Other Comprehensive Income (Loss), Net of  Tax |       | —                                              |       | —                                            |       | — |   | — |   |
| Other Comprehensive Income (Loss)              |       | $                                                   | (29,890    | )                                                 | $          | 8,554 |   | $ | (48,135 | ) | $ | 1,405 |   |

 

***Fair Value Measurements –***Effective January 1, 2008, the Companypartially adopted SFAS No. 157, *Fair ValueMeasurements,* which provides a common definition of fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements, but does not require any new fair value measurements.The partial adoption of SFAS No. 157 had no impact on the Company’sfinancial statements, but it did result in additional required disclosures asset forth in Note 9. In February 2008, the FASB issued FSP 157-2, *Effective Date of FASB Statement No. 157*,which delays the effective date of SFAS No. 157 for all non-financialassets and non-financial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). Accordingly, the Company has not yet applied the provisions ofSFAS No. 157 to its AROs.

 

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

 

***Recent Accounting Pronouncements***– In December 2007, the FASB issued SFASNo. 141R, *Business Combinations*(“SFAS No. 141R”). SFAS No. 141R expands the definition oftransactions and events that qualify as business combinations; requires thatthe acquired assets and liabilities, including contingencies, be recorded atthe fair value determined on the acquisition date and changes thereafterreflected in revenue, not goodwill; changes the recognition timing forrestructuring costs; and requires acquisition costs to be expensed as incurred.Adoption of SFAS No. 141R is required prospectively for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning on or after December 15, 2008.Early adoption and retroactive application of SFAS No. 141R to fiscalyears preceding the effective date are not permitted. However, accounting forchanges in valuation allowances for acquired deferred tax assets and theresolution of uncertain tax positions for prior business combinations willimpact income tax expense instead of impacting the prior business combinationaccounting starting January 1, 2009. The Company is currently evaluatingthe changes provided in SFAS No. 141R and believes it could have amaterial impact on the Company’s consolidated financial statements if it wereto undertake a significant acquisition or business combination.

 

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

 

In March 2008, the FASB issued SFAS No. 161, *Disclosures about Derivative Instruments and HedgingActivities – an amendment of FASB Statement No. 133*(“SFAS No. 161”).SFAS No. 161 requires entities to provide enhanced disclosures about (a) howand why an entity uses derivative instruments, (b) how derivativeinstruments and related hedged items are accounted for under SFAS No. 133and its related interpretations, and (c) how derivative instruments andrelated hedged items affect an entity’s financial position, financialperformance, and cash flows. SFAS No. 161 is effective for annual periodsbeginning on or after November 15, 2008. Early application of SFAS No. 161is encouraged, as are comparative disclosures for earlier periods at initialadoption. The Company will adopt SFAS No. 161 on January 1, 2009 anddoes not expect adoption of this statement to impact its consolidated financialstatements, but it does expect it to impact disclosures made in its futurequarterly and annual filings.

 

In May 2008, the FASB issued SFAS No. 162,*The Hierarchy of Generally AcceptedAccounting Principles*(“SFAS No. 162”), which identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principles(“GAAP”) in the United States of America (the GAAP hierarchy).   SFASNo. 162 is effective 60 days following the SEC’s approval of PublicCompany Accounting Oversight Board amendments to AU Section 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*. The Company does notexpect adoption of this statement to impact its consolidated financialstatements or related disclosures.

 

**2.****             ****LONG-TERM DEBT**

 

OnJanuary 30, 2007, the Company entered into a Fourth Amended and RestatedCredit Agreement (the “Agreement”) for a new Revolving Credit Facility withUnion Bank of California (“UBOC”), as administrative agent and issuing lender,and the other lenders party thereto (together with UBOC, the “Lenders”).Pursuant to the Agreement, UBOC acts as the administrative agent for asenior, first lien secured borrowing base revolving credit facility (the “RevolvingFacility”) in favor of the Company and certain of its wholly-owned subsidiariesin an amount equal to $750 million, of which only $250 million and $225 millionwere available under the borrowing base and conforming borrowing base,respectively, at June 30, 2008. The Revolving Facility has a letter ofcredit sub-limit of $20 million.

 

TheRevolving Facility matures on January 31, 2011 and bears interest at LIBORplus an applicable margin ranging from 1.25% to 2.5% or Prime plus a margin ofup to 0.50%, with an unused commitment fee ranging from 0.50% to 0.25%, all ofwhich depend on the utilization percentage of the conforming borrowing base. AtJune 30, 2008, the interest rates applied to the Company’s outstandingPrime and LIBOR borrowings were 5.50% and 4.95%, respectively, and we had arate of 0.25% applied to our unused borrowing capacity. In early May 2008,our Revolving Facility’s borrowing base and conforming borrowing base wereredetermined by our banks and set at $250 million and $225 million,respectively. As of June 30, 2008, $240 million in total borrowingswere outstanding under the Revolving Facility. Therefore, the Company’savailable borrowing capacity under the Revolving Facility was $10 million at June 30,2008.

 

OnJuly 11, 2008, in connection with the proposed merger with Chaparral, theCompany entered into a Consent agreement (the “Consent”) under theAgreement. Pursuant to the Consent, the Lenders deferred their right toconduct a borrowing base redetermination on or before June 30, 2008 andwill instead conduct the redetermination on October 31, 2008, subject tothe following terms:

 

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1.               if a redetermination occurs, only a borrowingbase shall be established and the borrowing base shall also be the conformingborrowing base,

 

2.               the redetermination is subject to theapproval of all the Lenders; and

 

3.               the deferral is contingent upon:

 

a.               in connection with the proposed merger, thefiling of the registration statement of Chaparral, which will include aprospectus of Chaparral and a proxy statement of the Company, with the SEC andthe filing of all initial filings for any other required governmental approvalson or before August 15, 2008, and

 

b.              the Company’s common stockholders approvingthe proposed merger within 40 days following the mailing to the Company’sstockholders of the prospectus and proxy statement with respect to the proposedmerger.

 

Ifthe above conditions are not satisfied or waived, the Consent Agreementprovides that the Lenders will promptly thereafter redetermine the Company’sborrowing base under the Revolving Facility. The Company paid the Lenders a feeof approximately $0.4 million in connection with the deferral of theredetermination. The failure of the Company and Chaparral to consummate theproposed merger prior to October 31, 2008 could lead the Lenders toredetermine the borrowing base to a level that requires the Company to makeadditional payments under the Revolving Facility. Should such a redeterminationactually result, the Company believes that it would be able to meet therequirements of its Lenders through a combination of cash on hand, adjustingits operations and planned capital spending, offering additional properties toserve as collateral and funds obtained through additional asset divestitures;however, there can be no assurance that this will prove to be correct.

 

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 on common stock andcertain distributions of cash or properties and certain liens and also containsfinancial covenants including, without limitation, the following:

 

·                  AnEBITDAX to interest expense ratio requires that as of the last day of eachfiscal quarter the ratio of (a) Edge’s consolidated EBITDAX (defined asEBITDA plus similar non-cash items and exploration and abandonment expenses forsuch period) to (b) Edge’s consolidated interest expense, not be less than2.5 to 1.0, calculated on a  rolling fourquarter basis.

 

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

 

·                  Amaximum leverage ratio requires that as of the last day of each fiscal quarterthe ratio of (a) Total Indebtedness (as defined in the Agreement) to (b) anamount equal to consolidated EBITDAX be not greater than 3.0 to 1.0, calculatedon a 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. It is an event of default under the RevolvingFacility if the Company undergoes a change in control. “Change in control,” asdefined in the Revolving Facility, means any of the following events: (a) any“person” or “group” (within the meaning of Section 13(d) or 14(d) ofthe Exchange Act) has become, directly or indirectly, the “beneficial owner”(as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that aperson shall be deemed to have “beneficial ownership” of all such shares that anysuch person has the right to acquire, whether such right is exercisableimmediately or only after the passage of time, by way of merger, consolidationor otherwise), of a majority or more of the common stock of the Company on afully-diluted basis, after giving effect to the conversion and exercise of alloutstanding warrants, options and other securities of the Company (whether ornot such securities are then currently convertible or exercisable), (b) duringany period of two consecutive calendar quarters, individuals who at thebeginning of such period were members of the Company’s Board of Directors ceasefor any reason to constitute a majority of the directors then in office unless (i) suchnew directors were elected by a majority of the directors of the Company whoconstituted the Board of Directors at the

 

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beginning of such period (or bydirectors so elected) or (ii) the reason for such directors failing toconstitute a majority is a result of retirement by directors due to age, deathor disability, or (c) the Company ceases to own directly or indirectly allof the equity interests of each of its subsidiaries. The Revolving Facility isexpected to be refinanced by Chaparral contemporaneously with the closing ofthe proposed merger with Chaparral.

 

**3.****             ****SHELF REGISTRATION STATEMENT**

 

Inthe third quarter 2007, the SEC declared effective the Company’s registrationstatement filed with the SEC that registered securities of up to $500 millionof any combination of debt securities, preferred stock, common stock, warrantsfor debt securities or equity securities of the Company and guarantees of debtsecurities by the Company’s subsidiaries. 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 11, 2008, the Company had$500 million available under its shelf registration statement.

 

**4.****             ****PREFERRED STOCK**

 

InJanuary 2007, 2,875,000 shares of its 5.75% Series A cumulativeconvertible perpetual preferred stock (“Convertible Preferred Stock”) wereissued in a public offering.

 

*Dividends*.  The Convertible PreferredStock accumulates dividends at a rate of $2.875 for each share of ConvertiblePreferred Stock per year. Dividends are cumulative from the date of firstissuance and, to the extent payment of dividends is not prohibited by theCompany’s debt agreements, assets are legally available to pay dividends andthe Board of Directors or an authorized committee of the board declares adividend payable, the Company will pay dividends in cash, every quarter. Thefirst payment was made on April 15, 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 (“parity shares”)or shares ranking junior to the Convertible Preferred Stock (“junior shares”),nor may any parity shares or junior shares be redeemed or acquired for anyconsideration by the Company (except by conversion into or exchange for sharesof a like or junior ranking) unless all accumulated and unpaid dividends havebeen paid or funds therefor have been set apart on the Convertible PreferredStock and any parity shares.

 

*Liquidation preference*.  Inthe event of the Company’s voluntary or involuntary liquidation, winding-up ordissolution, each holder of Convertible Preferred Stock will be entitled toreceive and to be paid out of the Company’s assets available for distributionto our stockholders, before any payment or distribution is made to holders ofjunior stock (including common stock), but after any distribution on any of ourindebtedness or senior stock, a liquidation preference in the amount of $50.00per share of the Convertible Preferred Stock, plus accumulated and unpaiddividends on the shares to the date fixed for liquidation, winding-up ordissolution.

 

*Ranking*.  Our Convertible PreferredStock ranks:

 

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

 

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

 

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

 

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

 

*Optional redemption*. If fewer than 15% of the shares ofConvertible Preferred Stock issued in the Convertible Preferred Stock offering(including any additional shares issued pursuant to the underwriters’over-allotment option) are outstanding, the Company may, at any time on orafter January 20, 2010, at its option, redeem for cash all such ConvertiblePreferred Stock at a redemption price equal to the liquidation preference of$50.00 plus any accrued and unpaid dividends, if any, on a share of ConvertiblePreferred Stock to, but excluding, the redemption date, for each share ofConvertible Preferred Stock.

 

*Conversion rights*. Each share of Convertible Preferred Stockmay be converted at any time, at the option of the holder, into approximately3.0193 shares of the Company’s common stock (which is based on an initialconversion price of $16.56 per share of common stock, subject to adjustment)plus cash in lieu of fractional shares, subject to the Company’s right tosettle all or a portion of any such conversion in cash or shares of its commonstock. If the Company elects to settle all or any portion of its conversionobligation in cash, the conversion value and the number of shares of its commonstock the Company will deliver upon conversion (if any) will be based upon a 20trading 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 the Company’s commonstock, as applicable, to be delivered upon conversion may be adjusted ifcertain events occur.

 

*Purchase upon fundamental change*. If the Company becomes subject to afundamental change (as defined below), each holder of shares of ConvertiblePreferred Stock will have the right to require the Company to purchase any orall of its shares at a purchase price equal to 100% of the liquidationpreference, plus accumulated and unpaid dividends, to the date of the purchase.The Company will have the option to pay the purchase price in cash, shares ofcommon stock or a combination of cash and shares. The Company’s ability topurchase all or a portion of the Convertible Preferred Stock for cash issubject to its obligation to repay or repurchase any outstanding debt requiredto be repaid or repurchased in connection with a fundamental change and to anycontractual restrictions then contained in our debt.

 

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

 

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

 

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

 

2.consummation of any share exchange, consolidation or merger of the Companypursuant to which its common stock will be converted into cash, securities orother property or any sale, lease or other transfer in one transaction or aseries of transactions of all or substantially all of the consolidated assetsof the Company and its subsidiaries, taken as a whole, to any person other thanone of its subsidiaries; provided,

 

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however,that a transaction where the holders of more than 50% of all classes of itscommon equity immediately prior to the transaction own, directly or indirectly,more than 50% of all classes of common equity of the continuing or survivingcorporation or transferee immediately after the event shall not be afundamental change;

 

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

 

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

 

However,a fundamental change will not be 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) in the shareexchange, merger or consolidation or exchange offer consists of common stock ofa United States company traded on a national securities exchange (or which willbe so traded or quoted when issued or exchanged in connection with suchtransaction).

 

*Voting rights*. If the Company fails to pay dividendsfor six quarterly dividend periods (whether or not consecutive) or if thecompany fails to pay the purchase price on the purchase date for theConvertible Preferred Stock following a fundamental change, holders of theConvertible Preferred Stock will have voting rights to elect two directors tothe board.

 

Inaddition, the Company may generally not, without the approval of the holders ofat least 66 2/3% of the shares of the Convertible Preferred Stock thenoutstanding:

 

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

 

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

 

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

 

**5.****             ****EARNINGS PER SHARE**

 

TheCompany accounts for earnings per share in accordance with SFAS No. 128, *Earnings per Share*, which establishes therequirements for presenting earnings per share (“EPS”).  SFAS No. 128 requires the presentationof “basic” and “diluted” EPS on the face of the statement of operations.  Basic EPS amounts are calculated using theweighted average number of common shares outstanding during each period.  Diluted EPS assumes the exercise of all stockoptions and warrants having exercise prices less than the average market priceof the common stock during the periods, using the treasury stock method. When aloss from continuing operations exists, as in the three and six months ended June 30,2008, potential common shares are excluded in the computation of diluted EPSbecause it would result in an anti-dilutive effect on per share amounts.

 

DilutedEPS also includes the effect of convertible securities by application of the “if-converted”method.  Under this method, if an entityhas convertible preferred stock outstanding, the preferred dividends applicableto the convertible preferred stock are added back to the numerator. Theconvertible preferred stock is assumed to have been converted at the beginningof the period (or at time of issuance, if later) and the resulting commonshares are included in the denominator of the EPS calculation.  In applying the if-converted method,conversion is not assumed for purposes of computing diluted EPS if the effectwould be anti-dilutive. During 2008 and the six months ended June 30,2007, conversion of the convertible preferred stock is not assumed because 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, 2008**         | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Loss  (Numerator)**                                                 | ** ** | **Shares  (Denominator)(1)**                                  | ** ** | **Per  Share  Amount** | ** ** | **Loss  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income (loss)                                   |       | $                                                                     | (27,823    | )                                                             |       |   |   |   | $ | 10,617 |   |   |   |   |   |
| Preferred stock dividends                           |       | (2,067                                                                | )          |                                                          |       |   |   | (2,063 | ) |   |   |   |   |
|                                                |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                                       |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income (loss) to common stockholders            |       | (29,890                                                               | )          | 28,652                                                        |       | $ | (1.04 | ) | 8,554 |   | 28,470 |   | $ | 0.30 |   |
| Effect of dilutive securities:                      |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Restricted stock units                              |       | —                                                                |       | —                                                        |       | — |   | — |   | 53 |   | — |   |
| Common stock options                                |       | —                                                                |       | —                                                        |       | — |   | — |   | 306 |   | — |   |
| Convertible preferred stock                         |       | —                                                                |       | —                                                        |       | — |   | 2,063 |   | 8,680 |   | (0.02 | ) |
| **Diluted EPS**                                     |       |                                                                  |       |                                                          |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common  stockholders |       | $                                                                     | (29,890    | )                                                             | 28,652     |   | $ | (1.04 | ) | $ | 10,617 |   | 37,509 |   | $ | 0.28 |   |

 
| ** **                                          | ** ** | **Six Months Ended June 30, 2008**           | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                          | ** ** | **Loss  (Numerator)**                                                 | ** ** | **Shares  (Denominator)(1)**                                | ** ** | **Per  Share  Amount** | ** ** | **Loss  (Numerator)** | ** ** | **Shares  (Denominator)(2)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                          | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income (loss)                                   |       | $                                                                     | (44,002    | )                                                           |       |   |   |   | $ | 4,849 |   |   |   |   |   |
| Preferred stock dividends                           |       | (4,133                                                                | )          |                                                        |       |   |   | (3,444 | ) |   |   |   |   |
|                                                |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                                       |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common  stockholders |       | (48,135                                                               | )          | 28,609                                                      |       | $ | (1.68 | ) | 1,405 |   | 26,679 |   | $ | 0.05 |   |
| Effect of dilutive securities:                      |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Restricted stock units                              |       | —                                                                |       | —                                                      |       | — |   | — |   | 31 |   | — |   |
| Common stock options                                |       | —                                                                |       | —                                                      |       | — |   | — |   | 305 |   | — |   |
| Convertible preferred stock                         |       | —                                                                |       | —                                                      |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                                     |       |                                                                  |       |                                                        |       |   |   |   |   |   |   |   |   |
| Net income (loss) available to common  stockholders |       | $                                                                     | (48,135    | )                                                           | 28,609     |   | $ | (1.68 | ) | $ | 1,405 |   | 27,015 |   | $ | 0.05 |   |

 

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(1)          In the calculation of diluted EPS for the three and six months ended June 30,2008, the 8.7 million shares of common stock resulting from an assumedconversion of the Company’s Convertible Preferred Stock is excluded because theconversion would be anti-dilutive. Additionally, for the three and six monthsended June 30, 2008, 63,839 and 65,109, respectively, equivalent shares ofthe Company’s restricted stock units and common stock options were excludedbecause the conversion would also be anti-dilutive.

 

(2)          In the calculation of diluted EPS for the six months ended June 30,2007, the 8.7 million shares of common stock resulting from an assumedconversion of the Company’s Convertible Preferred Stock is excluded because theconversion would be anti-dilutive.

 

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**6.****             ****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 ending December 31,2008 will be approximately 36%.  Anincome tax benefit of $24.8 million (36.01% of pre-tax income) was reported forthe six months ended June 30, 2008. This amount includes an income taxbenefit of approximately $0.4 million, recorded in the second quarter of 2008as a result of the conclusion of a state audit where no prior benefit was takenfor an uncertain tax position, which is now effectively settled withoutadjustment by the state tax authorities. A provision for income taxes of $2.8million (36.34% of pre-tax income) was reported for the six months ended June 30,2007. The Company’s income tax provision in 2008 is primarily non-cash as theCompany has NOL carryforwards available that were generated from drillingactivity.  However, in light of theproposed merger with Chaparral, the Company cannot provide any assurance thatthe availability of its NOL carryforward and other federal income taxattributes will not be significantly limited or possibly eliminated. Currently,the Company anticipates that it will incur federal alternative minimum tax forthe year ended 2008 in excess of amounts paid at June 30, 2008. Anoverpayment of approximately $229,000 is anticipated from the prior tax year,resulting in no required payments as of June 30, 2008.

 

TheCompany also accounts for income taxes under the provisions of FIN 48,which clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS No. 109*,*and FSP FIN 48-1, which provides that a company’s tax position will beconsidered settled if the taxing authority has completed its examination, thecompany does not plan to appeal, and it is remote that the taxing authoritywould reexamine the tax position in the future. FIN 48 prescribes abenefit recognition model with a two-step approach, a more-likely-than-notrecognition criterion and a measurement attribute that measures the position asthe largest amount of tax benefit that is greater than 50% likely of beingultimately realized upon ultimate settlement. If it is not more likely than notthat the benefit will be sustained on its technical merits, no benefit will berecorded. FIN 48 also requires that the amount of interest expense to berecognized related to uncertain tax positions be computed by applying theapplicable statutory rate of interest to the difference between the taxposition recognized in accordance with FIN 48 and the amount previouslytaken or expected to be taken in a tax return. The Company recognizes interestand penalties related to unrecognized tax benefits in tax expense. However, theCompany has accrued no interest or penalties at June 30, 2008. The Companyfiles income tax returns in the United States and various state jurisdictions.The Company’s tax returns for 2005 and 2006 remain open for examination by thetaxing authorities in the respective jurisdictions where those returns werefiled. The calculation of the net operating loss carryforwards from years priorto 2005 also remain open for examination.

 

**7.****             ****SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ANDNON-CASH INVESTING AND FINANCING ACTIVITIES**

 

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

 
| **Description**                                                                                           | ** ** | **Number of  Shares Issued** | ** ** | **Fair Market Value** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**                | ** ** |
| **Six months ended June 30, 2008:**                                                                  |       |                                   |       |                            |       |
| Shares issued to satisfy restricted stock  grants                                                         |       | 52                                     |       | $                               | 1,074      |   |
| Shares issued to fund the Company’s  matching contribution under the Company’s 401(k) plan |       | 61                                     |       | $                               | 324        |   |
| **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        |   |

 

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Forthe six months ended June 30, 2008 and 2007, the non-cash portion of AssetRetirement Costs was $0.5 million and $(0.9) million, respectively. Dividendsdeclared but not yet paid were $2.1 million, of which $1.7 million was accruedat June 30, 2008, and for the same prior year period dividends declaredbut not yet paid were also $2.1 million, of which $1.7 million was accrued asof June 30, 2007. A supplemental disclosure of cash flow information ispresented below:

 
| ** **                           | ** ** | **For the Six Months  Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                        | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(in thousands)**                                         | ** ** |
| Cash paid during the period for:     |       |                                                            |       |   |   |
| Interest, net of amounts capitalized |       | $                                                               | 6,896      |   | $ | 7,187 |   |
|                                      |            |                                                                 |            |  |  |  |  |

 

**8.****             ****HEDGING AND DERIVATIVE ACTIVITIES**

 

Dueto the volatility of oil and natural gas prices, the Company periodicallyenters into price-risk management transactions (e.g. swaps, collars and floors)for a portion of its expected oil and natural gas production to seek to achievea more predictable cash flow, as well as to reduce exposure from commodityprice fluctuations.  While the use ofthese arrangements may limit the Company’s ability to benefit from increases inthe price of oil and natural gas, it is also intended to reduce the Company’spotential exposure to significant price declines. As a result of changes to theCompany’s forecasted 2008 production and the impact of certain divestitures,both of which have reduced expected production as compared to that expected atthe time the Company entered into the derivative contracts, the Companycurrently has approximately 120% and 170% of its anticipated 2008 natural gasand crude oil production, respectively, covered by derivative contracts.  The Company’s arrangements, to the extent itenters into any, are intended to apply to only a portion of its expectedproduction, and thereby provide only partial price protection against declinesin oil and natural gas prices. None of these instruments are, at the time oftheir execution, intended to be used for trading or speculative purposes, butmay be deemed as such because of the decrease in the Company’s expected 2008production. These derivative transactions are generally placed with majorfinancial institutions that the Company believes are minimal credit risks. On aquarterly basis, the Company’s management sets all of the Company’s price-riskmanagement policies, including volumes, types of instruments andcounterparties. The Board of Directors reviews the Company’s policies andtrades monthly.

 

Allof these price-risk management transactions are considered derivativeinstruments 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. The cash flows resulting from settlement of derivativetransactions which relate to economically hedging the Company’s physicalproduction volumes are classified in operating activities on the statement ofcash flows and the cash flows resulting from settlement of derivativetransactions considered “overhedged” positions are classified in investingactivities on the statement of cash flows. For those derivatives in whichmark-to-market accounting treatment is applied, the changes in fair value arenot deferred through other comprehensive income on the balance sheet. Ratherthey are immediately recorded in total revenue on the statement of operations.While the contract is outstanding, the unrealized gain or loss may increase ordecrease until settlement 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.

 

Thefollowing table reflects the realized and unrealized gains and losses includedin revenue on the statement of operations:

 

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| ** **                                              | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                              | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                              | ** ** | **(in thousands)**                             | ** ** |
| Natural gas derivative realized settlements             |       | $                                                   | (6,733     | )                                                 | $          | — |   | $ | (6,370 | ) | $ | 569 |   |
| Crude oil derivative realized settlements               |       | (7,916                                              | )          | 235                                               |       | (12,278 | ) | 1,078 |   |
| Natural gas derivative unrealized change in  fair value |       | (30,914                                             | )          | 8,200                                             |       | (56,478 | ) | (7,272 | ) |
| Crude oil derivative unrealized change in  fair value   |       | (11,035                                             | )          | (1,919                                            | )          | (10,831 | ) | (4,190 | ) |
|                                                    |       |                                                |       |                                              |       |   |   |   |   |
| Gain (loss) on derivatives                              |       | $                                                   | (56,598    | )                                                 | $          | 6,516 |   | $ | (85,957 | ) | $ | (9,815 | ) |

 

Thefair value of outstanding derivative contracts reflected on the balance sheetwas as follows:

 
| ** **             | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | ** **        | ** ** | ** **       | ** ** | **Fair Value of Outstanding  Derivative Contracts as of** | ** ** |
|------------------------|------------|-----------------|------------|---------------|------------|------------|------------|-------------------|------------|------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Transaction**        | ** ** | **Transaction** | ** ** | ** **    | ** ** | ** ** | ** ** | **Price**         | ** ** | **Volumes**      | ** ** | **June 30,**                                                                       | ** ** | **December 31,** | ** ** |
| **Date**               | ** ** | **Type**        | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Per Unit** | ** ** | **Per Day** | ** ** | **2008**                                                                                | ** ** | **2007** | ** ** |
| ** **             | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | ** **        | ** ** | ** **       | ** ** | **(in thousands)**                                                                      | ** ** |
| ***Natural Gas (1):*** | * *   | * *        | * *   | * *      | * *   | * *   | * *   | * *          | * *   | * *         | * *   | * *                                                                                | * *   | * * | * * |
| 01/07                  |       | Collar          |       | 01/01/2008    |       | 12/31/2008 |       | $7.50-$9.00       |       | 20,000 MMBtu     |       | $                                                                                       | (16,701    | ) | $ | 1,096 |   |
| 01/07                  |       | Collar          |       | 01/01/2008    |       | 12/31/2008 |       | $7.50-$9.00       |       | 10,000 MMBtu     |       | (8,235                                                                                  | )          | 619 |   |
| 01/07                  |       | Collar          |       | 01/01/2008    |       | 12/31/2008 |       | $7.50-$9.02       |       | 10,000 MMBtu     |       | (8,205                                                                                  | )          | 599 |   |
| 04/07                  |       | Collar          |       | 01/01/2009    |       | 12/31/2009 |       | $7.75-$10.00      |       | 10,000 MMBtu     |       | (10,449                                                                                 | )          | 125 |   |
| 10/07                  |       | Collar          |       | 01/01/2009    |       | 12/31/2009 |       | $7.75-$10.08      |       | 10,000 MMBtu     |       | (10,263                                                                                 | )          | 187 |   |
|                   |       |            |       |          |       |       |       |              |       |             |       |                                                                                    |       |   |   |
| ***Crude Oil (2):***   |       |            |       |          |       |       |       |              |       |             |       |                                                                                    |       |   |   |
| 12/06                  |       | Swap            |       | 01/01/2008    |       | 12/31/2008 |       | $66.00            |       | 1,500 Bbl        |       | (20,520                                                                                 | )          | (14,541 | ) |
| 10/07                  |       | Collar          |       | 01/01/2009    |       | 12/31/2009 |       | $70.00-$93.55     |       | 300 Bbl          |       | (5,265                                                                                  | )          | (414 | ) |
|                   |       |            |       |          |       |       |       |              |       |             |       |                                                                                    |       |   |   |
|                   |       |            |       |          |       |       |       |              |       |             |       | $                                                                                       | (79,638    | ) | $ | (12,329 | ) |

 

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(1)          The Company’s natural gas contracts were entered into on a per MMBtudelivered price basis, using the NYMEX Natural Gas Index. Mark-to-marketaccounting treatment is applied to these contracts and the change in fair valueis reflected in total revenue.

 

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

 

**9.****             ****FAIR VALUE MEASUREMENTS**

 

Asdefined in SFAS No. 157, fair value is the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (an exit price). Where available,fair value is based on observable market prices or parameters or derived fromsuch prices or parameters. Where observable prices or inputs are not available,valuation models are applied. These valuation techniques involve some level ofmanagement estimation and judgment, the degree of which is dependent on theprice transparency for the instruments or market and the instruments’complexity.

 

*Valuation Techniques*

 

Inaccordance with SFAS No. 157, valuation techniques used for assets andliabilities accounted for at fair value are generally categorized into threetypes:

 

·                  Market Approach*.* Marketapproach valuation techniques use prices and other relevant information frommarket transactions involving identical or comparable assets or liabilities.

 

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·                  Income Approach*.*Incomeapproach valuation techniques convert future amounts, such as cash flows orearnings, to a single present amount, or a discounted amount. These techniquesrely on current market expectations of future amounts.

 

·                  Cost Approach*.*Costapproach valuation techniques are based upon the amount that, at present, wouldbe required to replace the service capacity of an asset, or the currentreplacement cost. That is, from the perspective of a market participant(seller), the price that would be received for the asset is determined based onthe cost to a market participant (buyer) to acquire or construct a substituteasset of comparable utility.

 

Thethree approaches described within SFAS No. 157 are consistent withgenerally accepted valuation methodologies. While all three approaches are notapplicable to all assets or liabilities accounted for at fair value, whereappropriate and possible, one or more valuation techniques may be used. Theselection of the valuation method(s) to apply considers the definition ofan exit price and the nature of the asset or liability being valued andsignificant expertise and judgment is required. For assets and liabilitiesaccounted for at fair value, valuation techniques are generally a combinationof the market and income approaches. Accordingly, the Company aims to utilizevaluation techniques that maximize the use of observable inputs and minimizethe use of unobservable inputs.

 

*Input Hierarchy*

 

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

 

·                  Level 1 – Inputs areunadjusted, quoted prices in active markets for identical assets or liabilitiesat the measurement date. Active markets are those in which transactionsfor the asset or liability occur in sufficient frequency and volume to providepricing information on an ongoing basis.

 

·                  Level 2 – Inputs(other than quoted prices included in Level I) are either directly orindirectly observable for the asset or liability through correlation withmarket data at the measurement date and for the duration of the instrument’santicipated life. Level 2 includes those financial instruments that are valuedusing models or other valuation methodologies, which consider variousassumptions, including quoted forward prices for commodities, time value,volatility factors, and current market and contractual prices for theunderlying instruments, as well as other relevant economic measures.

 

·                  Level 3 – Inputsreflect management’s best estimate of what market participants would use inpricing the asset or liability at the measurement date.

 

*Fair Value on a Recurring Basis*

 

Thefollowing table sets forth by level within the fair value hierarchy the Company’sfinancial assets and liabilities that were accounted for at fair value on arecurring basis as of June 30, 2008. As required by SFAS No. 157,financial assets and liabilities are classified in their entirety based on thelowest level of input that is significant to the fair value measurement. TheCompany’s assessment of the significance of a particular input to the fairvalue measurement requires judgment, and may affect the valuation of fair valueassets and liabilities and their placement within the fair value hierarchylevels.

 

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| ** **             | ** ** | **Fair Value Measurements Using:** | ** ** |
|------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | ** **                                        | ** ** | **Quoted** | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **                                        | ** ** | **Prices in** | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **             | ** ** | ** **                                        | ** ** | **Active** | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **             | ** ** | **Total Fair**                               | ** ** | **Markets** | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **             | ** ** | **Value**                                         | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| ** **             | ** ** | **(in thousands)**                                | ** ** |
| Assets:                |       |                                              |       |   |   |   |   |   |   |
| Derivative instruments |       | $                                                 | —     |   | $ | — |   | $ | — |   | $ | — |   |
|                   |       |                                              |       |   |   |   |   |   |   |
| Liabilities:           |       |                                              |       |   |   |   |   |   |   |
| Derivative instruments |       | $                                                 | (79,638    | ) | $ | — |   | $ | — |   | $ | (79,638 | ) |

 

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

 
| ** **                                                                                       | ** ** | **Three months ended  June 30, 2008** | ** ** | **Six months ended   June 30, 2008** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **Assets**                                                | ** ** | **Liabilities**                                               | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**                                   | ** ** |
| Balance as of beginning of period                                                                |       | $                                                         | —     |                                                          | $          | (37,689 | ) | $ | — |   | $ | (12,329 | ) |
| Realized and unrealized gains (losses)  included in earnings                                     |       | —                                                    |       | (27,300                                                       | )          | — |   | (48,661 | ) |
| Realized and unrealized gains (losses)  included in other comprehensive income                   |       | —                                                    |       | —                                                        |       | — |   | — |   |
| Settlements                                                                                      |       | —                                                    |       | (14,649                                                       | )          | — |   | (18,648 | ) |
| Transfers in and/or out of Level 3                                                               |       | —                                                    |       | —                                                        |       | — |   | — |   |
| Balance as of June 30, 2008                                                                 |       | $                                                         | —     |                                                          | $          | (79,638 | ) | $ | — |   | $ | (79,638 | ) |
|                                                                                             |       |                                                      |       |                                                          |       |   |   |   |   |
| Change in unrealized gains (losses)  relating to instruments still held as of June 30, 2008 |       | $                                                         | —     |                                                          | $          | (50,357 | ) | $ | — |   | $ | (72,562 | ) |

 

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

 

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

 

*Fair Value on a Nonrecurring Basis*

 

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

 

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**10.****      ****DIVESTITURES**

 

During the first half of 2008, the Company completed sales of certainnon-core assets, which included a pipeline and approximately 100 properties inTexas, to various buyers for aggregate proceeds of approximately $18.2 million.

 

**11.****      ****SUBSEQUENT EVENT**

 

OnJuly 14, 2008, the Company, Chaparral and Chaparral Exploration, L.L.C., aDelaware limited liability company and wholly owned direct subsidiary ofChaparral (“Sub”), entered into an Agreement and Plan of Merger (the “MergerAgreement”), whereby the Company will merge with and into Sub (the “Merger”).The transaction is expected to qualify as a tax-free reorganization under Section 368(a) ofthe Internal Revenue Code of 1986. The Merger Agreement was unanimouslyapproved by the Company’s Board of Directors and Chaparral’s Board of Directorsand stockholders. Completion of the Merger is conditioned upon, among otherthings, adoption of the Merger Agreement by the Company’s common stockholders andthe accuracy of representations and warranties (subject to materialityexceptions) as of the date of the Merger Agreement and the closing date of theMerger, and the performance by the parties in all material respects of theircovenants under the Merger Agreement.

 

Atthe effective time of the Merger, each share of the Company’s common stock willbe converted automatically into the right to receive 0.2511 shares of commonstock, par value $0.01 per share, of Chaparral (the “Common MergerConsideration”), and each share of the Company’s Convertible Preferred Stockwill be converted automatically into the right to receive one share of 5.75% Series ACumulative Convertible Perpetual Preferred Stock, par value $0.01 per share, ofChaparral.  The Chaparral preferred stock will have the same terms,rights, preferences and limitations as the Company’s preferred stock, subjectto appropriate adjustments to reflect the Merger and the exchange ratio for theCompany’s common stock. The initial conversion price per share of Chaparralpreferred stock will be $65.95 per share of Chaparral common stock.

 

Inaddition, each option to purchase a share of the Company’s common stock that isoutstanding as of the effective time of the Merger will be assumed by Chaparraland will be converted into the right to purchase 0.2511 shares of Chaparralcommon stock at an adjusted exercise price. Each share of restricted stock andeach unit with respect to the Company’s common stock will become fully vestedand will be converted into the right to receive the Common MergerConsideration.

 

TheCompany, Chaparral and Sub have made representations, warranties and covenantsin the Merger Agreement, including, among others, covenants to conduct theirbusinesses in the ordinary course between the execution of the Merger Agreementand the consummation of the Merger.  TheCompany, and to a lesser extent, Chaparral, have agreed to covenants not toengage in certain kinds of transactions and activities during that period. TheCompany has made certain additional covenants, including, among others,covenants, subject to certain exceptions, (1) not to solicit proposalsregarding alternative business combination transactions, (2) not to enterinto discussions concerning, or provide confidential information in connectionwith, alternative business combination transactions, (3) not to approve orrecommend any alternative business combination transaction proposals, (4) tocause a common stockholder meeting to be held to consider approval of theMerger and (5) for its Board of Directors to recommend approval of theMerger Agreement by the Company’s common stockholders.

 

TheMerger Agreement contains various termination rights for both parties,including if (1) the Board of Directors of the Company changes its recommendationto its common stockholders or authorizes the Company to enter into a definitiveagreement in connection with a Superior Proposal (as defined in the MergerAgreement), (2) the Merger Agreement is not adopted by the holders of theCompany’s common stock, or (3) Chaparral fails to enter into a new creditfacility or obtain or consummate alternative financing within two business daysafter the satisfaction or waiver of all other conditions to the Merger. The Merger Agreement includes a termination right for Chaparral only, if anevent of default occurs and is continuing under the Company’s RevolvingFacility that has not been cured within a specified period of time or theadministrative agent under the Revolving Facility has accelerated the Company’srepayment obligations thereunder.  Upon termination of the MergerAgreement under specified circumstances, one party will be required to pay theother party a termination fee of $15 million.  With certain

 

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exceptions, all costs andexpenses incurred in connection with the Merger Agreement will be paid by theparty incurring such expenses, whether or not the Merger is consummated. The Merger Agreement includes provisions limiting the maximum aggregateliability of the parties to $25 million in the event the Merger is notconsummated.

 

Theseprovisions are set forth in the Merger Agreement and will be more fully describedin the proxy statement/prospectus to be filed by the Company and Chaparral. TheMerger is expected to close during the fourth quarter of 2008, but noassurances can be made that the proposed merger with Chaparral will close and,if it does, that the terms will not change.

 

**12.****      ****RETENTION BONUS PLAN**

 

TheCompany’s Board of Directors adopted a Retention Bonus Plan awardingapproximately $2.9 million in bonuses effective May 21, 2008. Awards underthe Retention Bonus Plan are permitted under the Merger Agreement.  The Retention Bonus Plan provides for awardsto each non-executive employee  andadditional awards to certain key non-executive employees, in each case if theemployee remains employed by Edge through the earliest to occur of (1) October 1,2008, (2) the date of the employee’s termination by Edge, provided thatsuch termination is not a termination for cause (as defined in the employee’sseverance agreement) or (3) the date of the employee’s involuntarytermination with the company (as defined in the employee’s severanceagreement). C.W. MacLeod and Kirsten A. Hink were not executive officers at thetime of the adoption of the Retention Bonus Plan and are therefore eligible toparticipate in the Retention Bonus Plan. Subject to the terms of the plan, Mr. MacLeod and Ms. Hink areentitled to receive retention bonus awards of $97,600 and $78,000,respectively. This plan was adopted to provide an incentive to employees toremain with the Company during the remainder of the strategic alternatives processand proposed merger with Chaparral. For the three and six months ended June 30,2008, the Company recorded general and administrative expense related toretention benefits of $0.7 million.

 

**13.****      ****COMMITMENTS AND CONTINGENCIES**

 

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

 

**David Blake, et al. v. Edge Petroleum Corporation** – On September 19, 2005, David Blakeand David Blake, Trustee of the David and Nita Blake 1992 Children’s Trustfiled suit against the Company in state district court in Goliad County, Texasalleging breach of contract for failure and refusal to transfer overridingroyalty interests to plaintiffs in several leases in the Nita and Austinprospects 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 disparagementand slander; (4) monetary damages for tortious interference; and (5) attorneys’fees and court costs. Venue of the case was transferred to Harris County, Texasby agreement of the litigants.  TheCompany filed a counterclaim against Plaintiff Blake and joined various relatedentities that are controlled by Blake, seeking lease interests in which theCompany contends it had been wrongfully denied participation. The parties havemoved for summary judgment on each others’ claims and counterclaims, which thetrial court has denied as to both sides. In November 2007, the Company filed a separate motion for summaryjudgment based on the statute of frauds; the court has not ruled on thisseparate motion.  The trial, originallyscheduled to begin September 10, 2007, and reset for March 3, 2008and August 20, 2008, has been continued until November 17, 2008.Extensive written discovery has occurred in the case, and the parties arescheduling and commencing to take fact and expert witness depositions.  In June 2008, the Blake Plaintiffs fileda Sixth Amended Petition conditionally adding claims for certain prospects thathad been settled, but only to the extent that rescission of the priorsettlement and release was being sought by the Company. The Company is notseeking rescission of the prior settlement and release and will respondappropriately to this amended petition. The Company has responded aggressivelyto this lawsuit, and believes it has meritorious defenses and counterclaims.

 

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**Diana Reyes, et al. v. Edge Petroleum OperatingCompany, Inc., et al. **On January 8, 2008, the Company wasserved with a wrongful death action filed in Hidalgo County, Texas.  Plaintiffs allege negligence and grossnegligence resulting from a fatality accident at the Slick State B-12 wellsite, on the Company’s Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minorchildren of Mr. Reyes, who was killed in a one-car fatality accident on August 5,2007.  Mr. Reyes was an employee ofa vendor of the Company, Payzone Logging. No specific amount of damages has been alleged to date; plaintiffs areasserting damages from loss of companionship, pecuniary loss, pain and mentalanguish, loss of inheritance and funeral and burial expenses.  The Company may have insurance coverage forall or part of this claim.  The Company’sinsurance carrier has retained local counsel to represent the Company in thismatter.  The Company filed an answer on January 30,2008 denying plaintiffs’ allegations and asserting defenses and trial has beenset for February 16, 2009. The Company has not established a reserve withrespect to this claim and it is not possible to determine what, if any, theCompany’s ultimate exposure might be in this matter.  The Company will continue to respondaggressively to this lawsuit, and believes that it has meritorious defenses.

 

**Lexington Insurance Company v. Edge PetroleumExploration Company, et al.** - On March 13, 2008, Lexington Insurance Company (“Lexington”)filed a declaratory judgment action in the 125th Judicial DistrictCourt of Harris County, Texas.  Lexingtonseeks a judgment that it is not obligated to pay any claims of the Company andthe Sfondrini Partnerships (as defined below) in connection with a consolidatedsuit that Company and the Sfondrini Partnerships settled with the all of theplaintiffs in 2007.  The suit that wassettled,** **Wade and JoyceMontet, et al., v. Edge Petroleum Corp of Texas, et al., consolidated withRolland L. Broussard, et al., v. Edge Petroleum Corp of Texas, et al., andthe settlement thereof, is described in detail in “Item 3. Legal Proceedings”of the Company’s Annual Report on Form 10-K for the year ended December 31,2007.  In general, the action was aconsolidated suit by mineral/royalty owners under two wells, who claimed thatthe third party operator of the wells had failed to “block squeeze” thesections of one of the wells, as a prudent operator, according to theirallegations, would have done, to protect the gas reservoir from being floodedwith water from adjacent underground formations, and was negligent in notcreating a field-wide unit to protect their interests.  The Company and the Sfondrini Partnershipswere defendants in the suit as working interest owners in the wells, owning2.8% and 14.7%, respectively, at the time of the alleged acts oromissions.  In the case of thesettlements with some, but not all, of the plaintiffs, two other insurerscovered the settlement amounts in exchange for mutual releases.  The Company and the Sfondrini Partnershipsbore the costs of the settlements with the remaining plaintiffs in accordancewith their proportionate interests.  TheSfondrini Partnerships are partnerships that are directly or indirectlycontrolled by John Sfondrini, a director of the Company. Vincent Andrews, alsoa director of the Company, owns a minority interest in the corporate generalpartner one of the partnerships.

 

Lexingtonasserts that it is not obligated to pay any claims of the Company and theSfondrini Partnerships under its commercial, general liability insurance policyas related to the lawsuit that was settled because there was no “occurrence,”under the terms of their policy, of physical injury to or destruction oftangible property and other reasons.  TheCompany’s position is that the damages to the reservoir and attendant lossesincurred by the defendants were losses covered by Lexington’s policy, for whichLexington is legally obligated to pay. By agreement of the parties, an answer is due 30 days from notice oftermination of settlement discussions. Because the Company has already settled the underlying claims and hasnot recognized any amount for possible future recoveries against Lexington, itdoes not, in any event, expect the declaratory judgment action by Lexington tohave a material adverse affect on the Company.

 

InJune 2008, the Company and the Sfondrini Partnerships reached a settlementin principle with Lexington pursuant to which Lexington would pay the Companyand the Sfondrini Partnerships $75,000 (proportionate to their interests in theunderlying mineral leases that were the subject of the prior action) in returnfor a complete release.

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

Thefollowing is Management’s Discussion and Analysis (“MD&A”) of significantfactors that have affected certain aspects of our financial position andoperating results during the periods included in the accompanying unauditedcondensed consolidated financial statements. The following MD&A is intendedto help the reader understand Edge Petroleum Corporation (“Edge”). Thisdiscussion should be read in conjunction with the accompanying unauditedcondensed consolidated financial statements included elsewhere in this Form 10-Qand with MD&A of Financial Condition and Results of Operations and ouraudited consolidated financial statements included in our annual report on Form 10-Kfor the year ended December 31, 2007 (“2007 Annual Report”).

 

### **FORWARDLOOKING 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 and administrativeexpenses on a per unit of production basis, changes in wells operated andreserves, future growth and expansion, future exploration, future seismic data(including timing and results), the assessment of strategic alternatives, theproposed merger with Chaparral (including the benefits, results, effect andtiming thereof), expansion of operation, our ability to generate additionalprospects, review of outside generated prospects and acquisitions,divestitures, additional reserves and reserve increases, our ability to replaceproduction and manage our asset base, enhancement of visualization andinterpretation strengths, expansion and improvement of capabilities,integration of new technology into operations, credit facilities,redetermination of our borrowing base, attraction of new members to thetechnical team, future compensation programs, new focus on core areas, newprospects and drilling locations, new alliances, future capital expenditures(or funding thereof) and working capital, sufficiency of future workingcapital, borrowings and capital resources and liquidity, projected rates ofreturn, retained earnings and dividend policies, projected cash flows fromoperations, future commodity price environment, expectation or timing ofreaching payout, the outcome, effects or timing of any legal proceedings orcontingencies, the impact of any change in accounting policies on our financialstatements, the number, timing or results of any wells, the plans for timing,interpretation and results of new or existing seismic surveys or seismic data,future production or reserves, future acquisition of leases, lease options orother land rights, any other statements regarding future operations, financialresults, opportunities, growth, business plans and strategy and otherstatements that are not historical facts are forward-looking statements. Theseforward-looking statements reflect our current view of future events andfinancial performance. When used in this document, the words “budgeted,” “anticipate,”“estimate,” “expect,” “may,” “project,” “believe,” “intend,” “plan,” “potential,”“forecast,” “might,” “predict,” “should” and similar expressions are intendedto be among the expressions that identify forward-looking statements. Theseforward-looking statements speak only as of their dates and should not beunduly relied upon. We undertake no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, futureevents, or otherwise. Such statements involve risks and uncertainties,including, but not limited to, those set forth under “ITEM 1A. RISK FACTORS” ofour 2007 Annual Report and this Quarterly Report on Form 10-Q, theassessment of strategic alternatives, the proposed merger with Chaparral,actions by regulatory authorities or other third parties, costs anddifficulties related to integration of acquired businesses, delays, costs anddifficulties related to the transactions, market conditions, the combinedcompanies’ financial results and performance, consummation of financing,satisfaction of closing conditions, ability to repay debt and timing thereof,availability and terms of any financing, 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.

##  

## **GENERALOVERVIEW**

##  

EdgePetroleum Corporation (“Edge”, “we” or the “Company”) is a Houston-basedindependent energy company that focuses its exploration, development,production, acquisition and marketing activities in selected onshore basins ofthe United States. In late 1998, we began a shift in strategy from pureexploration, which focused 

 

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moreon prospect generation, to our current strategy which focuses on a balancedprogram of exploration, exploitation and development and acquisition of oil andnatural gas properties. We generate revenues, income and cash flows byproducing and marketing oil and natural gas produced from our oil and naturalgas properties. We make significant capital expenditures in our exploration,development, and production activities that allow us to continue generatingrevenue, income and cash flows. We have also spent considerable efforts onacquisitions, including both corporate and asset acquisitions.

 

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

 

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

 

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

 

·                  **Divestitures** – information about our sales and divestitures.

 

·                  **Assessment of Strategic Alternatives and ProposedMerger –** information aboutour future, the strategic alternatives process and proposed merger.

 

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

 

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

 

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

 

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

 

·                  **Fair Value Measurements –**supplementary discussion regarding fair valuemeasurements and implementation of SFAS No. 157, *Fair Value Measurements.*

 

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

 

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

 

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

 

# **Industry and Economic Factors**

#  

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

 

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

 

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Ouroperations entail significant complexities. Advanced technologies requiringhighly trained personnel are utilized in both exploration and production.  Even when the technology is properly used, wemay still not know conclusively if hydrocarbons will be present or the rate atwhich they will be produced.  Explorationis a high-risk activity, often times resulting in no commercially productivereserves being discovered.  Thesefactors, together with increased demand for rigs, equipment, supplies andservices, have made it difficult at times for us to further our growth, andmade timely execution of our planned activities difficult.

 

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

 

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

 

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

 

# **Approach to the Business**

#  

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

 

Wenormally hedge our exposure to volatile oil and natural gas prices on a portionof our expected production to reduce price risk. As a result of changes to ourforecasted 2008 production and the impact of certain asset divestitures, bothof which have reduced expected production as compared to that expected at thetime we entered into the derivative contracts, we currently have approximately120% and 170% of our anticipated 2008 natural gas and crude oil production,respectively, covered by derivative contracts. This overhedged position exposesus to greater risk of commodity price increases because we will not have thephysical production cash inflows to offset any potential losses incurred on theportion of the contracts that are overhedged. As of June 30, 2008, we hadderivative contracts in place for a portion of our expected 2009 oil andnatural gas production.

 

Generally, our goal is to fund ongoing explorationand development projects with cash flow provided by operating activities,occasionally supplemented with external sources of capital. As a result of thestrategic alternatives process that began in late 2007 (see discussion below),our Board approved an interim capital expenditure budget for 2008. We currentlyexpect that capital expenditures for the year will be approximately $66million. Under the terms of the Merger Agreement discussed below, we agreed tolimit, subject to certain exceptions, our capital expenditures beyond thatpreviously budgeted to capital expenditures made with Chaparral’s consent.Based on current expectations for production volumes and commodity prices, weexpect to fund those capital expenditures from internally generated cash fromoperating activities. Any decision to expand our drilling program will dependin large part on the timing and successful completion of the proposed mergerwith Chaparral that we recently announced (see below). Our long-term debtbalance as of June 30, 2008 was $240 million and our debt-to-total capitalratio was 38.2%. In early May 2008, our Revolving Facility’s (as definedbelow) borrowing base and conforming borrowing base were redetermined by ourbanks and set at $250 million and $225 million, respectively. The secondquarter redetermination has been postponed, subject to certain terms, until October 31,2008 (see Note 2 to our consolidated financial statements). We paid the Lenders(defined below) a fee of approximately $0.4 million in connection with thedeferral of the second quarter redetermination. As of August 11, 2008, wehad unused borrowing capacity of $10 million.

 

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**Divestitures**

 

We regularly review our asset base for the purposeof identifying non-core assets, the disposition of which would increase capitalresources available for other activities and create organizational andoperational efficiencies. While we generally do not dispose of assets solelyfor the purpose of reducing debt, such dispositions can have the result offurthering our objective of financial flexibility through reduced debt levels.During the first six months of 2008, we completed sales of a pipeline andcertain working interests in approximately 100 properties located in Texas tovarious buyers for aggregate proceeds of approximately $18.2 million. Themerger agreement with Chaparral discussed below limits our ability to engage inacquisitions and dispositions of assets until the closing of the proposedmerger, although those limitations are subject to certain exceptions agreed toby the parties and also may be waived by Chaparral.

 

**Assessment of Strategic Alternatives and Proposed Merger**

 

Inlate 2007, we announced the hiring of a financial advisor to assist our Boardof Directors with an assessment of strategic alternatives. On February 7,2008, we provided an update on the strategic alternatives process and announcedpublicly that we would implement a process to explore a merger or sale of thecompany. As a result of the strategic alternatives process, on July 14,2008, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)with Chaparral and Chaparral Exploration, L.L.C., a Delaware limited liabilitycompany and wholly owned direct subsidiary of Chaparral (“Sub”), whereby wewill merge with and into Sub (the “Merger”). Through the merger, Chaparral willbecome a publicly traded company. The transaction is expected to qualify as atax-free reorganization under Section 368(a) of the Internal RevenueCode of 1986. The Merger Agreement was unanimously approved by our Board ofDirectors and Chaparral’s Board of Directors and stockholders. Completion ofthe Merger is conditioned upon, among other things, adoption of the MergerAgreement by our common stockholders and the accuracy of representations andwarranties (subject to materiality exceptions) as of the date of the MergerAgreement and the closing date of the Merger, and the performance by theparties in all material respects of their covenants under the Merger Agreement.

 

Atthe effective time of the Merger, each share of our common stock will beconverted automatically into the right to receive 0.2511 shares of commonstock, par value $0.01 per share, of Chaparral (the “Common MergerConsideration”), and each share of our 5.75% Series A cumulativeconvertible perpetual preferred stock will be converted automatically into theright to receive one share of 5.75% Series A Cumulative ConvertiblePerpetual Preferred Stock, par value $0.01 per share, of Chaparral.  TheChaparral preferred stock will have the same terms, rights, preferences andlimitations as our preferred stock, subject to appropriate adjustments toreflect the Merger and the exchange ratio for our common stock. The initialconversion price per share of Chaparral preferred stock will be $65.95 pershare of Chaparral common stock.

 

Inaddition, each option to purchase a share of our common stock that isoutstanding as of the effective time of the Merger will be assumed by Chaparraland will be converted into the right to purchase 0.2511 shares of Chaparralcommon stock at an adjusted exercise price. Each share of restricted stock andeach unit with respect to our common stock will become fully vested and will beconverted into the right to receive the Common Merger Consideration.

 

 We,along with Chaparral and Sub, have made representations, warranties andcovenants in the Merger Agreement, including, among others, covenants toconduct business in the ordinary course between the execution of the MergerAgreement and the consummation of the Merger. We, and to a lesser extent, Chaparral, have agreed to covenants not toengage in certain kinds of transactions and activities during that period. Wehave made certain additional covenants, including, among others, covenants,subject to certain exceptions, (1) not to solicit proposals regardingalternative business combination transactions, (2) not to enter intodiscussions concerning, or provide confidential information in connection with,alternative business combination transactions, (3) not to approve orrecommend any alternative business combination transaction proposals, (4) tocause a common stockholder meeting to be held to consider approval of theMerger and (5) for our Board of Directors to recommend approval of theMerger Agreement by our common stockholders.

 

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TheMerger Agreement contains various termination rights for both parties,including if (1) our Board of Directors changes its recommendation to ourcommon stockholders or authorizes us to enter into a definitive agreement inconnection with a Superior Proposal (as defined in the Merger Agreement), (2) theMerger Agreement is not adopted by the holders of our common stock, or (3) Chaparralfails to enter into a new credit facility or obtain or consummate alternativefinancing within two business days after the satisfaction or waiver of allother conditions to the Merger.  The Merger Agreement includes atermination right for Chaparral only, if an event of default occurs and iscontinuing under our Revolving Facility that has not been cured within aspecified period of time or the administrative agent under the RevolvingFacility has accelerated our repayment obligations thereunder.  Upontermination of the Merger Agreement under specified circumstances, one partywill be required to pay the other party a termination fee of $15 million. With certain exceptions, all costs and expenses incurred in connection with theMerger Agreement will be paid by the party incurring such expenses, whether ornot the Merger is consummated.  The Merger Agreement includes provisionslimiting the maximum aggregate liability of the parties to $25 million in theevent the Merger is not consummated.

 

Theseprovisions are set forth in the Merger Agreement and will be more fullydescribed in the proxy statement/prospectus to be filed by us and Chaparral.The Merger is expected to close during the fourth quarter of 2008.

 

**Outlook**

 

·                  Duringthe remainder of 2008, we expect to spend considerable effort to complete themerger with Chaparral. In connection with the strategic alternatives process,our Board of Directors adopted a Retention Bonus Plan on May 21, 2008,which is intended to retain key employees as we move through this process and helpsecure their assistance with the proposed merger with Chaparral. The payout forthe Retention Bonus Plan is expected to occur October 1, 2008 and theanticipated total costs of approximately $2.9 million will be included in ourgeneral and administrative expense in the period of June 1, 2008 through October 1,2008.

 

·                  Giventhe backdrop of the strategic alternatives process that began in late 2007, wehave been operating under an interim capital spending budget during 2008. Thisinterim program calls for the drilling of 27 to 29 wells (10.9 to 11.9, net)during 2008, primarily in south Texas and, to a lesser extent, in southeast NewMexico, and complemented by selected expenditures for land and seismic. Duringthe first half of 2008, we logged 14 wells, all of which were apparentsuccesses. We currently expect that capital expenditures for the year will beapproximately $66 million and any increase to that amount for the remainder ofthe year will be somewhat dependent upon the timing and successful completionof the proposed merger with Chaparral.

 

·                  Wecompleted several non-core asset divestitures during the first half of 2008,and are awaiting the release of a lien to close the sale of our TallahallaCreek properties, but we do not expect to sell any further properties as wework toward the merger with Chaparral.

 

·                  Weapply mark-to-market accounting treatment to our outstanding derivativecontracts, rather than cash flow hedge accounting treatment, and thereforesignificant volatility from the changes in fair value of those outstandingcontracts has impacted our earnings in 2008 (see Note 8 to our consolidatedfinancial statements). See “Approach to the Business” above for informationregarding our current derivatives position in light of recent changes inexpected production and dispositions. Given the current commodity priceenvironment, especially subsequent to the date of our second quarter 2008financial statements, we expect to continue to realize significant volatility.As a result of the decline in commodity prices in late July, we will berecording a net non-cash unrealized gain of approximately $52.1 million in themonth of July 2008 that will partially offset the June 2008 year todate loss of $67.3 million, associated with our derivative contracts. Whilerealized cash settlement losses for the month of July 2008 totaledapproximately $4.9 million and $3.1 million for natural gas and crude oil,respectively, realized cash settlement losses for the month of August 2008totaled only $0.2 million for natural gas. Our oil swap had not settled for themonth of August as of the time of this filing, but we expect thesettlement payment to our counterparty to be lower than previous months of2008. As we move through the remainder of 2008, we will continue to be impactedby these types of swings in commodity prices.

 

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Ouroutlook and the expected results described above are both subject to changebased upon factors that include, but are not limited to, drilling results,commodity prices, the results of our strategic alternatives process andproposed merger with Chaparral, access to capital and factors referred to in “ForwardLooking Statements.”

 

**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 theseestimates and assumptions could materially affect our financial position,results of operations or cash flows. Management considers an accountingestimate to be critical if:

 

·                  itrequires assumptions to be made that were uncertain at the time the estimatewas made, and

 

·                  changesin the estimate or different estimates that could have been selected could havea material impact on our consolidated results of operations or financialcondition.

 

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

 

* *“Ceiling” Test - The full-cost method of accounting for oiland natural gas properties requires a quarterly calculation of a limitation oncapitalized costs, often referred to as a full-cost ceiling test. The ceilingis the discounted present value of our estimated total proved reserves (using a10% discount rate) adjusted for taxes and the impact of cash flow hedges onpricing, if cash flow hedge accounting is applied. The ceiling test calculationdictates that prices and costs in effect as of the last day of the period areto be used in calculating the discounted present value of our estimated totalproved reserves.  However, if pricesincrease subsequent to the balance sheet date, but before the filing date, SECguidelines allow a company to use the subsequent date’s higher prices incalculating the full-cost ceiling. We made this election for the third andfourth quarters of 2007. 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 testimpairment could result in a significant loss for a reporting period; however,future depletion expense would be correspondingly reduced.  Although we believe our estimated provedreserves volumes have decreased during the period from year-end 2007 to June30,2008, the average oil, NGL and natural gas prices at the balance sheet dateas of June 30, 2008 were higher at $140.00 per barrel, $84.00 per barrel and$13.01 per MMBtu, respectively. As a result, no ceiling test impairment wasrequired for the three months ended June 30, 2008.  No such impairment was required in the threemonths ended June 30, 2007.

 

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*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 thequarter by approximately 10%.

 

“Ceiling” limitation test - Factors that contribute to a ceiling test impairment include theprice used to calculate the reserve limitation threshold and reservequantities. A reduction in prices at a measurement date could trigger afull-cost ceiling impairment. We had a cushion of $306.3 million, net of tax,at June 30, 2008. A 10% increase or decrease in prices would haveincreased or decreased our cushion (i.e. the excess of the ceiling over ourcapitalized costs) by approximately 30%, net of tax, respectively. Although ourhedging program is intended to mitigate the economic impact of any significantprice decline, it did not impact our ceiling test at June 30, 2008 becausewe do not apply cash flow hedge accounting to our derivative contracts. Had weapplied cash flow hedge accounting to our outstanding derivative contracts, thecushion at June 30, 2008 would have been 16% lower. A 10% increase ordecrease in reserve volume would have increased or decreased the cushion calculatedat June 30, 2008 by approximately 20%.

 

*Nature of Critical Estimate Item:*Asset Retirement Obligations**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and natural gas production operations.  Our removal and restoration obligations areprimarily associated with plugging and abandoning wells. Prior to the adoptionof Statement of Financial Accounting Standards (“SFAS”) No. 143, *Accounting for Asset Retirement Obligations,*costs associated with this activity were capitalized to the full-cost pool asthey were incurred and charged to income through depletion expense. SFAS No. 143significantly changed the method of accruing for costs which an entity islegally obligated to incur related to the retirement of fixed assets (“assetretirement obligations” or “ARO”). Primarily, SFAS No. 143 requires us to estimate asset retirementcosts for all of our assets upon acquisition of the asset, adjust those costsfor inflation to the forecast abandonment date, discount that amount using acredit-adjusted-risk-free rate back to the date we acquired the asset orobligation to retire the asset and record an ARO liability in that amount witha corresponding addition to our asset value. When new obligations are incurred,i.e. a new well is drilled or acquired, we add to the ARO liability. Shouldeither the estimated life or the estimated abandonment costs of a propertychange upon our quarterly review, our estimate must be revised. When wellobligations are relieved by sale of the property or plugging and abandoning thewell, the related estimated liability and asset costs are removed from ourbalance sheet and replaced by the costs actually spent 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.

 

*Assumptions/Approach Used:*  Sincethere are so many variables in estimating AROs, we attempt to limit the impactof management’s judgment on certain of these variables by using input ofqualified third parties. We engage independent engineering firms to evaluateour properties annually. We use the remaining estimated useful life from theperiod-end reserve reports prepared by our independent reserve engineers inestimating when abandonment could be expected for each property. We utilize athree-year average rate for inflation to diminish any significant volatilitythat may be present in the short term. We have developed a standard costestimate based on historical costs, industry quotes and depth of wells. Thiscost estimate is reviewed annually to determine whether it is still areasonable estimate in the current environment. Unless we expect a well’splugging to be significantly different than a normal abandonment, we use thisestimate.

 

*Effect if Different AssumptionsUsed:* We expect tosee our calculations for new properties and revisions to existing propertiesimpacted significantly if interest rates rise, as the credit-adjusted-risk-freerate is one of the 

 

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variablesused on a quarterly basis. We also expect that significant changes to the costof retiring assets or the reserve life of our assets would have significantimpact on our estimated ARO. The resulting estimate, after application of adiscount factor and some significant calculations, could differ from actualresults, despite all our efforts to make an accurate estimate.

 

*Nature of Critical Estimate Item:*Income Taxes**-**In accordance with SFAS No. 109, *Accounting for Income Taxes,* we haverecorded a deferred tax asset and liability to account for the expected futuretax benefits and consequences, respectively, of events that have beenrecognized in our financial statements and our tax returns. There are severalitems that result in deferred tax assets and liabilities on the balance sheet,the largest of which are deferred liabilities attributable to book basis inexcess of tax basis in oil and natural gas properties and the impact of netoperating loss (“NOL”) carryforwards. We routinely assess our ability to useall of our NOL carryforwards that resulted from substantial income taxdeductions, prior year losses and acquisitions. We consider future taxableincome in making such assessments.  If weconclude that it is more likely than not that some portion or all of thedeferred tax assets will not be realized under accounting standards, it isreduced by a valuation allowance to remove the benefit of those NOLcarryforwards from our financial statements. Additionally, in accordance withFinancial Accounting Standards Board (“FASB”) Interpretation 48, *Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109* (“FIN 48”)**we have recorded a liability of $0.1million associated with uncertain tax positions. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  We are required to determine whether it is more likely thannot (a likelihood of more than 50 percent) that a tax position will be sustainedupon examination, including resolution of any related appeals or litigationprocesses, based on the technical merits of the position in order to record anyfinancial statement benefit.  If that step is satisfied, then we mustmeasure the tax position to determine the amount of benefit to recognize in thefinancial statements.  The tax position is measured at the largest amountof benefit that is greater than 50 percent likely of being realized uponultimate settlement.

 

*Assumptions/Approach Used:*Numerous judgments and assumptions areinherent in the determination of future taxable income and tax return filingpositions that we take, including factors such as future operating conditions(particularly as related to prevailing oil and natural gas prices). We are notcurrently required to pay any federal income taxes because of an anticipatedloss generated during the current year.

 

*Effect ifDifferent Assumptions Used:* Our in-house tax department, along with consultation from anindependent public accounting firm used in tax consultation, continuallyevaluate complicated tax law requirements and their effect on our current andfuture tax liability and our tax filing positions.  Despite our attempt to make an accurate estimate,the ultimate utilization of our NOL carryforwards is highly dependent upon ouractual production, the realization of taxable income in future periods,Internal Revenue Code Section 382 limitations and potential taxelections.  If we estimate that some orall of our NOL carryforwards are more likely than not going to expire orotherwise not be utilized to reduce future tax, we would record a valuationallowance to remove the benefit of those NOL carryforwards from our financialstatements. Our liability for uncertain tax positions is dependent upon ourjudgment on the amount of financial statement benefit that an uncertain taxposition will realize upon ultimate settlement and on the probabilities of theoutcomes that could be realized upon ultimate settlement of an uncertain taxposition using the facts, circumstances and information available at thereporting date to establish the appropriate amount of financial statementbenefit. To the extent that a valuation allowance or uncertain tax position isestablished or increased or decreased during a period, we may be required toinclude an expense or benefit within tax expense in the statement ofoperations.

 

*Nature of Critical Estimate Item:*Derivative and Hedging Activities**-**Due to the instability of oil and natural gasprices, we may enter into, from time to time, price-risk managementtransactions (e.g. swaps, collars and floors) related to our expected oil andnatural gas production to seek to achieve a more predictable cash flow, as wellas to reduce exposure from commodity price fluctuations. While thesetransactions are 

 

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intendedto be economic hedges of price risk, different accounting treatment may applydepending on if they qualify for cash flow hedge accounting. In accordance withSFAS No. 133, *Accounting for DerivativeInstruments and Hedging Activities (as amended),*all derivatives,other than those that meet the normal purchases and sales exception, arerecorded on the balance sheet at fair value.

 

Cash Flow Hedge Accounting - For transactions accounted for under cash flow hedge accountingtreatment, the effective portion of the change in fair value of outstandingderivative contracts is deferred through other comprehensive income (“OCI”) onthe balance sheet, rather than recorded immediately in total revenue on thestatement of operations. Ineffective portions of the changes in the fair valueof the derivative contracts are recognized in revenue as they occur. While thehedge contract is outstanding, the fair value may increase or decrease untilsettlement of the contract. The cash flows resulting from settlement ofderivative transactions which relate to economically hedging our physical productionvolumes are classified in operating activities on the statement of cash flows,and the cash flows resulting from settlement of derivative transactionsconsidered “overhedged” positions are classified in investing activities on thestatement of cash flows.

 

Mark-to-Market Accounting - For transactions accounted for using mark-to-market accountingtreatment, until the contract settles, the entire change in the fair value ofthe outstanding derivative contract is recorded in total revenue immediately,and not deferred through OCI, and there is no measurement of effectiveness.Since January 1, 2006, we have applied mark-to-market accounting treatmentto all outstanding derivative contracts.

 

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

 

*Effect if Different AssumptionsUsed:* At June 30,2008, a 10% change in the commodity price per unit would cause the fair valuetotal of our derivative financial instruments to increase or decrease byapproximately $7.6 million. Had we applied cash flow hedge accounting treatmentto all of our derivative contracts outstanding at June 30, 2008, our netloss to common stockholders for the six months would have been approximately$5.1 million, or $0.18 per basic and diluted loss per share, assuming that allhedges were fully effective.

 

# **Results of Operations**

#  

Thissection includes discussion of our results of operations for the three and sixmonths ended June 30, 2008 as compared to the same period of the prioryear.  We are an independent oil andnatural gas company engaged in the exploration, development, acquisition andproduction of crude oil and natural gas properties in the United States.  Our resources and assets are managed and ourresults reported as one operating segment. We conduct our operations primarilyalong the onshore United States Gulf Coast, with our primary emphasis in Texas,Mississippi, New Mexico and Louisiana.

 

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**Second Quarter 2008 Compared to the Second Quarter2007**

 

**Revenue and Production**

 

Total revenue decreased 114% from the second quarter of 2007 to thecomparable 2008 period, primarily as a result of our derivative losses.Excluding the effects of derivative activity, revenues increased 4% from thesecond quarter of 2007 to the comparable 2008 period.  For the three months ended June 30, 2008and 2007, our product mix contributed the following percentages of revenues andproduction volumes:

 
| ** **               | ** ** | **REVENUES (1)**                               | ** ** | **REVENUES (2)** | ** ** | **PRODUCTION  VOLUMES (MCFE)** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **Three months ended June 30,** | ** ** |
| ** **               | ** ** | **2008**                                            | ** ** | **2007**              | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Natural gas              |       | *                                                   |       | 80                    | %          | 67                                  | %          | 73 | % | 71 | % | 75 | % |
| Natural gas liquids      |       | *                                                   |       | 10                    | %          | 14                                  | %          | 12 | % | 18 | % | 14 | % |
| Crude oil and condensate |       | *                                                   |       | 10                    | %          | 19                                  | %          | 15 | % | 11 | % | 11 | % |
|                     |       |                                                |       |                  |       |                                |       |   |   |   |   |   |   |
| Total                    |       | *                                                   |       | 100                   | %          | 100                                 | %          | 100 | % | 100 | % | 100 | % |

 

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(1) Includes effect of derivative transactions

(2) Excludes effect of derivative transactions

* Not meaningful due to derivative losses

 

The following table summarizes volume and price information withrespect to our oil and natural gas production:

 
| ** **                             | ** ** | ** **                                                                 | ** ** | **2008 Period Compared  to 2007 Period** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                             | ** ** | **Three Months Ended  June 30,**                            | ** ** | **$  Increase**                                              | ** ** | **% Increase** | ** ** |
| ** **                             | ** ** | **2008**                                                                   | ** ** | **2007**                                                     | ** ** | **(Decrease)** | ** ** | **(Decrease)** | ** ** |
| ** **                             | ** ** | **(in thousands, except prices and percentages)** | ** ** |
| **Production Volumes:**                | * *   | * *                                                                   | * *   | * *                                                     | * *   | * * | * * | * * | * * |
| Natural gas (MMcf)                     |       | 3,042                                                                      |       | 4,793                                                        |       | (1,751 | ) | (37 | )% |
| Natural gas liquids (MBbls)            |       | 126                                                                        |       | 147                                                          |       | (21 | ) | (14 | )% |
| Crude oil and condensate (MBbls)       |       | 77                                                                         |       | 115                                                          |       | (38 | ) | (33 | )% |
| Natural gas equivalent (MMcfe)         |       | 4,260                                                                      |       | 6,370                                                        |       | (2,110 | ) | (33 | )% |
| **Average Sales Price(1):**            |       |                                                                       |       |                                                         |       |   |   |   |   |
| Natural gas ($per Mcf)(2)              |       | $                                                                          | 10.84      |                                                         | $          | 7.26 |   | $ | 3.58 |   | 49 | % |
| Natural gas liquids ($per Bbl)         |       | 53.08                                                                      |       | 37.07                                                        |       | 16.01 |   | 43 | % |
| Crude oil and condensate ($per Bbl)(2) |       | 122.57                                                                     |       | 61.54                                                        |       | 61.03 |   | 99 | % |
| Natural gas equivalent ($per Mcfe)(2)  |       | 11.52                                                                      |       | 7.44                                                         |       | 4.08 |   | 55 | % |
| Natural gas equivalent ($per Mcfe)(3)  |       | (1.77                                                                      | )          | 8.46                                                         |       | (10.23 | ) |   | * |
| **Operating Revenue:**                 |       |                                                                       |       |                                                         |       |   |   |   |   |
| Natural gas (2)                        |       | $                                                                          | 32,950     |                                                         | $          | 34,811 |   | $ | (1,861 | ) | (5 | )% |
| Natural gas liquids                    |       | 6,718                                                                      |       | 5,467                                                        |       | 1,251 |   | 23 | % |
| Crude oil and condensate (2)           |       | 9,392                                                                      |       | 7,108                                                        |       | 2,284 |   | 32 | % |
| Gain (loss) on derivatives             |       | (56,598                                                                    | )          | 6,516                                                        |       | (63,114 | ) |   | * |
| Total revenue                          |       | $                                                                          | (7,538     | )                                                            | $          | 53,902 |   | $ | (61,440 | ) |   | * |

 

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

(2) Excludes the effect of derivativetransactions. 

(3) Includes the effect of derivativetransactions. 

* Not meaningful

 

**Average sales price****–** Our sales revenue is sensitive to thechanges in prices received for our products. A substantial portion of our production is sold at prevailing marketprices, which fluctuate in response to many factors that are outside of ourcontrol. Imbalances in the supply and demand for oil and natural gas can have adramatic effect on the prices we receive for our production. Politicalinstability and availability of alternative fuels could impact worldwidesupply, while the economy, weather and other factors outside of our controlcould impact demand.

 

**Natural gas revenue** - For the three months ended June 30,2008, natural gas revenue, excluding derivative activity, decreased 5% over thesame period in 2007 due primarily to 37% lower production volumes. The overalldecrease in production compared to the prior year period resulted in a decreasein revenue of approximately $12.7 

 

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million (based on 2007 comparable period pre-derivative prices). Thedecrease in production was primarily the result of normal production declines,asset sales completed during the first half of 2008 and decreased re-investmentin replacing production as compared to historical levels. The increase in theaverage pre-derivative price received resulted in increased revenue ofapproximately $10.8 million (based on current period production).  See below for a discussion of the impact ofnatural gas derivatives on prices and revenue.

 

**Natural gas liquids (“NGL”) revenue**- For the three months ended June 30,2008, NGL revenue increased 23% over the same period in 2007 due to increasesin prices realized, partially offset by lower production volumes. The priceincrease resulted in an increase in revenue of approximately $2.0 million(based on current period production). We do not hedge our NGL production.  The decrease in NGL production decreasedrevenue by approximately $0.7 million (based on 2007 comparable period averageprices). The decrease in production was primarily the result of normalproduction declines, asset sales completed during the first half of 2008 anddecreased re-investment in replacing production as compared to historicallevels.

 

**Crude oil and condensate revenue**- For the three months ended June 30,2008, oil and condensate sales revenue, excluding derivative activity,increased 32% from the comparable period in 2007, due to the 99% increase inprices realized as a result of increasing crude oil prices in the market. Theincreased average realized price for oil and condensate for the three monthsended June 30, 2008 resulted in an increase in revenue of approximately$4.7 million (based on current period production). Partially offsetting theincrease in revenue due to increased prices was a decrease in oil andcondensate production resulting in a decrease in revenue of approximately $2.4million (based on 2007 comparable period pre-derivative prices). The decreasein production was primarily the result of normal production declines, assetsales completed during the first half of 2008 and decreased re-investment inreplacing production as compared to historical levels. See below for adiscussion of the impact of crude oil derivatives on prices and revenue.

 

**Derivatives****–**The volume and price contract terms of ourderivative contracts vary from period to period and therefore interact differentlywith the changing pricing environment, which makes the comparability of theresults for each period difficult. In both periods, we applied mark-to-marketaccounting treatment to our derivative contracts; therefore the full volatilityof the non-cash change in fair value of our outstanding contracts is reflectedin revenue and will continue to affect revenue until the contracts expire.Since these gains/losses are not a function of the operating performance of ouroil and natural gas assets, excluding their impact from the above discussionshelps isolate the operating performance of those assets. The following tablesummarizes the various components of the total gain or loss on derivatives andthe impact each component had on our realized prices:

 
| ** **                                                                        | ** ** | **Three Months Ended June 30,**                 | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                        | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                                                        | ** ** | **$**                                                               | ** ** | **$  per unit (1)** | ** ** | **$** | ** ** | **$  per unit(1)** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per unit prices)** | ** ** |
| Natural gas derivative contract settlements  (Mcf)                                |       | $                                                                   | (6,733     | ) | $ | (2.21 | ) | $ | — |   | $ | — |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Crude oil derivative contract settlements  (Bbl)                                  |       | (7,916                                                              | )          | (103.31 | ) | 235 |   | 2.04 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair  value of gas derivative contracts (Mcf) |       | (30,914                                                             | )          | (10.17 | ) | 8,200 |   | 1.71 |   |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair  value of oil derivative contracts (Bbl) |       | (11,035                                                             | )          | (144.01 | ) | (1,919 | ) | (16.62 | ) |
|                                                                              |       |                                                                |       |   |   |   |   |   |   |
| Gain (loss) on derivatives (Mcfe)                                                 |       | $                                                                   | (56,598    | ) | $ | (13.29 | ) | $ | 6,516 |   | $ | 1.02 |   |

 

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

 

Should crude oil or natural gas prices increase or decrease from thecurrent levels, it could materially impact our revenues. Our physical sales ofthese commodities are vulnerable to the volatility of market pricemovements.  Therefore, we enter intocontracts covering our anticipated production to ensure certain cash flows thatwe expect will allow us to plan our business activities. In a high priceenvironment, hedged positions could result in lost 

 

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opportunitiesif there is a cap in place, thus lowering our effective realized prices onhedged production, but in an environment of falling prices, these transactionsoffer some pricing protection for hedged production. Our current derivativeposition exceeds our 2008 expected production, therefore our cash losses exceedthe offsetting cash inflows from production revenue and we expect this maycontinue for the remaining months of 2008 if oil and natural gas commodityprices remain high or continue to increase, see “Approach to the Business”above.

 

**Costs and Operating Expenses**

 

Thetable below details our expenses:

 
| ** **                                            | ** ** | ** **                                            | ** ** | ** ** | ** **           | **2008 Period Compared  to 2007 Period** | ** **            |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|------------|----------------------|--------------------------------------------------------------|-----------------------|
| ** **                                            | ** ** | **Three Months Ended  June 30,**       | ** ** | **$**      | **   Increase** | ** **                                                   | **%   Increase** | ** ** |
| ** **                                            | ** ** | **2008**                                              | ** ** | **2007**   | ** **           | **(Decrease)**                                               | ** **            | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)** |
| Oil and natural gas operating expenses                |       | $                                                     | 3,941      |       | $                    | 4,048                                                        |                  | $ | (107 | ) | (3 | )% |
| Severance and ad valorem taxes                        |       | 3,297                                                 |       | 3,885      |                 | (588                                                         | )                     | (15 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                                  |       |       |                 |                                                         |                  |   |   |
| Oil and gas property and equipment                    |       | 21,237                                                |       | 20,854     |                 | 383                                                          |                  | 2 | % |
| Other assets                                          |       | 184                                                   |       | 140        |                 | 44                                                           |                  | 31 | % |
| ARO accretion                                         |       | 101                                                   |       | 70         |                 | 31                                                           |                  | 44 | % |
| General and administrative expenses                   |       | 5,152                                                 |       | 5,535      |                 | (383                                                         | )                     | (7 | )% |
| Total operating expenses                              |       | $                                                     | 33,912     |       | $                    | 34,532                                                       |                  | $ | (620 | ) | (2 | )% |
|                                                  |       |                                                  |       |       |                 |                                                         |                  |   |   |
| Other expense, net                                    |       | $                                                     | 2,491      |       | $                    | 3,049                                                        |                  | $ | (558 | ) | (18 | )% |
| Income tax expense (benefit)                          |       | (16,118                                               | )          | 5,704      |                 | (21,822                                                      | )                     | * |   |
| Preferred stock dividends                             |       | 2,067                                                 |       | 2,063      |                 | 4                                                            |                  | * |   |
|                                                       |            |                                                       |            |            |                      |                                                              |                       |  |  |  |  |  |  |  |  |

 

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* Not meaningful

 

**Oil and natural gas operating expenses** - For the three months ended June 30,2008, operating expenses decreased as compared to 2007 due to higher costproperties being divested in the first quarter of 2008. Average oil and naturalgas operating expenses were $0.93 per Mcfe and $0.64 per Mcfe for the threemonths ended June 30, 2008 and 2007, respectively. This increase in costper Mcfe resulted from the decrease in production volumes discussed previously.

 

**Severance and ad valorem taxes** – In total, severance and ad valorem taxesdecreased from the second quarter of 2007 to 2008. Severance tax expense forthe three months ended June 30, 2008 was 12% higher than the prior yearperiod primarily as a result of higher realized tax rates. Our severance taxexpense is levied on our revenue excluding derivative activity. The higher ratein 2008 is primarily due to our new production in New Mexico, including thePrairie Fire #1 well, which carries a higher rate than our Texas production.For the three months ended June 30, 2008, severance tax expense wasapproximately 6.1% of revenue subject to severance taxes compared to 5.6% ofrevenue subject to severance taxes for the second quarter of 2007. Offsettingthe higher severance tax was lower ad valorem tax expense. For the secondquarter of 2008, ad valorem tax expense was significantly lower than the prioryear period due to lower realized ad valorem taxes on properties acquired in January 2007.On an equivalent basis, severance and ad valorem taxes averaged $0.77 per Mcfeand $0.61 per Mcfe for the three months ended June 30, 2008 and 2007,respectively.

 

**Depletion, depreciation, and amortization (“DD&A”)and accretion**-Full-cost depletion on our oil and natural gas properties has increased as aresult of an increase in our depletion rate, partially offset by 33% lowerproduction volumes. Our depletion rate for the three months ended June 30,2008 remained flat from the first quarter of 2008 at $4.99 per Mcfe, a 3%increase since year-end 2007 and a 53% increase as compared to $3.27 per Mcfein the second quarter of 2007. The depletion rate has increased over the pastsix months due to negative revisions to our proved reserves at year-end 2007.Depreciation of other assets for the second quarter of 2008 increased as aresult of our office expansion that occurred during 2007. Accretion expenseassociated with our ARO for the three months ended June 30, 2008 increaseddue to revisions made in the ARO balances during the fourth quarter of 2007 andadditions of properties throughout 2007, partially offset by over 100properties retired from our ARO as a result of the sales completed during thefirst half of 2008.

 

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**General and administrative (“G&A”) expenses** – G&A expense in total remainedcomparable between the three months ended June 30 2008 and 2007.  Costs related to our staffing compriseapproximately 70% of our G&A expense. In connection with the strategicalternatives process we spent $0.8 million during the second quarter of 2008.These costs include data room expenses, legal expenses, auditor costs, traveland meals costs, and costs of outside consultants. We expect these types ofcosts to increase as we move through the next several months. On May 21,2008, our Board of Directors adopted a Retention Bonus Plan to retain employeesthrough the strategic alternatives process, including the completion of theproposed merger with Chaparral (see Note 12 to our consolidated financialstatements). The Retention Bonus Plan added approximately $0.7 million of costto second quarter 2008 G&A expense that was not included in 2007.Offsetting these increases in 2008 costs were decreases in audit fees, reservereport fees, compensation for our Board of Directors, and franchise taxexpense. Additionally, we recorded bad debt expense of $0.5 million during thesecond quarter of 2007, as compared to approximately $90,300 in the secondquarter of 2008, that led to overall 2007 costs being higher than 2008.Capitalized G&A costs for second quarter 2008 were 10% lower than thesecond quarter of 2007. G&A expense on a unit-of-production basis increasedfor the three months ended June 30, 2008, due to the decline in productionvolumes, to $1.21 per Mcfe from $0.87 per Mcfe for the comparable 2007 period.G&A expense, excluding non-cash share-based compensation costs and bad debtexpense, for the three months ended June 30, 2008 also increased as aresult of lower production volumes, averaging $1.06 per Mcfe as compared to$0.67 per Mcfe in the same period in 2007.

 

**Other expense, net** - During the three months ended June 30,2008, our other income and expense decreased primarily due to a decrease ingross interest expense resulting from lower interest rates. For the secondquarter of 2008, we capitalized much less interest due to a 72% lower unprovedproperty base (as compared to the second quarter of 2007) on which we calculateinterest expense subject to capitalization.

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(in thousands)**                             | ** ** |
| Gross interest expense     |       | $                                                   | 2,883      |   | $ | 4,398 |   |
| Less: capitalized interest |       | (599                                                | )          | (1,470 | ) |
| Interest expense, net      |       | $                                                   | 2,284      |   | $ | 2,928 |   |
|                       |       |                                                |       |   |   |
| Weighted average debt      |       | $                                                   | 243,385    |   | $ | 232,055 |   |

 

We also recorded less interest income in 2008 as compared to 2007 dueto lower interest rates. We recorded amortization of deferred loan costsrelated to our Revolving Facility during the three months ended June 30,2008 and 2007. These costs were comparable in both periods.

 

**Income tax expense (benefit)** - An income tax benefit was recorded duringthe three months ended June 30, 2008 because we generated a pre-tax netloss primarily as a result of unrealized losses on derivatives. This comparesto income tax expense that was recorded on pre-tax net income in the secondquarter of 2007. There has not been a substantial change to our effectiveincome tax rate since the second quarter of 2007. We are subject to state andfederal income taxes and we expect, as a result of taxable gains on propertydivestitures, to pay alternative minimum tax in 2008.

 

**Preferred stock dividends** – Our Board of Directors declared quarterlydividends on our 5.75% Series A cumulative convertible perpetual preferredstock in December 2007, and March and June 2008. Dividendexpense for the three months ended June 30, 2008 and 2007 wasapproximately the same.

 

**Earnings (loss) per share** – We reported a net loss for the quarterended June 30, 2008 primarily as a result of unrealized derivativeslosses. This compares to net income in the same quarter of 2007. Basic weightedaverage shares outstanding for the three months ended June 30, 2008increased 1% as compared to the same period in 2007 as a result of optionsexercised and vesting of restricted stock since June 30, 2007. At June 30,2008, we excluded the effect of restricted stock units and common stock optionsin the calculation of diluted earnings per share. Additionally, we excludedapproximately 8.7 million shares of if-converted common stock attributable toour 5.75% Series A cumulative convertible perpetual preferred stock which,when converted, have an anti-dilutive effect and, therefore, are not includedin the calculation of diluted earnings per share for the three months ended June 30,2008.

 

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** **

**Six Months Ended June 30, 2008 Compared to theSix Months Ended June 30, 2007**

 

**Revenue and Production**

 

Total revenue decreased 87% from the first six months of 2007 to thecomparable 2008 period primarily as a result of our derivative losses.  Excluding the effects of derivative activity,revenues increased 11% from the first six months of 2007 to the comparable 2008period.  Our product mix contributed thefollowing percentages of revenues and production volumes:

 
| ** **               | ** ** | **REVENUES (1)**                             | ** ** | **REVENUES (2)** | ** ** | **PRODUCTION  VOLUMES (MCFE)** | ** ** |
|--------------------------|------------|---------------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|
| ** **               | ** ** | **Six months ended June 30,** | ** ** |
| ** **               | ** ** | **2008**                                          | ** ** | **2007**              | ** ** | **2008**                            | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Natural gas              |       | *                                                 |       | 76                    | %          | 64                                  | %          | 75 | % | 70 | % | 77 | % |
| Natural gas liquids      |       | *                                                 |       | 10                    | %          | 17                                  | %          | 9 | % | 20 | % | 12 | % |
| Crude oil and condensate |       | *                                                 |       | 14                    | %          | 19                                  | %          | 16 | % | 10 | % | 11 | % |
|                     |       |                                              |       |                  |       |                                |       |   |   |   |   |   |   |
| Total                    |       | *                                                 |       | 100                   | %          | 100                                 | %          | 100 | % | 100 | % | 100 | % |

 

----

(1) Includes effect of derivativetransactions

(2) Excludes effect of derivativetransactions

* Not meaningful due to derivative losses

 

The following table summarizes volume and price information withrespect to our oil and natural gas production for the six months ended June 30,2008 and 2007:

 
| ** **                             | ** ** | ** **                                                                 | ** ** | ** **            | ** ** | **2008 Period Compared  to 2007 Period** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------------------------------------------|------------|
| ** **                             | ** ** | **Six Months Ended  June 30,**                              | ** ** | **$   Increase** | ** ** | **% Increase**                                          | ** ** |
| ** **                             | ** ** | **2008**                                                                   | ** ** | **2007**              | ** ** | **(Decrease)**                                               | ** ** | ** (Decrease)** | ** ** |
| ** **                             | ** ** | **(in thousands, except prices and percentages)** | ** ** |
| **Production Volumes:**                | * *   | * *                                                                   | * *   | * *              | * *   | * *                                                     | * *   | * * | * * |
| Natural gas (MMcf)                     |       | 6,815                                                                      |       | 9,258                 |       | (2,443                                                       | )          | (26 | )% |
| Natural gas liquids (MBbls)            |       | 317                                                                        |       | 246                   |       | 71                                                           |       | 29 | % |
| Crude oil and condensate (MBbls)       |       | 162                                                                        |       | 226                   |       | (64                                                          | )          | (28 | )% |
| Natural gas equivalent (MMcfe)         |       | 9,689                                                                      |       | 12,091                |       | (2,402                                                       | )          | (20 | )% |
| **Average Sales Price(1):**            |       |                                                                       |       |                  |       |                                                         |       |   |   |
| Natural gas ($per Mcf)(2)              |       | $                                                                          | 9.05       |                  | $          | 7.03                                                         |       | $ | 2.02 |   | 29 | % |
| Natural gas liquids ($per Bbl)         |       | 51.54                                                                      |       | 32.69                 |       | 18.85                                                        |       | 58 | % |
| Crude oil and condensate ($per Bbl)(2) |       | 111.23                                                                     |       | 59.56                 |       | 51.67                                                        |       | 87 | % |
| Natural gas equivalent ($per Mcfe)(2)  |       | 9.91                                                                       |       | 7.16                  |       | 2.75                                                         |       | 38 | % |
| Natural gas equivalent ($per Mcfe)(3)  |       | 1.04                                                                       |       | 6.35                  |       | (5.31                                                        | )          | (84 | )% |
| **Operating Revenue:**                 |       |                                                                       |       |                  |       |                                                         |       |   |   |
| Natural gas (2)                        |       | $                                                                          | 61,694     |                  | $          | 65,079                                                       |       | $ | (3,385 | ) | (5 | )% |
| Natural gas liquids                    |       | 16,345                                                                     |       | 8,041                 |       | 8,304                                                        |       | 103 | % |
| Crude oil and condensate (2)           |       | 18,037                                                                     |       | 13,480                |       | 4,557                                                        |       | 34 | % |
| Loss on derivatives                    |       | (85,957                                                                    | )          | (9,815                | )          | (76,142                                                      | )          | * |   |
| Total revenue                          |       | $                                                                          | 10,119     |                  | $          | 76,785                                                       |       | $ | (66,666 | ) | (87 | )% |

 

----

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

(2) Excludes the effect of derivativetransactions.

(3) Includes the effect of derivativetransactions.

*  Notmeaningful

 

**Average Sales Price –** Our sales revenue is sensitive to thevolatility 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.

 

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**Natural gas revenue** - For the first half of 2008, natural gasrevenue, excluding derivative activity, decreased due to lower productionvolumes partially offset by higher realized prices. The decrease in productionvolumes compared to the prior year period resulted in decreased revenue ofapproximately $17.2 million (based on 2007 comparable period pre-derivativeprices). The decrease in production was primarily the result of normalproduction declines, asset sales completed during the first half of 2008 anddecreased re-investment in replacing production as compared to historicallevels. The increase in average price received resulted in increased revenue ofapproximately $13.8 million (based on current period production). See below fora discussion of the impact of natural gas derivatives on prices and revenue.

 

**NGL revenue**- For the six months ended June 30,2008, NGL sales revenue increased 103% over the same period in 2007 as a resultof both higher production volumes and average realized prices. We do not hedgeour NGL production. Increased NGL production volumes led to increased revenueof approximately $2.3 million (based on 2007 comparable period prices). Higheraverage realized NGL prices for the six months ended June 30, 2008resulted in increased revenue of approximately $6.0 million (based on currentperiod production). Production volumes for NGLs increased for the six monthsended June 30, 2008 compared to the same prior year period due toincreases in processing at our Flores/Bloomberg field and other propertiesacquired in early 2007 as well as a new processing agreement on certainnon-operated production in Jim Hogg county, Texas, which began in June 2007.

 

**Crude oil and condensate revenue**- For the six months ended June 30,2008, oil and condensate sales revenue, excluding derivative activity,increased as compared to the same period in 2007, due to higher averagerealized prices partially offset by lower production. Higher average realizedprices resulted in increased revenue of approximately $8.4 million (based oncurrent period production).  The decreasein oil and condensate production resulted in a decrease in revenue ofapproximately $3.8 million (based on 2007 comparable period pre-derivativeprices).  The decrease in production wasprimarily the result of normal production declines, asset sales completedduring the first half of 2008 and decreased re-investment in replacingproduction as compared to historical levels. See below for a discussion of theimpact of crude oil derivatives on prices and revenue.

 

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

 

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| ** **                                                                                                 | ** ** | **Six Months Ended June 30,**                   | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                                                                                 | ** ** | **$**                                                               | ** ** | **$  per unit (1)** | ** ** | **$** | ** ** | **$  per unit(1)** | ** ** |
| ** **                                                                                                 | ** ** | **(in thousands, except per unit prices)** | ** ** |
| ** **                                                                                                 | ** ** | ** **                                                          | ** ** |
| Natural gas contract settlements (Mcf)                                                                     |       | $                                                                   | (6,370     | ) | $ | (0.93 | ) | $ | 569 |   | $ | 0.06 |   |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Crude oil contract settlements (Bbl)                                                                       |       | (12,278                                                             | )          | (75.72 | ) | 1,078 |   | 4.77 |   |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market reversal of prior period  unrealized change in fair value of gas derivative contracts (Mcf) |       | (2,626                                                              | )          | (0.39 | ) | (4,686 | ) | (0.51 | ) |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair  value of gas derivative contracts (Mcf)                          |       | (53,852                                                             | )          | (7.90 | ) | (2,586 | ) | (0.28 | ) |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market reversal of prior period  unrealized change in fair value of oil derivative contracts (Bbl) |       | 14,954                                                              |       | 92.23 |   | (501 | ) | (2.21 | ) |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair  value of oil derivative contracts (Bbl)                          |       | (25,785                                                             | )          | (159.02 | ) | (3,689 | ) | (16.30 | ) |
|                                                                                                       |       |                                                                |       |   |   |   |   |   |   |
| Loss on derivatives (Mcfe)                                                                                 |       | $                                                                   | (85,957    | ) | $ | (8.87 | ) | $ | (9,815 | ) | $ | (0.81 | ) |

 

----

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

 

Should crude oil or natural gas prices increase or decrease from thecurrent levels, it could materially impact our revenues. Our physical sales ofthese commodities are vulnerable to the volatility of market pricemovements.  Therefore, we enter intocontracts covering our anticipated production to ensure certain cash flows thatwe expect will allow us to plan our business activities. In a high price environment,hedged positions could result in lost opportunities if there is a cap in place,thus lowering our effective realized prices on hedged production, but in anenvironment of falling prices, these transactions offer some pricing protectionfor hedged production. Our current derivative position exceeds our 2008expected production, therefore our cash losses exceed the offsetting cashinflows from production revenue and we expect this may continue for theremaining months of 2008 if oil and natural gas commodity prices remain high orcontinue to increase, see “Approach to the Business” above.

 

**Costs and Operating Expenses**

 

Thetable below details our expenses:

 
| ** **                                            | ** ** | ** **                                            | ** ** | ** **      | ** ** | **2008 Period Compared  to 2007 Period** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------|------------|--------------------------------------------------------------|------------|
| ** **                                            | ** ** | **Six Months Ended  June 30,**         | ** ** | **$  Increase** | ** ** | **% Increase**                                          | ** ** |
| ** **                                            | ** ** | **2008**                                              | ** ** | **2007**        | ** ** | **(Decrease)**                                               | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in thousands, except percentages)** | ** ** |
| ** **                                            | ** ** | ** **                                            | ** ** |
| Oil and natural gas operating expenses                |       | $                                                     | 8,413      |            | $          | 7,428                                                        |       | $ | 985 |   | 13 | % |
| Severance and ad valorem taxes                        |       | 5,482                                                 |       | 6,196           |       | (714                                                         | )          | (12 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                                  |       |            |       |                                                         |       |   |   |
| Oil and gas property and equipment                    |       | 48,325                                                |       | 39,224          |       | 9,101                                                        |       | 23 | % |
| Other assets                                          |       | 377                                                   |       | 248             |       | 129                                                          |       | 52 | % |
| ARO accretion                                         |       | 191                                                   |       | 134             |       | 57                                                           |       | 43 | % |
| General and administrative expenses                   |       | 9,212                                                 |       | 9,930           |       | (718                                                         | )          | (7 | )% |
| Total operating expenses                              |       | $                                                     | 72,000     |            | $          | 63,160                                                       |       | $ | 8,840 |   | 14 | % |
|                                                  |       |                                                  |       |            |       |                                                         |       |   |   |
| Other expense, net                                    |       | $                                                     | 6,885      |            | $          | 6,007                                                        |       | $ | 878 |   | 15 | % |
| Income tax expense (benefit)                          |       | (24,764                                               | )          | 2,769           |       | (27,533                                                      | )          | * |   |
| Preferred stock dividends                             |       | 4,133                                                 |       | 3,444           |       | 689                                                          |       | 20 | % |

 

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*Not meaningful.

 

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**Oil and natural gas operating expenses** - For the six months ended June 30,2008, operating expenses increased as compared to the same period of 2007 dueto increased expensed workovers and higher costs for compressor rent, gasprocessing, and salt-water disposal as well as overall cost inflation in ourindustry. This along with the decline in production lead to an increase in ouraverage oil and natural gas operating expenses, which were $0.87 per Mcfe forthe six months ended June 30, 2008 as compared to $0.61 per Mcfe in thesame period of 2007.

 

**Severance and ad valorem taxes** - For the six months ended June 30,2008, severance and ad valorem taxes decreased from the first half of2007.  Severance tax expense for the sixmonths ended June 30, 2008 was 40% higher than the prior year period dueprimarily to increased realized rates. Our severance tax expense is levied on our oil and natural gas revenuefrom physical production (i.e. excluding derivative activity). For the sixmonths ended June 30, 2008, severance tax expense was approximately 5.8%of revenue subject to severance taxes compared to 4.6% of revenue subject toseverance taxes for the first half of 2007. We recorded severance taxabatements related to prior year periods during early 2007, which effectivelylowered the 2007 expense. In addition, the higher rate in 2008 is primarily dueto our new production in New Mexico, including the Prairie Fire #1 well, whichcarries a higher rate than Texas production. Ad valorem tax expense for thefirst half of 2008 was 103% lower than the prior year because of lower thananticipated costs for newly acquired properties in 2007 being realized in early2008. We lowered those estimates in 2008 as a result of the actual costs paidin late 2007 and early 2008. On an equivalent basis, severance and ad valoremtaxes averaged $0.57 per Mcfe and $0.51 per Mcfe for the six months ended June 30,2008 and 2007, respectively.

 

**DD&A and accretion**- Depletion on our oil and natural gasproperties increased for the first half of 2008 compared to the same period of2007 due to an increase in our unit-of-production depletion rate partiallyoffset by declines in production, which are discussed under “Revenue andProduction” above. The depletion rate increased from $3.24 per Mcfe in thefirst half of 2007 to $4.99 per Mcfe in the first half of 2008, primarily as aresult of negative revisions to our proved reserves at year-end 2007.Depreciation of furniture and fixtures increased compared to the prior yearfirst half due to our office expansion that occurred in late 2007 andadditional computer equipment associated with an increased number of employees.Accretion expense associated with our asset retirement obligations for the sixmonths ended June 30, 2008 increased due to revisions made in the ARObalances during the fourth quarter of 2007 and additions of propertiesthroughout 2007 and 2008, partially offset by over 100 properties retired fromour ARO as a result of the sales completed during the first half of 2008.

 

**G&A expense** - G&A expense decreased slightly for thefirst six months of 2008 as compared to the same 2007 period. Within totalG&A expense, there were increases in salaries and health insurance, rentexpense, and legal costs related to pending litigation. We also incurred costsof $0.9 million related to the strategic alternatives process and $0.7 millionrelated to retention bonuses to retain employees, and we expect these types ofcosts to increase as we move through the next several months. These increaseswere offset by decreases in annual bonuses, contract labor, Board of Directorcompensation and travel expense, audit fees, and franchise taxes. During thefirst half of 2008, we recorded bad debt expense of approximately $0.1 millionto increase our reserve allowance on certain accounts receivable that webelieve to be potentially uncollectible. During the first half of 2007, werecorded approximately $0.5 million in bad debt expense related to a receivablerecorded for an outstanding litigation matter which was deemed to beuncollectible. G&A expense is typically reduced by overhead reimbursementsand capitalized G&A. Overhead reimbursements increased in 2008 whichlowered G&A expense more than in 2007. Capitalized G&A costs for thefirst half of 2008 were slightly lower at $2.1 million as compared to $2.2million for the comparable prior year period. G&A expense on a unit-of-productionbasis for the six months ended June 30, 2008 increased to $0.95 per Mcfeas compared to $0.82 per Mcfe for the comparable 2007 period, primarily as aresult of lower production volumes. G&A, excluding non-cash share-basedcompensation costs and bad debt expense, for the six months ended June 30,2008 also increased due to lower production volumes, averaging $0.81 per Mcfeas compared to $0.66 per Mcfe for the comparable 2007 period.

 

**Other expense, net** - During the six months ended June 30, 2008,other income and expense in total increased primarily due to a decrease in theamount of interest expense we capitalized. We also recorded lower interestincome in 2008 as compared to 2007. For the first half of 2008, 18% of ourgross interest expense was capitalized, as compared to 39% in the same 2007period. We calculate the amount of interest we can capitalize based on thecomparison of our unproved property costs and our weighted average debtbalance. Gross interest expense in 2007 was higher than 2008 due to commitmentfees of $1.3 million paid to our lender related to an 

 

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unused bridge loan facility. Although average debt balances outstandingin 2008 were higher, the interest rates were lower, thus resulting incomparable gross interest expense (excluding the commitment fee) betweenperiods.

 
| ** **                 | ** ** | **For the Six Months Ended June 30,** | ** ** |
|----------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                 | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                 | ** ** | **(in thousands)**                                             | ** ** |
| Gross interest expense     |       | $                                                                   | 7,898      |   | $ | 9,256 |   |
| Less: capitalized interest |       | (1,390                                                              | )          | (3,566 | ) |
| Interest expense, net      |       | $                                                                   | 6,508      |   | $ | 5,690 |   |
|                       |       |                                                                |       |   |   |
| Weighted average debt      |       | $                                                                   | 250,319    |   | $ | 215,376 |   |

 

We also recorded amortization of deferred loan costs related to ourRevolving Facility during the six months ended June 30, 2008 and 2007,which were comparable between periods. During the six months ended June 30,2008, we recorded a gain on ARO settlements of approximately $9,400, ascompared to none in the comparable 2007 period.

 

**Income tax expense** - An income tax benefit was recorded for thesix months ended June 30, 2008 as a result of the pre-tax net loss weincurred. This compares to an income tax expense provision for the first halfof 2007 recorded on pre-tax net income. There was not a substantial differencein our effective income tax rate for the two periods.

 

**Preferred stock dividends** - Our Board of Directors declared dividendson our 5.75% Series A cumulative convertible perpetual preferred stock in March andJune 2007 and 2008.  The preferredstock was issued in connection with a public offering in January 2007,therefore 2007 reflects a partial period as compared to a full period in 2008.

 

**Earnings (loss) per share** - For the first half of 2008, we reported aloss per share as compared to earnings per share in the same period in 2007mainly as a result of decreased net income due primarily to derivative lossesand an increased number of shares outstanding. Basic weighted average sharesoutstanding for the six months ended June 30, 2008 increased approximately7% as a result of normal stock activity, including stock option exercises andrestricted stock units vesting, and as a result of the common stock issued inthe January 2007 offering not being outstanding for the entire period in2007. We excluded approximately 8.7 million shares of if-converted common stockattributable to our 5.75% Series A cumulative convertible perpetualpreferred stock which, when converted, have an anti-dilutive effect and,therefore, are not included in the calculation of diluted earnings per sharefor the six months ended June 30, 2008 or 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 27% 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 mitigate the price risk with our hedging program.Reserves and production volumes are influenced, in part, by the amount offuture capital expenditures. In turn, capital expenditures are influenced bymany factors including drilling results, oil and natural gas prices, industryconditions, availability and cost of goods and services and the extent to whichoil and natural gas properties are acquired.

 

Ourprimary cash requirements are for exploration, development and acquisition ofoil and natural gas properties, payment of preferred stock dividends, paymentof derivative loss settlements and the repayment of principal and interest onoutstanding debt. We attempt to fund our exploration and development activitiesprimarily through internally generated cash flows and budget capitalexpenditures based largely on projected cash flows. We routinely adjust capitalexpenditures in response to changes in oil and natural gas prices, drilling andacquisition 

 

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costs,and cash flow. We typically have funded acquisitions from borrowings under ourcredit facility, cash flow from operations and sales of common stock andpreferred stock.

 

Significantchanges to working capital may affect our liquidity in the short term. Theincrease in our derivative instrument liability is indicative of potentialfuture cash settlement outflows on our outstanding oil and natural gasderivative positions, which are scheduled to settle in future months. The fairmarket value represents the potential settlement for those contracts if themarket prices remain unchanged. Should commodity prices increase or decrease,the fair value of those outstanding contracts would change, as evidenced in July 2008when we will be recording a  net non-cashunrealized derivative gain of approximately $52.1 million that will partiallyoffset the June 2008 year to date unrealized loss of $67.3 million. Thisgain resulted from declines in commodity prices at the end of July 2008(See “Outlook” section above). Subsequent increases or decreases in commodityprices will continue to result in additional changes to the fair market valueof these contracts. When our derivatives result in cash settlement outflows, wereceive higher cash inflows on the sale of our physical production at thosehigher market prices, thus providing us with funds to cover at least a portionof any derivative payments that may come due in the future. This will not betrue, however, for the portion of our 2008 production that is overhedged.Currently we expect to have approximately 120% of our anticipated natural gasproduction and approximately 170% of our anticipated crude oil productionhedged in 2008 as a result of a decrease in expected future production sincethe time we entered into our 2008 derivative positions. We have no derivativescovering our substantial production of NGLs, which have historically received aprice of approximately 40% to 60% of our realized crude oil price. As a result,even though we do not benefit from increases in oil prices and might sufferincreased losses as oil prices increase, those increased losses may bepartially offset by increased revenues from NGL production.  See “Approach to the Business” above.

 

Wehad $240 million of total borrowings outstanding under our Revolving Facilityat June 30, 2008. Our Revolving Facility matures on January 31, 2011.We have historically used our credit facility to supplement any deficienciesbetween operating cash flow and capital expenditures. Our outstanding debtbalance at August 11, 2008 has not changed since June 30, 2008. Wetypically do not rely on the sale of assets as a source of cash, but realizedapproximately $18.2 million related to the sale of a pipeline and approximately100 properties in Texas to various buyers during the first half of 2008, and weused the proceeds to reduce outstanding debt and fund ongoing capital spending.

 

Asa result of the strategic alternatives process we began in late 2007, wereduced our planned capital spending for 2008 as compared to recent years.During the first quarter of 2008, our Board of Directors approved an interimcapital budget. This interim program calls for the drilling of 27 to 29 wells(10.9 to 11.9, net) during 2008, primarily in south Texas and, to a lesserextent, in southeast New Mexico, complemented by selected expenditures for landand seismic. We currently expect that capital expenditures for the year will beapproximately $66 million. Under the terms of the Merger Agreement discussedabove, we agreed to limit, subject to certain exceptions, our capitalexpenditures beyond that previously budgeted to capital expenditures made withChaparral’s consent. Depending on the volatility of our derivative cashsettlements, we expect capital expenditures to be less than our cash flow fromoperating activities, thereby allowing us to either reduce outstanding debt orincrease capital spending, with Chaparral’s consent, as we move through theremainder of the year. By adjusting our operations and planned capitalspending, we believe we have sufficient capital resources to meet our projectedcash flow requirements for the next 12 months. We expect capital expendituresfor the remainder of the year to be somewhat dependent upon the timing of andsuccessful completion of the proposed merger with Chaparral.

 

If the proposed merger with Chaparral is not consummated, we may needto obtain additional financing if we choose to expand our operationalactivities beyond our current reduced level. Our present credit facility has$10 million in available borrowing capacity as of August 11, 2008.  If during the remainder of 2008 andthereafter, we are not successful in generating sufficient liquidity from operations(even though we currently expect cash flow from operating activities to exceedcapital expenditures, as discussed above) or raising sufficient alternativecapital resources on terms acceptable to us, our reduced level of liquiditycould have a material adverse effect on our business, results of operations andfinancial condition. If additional financing is not available or is notavailable on acceptable terms, we may sell assets or further curtail ouroperations.

 

AtJune 30, 2008, we had $12.5 million in cash and cash equivalents as comparedto $7.2 million at December 31, 2007. Our working capital deficit was $28.0 million at June 30, 2008, ascompared to a working capital surplus of $2.3 million at December 31,2007. Our sources and uses of cash were as follows:

** **
| ** **                                             | ** ** | **For the Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2008**                                                            | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                                             | ** ** |
| *Net Cash Provided By Operating Activities*            |       | $                                                                   | 53,440     |   | $ | 65,440 |   |
| * *                                               |       |                                                                |       |   |   |
| *Net Cash Used In Investing Activities*                |       | (24,015                                                             | )          | (431,032 | ) |
| * *                                               |       |                                                                |       |   |   |
| *Net Cash Provided by (Used In) Financing  Activities* |       | (24,133                                                             | )          | 372,185 |   |
|                                                        |            |                                                                     |            |  |  |  |  |

 

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**Net Cash Provided By Operating Activities***-*The decrease in cash flows provided byoperating activities for the first six months of 2008 as compared to the sameperiod in 2007 is primarily a result of cash settlement losses of approximately$12.4 million on our derivative contracts as compared to cash settlement gainsof $1.6 million in the first six months of 2007. In the first half of 2008,higher revenues on physical production resulting from increased averagerealized prices partially offset the derivative losses. Another contributor tothe decrease in cash flows in the first half of 2008 was an increase in cashcosts such as severance taxes and oil and natural gas operating expenses.Changes in working capital increased total cash flows by $4.1 million in thefirst half of 2008 as compared to $3.7 million in the same period of 2007.

 

**Net Cash Used In Investing Activities***-*We reinvest a substantial portion of our cashflows in our drilling, acquisition, land and geophysical activities.  During the first six months of 2008, we spent$33.9 million on our drilling and operating program. We drilled 14 wells in thefirst half of 2008, all of which were apparent successes.  Leasehold and geological and geophysicalactivities accounted for expenditures of $2.7 million through June 30,2008. There were also minimal capital expenditures associated with computer hardware,office equipment and other miscellaneous capital charges. This limited programcompares to the prior year in which our largest expenditure was the acquisitionthat occurred in January 2007. During the six months ended June 30,2007, we also spent $42.6 million on our drilling and operating program and$9.7 million on leasehold and geological and geophysical activities. Theremaining capital expenditures were associated with computer hardware, officeequipment and leasehold improvements related to our office expansion. Duringthe six months ended June 30, 2008, proceeds from the sale of certainnon-core properties in Texas and a pipeline to various buyers totaledapproximately $18.2 million. In the same period last year, proceeds from thesale of an interest in one of our Louisiana oil and gas properties totaled $1.1million.

 

Due to the overhedged position in 2008, the cash settlements related tooverhedged production are reflected in investing activities because they do notapply to operating revenues and are similar in nature to an investment.Approximately 42% of our oil settlements and 17% of our natural gas settlementsare represented by the $6.2 million of speculative settlements in this sectionof the statement of cash flows. The remainder of cash settlements is located innet cash provided by operating activities. For further discussion of ouroverhedged position, see “Approach to the Business” above.

 

**Net Cash Provided By (Used In) Financing Activities***-*During the six months ended June 30,2008, we repaid $20.0 million under our Revolving Facility (as defined below)using proceeds from our asset sales. We also paid quarterly dividends on ourpreferred stock in January and April 2008.

 

OurRevolving Facility had $10 million of availability at August 11, 2008 tosupplement timing differences in our projected cash inflows and outflows. Webelieve we will be able to generate capital resources and liquidity sufficientto meet our financial obligations as they come due, especially during the shortterm as we have reduced much of our spending in light of the strategicalternatives process and proposed merger with Chaparral.

 

*Revolving Facility*

 

OnJanuary 30, 2007, we 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 (together with UBOC, the “Lenders”).Pursuant to the Agreement, UBOC acts as the administrative agent for a senior,first lien secured borrowing base revolving credit facility (the “RevolvingFacility”) in favor of the Company and certain of its wholly-owned subsidiariesin an amount equal to $750 million, of which only $250 million and $225 millionare available under the borrowing base and conforming borrowing base,respectively, currently in effect. The Revolving Facility has a letter ofcredit sub-limit of $20 million.

 

TheRevolving Facility matures on January 31, 2011 and bears interest at LIBORplus an applicable margin ranging from 1.25% to 2.5% or Prime plus a margin ofup to 0.50%, with an unused commitment fee ranging from 0.50% to 0.25%, all ofwhich depend on the utilization percentage of the conforming borrowingbase.  At June 30, 2008, theinterest rates applied to our outstanding Prime and LIBOR borrowings were 5.50%and 4.95%, respectively and we had a rate of 0.25% applied to our unusedborrowing capacity.  As of June 30,2008, $240 million in total borrowings were outstanding under the Revolving Facility.Our available borrowing capacity under 

 

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theRevolving Facility was $10 million at June 30, 2008. The borrowing basewas reduced from $320 million to $300 million during the fourth quarter of 2007and the conforming borrowing base was reduced from $300 million to $250million. In early May 2008, our Revolving Facility’s borrowing base andconforming borrowing base were redetermined by our banks and set at $250million and $225 million, respectively. They were reduced primarily as a resultof the sale of certain non-core assets during the first quarter of 2008 and thereduction of total proved reserves as reported in the year-end reserve reportsof our independent reserve engineers.

 

OnJuly 11, 2008, in connection with the proposed merger with Chaparral, weentered into a Consent agreement (the “Consent”) under theAgreement. Pursuant to the Consent, the Lenders deferred their right toconduct a borrowing base redetermination on or before June 30, 2008 andwill instead conduct the redetermination on October 31, 2008, subject tothe following terms:

 

1.               if a redetermination occurs, only a borrowingbase shall be established and the borrowing base shall also be the conformingborrowing base,

 

2.               the redetermination is subject to theapproval of all the Lenders; and

 

3.               the deferral is contingent upon:

 

a.               in connection with the proposed merger, thefiling of the registration statement of Chaparral, which will include aprospectus of Chaparral and a proxy statement of ours, with the SEC and thefiling of all initial filings for any other required governmental approvals onor before August 15, 2008, and

 

b.              our common stockholders approving theproposed merger within 40 days following the mailing to our stockholders of theprospectus and proxy statement with respect to the proposed merger.

 

Ifthe above conditions are not satisfied or waived, the Consent Agreement providesthat the Lenders will promptly thereafter redetermine our borrowing base underthe Revolving Facility. We paid the Lenders a fee of approximately $0.4 millionin connection with the deferral of the redetermination. Our and Chaparral’sfailure to consummate the proposed merger prior to October 31, 2008 couldlead the Lenders to redetermine the borrowing base to a level that requires usto make additional payments under the Revolving Facility. Should such aredetermination actually result, we believe that we would be able to meet therequirements of our Lenders through a combination of cash on hand, adjustingour operations and planned capital spending, offering additional properties toserve as collateral and funds obtained through additional asset divestitures;however, there can be no assurance that this will prove to be correct.

 

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 common stock dividends and certain distributionsof cash or properties and certain liens and also contains financial covenantsincluding, without limitation, the following:

 

·                  AnEBITDAX to interest expense ratio requires that as of the last day of eachfiscal quarter the ratio of (a) our consolidated EBITDAX (defined asEBITDA plus similar non-cash items and exploration and abandonment expenses forsuch period) to (b) our consolidated interest expense, not be less than2.5 to 1.0, calculated on a rolling four quarter basis.

 

·                  Acurrent ratio requires that as of the last day of each fiscal quarter the ratioof our consolidated current assets to our consolidated current liabilities, asdefined in the Revolving Facility, be at least 1.0 to 1.0.

 

·                  Amaximum leverage ratio requires that as of the last day of each fiscal quarterthe ratio of (a) Total Indebtedness (as defined in the Agreement) to (b) anamount equal to consolidated EBITDAX be not greater than 3.0 to 1.0, calculatedon a rolling four quarter basis.

 

ConsolidatedEBITDAX is a component of negotiated covenants with our lender and is discussedhere as part of the disclosure of our covenant obligations. The Revolving Facilityincludes other covenants and events of default that are customary for similarfacilities. It is an event of default under the Revolving Facility if weundergo a change in control. “Change in control,” as defined in the RevolvingFacility, means any of the following events: (a) any 

 

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“person”or “group” (within the meaning of Section 13(d) or 14(d) of theExchange Act) has become, directly or indirectly, the “beneficial owner” (asdefined in Rules 13d-3 and 13d-5 under the Exchange Act, except that aperson shall be deemed to have “beneficial ownership” of all such shares thatany such person has the right to acquire, whether such right is exercisableimmediately or only after the passage of time, by way of merger, consolidationor otherwise), of a majority or more of our common stock on a fully-dilutedbasis, after giving effect to the conversion and exercise of all of ouroutstanding warrants, options and other securities (whether or not suchsecurities are then currently convertible or exercisable), (b) during anyperiod of two consecutive calendar quarters, individuals who at the beginningof such period were members of our Board of Directors cease for any reason toconstitute a majority of the directors then in office unless (i) such newdirectors were elected by a majority of our directors who constituted the Boardof Directors at the beginning of such period (or by directors so elected) or (ii) thereason for such directors failing to constitute a majority is a result ofretirement by directors due to age, death or disability, or (c) we ceaseto own directly or indirectly all of the equity interests of each of oursubsidiaries. The Revolving Facility is expected to be refinanced by Chaparralcontemporaneously with the closing of the proposed merger with Chaparral.

 

*Shelf Registration Statement & Offerings*

 

Inthe third quarter of 2007, the SEC declared effective our registrationstatement filed with the SEC that registered securities of up to $500 millionof any combination of debt securities, preferred stock, common stock, warrantsfor debt securities or equity securities of the Company and guarantees of debtsecurities by our subsidiaries. Net proceeds, terms and pricing of the offeringof securities issued under the shelf registration statement will be determinedat the time of the offerings. The shelf registration statement does not provideassurance that we will or could sell any such securities. Our ability toutilize our shelf registration statement for the purpose of issuing, from timeto time, any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities will depend upon, among otherthings, market conditions and the existence of investors who wish to purchaseour securities at prices acceptable to us.

 

*Convertible Preferred Stock*

 

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

 

*Dividends*.  The Convertible PreferredStock accumulates dividends at a rate of $2.875 for each share of ConvertiblePreferred Stock per year. Dividends are cumulative from the date of firstissuance and, to the extent payment of dividends is not prohibited by our debtagreements, assets are legally available to pay dividends and our Board ofDirectors or an authorized committee of our board declares a dividend payable,we will pay dividends in cash, every quarter. The first payment was made on April 15, 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 (“parity shares”)or shares ranking junior to the Convertible Preferred Stock (“junior shares”),nor may any parity shares or junior shares be redeemed or acquired for anyconsideration by us (except by conversion into or exchange for shares of a likeor junior ranking) unless all accumulated and unpaid dividends have been paidor funds therefor have been set apart on the Convertible Preferred Stock andany parity shares.

 

*Liquidation preference*.  Inthe event of our voluntary or involuntary liquidation, winding-up ordissolution, each holder of Convertible Preferred Stock will be entitled toreceive and to be paid out of our assets available for distribution to ourstockholders, before any payment or distribution is made to holders of juniorstock (including common stock), but after any distribution on any of ourindebtedness or senior stock, a liquidation preference in the amount of $50.00per share of the Convertible Preferred Stock, plus accumulated and unpaiddividends on the shares to the date fixed for liquidation, winding-up ordissolution.

 

*Ranking*.  Our Convertible PreferredStock ranks:

 

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

 

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

 

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

 

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

 

*Optional redemption*. If fewer than 15% of the shares ofConvertible Preferred Stock issued in the Convertible Preferred Stock offering(including any additional shares issued pursuant to the underwriters’over-allotment option) are outstanding, we may, at any time on or after January 20,2010, at our option, redeem for cash all such Convertible Preferred Stock at aredemption price equal to the liquidation preference of $50.00 plus any accruedand unpaid dividends, if any, on a share of Convertible Preferred Stock to, butexcluding, the redemption date, for each share of Convertible Preferred Stock.

 

*Conversion rights*. Each share of Convertible Preferred Stockmay be converted at any time, at the option of the holder, into approximately3.0193 shares of our common stock (which is based on an initial conversionprice of $16.56 per share of common stock, subject to adjustment) plus cash inlieu of fractional shares, subject to our right to settle all or a portion ofany such conversion in cash or shares of our common stock. If we elect tosettle all or any portion of our conversion obligation in cash, the conversionvalue and the number of shares of our common stock we will deliver uponconversion (if any) will be based upon a 20 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*. If we become subject to a fundamentalchange (as defined herein), each holder of shares of Convertible PreferredStock will have the right to require us to purchase any or all of its shares ata purchase price equal to 100% of the liquidation preference, plus accumulatedand unpaid dividends, to the date of the purchase. We will have the option topay the purchase price in cash, shares of common stock or a combination of cashand shares. Our ability to purchase all or a portion of the ConvertiblePreferred Stock for cash is subject to our obligation to repay or repurchaseany outstanding 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 a holder elects to convert itsshares of our Convertible Preferred Stock in connection with certainfundamental changes, we will in certain circumstances increase the conversionrate for such Convertible Preferred Stock. Upon a conversion in connection witha fundamental change, the holder will be entitled to receive a cash payment forall 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” subject to specified exceptions, discloses that theperson or group has become the direct or indirect ultimate “beneficial owner”of our common equity representing more than 50% of the voting power of ourcommon equity other than a filing with a disclosure relating to a transactionwhich complies with the proviso in subsection 2 below;

 

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

 

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

 

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

 

However,a fundamental change will not be 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) in the shareexchange, merger or consolidation or exchange offer consists of common stock ofa United States company traded on a national securities exchange (or which willbe so traded or quoted when issued or exchanged in connection with suchtransaction).

 

*Voting rights*. If we fail to pay dividends for sixquarterly dividend periods (whether or not consecutive) or if we fail to paythe purchase price on the purchase date for the Convertible Preferred Stockfollowing a fundamental change, holders of our Convertible Preferred Stock willhave voting rights to elect two directors to our 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:

 

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

 

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

 

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

 

* Off BalanceSheet Arrangements*

 

We currently do not have any off balance sheet arrangements.

 

**Fair Value Measurements**

 

EffectiveJanuary 1, 2008, we partially adopted SFAS No. 157, *Fair Value Measurements* which provides acommon definition of fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements, but does notrequire any new fair value measurements. The partial adoption of SFAS No. 157had no impact on our financial statements, but it did result in additionalrequired disclosures as set forth in Note 9 to our consolidated financialstatements. In February 2008, the FASB issued FSP 157-2, *Effective Date of FASB Statement No. 157*,which delays the effective date of SFAS No. 157 for all non-financialassets and non-financial liabilities, except those that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually). Accordingly, we have not yet applied the provisions of SFAS No. 157to our AROs.

 

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

 

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

 

·                  Level 1 – Inputs are unadjusted, quoted prices in activemarkets for identical assets or liabilities.

 

·                  Level 2 – Significant observable pricing inputs other thanquoted prices included within Level 1 that are either directly or indirectlyobservable as of the reporting date. Essentially, inputs that are derivedprincipally from or corroborated by observable market data.

 

·                  Level 3 – Generally, inputs are unobservable, developed basedon the best information available and reflect management’s best estimate ofwhat market participants would use in pricing the asset or liability at themeasurement date.

 

Determining theappropriate classification of our fair value measurements within the fair valuehierarchy requires management’s judgment regarding the degree to which marketdata is observable or corroborated by observable market data. Currently wehave categorized derivative instruments’ fair value measurements as Level 3 andexpect to categorize our AROs’ fair value measurements as Level 3 upon fulladoption of SFAS No. 157. As interpretations of SFAS No. 157 evolve,our classification of certain instruments within the hierarchy may be revised.See “Critical Accounting Policies and Estimates — Derivative and HedgingActivities” above, “Risk Management Activities” below and Note 8 to ourconsolidated financial statements for additional discussion of our derivativeinstruments.

 

In conjunction with theadoption of SFAS No. 157, we also adopted SFAS No. 159, *The Fair Value Option for Financial Assets and FinancialLiabilities – Including an Amendment of FASB Statement No. 115,*effectiveJanuary 1, 2008. SFAS No. 159 allows a company the option to valueits financial assets and liabilities, on an instrument by instrument basis, atfair value, and include the change in fair value of such assets and liabilitiesin its results of operations. The Company did not elect to apply the provisionsof SFAS No. 159 to any of its financial assets or liabilities.Accordingly, there was no impact to the Company’s financial statementsresulting from the adoption of SFAS No. 159.

 

**RiskManagement Activities**

 

Due to the volatility ofoil and natural gas prices, we may enter into, from time to time, price-riskmanagement transactions (e.g., swaps, collars and floors) related to our expectedoil and natural gas production to seek to achieve a more predictable cash flow,as well as to reduce exposure to commodity price fluctuations.  While the use of these arrangements may limitour ability to benefit from increases in the prices of oil and natural gas, itis also intended to reduce our potential exposure to adverse pricemovements.  See “Approach to the Business”for a discussion of our current level of derivative contracts as it relates toexpected production. Our arrangements, to the extent we enter into any, areintended to apply to only a portion of our expected production, and therebyprovide only partial price protection against declines in oil and natural gasprices. None of these instruments are, at the time of their execution, intendedto be used for trading or speculative purposes, but may be deemed as suchbecause of the expected decrease in our anticipated 2008 production. The use ofderivative instruments involves some credit risk, but 

 

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generally we place ourderivative transactions with major financial institutions that we believe areminimal credit risks.  On a quarterlybasis, our management sets all of our price-risk management policies, includingvolumes, types of instruments and counterparties.  Our Board of Directors monitors the Company’sprice-risk management policies and trades on a monthly basis.

 

All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*(as amended).These derivative instruments are intended to hedge our price risk and may beconsidered hedges for economic purposes. There are two types of accountingtreatments for derivatives, (i) mark-to-market accounting and (ii) cashflow hedge accounting. For discussion of these accounting treatments, see Note8 to our consolidated financial statements. We currently apply mark-to-marketaccounting treatment to all of our derivative contracts. All derivatives arerecorded on the balance sheet at fair value and the changes in fair value arepresented in total revenue on the statement of operations. Cash flows fromresulting derivative settlements are included in operating activities andinvesting activities on the statement of cash flows. The following tableprovides additional information regarding our various derivative transactionsthat were recorded at fair value on the balance sheet as of June 30, 2008.

 
| ** **                                                                              | ** ** | **(in thousands)** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|
| Fair value of contracts outstanding at December 31, 2007                           |       | $                       | (12,329    | ) |
| Contracts realized or otherwise settled during the period                               |       | (18,648                 | )          |
| Fair value at June 30, 2008 of new contracts entered into during  2008:       |       |                    |       |
| Asset                                                                                   |       | —                  |       |
| Liability                                                                               |       | —                  |       |
| Changes in fair values attributable to changes in valuation  techniques and assumptions |       | —                  |       |
| Other changes in fair values                                                            |       | (48,661                 | )          |
| Fair values of contracts outstanding at June 30, 2008                              |       | $                       | (79,638    | ) |

 

The following tabledetails the fair value of our commodity-based derivative contracts by year ofmaturity and valuation methodology as of June 30, 2008.

 
| ** **                                          | ** ** | **Fair Value of Contracts at June 30, 2008** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **Source of Fair Value**             | ** ** | **Maturity less  than 1 year**                                   | ** ** | **Maturity  1-3 years** | ** ** | **Maturity  4-5 years** | ** ** | **Maturity in  excess of 5  years** | ** ** | **Total fair  value** | ** ** |
| ** **                                          | ** ** | **(in thousands)**                                                         | ** ** |
| Prices actively quoted:                             |       | —                                                                          |       | — |   | — |   | — |   | — |   |
| Prices provided by other external sources:          |       | —                                                                          |       | — |   | — |   | — |   | — |   |
| Asset                                               |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Liability                                           |       | (67,981                                                                         | )          | (11,657 | ) | — |   | — |   | (79,638 | ) |
| Prices based on models and other valuation methods: |       | —                                                                          |       | — |   | — |   | — |   | — |   |
| Total                                               |       | $                                                                               | (67,981    | ) | $ | (11,657 | ) | $ | — |   | $ | — |   | $ | (79,638 | ) |
|                                                     |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**TaxMatters**

 

At June 30, 2008, wehad cumulative net operating loss carryforwards (“NOLs”) for federal income taxpurposes of approximately $114.6 million that expire beginning in 2012. We alsohad state NOL carryforwards at June 30, 2008 of approximately $16 million,without consideration of valuation allowances, which will expire in varyingamounts between 2008 and 2027. These estimated NOLs assume that certain items,primarily intangible drilling costs, have been written off for tax purposes inthe current year. However, we have not made a final determination if an electionwill be made to capitalize all or part of these items for tax purposes in thefuture. Our ability to utilize federal NOL carryforwards in cases where the NOLwas acquired in a reorganization may be subject to limitations under Section 382of the Internal Revenue Code of 1986, as amended (“Section 382”) if weundergo a majority ownership change as defined by Section 382.

 

We would undergo amajority ownership change if, among other things, the stockholders who own orhave owned, directly or indirectly, five percent or more of our common stock orare otherwise treated as five percent stockholders under Section 382 andthe regulations promulgated thereunder, increase their aggregate percentageownership of our stock by more than 50 percentage points over the lowestpercentage of stock owned by these 

 

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stockholders at any timeduring the testing period, which is generally the three-year period precedingthe potential ownership change. In the event of a majority ownership change, Section 382imposes an annual limitation on the amount of taxable income a corporation mayoffset with the NOL carryforwards. Any unused annual limitation may be carriedover to later years until the applicable expiration of the respective NOLcarryforwards. The amount of the limitation may, under certain circumstances,be increased by built-in gains held by us at the time of the change that arerecognized in the five year period after the change. Any built in losses onassets held subsequent to a merger are subject to the limitation.  If we were to undergo a majority ownershipchange during 2008, we will likely be required to record a reserve for some orall of the asset currently recorded on our balance sheet. During 2007, webelieve that there may have been an additional change of ownership pursuant to Section 382as a result of the concurrent public offerings of our common and preferred stockthat occurred in January 2007. We cannot make assurances that we will notundergo a majority ownership change in the future because an ownership changefor federal tax purposes can occur based on trades among our existingstockholders. Whether we undergo a majority ownership change may be a matterbeyond our control. However, in light of the proposed merger with Chaparral, wecannot provide any assurance that the availability of our NOL carryforward andother federal income tax attributes will not be significantly limited orpossibly eliminated.

 

In 2007, weadopted FIN 48, which clarifies the accounting for uncertainty in income taxesrecognized in accordance with SFAS No. 109, *Accounting for Income Taxes*.   As a result of the adoption of FIN 48 on January 1,2007, we recognized a liability of $534,035 which reduced the January 1,2007 retained earnings balance.  Theamount recorded did not include interest as the anticipated adjustments morelikely than not will result in no current tax due as a result of NOLcarryovers.  All of the amounts ofunrecognized tax benefits reported affect the effective tax rate throughdeferred tax accounting. We also adopted FSP FIN 48-1 during 2007, whichprovides that 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. We had no accrued liabilities prior to adoption at January 1,2007. We recognize interest and penalties related to unrecognized tax benefitsin tax expense as a period cost. However, we accrued no interest or penaltiesat June 30, 2008.

 

During secondquarter 2008 an income tax benefit of approximately $0.4 million was recordedas a result of the conclusion of a state audit where no prior benefit was takenfor an uncertain tax position, which is now effectively settled withoutadjustment by the state tax authorities.

 

**RecentlyIssued Accounting Pronouncements**

 

In December 2007,the FASB issued SFAS No. 141R, *BusinessCombinations* (“SFAS No. 141R”). SFAS No. 141R expandsthe definition of transactions and events that qualify as businesscombinations; requires that the acquired assets and liabilities, includingcontingencies, be recorded at the fair value determined on the acquisition dateand changes thereafter reflected in revenue, not goodwill; changes therecognition timing for restructuring costs; and requires acquisition costs tobe expensed as incurred. Adoption of SFAS No. 141R is requiredprospectively for business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008. Early adoption and retroactive application of SFAS No. 141R to fiscalyears preceding the effective date are not permitted. However, accounting forchanges in valuation allowances for acquired deferred tax assets and theresolution of uncertain tax positions for prior business combinations willimpact tax expense instead of impacting the prior business combinationaccounting starting January 1, 2009. We are currently evaluating thechanges provided in SFAS No. 141R and believe it could have a materialimpact on our consolidated financial statements if we were to undertake asignificant acquisition or business combination.

 

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

 

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

 

In May 2008,the FASB issued SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*(“SFAS No. 162”),which identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (“GAAP”) in the United States of America (theGAAP hierarchy).   SFAS No. 162 is effective 60 days followingthe SEC’s approval of Public Company Accounting Oversight Board amendments toAU Section 411, *The Meaning of PresentFairly in Conformity With Generally Accepted Accounting Principles*.We do not expect adoption of this statement to impact our consolidatedfinancial statements or related disclosures.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to marketrisk from changes in interest rates and commodity prices.  We use a Revolving Facility with a floatinginterest rate. We are not subject to fair value risk resulting from changes inour floating interest rates.  The use offloating rate debt instruments provides a benefit due to downward interest ratemovements but does not limit us to exposure from future increases in interestrates.  Based on the June 30, 2008outstanding borrowings and interest rates of 5.50% and 4.95% applied to variousborrowings, a 10% change in interest rates would result in an increase ordecrease of interest expense of approximately $1.1 million on an annual basis.

 

In the normal course ofbusiness, we enter into derivative transactions, including commodity pricecollars, swaps and floors to mitigate our exposure to commodity pricemovements. They are not intended for trading or speculative purposes.  While the use of these arrangements may limitthe benefit to us of increases in the prices of oil and natural gas, it alsolimits the downside risk of adverse price movements.  During early 2007, we put in place severalnatural gas and crude oil derivative contracts to hedge our expected 2008 and2009 production to achieve a more predictable cash flow. As a result of recentchanges to our forecasted 2008 production and the impact of certain assetdivestitures, both of which have reduced expected production as compared tothat expected at the time we entered into the derivative contracts, wecurrently have approximately 120% and 170% of our anticipated 2008 natural gasand crude oil production, respectively, covered by derivative contracts. Thisoverhedged position exposes us to greater risk of commodity price increasesbecause we will not have the physical production cash inflows to offset anypotential losses incurred on the portion of the contracts that are overhedged.Please refer to Note 8 to our consolidated financial statements for adiscussion of these contracts. The following is a list of contracts outstandingat June 30, 2008:

 

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| **Transaction  Date**  | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  June 30, 2008** | ** ** |
|------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|--------------------------|------------|---------------------------|------------|---------------------------------------------------------------------------|------------|
| *** ***           | * *   | * *              | * *   | * *      | * *   | * *   | * *   | * *                 | * *   | * *                  | * *   | **(in thousands)**                                                   | * *   |
| ***Natural Gas (1):*** | * *   | * *              | * *   | * *      | * *   | * *   | * *   | * *                 | * *   | * *                  | * *   | ** **                                                                | * *   |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.00              |       | 20,000  MMBtu             |       | $                                                                         | (16,701    | ) |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.00              |       | 10,000  MMBtu             |       | (8,235                                                                    | )          |
| 01/07                  |       | Collar                |       | 01/01/08      |       | 12/31/08   |       | $7.50-$9.02              |       | 10,000  MMBtu             |       | (8,205                                                                    | )          |
| 04/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.00             |       | 10,000  MMBtu             |       | (10,449                                                                   | )          |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.08             |       | 10,000  MMBtu             |       | (10,263                                                                   | )          |
| ***Crude Oil (2):***   |       |                  |       |          |       |       |       |                     |       |                      |       |                                                                      |       |
| 12/06                  |       | Swap                  |       | 01/01/08      |       | 12/31/08   |       | $66.00                   |       | 1,500  Bbl                |       | (20,520                                                                   | )          |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $70.00-$93.55            |       | 300  Bbl                  |       | (5,265                                                                    | )          |
|                   |       |                  |       |          |       |       |       |                     |       |                      |       | $                                                                         | (79,638    | ) |

 

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(1)          Our natural gas contractswere entered into on a per MMBtu delivered price basis, using the NYMEX NaturalGas Index. Mark-to-market accounting treatment is applied to these contractsand the change in fair value is reflected in total revenue.

 

(2)          Our 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 treatmentis applied to these contracts and the change in fair value is reflected intotal revenue.

 

  At June 30, 2008, the fair value of theoutstanding derivatives was a net liability of approximately $79.6 million. A10% change in the commodity price per unit, as long as the price is eitherabove the ceiling or below the floor price, would cause the fair value total ofthe derivative instruments to increase or decrease by approximately $7.6million.

 

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

#####  

In accordance withExchange Act Rules 13a-15 and 15d-15, we carried out an evaluation, underthe supervision and with the participation of management, including our ChiefExecutive Officer and Acting Chief Financial Officer, of the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report.  Based on that evaluation,our Chief Executive Officer and Acting Chief Financial Officer concluded thatour disclosure controls and procedures were effective as of June 30, 2008to provide reasonable assurance that information required to be disclosed inour reports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

There has been no changein our internal controls over financial reporting that occurred during thethree months ended June 30, 2008 that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II - OTHER INFORMATION**

 

**Item 1 -Legal Proceedings**

 

From time to time we area party to various legal proceedings arising in the ordinary course of ourbusiness.  While the outcome of lawsuitscannot be predicted with certainty, we are not currently a party to any proceedingthat we believe, if determined in a manner adverse to us, could have a materialadverse effect on our financial condition, results of operations or cash flows,except as set forth below.

 

**DavidBlake, et al. v. Edge Petroleum Corporation** — On September 19, 2005, David Blake and DavidBlake, Trustee of the David and Nita Blake 1992 Children’s Trust filed suitagainst us in state district court in Goliad County, Texas alleging breach ofcontract for failure and refusal to transfer overriding royalty interests toplaintiffs in several leases in the Nita and Austin prospects in Goliad County,Texas and failure and refusal to pay monies to Blake pursuant to suchoverriding royalty interests for wells completed on the leases. The plaintiffsseek relief of (1) specific performance of the alleged agreement,including granting of overriding royalty interests by us to Blake; (2) monetarydamages for failure to grant the overriding royalty interests; (3) exemplarydamages for his claims of business disparagement and slander; (4) monetarydamages for tortious interference; and (5) attorneys’ fees and courtcosts. Venue of the case was transferred to Harris County, Texas by agreementof the litigants.  We filed acounterclaim against Plaintiff Blake and joined various related entities thatare controlled by Blake, seeking lease interests in which we contend we hadbeen wrongfully denied participation. The parties have moved for summaryjudgment on each others’ claims and counterclaims, which the trial court hasdenied as to both sides.  In November 2007,we filed a separate motion for summary judgment based on the statute of frauds;the court has not ruled on this separate motion.  The trial, originally scheduled to begin September 10,2007, and reset for March 3, 2008 and August 20, 2008, has beencontinued until November 17, 2008. Extensive written discovery hasoccurred in the case, and the parties are scheduling and commencing to takefact and expert witness depositions.  In June 2008,the Blake Plaintiffs filed a Sixth Amended Petition conditionally adding claimsfor certain prospects that had been settled, but only to the extent thatrescission of the prior settlement and release was being sought by us. We arenot seeking rescission of the prior settlement and release and will respondappropriately to this amended petition. We have responded aggressively to thislawsuit, and believe we have meritorious defenses and counterclaims.

 

**DianaReyes, et al. v. Edge Petroleum Operating Company, Inc., et al. **On January 8, 2008, we were served with awrongful death action filed in Hidalgo County, Texas.  Plaintiffs allege negligence and grossnegligence resulting from a fatality accident at the Slick State B-12 wellsite, on our Bloomberg Flores lease in Starr County, Texas.  The plaintiffs are the widow and minorchildren of Mr. Reyes, who was killed in a one-car fatality accident on August 5,2007.   Mr. Reyes was an employee ofPayzone Logging, a vendor of ours. No specific amount of damages has beenalleged to date; plaintiffs are asserting damages from loss of companionship,pecuniary loss, pain and mental anguish, loss of inheritance and funeral andburial expenses.  We may have insurancecoverage for all or part of this claim. Our insurance carrier has retained local counsel to represent us in thismatter.  We filed an answer on January 30,2008 denying plaintiffs’ allegations and asserting defenses and trial has beenset for February 16, 2009.  We havenot established a reserve with respect to this claim and it is not possible todetermine what, if any, our ultimate exposure might be in this matter.  We will continue to respond aggressively tothis lawsuit, and believe that we have meritorious defenses.

 

**LexingtonInsurance Company v. Edge Petroleum Exploration Company, et al.** - On March 13, 2008, LexingtonInsurance Company (“Lexington”) filed a declaratory judgment action in the 125thJudicial District Court of Harris County, Texas.  Lexington seeks a judgment that it is notobligated to pay any claims of ours and the Sfondrini Partnerships (as definedbelow) in connection with a consolidated suit that we and the SfondriniPartnerships settled with the all of the plaintiffs in 2007.  The suit that was settled,** **Wade and Joyce Montet, et al., v.Edge Petroleum Corp of Texas, et al., consolidated with Rolland L. Broussard,et al., v. Edge Petroleum Corp of Texas, et al., and the settlementthereof, is described in detail in “Item 3. Legal Proceedings” of our AnnualReport on Form 10-K for the year ended December 31, 2007. In general,the action was a consolidated suit by mineral/royalty owners under two wells,who claimed that the third party operator of the wells had failed to “blocksqueeze” the sections of one of the wells, as a prudent operator, according totheir allegations, would have done, to protect the gas reservoir from beingflooded with water from adjacent underground formations, and was negligent in 

 

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not creating a field-wideunit to protect their interests.  Alongwith the Sfondrini Partnerships, we were defendants in the suit as workinginterest owners in the wells, owning 2.8% and 14.7%, respectively, at the timeof the alleged acts or omissions.  In thecase of the settlements with some, but not all, of the plaintiffs, two otherinsurers covered the settlement amounts in exchange for mutual releases. We andthe Sfondrini Partnerships bore the costs of the settlements with the remainingplaintiffs in accordance with their proportionate interests.  The Sfondrini Partnerships are partnershipsthat are directly or indirectly controlled by John Sfondrini, a director ofours.  Vincent Andrews, also a directorof ours, owns a minority interest in the corporate general partner one of thepartnerships.

 

Lexington asserts that itis not obligated to pay any claims of ours and the Sfondrini Partnerships underits commercial, general liability insurance policy as related to the lawsuitthat was settled because there was no “occurrence,” under the terms of theirpolicy, of physical injury to or destruction of tangible property and otherreasons.  Our position is that thedamages to the reservoir and attendant losses incurred by the defendants were lossescovered by Lexington’s policy, for which Lexington is legally obligated topay.  By agreement of the parties, ananswer is due 30 days from notice of termination of settlementdiscussions.  Because we have alreadysettled the underlying claims and have not recognized any amount for possiblefuture recoveries against Lexington, we do not, in any event, expect thedeclaratory judgment action by Lexington to have a material adverse affect onus.

 

        In June 2008, we and the Sfondrini Partnerships reacheda settlement in principle with Lexington pursuant to which Lexington would payus and the Sfondrini Partnerships $75,000 (proportionate to their interests inthe underlying mineral leases that were the subject of the prior action) inreturn for a complete release.

 

**Item 1A – Risk Factors**

 

In addition to the otherinformation and risk factors set forth in this report, you should carefullyconsider the factors discussed in Part I, “Item 1A. Risk Factors” in our2007 Annual Report on Form 10-K, which could materially affect ourbusiness, financial condition or future results. The risks described below andin our 2007 Annual Report on Form 10-K are not the only risks facing ourCompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition and/or operating results.

 

**RisksRelated to our proposed merger with Chaparral**

 

**Thevalue of the shares of Chaparral common stock that our common stockholders willreceive upon the consummation of the proposed merger will fluctuate.**

 

The common exchange ratioin the proposed merger with Chaparral is fixed and will not be adjusted in theevent of any change in our stock price prior to the proposed merger. There maybe a significant amount of time between the dates when our common stockholdersvote on the merger agreement at our annual meeting and the date when theproposed merger with Chaparral is completed. The price of shares of our stockmay vary significantly between the date of the proxy statement/prospectus thatwill be sent to our stockholders, the date of our annual meeting and the dateof the completion of the proposed merger with Chaparral. These variations maybe caused by, among other things, changes in our and Chaparral’s businesses,operations, results or prospects, market expectations of the likelihood thatthe proposed merger with Chaparral will be completed and the timing ofcompletion, the prospects of post-merger operations, general market and economicconditions, commodity prices for oil and natural gas, increasing familiaritywith Chaparral by stockholders, analysts and other market participants, thevalue these people attribute to Chaparral and other factors.  Chaparral’s common stock is not currentlytraded on any exchange, and this may increase the uncertainty regarding theprice of our stock prior to the proposed merger with Chaparral.  In addition, it is impossible to predictaccurately the market price of the Chaparral common stock to be received by ourcommon stockholders after the completion of the proposed merger with Chaparral.Accordingly, the price of our common stock on the date of the proxystatement/prospectus and on the date of our annual meeting may not beindicative of the price immediately prior to completion of the proposed mergerwith Chaparral or the price of Chaparral common stock after the proposed mergerwith Chaparral is completed.

 

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**Theanticipated benefits of the proposed merger with Chaparral may not be realized.**

 

We and Chaparral enteredinto the merger agreement with the expectation that the proposed merger shouldresult in various benefits, including, among other things, synergies, costsavings and other operating efficiencies. The combined company may not achieve these benefits at the levelsexpected or at all. If the combined company fails to achieve these expectedbenefits, the results of operations and the value of the combined company maybe adversely affected.

 

**Chaparral’sintegration of our business following the proposed merger will presentsignificant challenges that may reduce the anticipated potential benefits ofthe proposed merger.**

 

We and Chaparral willface significant challenges in consolidating functions and integrating ourorganizations, procedures and operations in a timely and efficient manner, aswell as retaining key personnel. Our integration with Chaparral will be complexand time-consuming. The principal challenges will include the following:

 

·                  integrating our and Chaparral’s existingbusinesses;

 

·                  addressing differences in businesscultures, preserving employee morale and retaining key employees, while meetingthe operational and financial goals of the combined company;

 

·                  preserving supplier, customer, businesspartner and other important relationships and resolving potential conflictsthat may arise as a result of the proposed merger; and

 

·                  consolidating other corporate andadministrative functions.

 

After the completion ofthe proposed merger, the management of Chaparral will need to dedicatesubstantial efforts to integrating the businesses. These efforts could divertmanagement’s focus and resources from other day-to-day tasks, corporateinitiatives or strategic opportunities during the integration process.

 

**We willincur significant transaction costs in connection with the proposed merger withChaparral.**

 

We expect to incurtransaction costs of approximately $9.0 million in connection with the proposedmerger with Chaparral. These transaction costs include investment banking,legal and accounting fees and expenses, printing expenses, mailing expenses andother related charges, and retention costs. These amounts are preliminaryestimates that are subject to change. A portion of the transaction costs willbe incurred regardless of whether the proposed merger with Chaparral isconsummated. We and Chaparral will each pay our own transaction costs, except thatChaparral will pay 86% and we will pay 14% of certain filing and printing costsand expenses.

 

**Whilethe proposed merger with Chaparral is pending, we and Chaparral will be subjectto business uncertainties and contractual restrictions that could adverselyaffect our businesses.**

 

Uncertainty about theeffect of the proposed merger with Chaparral on employees, suppliers, customersand business partners may have an adverse effect on us and, to a lesser extent,Chaparral and, consequently, on the combined company. These uncertainties mayimpair our and Chaparral’s ability to attract, retain and motivate keypersonnel until the proposed merger is consummated and for a period of timethereafter, and could cause suppliers, customers, business partners and otherswho deal with us and Chaparral to seek to change existing businessrelationships with us and Chaparral. Employee retention may be particularlychallenging during the pendency of the proposed merger with Chaparral becauseemployees may experience uncertainty about their future roles with the combinedcompany. In addition, we adopted a Retention Bonus Plan that will generally resultin payments to employees who remain employed by us through October 1,2008; following receipt of these payments on that date, some of these employeesmay elect to terminate their employment. If, despite our and Chaparral’sretention efforts, key employees depart because of issues relating to theuncertainty and difficulty of integration or a desire not to remain with thecombined company, the combined company’s business could be materially harmed.In addition, the merger agreement restricts us and Chaparral, without the otherparty’s consent and subject to certain exceptions, from taking actions outsidethe ordinary course of business, incurring certain 

 

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indebtedness and takingother specified actions until the proposed merger with Chaparral occurs or theproposed merger with Chaparral agreement terminates. These restrictions mayprevent us and, to a lesser extent, Chaparral from pursuing otherwiseattractive business opportunities and making other changes to their businessesthat may arise prior to completion of the proposed merger or termination of themerger agreement.

 

**Failureto complete the proposed merger with Chaparral could negatively impact ourstock price and future business and financial results because of, among otherthings, the costs incurred and the disruption that would occur as a result ofuncertainties relating to a failure to complete the proposed merger withChaparral.**

 

Our common stockholdersmay not approve the proposed merger with Chaparral. If the proposed merger withChaparral is not completed for any reason, we could be subject to severalrisks, including the following:

 

·                  being required to pay Chaparral atermination fee of up to $15 million, or monetary damages of up to $25 million,in certain circumstances;

 

·                  having had the focus of our managementdirected toward the proposed merger with Chaparral and integration planninginstead of on our core business and other opportunities that could have beenbeneficial to us;

 

·                  delaying the pursuit of alternatefinancing plans or of operational opportunities during the pendency of theproposed merger with Chaparral;

 

·                  incurring substantial transaction costsrelated to the proposed merger with Chaparral; and

 

·                  being subject to a redetermination of theborrowing base under our Revolving Facility to a level that requires us to makeadditional payments under the Revolving Facility.

 

Inaddition, we would not realize any of the expected benefits of having completedthe proposed merger with Chaparral.

 

If the proposed mergerwith Chaparral is not completed, the price of our stock may decline to theextent that the current market price of our stock reflects a market assumptionthat the proposed merger will be completed and that the related benefits andsynergies will be realized, or it may decline as a result of the market’sperceptions that the proposed merger was not consummated due to an adversechange in or negative view of our business. In addition, our current andprospective employees may experience uncertainty about their future roles withthe resulting company and choose to pursue other opportunities, which couldadversely affect us if the proposed merger with Chaparral is notcompleted.  Our business may be harmed,and the price of our stock may decline, to the extent that suppliers,customers, business partners and others remain uncertain about the companies’future prospects in the absence of the proposed merger with Chaparral. Therealization of any of these risks may materially adversely affect our business,financial results and financial condition, and the price of our stock.

 

**Themerger agreement limits our ability to pursue an alternative acquisitionproposal and requires us to pay a termination fee of $15 million if we do.**

 

The merger agreementprohibits us from soliciting, initiating or knowingly encouraging inquiries,proposals or offers for an alternative transaction with any person. The mergeragreement also provides that we must pay a termination fee of $15 million ifthe merger agreement is terminated in certain circumstances in connection witha competing acquisition proposal or our board of directors modifies, qualifiesor withdraws its recommendation that our common stockholders vote for theadoption of the merger agreement.  Beforeterminating the merger agreement for this reason, we also must first provideChaparral with five business days’ notice of our intention to terminate themerger agreement and the material terms and conditions of any superior proposalwe have received from a third party.

 

These provisions limitour ability to pursue offers from third parties that could result in greatervalue to our stockholders. The obligation to make the termination fee paymentalso may discourage a third party from pursuing 

 

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an alternativeacquisition proposal and may affect the structure, pricing and other termsproposed by other parties seeking to enter into an alternate transaction withus. As a result of these restrictions, we may not be able to enter into anagreement with respect to an alternative transaction on more favorable termswithout incurring potentially significant liability to Chaparral.

 

**Some ofour directors and executive officers have interests in the proposed merger withChaparral that are different from the interests of our stockholders.**

 

When considering therecommendation of our board of directors with respect to the proposed mergerwith Chaparral, our common stockholders should be aware that some of ourdirectors and executive officers have interests in the proposed merger withChaparral that are different from, or in addition to, the interests of ourstockholders. These interests include:

 

·                  their designation as Chaparral directors;

 

·                  the fact that the completion of thetransaction will result in the acceleration of vesting of restricted stock heldby directors and executive officers; and

 

·                  the fact that our executive officers haveentered into employment or severance agreements with us or our subsidiariesthat will entitle them to cash payments and other benefits if the proposedmerger with Chaparral is completed and their employment is terminated withoutcause or if the executive officer resigns for good reason, as defined in theagreements.

 

Our common stockholdersshould consider these interests in conjunction with the recommendation of ourdirectors of approval of the proposed merger with Chaparral.

 

**Chaparralmay not be successful in refinancing its and our existing secured creditfacilities, and our monetary recourse for Chaparral’s failure to consummate theproposed merger is limited.**

 

The completion of theproposed merger with Chaparral requires Chaparral to replace its and our existingsecured credit facilities with a new secured credit facility. Chaparral hasreceived a financing commitment for a new credit facility that is conditionedupon, among other things, the lenders’ reasonable satisfaction with the resultsof their due diligence review of us and Chaparral, the absence of a materialadverse change with respect to Chaparral, its subsidiaries and us, andconditions in the credit markets, which are currently volatile. In addition,although Chaparral intends to sell $150 million of Chaparral Series Bpreferred stock in connection with the completion of the proposed merger, thesale is not a condition to closing its new secured credit facility.  However, Chaparral believes that it will benecessary to consummate the sale in order to obtain commercially acceptableterms under its new secured credit facility. There can be no assurance that Chaparral will be able to complete thesale of the Chaparral Series B preferred stock. Although Chaparral’sobligation to complete the proposed merger is not conditioned upon the receiptor availability of debt financing, Chaparral may terminate the merger agreementand pay us a termination fee of $15 million under certain circumstances if theproposed merger has not been completed because of a failure to obtain andconsummate its debt financing.  There canbe no assurance that Chaparral will be successful in refinancing its and ourexisting secured credit facilities, which could adversely affect the completionof the proposed merger and our and Chaparral’s results of operations orfinancial condition. Additionally, even if the financing were to be available,if Chaparral willfully breaches the merger agreement prior to the completion ofthe proposed merger, its monetary liability to us is limited by the mergeragreement to $25 million.

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

 

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**Item 6 -Exhibits**

 

The following exhibitsare filed as part of this report:

 

# **INDEX TO EXHIBITS**

#  

| **Exhibit No.** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |       |
| 2.1                  |       | —     |       | Amended and Restated  Combination Agreement by and among (i) Edge Group II Limited  Partnership, (ii) Gulfedge Limited Partnership, (iii) Edge Group  Partnership, (iv) Edge Petroleum Corporation, (v) Edge  Mergeco, Inc. and (vi) the Company, dated as of January 13,  1997 (Incorporated by reference from exhibit 2.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-17269)).                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.2                  |       | —     |       | Agreement and Plan of  Merger dated as of May 28, 2003 among Edge Petroleum Corporation, Edge  Delaware Sub Inc. and Miller Exploration Company (“Miller”) (Incorporated by  reference from Annex A to the Joint Proxy Statement/Prospectus contained in  the Company’s Registration Statement on Form S-4/A filed on  October 31, 2003 (Registration No. 333-106484)).                                                                                                                                                         |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.3                  |       | —     |       | Asset Purchase  Agreement by and among Contango STEP, L.P., Contango Oil & Gas  Company, Edge Petroleum Exploration Company and Edge Petroleum Corporation,  dated as of October 7, 2004 (Incorporated by reference from exhibit 2.1  to the Company’s Current Report on Form 8-K filed October 12,  2004).                                                                                                                                                                                                                           |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.4                  |       | —     |       | Purchase and Sale  Agreement, dated as of September 21, 2005 among Pearl Energy Partners,  Ltd., and Cibola Exploration Partners, L.P., as Sellers; and Edge Petroleum  Exploration Company as Buyer and Edge Petroleum Corporation as Guarantor  (Incorporated by reference from exhibit 2.1 to the Company’s Current Report  on Form 8-K filed October 19, 2005).                                                                                                                                                                            |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.5                  |       | —     |       | Stock Purchase  Agreement by and among Jon L. Glass, Craig D. Pollard, Leigh T. Prieto,  Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P., Cinco  Energy Corporation, and Edge Petroleum Exploration Company and Edge Petroleum  Corporation, dated as of September 21, 2005 (Incorporated by reference  from exhibit 2.5 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2005).                                                                                               |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.6                  |       | —     |       | Letter Agreement dated  November 18, 2005 by and among Edge Petroleum Exploration Company, Cinco  Energy Corporation and Sellers (Incorporated by reference from exhibit 2.02  to the Company’s Current Report on Form 8-K filed December 6,  2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Company had  omitted certain Schedules to the Letter Agreement (all of which are listed  therein) from this Exhibit 2.6. It hereby agrees to furnish a supplemental  copy of any such omitted item to the SEC on its request. |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.7                  |       | —     |       | Agreement and Plan of  Merger, dated July 14, 2008, among Chaparral Energy, Inc.,  Chaparral Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by  reference from exhibit 2.1 to the Company’s Current Report on Form 8-K  filed July 15, 2008). Pursuant to Item 601(b)(2) of Regulation S-K,  the Company had omitted the disclosure schedules to the Merger Agreement from  this Exhibit 2.1. It hereby agrees to furnish a supplemental copy of any  such omitted item to the SEC on its request.            |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                  |       | —     |       | Restated Certificate of  Incorporation of the Company effective January 27, 1997 (Incorporated by  reference from exhibit 3.1 to the Company’s Current Report on Form 8-K  filed April 29, 2005).                                                                                                                                                                                                                                                                                                                                              |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | —     |       | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective January 31, 1997 (Incorporated by reference from exhibit 3.2  to the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                              |
|                      |            |            |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |

 

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| 3.3    |   | — |   | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective April 27, 2005 (Incorporated by reference from exhibit 3.3 to  the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                                                                           |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.4    |   | — |   | Bylaws of the Company  (Incorporated by reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999  (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.5    |   | — |   | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by reference  from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 1999 (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.6    |   | — |   | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from  exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.7    |   | — |   | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to Edge’s Current Report on Form 8-K filed  January 30, 2007).                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1    |   | — |   | Third Amended and  Restated Credit Agreement dated December 31, 2003 among Edge Petroleum  Corporation, Edge Petroleum Exploration Company, Edge Petroleum Operating  Company, Inc., Miller Oil Corporation and Miller Exploration Company, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from  Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2004).                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2    |   | — |   | Agreement and Amendment  No. 1 to Third Amended and Restated Credit Agreement dated May 31,  2005 among Edge Petroleum Corporation, Edge Petroleum Exploration Company,  Edge Petroleum Operating Company, Inc., Miller Exploration Company and  Miller Oil Corporation, as borrowers, the lenders thereto and Union Bank of  California, N.A., a national banking association, as agent for the lenders  (Incorporated by reference from exhibit 4.2 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended June 30, 2005 (File  No. 000-22149)). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3    |   | — |   | Agreement and Amendment  No. 2 to the Third Amended and Restated Credit Agreement dated  November 30, 2005 among Edge Petroleum Corporation, Edge Petroleum  Exploration Company, Edge Petroleum Operating Company, Inc., Miller Oil  Corporation, Miller Exploration Company, and Cinco Energy Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from exhibit 4.3 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005).                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4    |   | — |   | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller Exploration Company’s Annual  Report on Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5    |   | — |   | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller Exploration Company’s  Registration Statement on Form S-8 filed on April 11, 2001  (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6    |   | — |   | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller Exploration  Company’s Registration Statement on Form S-8 filed on April 11,  2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7    |   | — |   | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                                 |

 

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| 4.8         |   | — |   | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to Edge’s Current Report on  Form 8-K filed on February 5, 2007).                                       |
|-------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.9         |   | — |   | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated  January 31, 2007 by and among Edge Petroleum Corporation, as borrower,  and Union Bank of California, N.A., as Administrative Agent and Issuing  Lender, and the other lenders party thereto (Incorporated by reference from  exhibit 4.9 to Edge’s Quarterly Report on Form 10-Q filed on  May 12, 2008). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.10        |   | — |   | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                                                                           |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.1  |   | — |   | Form of  Indemnification Agreement between the Company and each of its directors  (Incorporated by reference from exhibit 10.7 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-17269)).                                                                                                                                                                                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.2  |   | — |   | Stock Option Plan of  Edge Petroleum Corporation, a Texas corporation (Incorporated by reference  from exhibit 10.13 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.3  |   | — |   | Employment Agreement  dated as of November 16, 1998, by and between the Company and John W.  Elias (Incorporated by reference from exhibit 10.12 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1998 (File  No. 000-22149)).                                                                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.4  |   | — |   | Amended and Restated  Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of August 1, 2006 (Incorporated by reference from exhibit  10.4 to the Company’s Quarterly Report on Form 10-Q for the six months  ended June 30, 2006).                                                                                                                                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.5  |   | — |   | Edge Petroleum  Corporation Incentive Plan “Standard Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Officers named therein  (Incorporated by reference from exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)).                                                |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.6  |   | — |   | Edge Petroleum  Corporation Incentive Plan “Director Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Directors named therein  (Incorporated by reference from exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)).                                               |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.7  |   | — |   | Severance Agreements by  and between Edge Petroleum Corporation and the Officers of the Company named  therein (Incorporated by reference from exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999 (File No. 000-22149)).                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.8  |   | — |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.9  |   | — |   | Form of Employee  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999 (File No. 000-22149)).                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                      |
| †10.10 |   | — |   | Edge Petroleum  Corporation Amended and Restated Elias Stock Incentive Plan. (Incorporated by  reference from exhibit 4.5 to the Company’s Registration Statement on  Form S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                                                                                                      |

 

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| †10.11 |   | — |   | Form of Edge  Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                          |
|-------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.12 |   | — |   | Summary of Compensation  of Non-Employee Directors (Incorporated by reference from exhibit 10.12 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                                          |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.13 |   | — |   | Salaries and Certain  Other Compensation of Executive Officers (Incorporated by reference from  exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2007).                                                                                              |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.14 |   | — |   | Description of Annual  Cash Bonus Program for Executive Officers (Incorporated by reference from  exhibit 10.2 to the Company’s Current Report on Form 8-K filed  March 12, 2007).                                                                                                             |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.15 |   | — |   | New Base Salaries and  Long-Term Incentive Awards for Certain Executive Officers (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K  filed August 29, 2006).                                                                                            |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.16       |   | — |   | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated  by reference to exhibit 10.1 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.17       |   | — |   | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated  by reference to exhibit 10.2 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.18       |   | — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated December 16,  2006 (Incorporated by reference to exhibit 10.3 to Edge’s Current Report on  Form 8-K filed January 16, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.19       |   | — |   | Second Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 15,  2007 (Incorporated by reference to exhibit 10.1 to Edge’s Current Report on  Form 8-K filed January 19, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.20       |   | — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 15,  2007 (Incorporated by reference to exhibit 10.2 to Edge’s Current Report on  Form 8-K filed January 19, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.21       |   | — |   | Third Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 31,  2007 (Incorporated by reference to exhibit 10.6 to Edge’s Current Report on  Form 8-K filed February 5, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.22 |   | — |   | New Base Salaries of  Executive Officers (Incorporated by reference from Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.23 |   | — |   | Form of Amended  and Restated Severance Agreement dated April 3, 2008, between the  Company and Executive Officers of the Company Named Therein (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.24 |   | — |   | Amended and Restated  Severance Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.2 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                     |

 

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| †10.25 |   | — |   | Amended and Restated  Employment Agreement dated April 3, 2008, between the Company and John  W. Elias (Incorporated by reference from exhibit 10.3 to the Company’s  Current Report on Form 8-K filed April 4, 2008).                                                       |
|-------------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| †10.26 |   | — |   | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and John W. Elias (Incorporated by reference from exhibit 10.1 to  the Company’s Current Report on Form 8-K filed July 15, 2008).                                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| †10.27 |   | — |   | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and Executive Officers of the Company Named Therein (Incorporated  by reference from exhibit 10.2 to the Company’s Current Report on  Form 8-K filed July 15, 2008). |
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| *31.1       |   | — |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| *31.2       |   | — |   | Certification by C.W.  MacLeod, Acting Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| *32.1       |   | — |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                             |
| *32.2       |   | — |   | Certification by C.W.  MacLeod, Acting Chief Financial Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                 |

 

----

* Filed herewith.

† Denotes management orcompensatory contract, arrangement or agreement.

 

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## **SIGNATURES**

##  

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

 
|   |                 | EDGE PETROLEUM  CORPORATION,                                                                     |
|--------|----------------------|--------------------------------------------------------------------------------------------------|
|   |                 | A DELAWARE CORPORATION                                                                           |
|   |                 | (REGISTRANT)                                                                                     |
|   |                 |                                                                                             |
|   |                 |                                                                                             |
| Date   | August 11, 2008 |                                                                                             | /s/ John W.  Elias |
|   |                 |      John W. Elias                                                                |
|   |                 | Chairman of the  Board, President and                                                            |
|   |                 | Chief Executive  Officer                                                                         |
|   |                 |                                                                                             |
|   |                 |                                                                                             |
| Date   | August 11, 2008 |                                                                                             | /s/ C.W. MacLeod |
|   |                 |       C.W. MacLeod                                                           |
|   |                 | Acting Chief Financial  Officer and Senior Vice President of Business Development & Planning |
|        |                      |                                                                                                  |  |  |

 

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# **INDEX TO EXHIBITS**

#  

| **Exhibit No.** | ** ** | ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------|------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | —     |       | Amended and Restated  Combination Agreement by and among (i) Edge Group II Limited  Partnership, (ii) Gulfedge Limited Partnership, (iii) Edge Group  Partnership, (iv) Edge Petroleum Corporation, (v) Edge  Mergeco, Inc. and (vi) the Company, dated as of January 13,  1997 (Incorporated by reference from exhibit 2.1 to the Company’s  Registration Statement on Form S-4 (Registration No. 333-17269)).                                                                                             |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.2                  |       | —     |       | Agreement and Plan of  Merger dated as of May 28, 2003 among Edge Petroleum Corporation, Edge  Delaware Sub Inc. and Miller Exploration Company (“Miller”) (Incorporated by  reference from Annex A to the Joint Proxy Statement/Prospectus contained in  the Company’s Registration Statement on Form S-4/A filed on  October 31, 2003 (Registration No. 333-106484)).                                                                                                                                                         |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.3                  |       | —     |       | Asset Purchase  Agreement by and among Contango STEP, L.P., Contango Oil & Gas  Company, Edge Petroleum Exploration Company and Edge Petroleum Corporation,  dated as of October 7, 2004 (Incorporated by reference from exhibit 2.1  to the Company’s Current Report on Form 8-K filed October 12,  2004).                                                                                                                                                                                                                           |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.4                  |       | —     |       | Purchase and Sale  Agreement, dated as of September 21, 2005 among Pearl Energy Partners,  Ltd., and Cibola Exploration Partners, L.P., as Sellers; and Edge Petroleum  Exploration Company as Buyer and Edge Petroleum Corporation as Guarantor  (Incorporated by reference from exhibit 2.1 to the Company’s Current Report  on Form 8-K filed October 19, 2005).                                                                                                                                                                            |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.5                  |       | —     |       | Stock Purchase Agreement  by and among Jon L. Glass, Craig D. Pollard, Leigh T. Prieto, Yorktown Energy  Partners V, L.P., Yorktown Energy Partners VI, L.P., Cinco Energy  Corporation, and Edge Petroleum Exploration Company and Edge Petroleum  Corporation, dated as of September 21, 2005 (Incorporated by reference  from exhibit 2.5 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 2005).                                                                                               |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.6                  |       | —     |       | Letter Agreement dated  November 18, 2005 by and among Edge Petroleum Exploration Company, Cinco  Energy Corporation and Sellers (Incorporated by reference from exhibit 2.02  to the Company’s Current Report on Form 8-K filed December 6,  2005). Pursuant to Item 601(b)(2) of Regulation S-K, the Company had  omitted certain Schedules to the Letter Agreement (all of which are listed  therein) from this Exhibit 2.6. It hereby agrees to furnish a  supplemental copy of any such omitted item to the SEC on its request. |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.7                  |       | —     |       | Agreement and Plan of  Merger, dated July 14, 2008, among Chaparral Energy, Inc.,  Chaparral Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by  reference from exhibit 2.1 to the Company’s Current Report on Form 8-K  filed July 15, 2008). Pursuant to Item 601(b)(2) of Regulation S-K,  the Company had omitted the disclosure schedules to the Merger Agreement from  this Exhibit 2.1. It hereby agrees to furnish a supplemental copy of any  such omitted item to the SEC on its request.            |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1                  |       | —     |       | Restated Certificate of  Incorporation of the Company effective January 27, 1997 (Incorporated by  reference from exhibit 3.1 to the Company’s Current Report on Form 8-K  filed April 29, 2005).                                                                                                                                                                                                                                                                                                                                              |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2                  |       | —     |       | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective January 31, 1997 (Incorporated by reference from exhibit 3.2  to the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                              |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3                  |       | —     |       | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective April 27, 2005 (Incorporated by reference from exhibit 3.3 to  the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                                |
|                 |       |       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.4                  |       | —     |       | Bylaws of the Company  (Incorporated by reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999  (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                   |
|                      |            |            |            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |

 

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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 (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                |
|--------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.6    |   | — |   | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from  exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.7    |   | — |   | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to Edge’s Current Report on Form 8-K filed  January 30, 2007).                                                                                                                                                                                                                                                                                                                                     |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.1    |   | — |   | Third Amended and  Restated Credit Agreement dated December 31, 2003 among Edge Petroleum  Corporation, Edge Petroleum Exploration Company, Edge Petroleum Operating  Company, Inc., Miller Oil Corporation and Miller Exploration Company, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from  Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2004).                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.2    |   | — |   | Agreement and Amendment  No. 1 to Third Amended and Restated Credit Agreement dated May 31,  2005 among Edge Petroleum Corporation, Edge Petroleum Exploration Company,  Edge Petroleum Operating Company, Inc., Miller Exploration Company and  Miller Oil Corporation, as borrowers, the lenders thereto and Union Bank of  California, N.A., a national banking association, as agent for the lenders  (Incorporated by reference from exhibit 4.2 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended June 30, 2005 (File  No. 000-22149)). |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.3    |   | — |   | Agreement and Amendment  No. 2 to the Third Amended and Restated Credit Agreement dated  November 30, 2005 among Edge Petroleum Corporation, Edge Petroleum  Exploration Company, Edge Petroleum Operating Company, Inc., Miller Oil  Corporation, Miller Exploration Company, and Cinco Energy Corporation, as  borrowers, the lenders thereto and Union Bank of California, N.A., a national  banking association, as Agent (Incorporated by reference from exhibit 4.3 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2005).                  |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.4    |   | — |   | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller Exploration Company’s Annual  Report on Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.5    |   | — |   | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller Exploration  Company’s Registration Statement on Form S-8 filed on April 11,  2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.6    |   | — |   | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller Exploration  Company’s Registration Statement on Form S-8 filed on April 11,  2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.7    |   | — |   | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller Exploration Company’s Annual Report on Form 10-K  for the year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.8    |   | — |   | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to Edge’s Current Report on  Form 8-K filed on February 5, 2007).                                                                                                                                                                                                                           |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 4.9    |   | — |   | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated  January 31, 2007 by and among Edge Petroleum Corporation, as borrower,  and Union Bank of California, N.A.,                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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|        |   |   |   | as Administrative Agent  and Issuing Lender, and the other lenders party thereto (Incorporated by  reference from exhibit 4.9 to Edge’s Quarterly Report on Form 10-Q filed  on May 12, 2008).                                                                                                                                                               |
|-------------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.10        |   | — |   | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                             |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.1  |   | — |   | Form of  Indemnification Agreement between the Company and each of its directors  (Incorporated by reference from exhibit 10.7 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-17269)).                                                                                                                                      |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.2  |   | — |   | Stock Option Plan of  Edge Petroleum Corporation, a Texas corporation (Incorporated by reference  from exhibit 10.13 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.3  |   | — |   | Employment Agreement  dated as of November 16, 1998, by and between the Company and John W.  Elias (Incorporated by reference from exhibit 10.12 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1998 (File  No. 000-22149)).                                                                                         |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.4  |   | — |   | Amended and Restated  Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of August 1, 2006 (Incorporated by reference from exhibit  10.4 to the Company’s Quarterly Report on Form 10-Q for the six months  ended June 30, 2006).                                                                                       |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.5  |   | — |   | Edge Petroleum  Corporation Incentive Plan “Standard Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Officers named therein  (Incorporated by reference from exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.6  |   | — |   | Edge Petroleum  Corporation Incentive Plan “Director Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Directors named therein  (Incorporated by reference from exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.7  |   | — |   | Severance Agreements by  and between Edge Petroleum Corporation and the Officers of the Company named  therein (Incorporated by reference from exhibit 10.4 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  September 30, 1999 (File No. 000-22149)).                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.8  |   | — |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended June 30,  2004).                                                                                         |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.9  |   | — |   | Form of Employee  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999 (File No. 000-22149)).                                                                   |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.10 |   | — |   | Edge Petroleum  Corporation Amended and Restated Elias Stock Incentive Plan. (Incorporated by  reference from exhibit 4.5 to the Company’s Registration Statement on  Form S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.11 |   | — |   | Form of Edge  Petroleum Corporation John W. Elias Non-Qualified Stock Option Agreement  (Incorporated by reference from exhibit 4.6 to the Company’s Registration  Statement on Form S-8 filed May 30, 2001 (Registration  No. 333-61890)).                                                                                                        |
|        |   |   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.12 |   | — |   | Summary of Compensation  of Non-Employee Directors (Incorporated by reference from exhibit 10.12 to  the Company’s Annual Report on Form 10-K for the year ended  December 31, 2007).                                                                                                                                                                        |

 

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| †10.13 |   | — |   | Salaries and Certain  Other Compensation of Executive Officers (Incorporated by reference from  exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2007).                                                                                              |
|-------------|--------|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.14 |   | — |   | Description of Annual  Cash Bonus Program for Executive Officers (Incorporated by reference from  exhibit 10.2 to the Company’s Current Report on Form 8-K filed  March 12, 2007).                                                                                                             |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.15 |   | — |   | New Base Salaries and  Long-Term Incentive Awards for Certain Executive Officers (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K  filed August 29, 2006).                                                                                            |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.16       |   | — |   | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated  by reference to exhibit 10.1 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.17       |   | — |   | Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated  by reference to exhibit 10.2 to Edge’s Current Report on Form 8-K filed  January 16, 2007).                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.18       |   | — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated December 16,  2006 (Incorporated by reference to exhibit 10.3 to Edge’s Current Report on  Form 8-K filed January 16, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.19       |   | — |   | Second Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 15,  2007 (Incorporated by reference to exhibit 10.1 to Edge’s Current Report on  Form 8-K filed January 19, 2007). |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.20       |   | — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 15,  2007 (Incorporated by reference to exhibit 10.2 to Edge’s Current Report on  Form 8-K filed January 19, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| 10.21       |   | — |   | Third Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller,  and Edge Petroleum Exploration Company, as purchaser, dated January 31,  2007 (Incorporated by reference to exhibit 10.6 to Edge’s Current Report on  Form 8-K filed February 5, 2007).  |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.22 |   | — |   | New Base Salaries of  Executive Officers (Incorporated by reference from Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.23 |   | — |   | Form of Amended  and Restated Severance Agreement dated April 3, 2008, between the  Company and Executive Officers of the Company Named Therein (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K  filed April 4, 2008).                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.24 |   | — |   | Amended and Restated  Severance Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.2 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                     |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.25 |   | — |   | Amended and Restated  Employment Agreement dated April 3, 2008, between the Company and John  W. Elias (Incorporated by reference from exhibit 10.3 to the Company’s  Current Report on Form 8-K filed April 4, 2008).                                                                    |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.26 |   | — |   | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and John W. Elias (Incorporated by reference from exhibit 10.1 to  the Company’s Current Report on Form 8-K filed July 15, 2008).                                                 |
|        |   |   |   |                                                                                                                                                                                                                                                                                                          |
| †10.27 |   | — |   | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and Executive Officers of the Company Named Therein (Incorporated  by reference from exhibit 10.2 to the Company’s Current Report on  Form 8-K filed July 15, 2008).              |

 

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| *31.1  |   | — |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.       |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                             |
| *31.2  |   | — |   | Certification by C.W.  MacLeod, Acting Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
|   |   |   |   |                                                                                                                             |
| *32.1  |   | — |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.       |
|   |   |   |   |                                                                                                                             |
| *32.2  |   | — |   | Certification by C.W.  MacLeod, Acting Chief Financial Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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* Filed herewith.

† Denotes management orcompensatory contract, arrangement or agreement.

 

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