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** **

 

** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

** **

| **x**      | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|------------|---------------------------------------------------------------------------------------------------------|
|       |                                                                                                    |
| ** ** | **For the quarterly period ended  September 30, 2009**                                             |
|       |                                                                                                    |
|       | **OR**                                                                                                  |
|       |                                                                                                    |
| **o**      | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For thetransition periodfrom            to            **

 

**Commissionfile number 0-22149**

 

 

**EDGEPETROLEUM CORPORATION**

(Exact Name of Registrant asSpecified in Its Charter)

 

| **Delaware**                             | ** ** | **76-0511037**      |
|------------------------------------------|------------|---------------------|
| (State or Other  Jurisdiction of         |       | (I.R.S. Employer    |
| Incorporation or  Organization)          |       | Identification No.) |
|                                     |       |                |
| **1301 Travis, Suite 2000**         |       |                |
| **Houston, Texas**                       |       | **77002**           |
| (Address of Principal Executive Offices) |       | (Zip Code)          |

 

**(713) 654-8960**

(Registrant’s TelephoneNumber, Including Area Code)

 

Indicate by checkmarkwhether the registrant (1) has filed all reports required to be filed by Section 13 or15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  xYes o No

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  oYeso No

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).  oYes xNo

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**    | ** ** | **Outstanding at November 6, 2009** |
|--------------|------------|---------------------------------------------------------|
| Common Stock |       | 28,905,613                                              |

 

 

 

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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 September 30, 2009 and December 31, 2008                        |       | 3                 |
| Consolidated  Statements of Operations for the Three and Nine Months Ended  September 30, 2009 and 2008 |       | 4                 |
| Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2009  and 2008           |       | 5                 |
| Consolidated Statement  of Stockholders’ Equity for the Nine Months Ended September 30, 2009       |       | 6                 |
| Notes to the Consolidated  Financial Statements                                                              |       | 7                 |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations          |       | 32                |
| Item 3. Qualitative and Quantitative Disclosures About  Market Risk                                          |       | 64                |
| Item 4. Controls and Procedures                                                                              |       | 65                |
| Part II.  Other Information                                                                             |       |              |
| Item  1. Legal Proceedings                                                                                   |       | 66                |
| Item  1A. Risk Factors                                                                                       |       | 67                |
| Item 2. Unregistered Sale of Equity Securities and Use  of Proceeds                                          |       | 72                |
| Item 3. Defaults Upon Senior Securities                                                                      |       | 72                |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                 |       | 73                |
| Item  5. Other Information                                                                                   |       | 73                |
| Item 6. Exhibits                                                                                             |       | 73                |
| Signatures                                                                                                   |       | 79                |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

### **EDGE PETROLEUM CORPORATION**

 

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                         | ** **   | **September 30,**                      | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------|----------------------------------------|------------|------------------|------------|
| ** **                                                                                                                                                                                                                         | ** **   | **2009**                               | ** ** | **2008**         | ** ** |
| ** **                                                                                                                                                                                                                         | ** **   | **(Unaudited)**                        | ** ** | ** **       | ** ** |
| ** **                                                                                                                                                                                                                         | *** *** | **(in  thousands, except share data)** | ** ** |
| ASSETS                                                                                                                                                                                                                             |         |                                   |       |             |       |
| CURRENT  ASSETS:                                                                                                                                                                                                                   |         |                                   |       |             |       |
| Cash  and cash equivalents                                                                                                                                                                                                         |         | $                                      | 13,449     |             | $          | 8,475 |   |
| Accounts  receivable, trade, net of allowance                                                                                                                                                                                      |         | 8,749                                  |       | 14,548           |       |
| Accounts  receivable, joint interest owners and other, net of allowance                                                                                                                                                            |         | 850                                    |       | 5,689            |       |
| Derivative  financial instruments                                                                                                                                                                                                  |         | 5,651                                  |       | 15,407           |       |
| Other  current assets                                                                                                                                                                                                              |         | 2,790                                  |       | 4,591            |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| Total  current assets                                                                                                                                                                                                              |         | 31,489                                 |       | 48,710           |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| PROPERTY  AND EQUIPMENT, net – full cost method of accounting for oil and natural gas  properties (including unevaluated costs of $24.4 million and $16.4 million at  September 30, 2009 and December 31, 2008, respectively) |         | 215,467                                |       | 307,059          |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| OTHER  ASSETS                                                                                                                                                                                                                      |         | 613                                    |       | 1,828            |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| TOTAL  ASSETS                                                                                                                                                                                                                      |         | $                                      | 247,569    |             | $          | 357,597 |   |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                      |         |                                   |       |             |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                              |         |                                   |       |             |       |
| Accounts  payable, trade                                                                                                                                                                                                           |         | $                                      | 387        |             | $          | 3,086 |   |
| Accrued  liabilities                                                                                                                                                                                                               |         | 7,330                                  |       | 8,779            |       |
| Current  portion of delivery commitment                                                                                                                                                                                            |         | 1,987                                  |       | —           |       |
| Accrued  interest payable                                                                                                                                                                                                          |         | 1,100                                  |       | 579              |       |
| Current  portion of debt                                                                                                                                                                                                           |         | 226,500                                |       | 239,000          |       |
| Asset  retirement obligation                                                                                                                                                                                                       |         | 558                                    |       | 547              |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| Total  current liabilities                                                                                                                                                                                                         |         | 237,862                                |       | 251,991          |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| ASSET  RETIREMENT OBLIGATION – long-term                                                                                                                                                                                      |         | 6,274                                  |       | 6,011            |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| OTHER  NON-CURRENT LIABILITIES                                                                                                                                                                                                     |         | 102                                    |       | 102              |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| DELIVERY  COMMITMENT                                                                                                                                                                                                               |         | —                                 |       | 2,005            |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| Total  liabilities                                                                                                                                                                                                                 |         | 244,238                                |       | 260,109          |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| 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 September 30, 2009 and December 31, 2008                                                                                      |         | 29                                     |       | 29               |       |
| Common  stock, $0.01 par value; 60,000,000 shares authorized; 28,905,613, and  28,833,546 shares issued and outstanding at September 30, 2009 and December  31, 2008, respectively                                                 |         | 289                                    |       | 288              |       |
| Additional  paid-in capital                                                                                                                                                                                                        |         | 424,508                                |       | 423,951          |       |
| Retained  deficit                                                                                                                                                                                                                  |         | (421,495                               | )          | (326,780         | )          |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| Total  stockholders’ equity                                                                                                                                                                                                   |         | 3,331                                  |       | 97,488           |       |
|                                                                                                                                                                                                                               |         |                                   |       |             |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                   |         | $                                      | 247,569    |             | $          | 357,597 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS (Unaudited)**

 
| ** **                                                    | ** ** | **Three Months Ended  September 30,**        | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2009**                                     | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                    | ** ** | **(in thousands, except per share amounts)** | ** ** |
| OIL AND NATURAL GAS REVENUE:                                  |       |                                         |       |                                 |       |   |   |   |   |
| Oil  and natural gas sales                                    |       | $                                            | 10,125     |                                 | $          | 43,136 |   | $ | 34,797 |   | $ | 139,212 |   |
| Gain  (loss) on derivatives                                   |       | 1,011                                        |       | 63,505                               |       | 12,188 |   | (22,452 | ) |
| Total  revenue                                                |       | 11,136                                       |       | 106,641                              |       | 46,985 |   | 116,760 |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| OPERATING EXPENSES:                                           |       |                                         |       |                                 |       |   |   |   |   |
| Oil and natural gas operating expenses                        |       | 3,171                                        |       | 4,039                                |       | 10,820 |   | 12,452 |   |
| Severance and ad valorem taxes                                |       | 324                                          |       | 2,654                                |       | 2,672 |   | 8,136 |   |
| Depletion, depreciation, amortization and  accretion          |       | 6,720                                        |       | 21,874                               |       | 24,348 |   | 70,767 |   |
| Impairment of oil and natural gas properties                  |       | —                                       |       | 129,520                              |       | 78,254 |   | 129,520 |   |
| General and administrative expenses                           |       | 5,152                                        |       | 6,380                                |       | 14,666 |   | 15,592 |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| Total operating expenses                                      |       | 15,367                                       |       | 164,467                              |       | 130,760 |   | 236,467 |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| OPERATING LOSS                                                |       | (4,231                                       | )          | (57,826                              | )          | (83,775 | ) | (119,707 | ) |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| OTHER INCOME AND EXPENSE:                                     |       |                                         |       |                                 |       |   |   |   |   |
| Other income                                                  |       | 5                                            |       | 156                                  |       | 17 |   | 257 |   |
| Interest expense, net of amounts capitalized                  |       | (3,016                                       | )          | (2,815                               | )          | (8,328 | ) | (9,323 | ) |
| Amortization of deferred loan costs                           |       | —                                       |       | (239                                 | )          | (1,465 | ) | (717 | ) |
| Reorganization expenses                                       |       | (1,122                                       | )          | —                               |       | (1,122 | ) | — |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                                      |       | (8,364                                       | )          | (60,724                              | )          | (94,673 | ) | (129,490 | ) |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| INCOME TAX BENEFIT (EXPENSE)                                  |       | (42                                          | )          | 20,714                               |       | (42 | ) | 45,478 |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| NET LOSS                                                      |       | (8,406                                       | )          | (40,010                              | )          | (94,715 | ) | (84,012 | ) |
| Preferred Stock Dividends                                     |       | —                                       |       | (2,066                               | )          | — |   | (6,199 | ) |
| NET LOSS TO COMMON STOCKHOLDERS                               |       | $                                            | (8,406     | )                                    | $          | (42,076 | ) | $ | (94,715 | ) | $ | (90,211 | ) |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| BASIC LOSS PER SHARE                                          |       | $                                            | (0.36      | )                                    | $          | (1.47 | ) | $ | (3.50 | ) | $ | (3.15 | ) |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| DILUTED LOSS PER SHARE                                        |       | $                                            | (0.36      | )                                    | $          | (1.47 | ) | $ | (3.50 | ) | $ | (3.15 | ) |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING   |       | 28,873                                       |       | 28,690                               |       | 28,860 |   | 28,636 |   |
|                                                          |       |                                         |       |                                 |       |   |   |   |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING |       | 28,873                                       |       | 28,690                               |       | 28,860 |   | 28,636 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                       | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                                                       | ** ** | **(in thousands)**                  | ** ** |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       | ** ** | ** **                          | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                   | (94,715    | ) | $ | (84,012 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                                |       |   |   |
| Unrealized (gain) loss on the fair value of  derivatives                         |       | 9,756                               |       | (8,402 | ) |
| Loss on property                                                                 |       | —                              |       | 34 |   |
| Deferred income taxes                                                            |       | —                              |       | (45,491 | ) |
| Depletion, depreciation, amortization and  accretion                             |       | 24,348                              |       | 70,767 |   |
| Impairment of oil and natural gas properties                                     |       | 78,254                              |       | 129,520 |   |
| Gain on ARO settlement                                                           |       | —                              |       | (83 | ) |
| Amortization of deferred loan costs                                              |       | 1,465                               |       | 717 |   |
| Bad debt expense                                                                 |       | 263                                 |       | 90 |   |
| Share based compensation costs                                                   |       | 558                                 |       | 2,371 |   |
| Changes in assets and liabilities:                                               |       |                                |       |   |   |
| Decrease in accounts receivable, trade                                           |       | 5,696                               |       | 1,555 |   |
| Decrease in accounts receivable, joint interest  owners                          |       | 4,679                               |       | 6,432 |   |
| Decrease in other assets                                                         |       | 388                                 |       | 244 |   |
| Increase (decrease) in accounts payable, trade                                   |       | (2,699                              | )          | 1,173 |   |
| Increase (decrease) in accrued liabilities                                       |       | (2,121                              | )          | 2,647 |   |
| Decrease in other liabilities                                                    |       | (18                                 | )          | — |   |
| Increase (decrease) in accrued interest payable                                  |       | 521                                 |       | (355 | ) |
|                                                                             |       |                                |       |   |   |
| Net cash provided by operating activities                                        |       | 26,375                              |       | 77,207 |   |
|                                                                             |       |                                |       |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |       |                                |       |   |   |
| Oil and natural gas property and equipment  additions                            |       | (11,064                             | )          | (50,515 | ) |
| Decrease in drilling advances                                                    |       | 1,163                               |       | 798 |   |
| Proceeds from the sale of oil and natural gas  properties                        |       | 328                                 |       | 19,173 |   |
| Overhedge derivative settlements                                                 |       | 672                                 |       | (10,905 | ) |
|                                                                             |       |                                |       |   |   |
| Net cash used in investing activities                                            |       | (8,901                              | )          | (41,449 | ) |
|                                                                             |       |                                |       |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |       |                                |       |   |   |
| Repayments of debt                                                               |       | (12,500                             | )          | (21,000 | ) |
| Preferred stock dividends paid                                                   |       | —                              |       | (6,199 | ) |
|                                                                             |       |                                |       |   |   |
| Net cash used in financing activities                                            |       | (12,500                             | )          | (27,199 | ) |
|                                                                             |       |                                |       |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                   |       | 4,974                               |       | 8,559 |   |
| ** **                                                                       |       |                                |       |   |   |
| **CASH AND CASH EQUIVALENTS,  BEGINNING OF PERIOD**                              |       | 8,475                               |       | 7,163 |   |
| ** **                                                                       |       |                                |       |   |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                    |       | $                                   | 13,449     |   | $ | 15,722 |   |

 

See accompanying notes toconsolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

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

 
| ** **                     | ** ** | ** **          | ** ** | ** **       | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**         | ** ** | ** **  | ** ** | **Total**  | ** ** |
|--------------------------------|------------|---------------------|------------|------------------|------------|-------------|------------|--------------|------------|------------------------|------------|-------------|------------|------------|------------|
| ** **                     | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Retained** | ** ** | **Stockholders’** | ** ** |
| ** **                     | ** ** | **Shares**          | ** ** | **Amount**       | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **Deficit** | ** ** | **Equity** | ** ** |
| ** **                     | ** ** | **(in thousands)**  | ** ** |
| BALANCE, DECEMBER 31, 2008     |       | 2,875               |       | $                | 29         |        | 28,833     |         | $          | 288                    |       | $           | 423,951    |       | $          | (326,780 | ) | $ | 97,488 |   |
|                           |       |                |       |             |       |        |       |         |       |                   |       |        |       |       |       |
| Issuance of common stock       |       | —              |       | —           |       | 72          |       | 1            |       | (1                     | )          | —      |       | —     |       |
|                           |       |                |       |             |       |        |       |         |       |                   |       |        |       |       |       |
| Share-based compensation costs |       | —              |       | —           |       | —      |       | —       |       | 558                    |       | —      |       | 558        |       |
|                           |       |                |       |             |       |        |       |         |       |                   |       |        |       |       |       |
| Net loss                       |       | —              |       | —           |       | —      |       | —       |       | —                 |       | (94,715     | )          | (94,715    | )          |
| BALANCE, SEPTEMBER 30, 2009    |       | 2,875               |       | $                | 29         |        | 28,905     |         | $          | 289                    |       | $           | 424,508    |       | $          | (421,495 | ) | $ | 3,331 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

**NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS**

 

**1.     ORGANIZATIONAND BASIS FOR PRESENTATION**

 

**The financial statements includedherein have been prepared by Edge Petroleum Corporation, a Delaware corporation(“we”, “our”, “us” or the “Company”), without audit pursuant to the rules andregulations of the Securities and Exchange Commission (“SEC”), and reflect alladjustments which are, in the opinion of management, necessary to present afair statement of the results for the interim periods on a basis consistentwith the annual audited consolidated financial statements. All such adjustmentsare of a normal recurring nature, except for the impairment of the Company’soil and natural gas properties, as discussed below.  The results of operations for the interimperiods are not necessarily indicative of the results to be expected for anentire year.  Certain information,accounting policies and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been omitted pursuant to such rules andregulations, although the Company believes that the disclosures are adequate tomake the information presented not misleading. These financial statementsshould be read in conjunction with our audited consolidated financialstatements included in our Annual Report on Form 10-K for the year ended December31, 2008.**

 

***GoingConcern*** – Inlight of the deficiency in the Company’s Revolving Facility, debt covenantviolations, stock price decline, negative working capital, continued net lossesand the Chapter 11 Cases (defined below) filed subsequent to September 30,2009, there is substantial doubt as to the Company’s ability to continue as agoing concern for a period longer than the next twelve months. Additionally,our independent auditors included an explanatory paragraph in their report onour consolidated financial statements in our Form 10-K for the year ended December31, 2008 that raises substantial doubt about the Company’s ability to continueas a going concern. The Company’s ability to continue as a going concern isdependent upon the outcome of the Chapter 11 Cases and the Company does notexpect to continue as a going concern at the conclusion of the Chapter 11Cases.

 

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

 

Financial Accounting StandardsBoard (“FASB”) Accounting Standards Codification (“ASC”) 852 *Reorganizations*, which is applicable to companies inreorganization proceedings under Chapter 11, generally does not change themanner in which financial statements are prepared. However, it does requirethat the financial statements for periods subsequent to the filing of theChapter 11 petition distinguish transactions and events that are directlyassociated with the reorganization from the ongoing operations of the business.Accordingly, due to the Chapter 11 Cases (defined below) filed on October 1,2009, revenues, expenses (including professional fees), realized gains andlosses, and provisions for losses that can be directly associated with thereorganization and restructuring of the business must be reported separately asreorganization items in the consolidated statements of operations beginning inthe quarter ending December 31, 2009. The consolidated balance sheet mustdistinguish pre-petition liabilities subject to compromise from both thosepre-petition liabilities that are not subject to compromise and frompost-petition liabilities. Liabilities that may be affected by the plan must bereported at the amounts expected to be allowed, even if they may be settled forlesser amounts. In addition, cash provided by reorganization items must bedisclosed separately in the consolidated statement of cash flows. The Companyadopted ASC 852 effective on October 1, 2009 and will segregate those items asoutlined above for all reporting periods subsequent to such date.

 

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**2.     RECENTDEVELOPMENTS**

 

***Financial and Strategic Alternatives Process -*** In late 2007, the Company announcedthe hiring of a financial advisor to assist its Board of Directors with anassessment of strategic alternatives. The credit crisis and related turmoil inthe global financial system and economic recession in the U.S. during the fourthquarter of 2008, along with declines in commodity prices and our stock prices,created a challenging environment for the successful completion of our proposedmerger with Chaparral Energy, Inc. (“Chaparral”), a privately held company. On December17, 2008, the Company announced the termination of the Chaparral mergeragreement after both the Company and Chaparral determined it was highlyunlikely that the conditions to the closing of the proposed merger would besatisfied or that Chaparral would be able to obtain sufficient debt and equityfinancing to allow them to complete the proposed merger and operate as acombined company, particularly in light of the challenging environment in thefinancial markets and the energy industry. The Company continued undertakingthe evaluation and assessment of various financial and strategic alternativesthroughout 2009 in order to address its liquidity issues and the impendingmaturity of the Company’s Fourth Amended and Restated Credit Agreement, asamended (the “Revolving Facility”) (see Note 4). In connection with thisprocess, the Company also retained a new investment banking firm early in 2009to assist further in the evaluation of its financial and strategicalternatives. On August 31, 2009, and after a series of other amendmentsextending the maturity date, the Company entered into Amendment No. 9(“Amendment No. 9”) to its Revolving Facility, which changed the maturity dateof the Revolving Facility from August 31, 2009 to September 30, 2009.

 

On September30, 2009, the Company and its subsidiaries, Edge Petroleum Exploration Company(“EPEX”), Miller Exploration Company (“Miller”), Edge Petroleum OperatingCompany, Inc. (“EPOC”), Edge Petroleum Production Company (“EPPC”) and MillerOil Corporation (“Miller Oil” and, together with EPEX, Miller, EPOC and EPPC,the “Subsidiaries” and, together with the Company, the “Debtors”) entered intoa Purchase and Sale Agreement (the “Purchase Agreement”) with PGP Gas SupplyPool No. 3 LLC (the “Proposed Purchaser”) pursuant to which the ProposedPurchaser will acquire all of the equity interests of each of the reorganizedSubsidiaries (together, the “Equity Interests”). The Purchase Agreementcontained certain covenants by the Debtors, including, among others, theagreement by each Debtor to file the Chapter 11 Cases (defined below) withinfive (5) business days of the date of signing of the Purchase Agreement (suchbankruptcy filing date, the “Filing Date”).

 

Pursuantto the Purchase Agreement, the effective date for the sale of the EquityInterests of the reorganized Subsidiaries is June 30, 2009. The Purchase Pricefor the Equity Interests to be conveyed pursuant to the Purchase Agreement is$191 million, subject to adjustment for, among other things, a downwardadjustment related to certain changes in the NYMEX Strip Price over the fiveyear period from January 1, 2010 through December 31, 2014 (the “Gas PricingDownward Adjustment”).  The Gas PricingDownward Adjustment is capped at approximately $23.9 million.  In addition to the Gas Pricing DownwardAdjustment, the Purchase Price is subject to further adjustments, as providedin the Purchase Agreement, including, among others, adjustments relating to (i)costs and expenses incurred by the Debtors in connection with the maintenanceof the Debtors’ properties before and after the effective date, (ii) changes inthe value of certain of the Company’s hedging contracts in the event of theirearly termination prior to the closing, (iii) gas imbalance volumes, (iv) environmentalconditions, if any, (v) title defects and benefits, if any, (vi) taxes, (vii) proceedsof production before and after the effective date, (viii) unsold inventory asof the effective date, and (ix) prepaid items.  The proceeds from the sale of the Equity Interestswill be used to substantially reduce the Company’s indebtedness under theRevolving Facility.  The Companycurrently has approximately $226.5 million of outstanding principal under itsRevolving Facility which is substantially in excess of the proceeds expected tobe received pursuant to the Purchase Agreement.

 

ThePurchase Agreement also provides for (i) a break-up fee (the “Break-Up Fee”) of$6 million together with an expense reimbursement (the “Expense Reimbursement”)of up to $500,000 to the Proposed Purchaser under certain circumstances if thetransaction is not ultimately consummated with the Proposed Purchaser, (ii) adeposit by the Proposed Purchaser of $8 million and (iii) a liquidated damagesprovision which generally provides for a limitation on damages in the amount of$8 million that may be claimed by the Company in the event of a breach by theProposed Purchaser of certain of the terms and conditions of the PurchaseAgreement (including certain breaches by the Proposed Purchaser which mayresult in the transactions 

 

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contemplated by the PurchaseAgreement not being consummated).  TheProposed Purchaser may terminate the Purchase Agreement under certaincircumstances, including if (i) the Bankruptcy Court (defined below) has notconfirmed the joint plan of reorganization (the “Plan”) by the Filing Date plusone hundred five (105) days, (ii) the Bankruptcy Court denies the motion forentry of the bidding procedures order, fails to approve the Break-Up Fee or theExpense Reimbursement, or fails to enter the bidding procedures order by theFiling Date plus thirty (30) days (which conditions were each satisfied on October5, 2009), (iii) the Company has breached any representation, warranty orcovenant in the Purchase Agreement in any material respect and such breachresults in a material adverse effect and the Company has failed to cure suchbreach within a reasonable time period after receiving written notice from theProposed Purchaser of such breach, (iv) the Chapter 11 Cases have beenconverted to cases under Chapter 7 of the Bankruptcy Code (defined below), (v) theChapter 11 Cases have been dismissed, (vi) a trustee or examiner withmanagerial powers is appointed, other than at the request of the ProposedPurchaser, under Bankruptcy Code Section 1104 and such trustee or examinertakes any action to interfere with or impair the transactions contemplated bythe Purchase Agreement, (vii) the Company enters into an alternativetransaction to the Purchase Agreement, (viii) the Company takes affirmativesteps to effect an alternative transaction (except as otherwise provided in thebidding procedures order), or (ix) any event, circumstance, condition, fact,effect or other matter has occurred or exists which would, or would bereasonably likely to, give rise to the failure of any of the conditionsprecedent to the obligations of the Proposed Purchaser and cannot be curedwithin five (5) business days prior to closing.  Consummation of the transactions contemplatedby the Purchase Agreement is subject to higher and better offers received in aBankruptcy Court-supervised auction, approval of the Bankruptcy Court and othercustomary closing conditions.  TheCompany can terminate the Purchase Agreement under certain circumstances,including if the Proposed Purchaser has breached any representation, warrantyor covenant in any material respect and the Proposed Purchaser has failed tocure such breach within five (5) business days after receiving written noticefrom the Company of such breach.  TheCompany and the Proposed Purchaser can each terminate the Purchase Agreementunder certain circumstances if the closing has not occurred on or before the11th day after entry of the confirmation order in the Chapter 11 Cases and alsoif certain of the purchase price adjustments relating generally to titledefects, title benefits, environmental matters, retained properties andcasualty losses exceed a downward adjustment of greater than twenty percent(20%) of the Purchase Price.

 

***Chapter 11 Cases*** - On October 1, 2009, the Debtorsfiled voluntary petitions (the “Chapter 11 Cases”) for reorganization reliefunder Chapter 11 of Title 11 of the United States Code, 11 U.S.C. §§ 101 et.seq., as amended (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the Southern District of Texas, Corpus Christi Division (the “BankruptcyCourt”).  The Chapter 11 Cases are beingjointly administered under the caption “In re: Edge Petroleum Corporation, etal.,” Case No. 09-20644(RSS). The Debtors remain in possession of their assets,and will continue to manage and operate their businesses and properties as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with Bankruptcy Code Sections 1107 and 1108 and other applicableprovisions of the Bankruptcy Code, which require, among other things,Bankruptcy Court approval of certain matters outside the ordinary course ofbusiness.  During the bankruptcy process,the Company, with the consent of the Pre-petition Lender, has receivedBankruptcy Court authority to use cash flow from operations to provide workingcapital and financial resources necessary to allow business operations tocontinue as normal, including meeting obligations to employees and certainvendors, customers and others.

 

Whileno trustee, examiner, or official committee has been appointed, there can be noassurance that the Debtors will remain in possession of their assets andcontrol of their businesses as debtors-in-possession and that a trustee willnot be appointed to operate the businesses of the Debtors.  The Debtors’ current business relationshipsand arrangements, and the Debtors’ ability to negotiate future businessarrangements may be adversely affected by the filing of the Chapter 11 Cases.

 

On theFiling Date, the Company filed motions for an order granting authority to sellthe Equity Interests, establishing bidding and auction procedures pursuant toBankruptcy Code Sections 105, 363, 365 and 1123(b), designating the ProposedPurchaser as the “stalking horse bidder”, approving the Break-Up Fee and theExpense Reimbursement and setting a hearing date to approve the sale of the EquityInterests.  After entry of the bidprocedures order approving the bidding and auction process for all of theEquity Interests, or substantially all of the Debtors’ assets, the Debtorsintend to engage in an auction process with any and all 

 

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interested parties.  The Company intends to request the BankruptcyCourt to approve the sale to the highest and best bid at the auction.

 

TheCompany has filed the Plan, which is subject to confirmation by the BankruptcyCourt and the approval of at least one of the impaired classes.  The Company expects the Bankruptcy Court toenter a ruling on the Plan in early December 2009. There can be no assurancethat the Plan will be acceptable to the Company’s creditors or confirmed by theBankruptcy Court, or that the Disclosure Statement (defined below) will beapproved by the Bankruptcy Court.  Accordingly, all information contained in thePlan and the Disclosure Statement is subject to change, whether as a result ofamendments or supplements thereto, actions of third parties or otherwise.

 

***Plan Support and Lock-Up Agreement*** - In order to expedite therestructuring and reorganization of the Debtors as contemplated in the PurchaseAgreement, the Company and the lenders to the Company’s Revolving Facility (the“Supporting Lenders”) who hold at least two-thirds of the outstanding principalamount pursuant to the Revolving Facility and who constitute more than one-halfof the number of lenders under the Revolving Facility entered into a PlanSupport and Lock-Up Agreement (the “Plan Support Agreement”) dated as of September30, 2009 which contains as exhibits a draft of the Plan and a draft of thedisclosure statement (the “Disclosure Statement”).  The Plan Support Agreement requires theSupporting Lenders to (i) vote in favor of and support the Plan, (ii) voteagainst and not support any restructuring or reorganization that is not consistentwith the Plan, and (iii) not (a) seek, solicit, support or encourage any otherrestructuring plan, (b) object to the Disclosure Statement or the solicitationof votes for the Plan or support any objection by any third party, or (c) takeany action that is inconsistent with, or that would materially delay orobstruct the proposed solicitation, confirmation or consummation of, the Plan.

 

Underthe Plan Support Agreement, the Debtors agreed, among other things, to usereasonable commercial efforts to (i) file the Plan and Disclosure Statement nolater than five (5) days after the Filing Date, (ii) obtain Bankruptcy Courtapproval of the Disclosure Statement no later than forty-five (45) days afterthe Filing Date, (iii) obtain confirmation of the Plan by the Bankruptcy Courtwithin ninety (90) days of the Filing Date, and (iv) consummate the PurchaseAgreement or another agreement entered into pursuant to the bidding proceduresorder within (11) days of confirmation of the Plan, and not take any action thatis materially inconsistent with, or that would materially delay consummationof, either the restructuring of the Debtors or the effectiveness of the Plan.

 

Thesupport of the Supporting Lenders under the Plan Support Agreement willterminate under certain circumstances, including among others, if (i) the sumof certain proposed adjustments to the Purchase Price with respect to titledefects, environmental matters, retained properties and casualty losses exceeds$5 million, (ii) the sum of certain allowed administrative and priority claimsexceeds the specified reserve for administrative and priority claims, (iii) theDebtors file a plan of reorganization that is different from the Plan or shallmodify or amend the Plan in any material respect without the written consent ofthe Administrative Agent, (iv) the Bankruptcy Court enters a cash collateralorder or budget without the written consent of the required lenders that ismaterially different from those agreed upon by the Supporting Lenders and theDebtors, (v) the Plan shall not have been confirmed by the Bankruptcy Court inaccordance with its terms within one hundred and five (105) days of the FilingDate, (vi) the Company shall withdraw or revoke the Plan or shall publiclyannounce its intention not to pursue confirmation of the Plan, (vii) a trusteeshall have been appointed in any of the Chapter 11 Cases, any of the Chapter 11Cases shall have been converted to cases under Chapter 7 of the Bankruptcy Codeor any of the Chapter 11 Cases shall have been dismissed by order of theBankruptcy Court, or (viii) the Plan shall not have been substantiallyconsummated in accordance with its terms within one hundred twenty (120) daysof the Filing Date.

 

***NASDAQ Actions*** - On September 16, 2009, the Company received notice (the“Common Notice”) from The Nasdaq Stock Market (the “NASDAQ”) that the minimumbid price of the Company’s common stock was below $1.00 per share for 30consecutive business days and that the Company was therefore not in compliancewith the minimum bid price rule for continued listing set forth in NasdaqMarketplace Rule 5450(a)(1).

 

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On October2, 2009, the Company received notice (the “Notice”) from the NASDAQ that theCompany’s common stock and 5.75% series A cumulative convertible perpetualpreferred stock (the “Convertible Preferred Stock”) would be suspended fromtrading on the NASDAQ at the opening of business on October 13, 2009 pursuantto the NASDAQ’s Listing Rules 5100, 5110(b) and IM-5100-1, and that a Form 25-NSEwould be filed with the SEC, which would remove the Company’s securities fromlisting and registration on the NASDAQ.  According to the Notice, the determination todelist the Company’s securities was based on (i) the announcement by theCompany on October 2, 2009 that it and each of its subsidiaries have filedvoluntary petitions for reorganization under Chapter 11 of the U.S. BankruptcyCode and the associated public interest concerns raised by such bankruptcypetitions; (ii) concerns regarding the residual equity interest of the existinglisted securities holders; and (iii) concerns about the Company’s ability tosustain compliance with all requirements for continued listing on the NASDAQ.

 

TheCompany decided not to appeal the NASDAQ’s determination to a Hearings Panel,pursuant to the procedures set forth in the NASDAQ’s Listing Rule 5800 Series andthe Company did not take any further action to appeal the NASDAQ’s decision,and therefore the Company’s securities were suspended from trading on October 13,2009 and are expected to be delisted in November 2009.

 

**3.     SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

***Codification****-*On June 3, 2009, the Financial AccountingStandards Board (“FASB”) approved the FASB Accounting Standards Codification(“Codification”) as the single source of generally accepted accountingprinciples in the United States of America (“GAAP”). On June 29, 2009, the FASBissued ASC105-10, *Generally Accepted Accounting Principles*.FASB ASC 105-10 establishes the Codification to become the source ofauthoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority of federalsecurities laws are also sources of authoritative GAAP for SEC registrants. TheCodification supersedes all existing non-SEC accounting and reportingstandards. All other non-grandfathered non-SEC accounting literature not includedin the Codification become non-authoritative. Following FASB ASC 105-10, theFASB will not issue new standards in the form of Statements, FASB StaffPositions, or Emerging Issues Task Force Abstracts. Rather, the FASB will issueAccounting Standards Updates, which will serve only to: (a) update theCodification; (b) provide background information about such guidance; and (c) providethe bases for conclusions on the change(s) in the Codification. The content ofthe Codification carries the same level of authority as such FASB AccountingStandards Updates. The GAAP hierarchy will be modified to include only twolevels of GAAP: authoritative and non-authoritative. FASB ASC 105-10 and theCodification are effective for financial statements issued for interim andannual periods ending after September 15, 2009, which means that a calendaryear-end public entity should follow the guidelines in the Codificationbeginning with its third quarter starting on July 1, 2009. The Company adoptedthe Codification on July 1, 2009. Since the Codification did not alter existingGAAP, it did not have an impact on our Consolidated Financial Statements. Allreferences to pre-codified GAAP have been removed from this Form 10-Q andreplaced with the Codification references.

 

***Oil and Natural GasProperties*****-**Investments in oil and natural gas properties are accounted for usingthe full-cost method of accounting. The accounting for our business is subjectto special accounting rules that are unique to the oil and natural gas industry.  There are two allowable methods of accountingfor oil and natural gas business activities: the successful-efforts method and the full-cost method. Thereare several significant differences between these methods. Among thesedifferences is that, under the successful-efforts method, costs such asgeological and geophysical (“G&G”), exploratory dry holes and delay rentalsare expensed as incurred whereas under the full-cost method these types ofcharges are capitalized to their respective full-cost pool. In accordance withthe full-cost method of accounting, all costs associated with the exploration,development and acquisition of oil and natural gas properties, includingsalaries, benefits and other internal costs directly attributable to theseactivities are capitalized within a cost center.  The Company’s oil and natural gas propertiesare located within the United States of America, which constitutes one costcenter. The Company also capitalizes a portion of interest expense on borrowedfunds.

 

In the measurement ofimpairment of oil and natural gas properties, the successful-efforts methodfollows the guidance provided in FASB ASC 932-360-35-8, *Impairment*, where the first measurementfor 

 

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impairment is to compare the net book value of therelated asset to its undiscounted future cash flows using commodity pricesconsistent with management expectations. The full-cost method follows guidanceprovided in FASB ASC 932-10-S99-1, *Extractive Activities –Oil and Gas – SEC Materials,* (also SEC Regulation S-X Rule 4-10),where impairment is determined by the “ceiling test,” whereby to the extentthat such capitalized costs subject to amortization in the full-cost pool (netof accumulated depletion, depreciation and amortization, prior impairments, andrelated tax effects) exceed the present value (using a 10% discount rate) ofestimated future net after-tax cash flows from proved oil and natural gasreserves, such excess costs are charged to expense. Once incurred, animpairment of oil and natural gas properties is not reversible at a laterdate.  A ceiling test impairment couldresult in a significant loss for a reporting period; however, future depletionexpense would be correspondingly reduced. Impairment of oil and natural gasproperties is assessed on a quarterly basis in conjunction with the Company’squarterly and annual SEC filings. The Company recorded a net non-cash ceilingtest impairment of $78.3 million during the quarter ended March 31, 2009 as aresult of further declines in commodity prices since December 31, 2008. Noceiling test impairment was required during the quarter ended September 30,2009. At September 30,2008 the Company recorded a net non-cash ceiling test impairment of $129.5million ($84.2 million, net of tax), which was the result of declines incommodity prices and negative revisions in our proved reserve quantities atyear-end 2007 and during 2008.

 

In accordance with FASB ASC932-10-S99-2, *Extractive Activities – Oil and Gas – SECMaterials,*derivative instruments qualifying as cash flow hedges areto be included in the computation of limitation on capitalized costs.  Since January 1, 2006, the Company has notapplied cash flow hedge accounting to any derivative contracts (see Note 10),therefore the ceiling tests at September 30, 2009 and 2008 were not impacted bythe value of our derivatives.

 

Oil and natural gasproperties are amortized based on a unit-of-production method using estimatesof proved reserve quantities. Oil and natural gas liquids (“NGL”) are convertedto a gas equivalent basis (“Mcfe”) at the rate of one barrel equals six Mcf. Inaccordance with FASB ASC 932-10-S99-2, *Extractive Activities –Oil and Gas – SEC Materials,*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 an unprovedproperty is impaired, the amount of impairment is added to the proved oil andnatural gas property costs to be amortized. Costs excluded from amortizationrelated to unproved properties were $24.4 million and $16.4 million at September30, 2009 and December 31, 2008, respectively.

 

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

 

***Financial Instruments*** – The Company adopted theprovisions of FASB ASC 825-10-65, Financial Instruments – Transition and OpenEffective Date Information, effective April 1, 2009. FASB ASC 825-10-65requires disclosures about fair value of financial instruments for publiclytraded companies for interim periods. Historically, these disclosures were onlyrequired annually. The interim disclosures are intended to provide financialstatement users with more timely and transparent information about the effectsof current market conditions on an entity’s financial instruments that are nototherwise reported at fair value. The Company’s financial instruments consistof cash, receivables, payables, debt and oil and natural gas commodity derivatives.  The carrying amount of cash, receivables andpayables approximates fair value because of the short-term nature of theseitems.  Derivative instruments arereflected at fair value based on quotes obtained from the Company’scounterparties (see Note 10). The carrying amount of the Company’s debt as of December31, 2008 approximated fair value because the interest rates were variable andreflective of market rates, but as of September 30, 2009 the Company believesit is not practicable to estimate the fair value of its outstanding debt inlight of the Chapter 11 Cases that the Company filed (see Note 4). As providedby Amendment No. 9, the maturity date of the outstanding debt under theRevolving Facility was September 30, 2009. The Company failed to make thepayment due under the Revolving Facility on or before September 30, 2009 whichhas resulted in an event of default under the Revolving Facility. The filing ofthe Chapter 11 Cases also constitutes an event of default under the RevolvingFacility. The ability of the secured creditors to seek remedies to enforce 

 

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their rights under the RevolvingFacility is automatically stayed as a result of the filing of the Chapter 11Cases.  The automatic stay invoked by thefiling of the Chapter 11 Cases effectively precludes any actions by theCompany’s secured creditors to collect, assert, or recover a claim against theDebtors, subject to the applicable provisions of the Bankruptcy Code and ordersgranted by the Bankruptcy Court.The carrying amount of the Company’s debt under the Revolving Facility(including principal, fees and interest) as of September 30, 2009 was $227.6million and the interest rate applied at September 30, 2009 was 5.75%.

 

***Accounts Receivable and Allowance for Doubtful Accounts*** - The Company routinely assesses therecoverability of all material trade and other receivables to determine itsability to collect the receivables in full. Accounts Receivable, JointInterest Owners included an allowance for doubtful accounts of approximately$175,700 and $15,300 at September 30, 2009 and December 31, 2008, respectively.Accounts Receivable, Trade included an allowance for doubtful accounts ofapproximately $167,500 and $64,500 at September 30, 2009 and December 31, 2008,respectively.

 

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

 

***Asset RetirementObligations (“ARO”) –***The Company records a liability for legal obligationsassociated with the retirement of tangible long-lived assets in the period inwhich they are incurred in accordance with FASB ASC 410-20, *Asset Retirement Obligations.* Under FASB ASC 410-20, when liabilities for dismantlementand abandonment costs, excluding salvage values, are initially recorded, thecarrying amount of the related oil and natural gas properties is increased.Accretion of the liability is recognized each period using the interest methodof allocation, and the capitalized cost is depleted over the useful life of therelated asset. The changes to the ARO for oil and natural gas properties andrelated equipment during the nine months ended September 30, 2009 and 2008 areas follows:

 
| ** **                                      | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                      | ** ** | **2009**                            | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                  | ** ** |
| ARO,  Beginning of Period                       |       | $                                   | 6,558      |   | $ | 6,634 |   |
| Liabilities  incurred in the current period     |       | 11                                  |       | 615 |   |
| Liabilities  settled/sold in the current period |       | (12                                 | )          | (1,349 | ) |
| Accretion  expense                              |       | 288                                 |       | 283 |   |
| Revisions                                       |       | (13                                 | )          | 152 |   |
| ARO,  End of Period                             |       | $                                   | 6,832      |   | $ | 6,335 |   |
|                                            |       |                                |       |   |   |
| Current  Portion                                |       | $                                   | 558        |   | $ | 491 |   |
| Long-Term  Portion                              |       | $                                   | 6,274      |   | $ | 5,844 |   |

 

During the nine monthsended September 30, 2009, ARO liabilities were recorded for two new obligationsand liabilities settled include three properties. Revisions resulted from achange in working interest on a property located in Texas.

 

***RevenueRecognition and Gas Balancing -***The Companyrecognizes oil and natural gas revenue from its interests in producing wells asoil and natural gas is produced and sold from those wells. Oil and natural gassold by the Company is typically not significantly different from the Company’sshare of production. But gas imbalances can occur when sales are more or lessthan the Company’s entitled ownership percentage of total gas production. Gasimbalances may be accounted for under either the (1) entitlements method,whereby revenue is recorded on the Company’s interest in the gas productionactually sold or (2) sales method, whereby revenue is recorded on the basis oftotal gas actually sold by the Company. The Company uses the sales method ofaccounting for gas balancing and an asset or a liability is recognized to theextent that there is a material imbalance in excess of the remaining gasreserves on the underlying properties.  Asof September 30, 2009 and December 31, 2008, our gas production was materiallyin balance, i.e. our cumulative portion of gas production 

 

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taken and sold from wellsin which the Company has an interest was not materially different from ourentitled interest in gas production from those wells.

 

***Share-BasedCompensation***– The Company accounts for share-basedcompensation in accordance with the provisions of FASB ASC 718, *Compensation - Stock Compensation,* which requires that thecompensation cost relating to share-based payment transactions be recognized infinancial statements. Share-based compensation for the nine months ended September30, 2009 was approximately $0.6 million, of which approximately $0.3 millionwas included in general and administrative expenses (“G&A”) andapproximately $0.3 million was capitalized to oil and natural gas properties.Share-based compensation for the nine months ended September 30, 2008 wasapproximately $1.9 million, of which $1.5 million was included in general andadministrative expenses and $0.4 million was capitalized to oil and natural gasproperties.

 

During the nine monthsended September 30, 2009, no restricted stock units (“RSUs”) were granted. At September30, 2009, there were 143,424 RSUs outstanding, all of which were classified asequity instruments.  No options weregranted during the nine months ended September 30, 2009, and at period end,there were 359,000 vested unexercised options outstanding.

 

***IncomeTaxes -***Effective January 1, 2007, the Company adopted certain provisions of FASB ASC740-10-25, *Income Taxes*.  These provisions clarified the accounting foruncertainty in income taxes recognized in the financial statements byprescribing a recognition threshold and measurement attribute for a taxposition taken or expected to be taken in a tax return.  ASC 740-10-25 also provides guidance onde-recognitions, classification, interest and penalties, accounting in interimperiods, disclosure and transition. The Company also adopted provisions thatrequire a company’s tax position to 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 (see Note 8).

 

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

 
| ** **                                    | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2009**                              | ** ** | **2008**                             | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    | ** ** | **(in thousands)**                    | ** ** |
| Net Loss                                      |       | $                                     | (8,406     | )                                    | $          | (40,010 | ) | $ | (94,715 | ) | $ | (84,012 | ) |
| Preferred Dividends                           |       | —                                |       | (2,066                               | )          | — |   | (6,199 | ) |
| Net Loss Available to Common Stockholders     |       | (8,406                                | )          | (42,076                              | )          | (94,715 | ) | (90,211 | ) |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Other Comprehensive Income (Loss), Net of Tax |       | —                                |       | —                               |       | — |   | — |   |
| Total Comprehensive Loss                      |       | $                                     | (8,406     | )                                    | $          | (42,076 | ) | $ | (94,715 | ) | $ | (90,211 | ) |

 

***Fair ValueMeasurements –***Effective January 1,2008, the Company partially adopted FASB ASC 820, *Fair Value Measurements and Disclosure,* which provides acommon definition of fair value, establishes a framework for measuring fairvalue and expands disclosures about fair value measurements, but does notrequire any new fair value measurements. On January 1, 2009 the Company adoptedFASB ASC 820 for the non-financial assets and non-financial liabilities thatwere delayed in adoption by FASB ASC 820-10-15, *Fair Value Measurements and Disclosure – Scope and Scope Exceptions*.Accordingly, the Company has now applied the provisions of FASB ASC 820 to itsAROs. The adoption of FASB ASC 820 had no impact on the Company’s financialstatements, but it did result in additional required disclosures as set forthin Note 11.

 

***SubsequentEvents –***TheCompany adopted FASB ASC 855-10-25, *Subsequent Events,*effective April 1, 2009. FASB ASC 855-10-25 does not change the Company’saccounting policy for subsequent events, but instead incorporates existingaccounting and disclosure requirements related to subsequent events into 

 

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GAAP. FASB ASC855-10-25 defines subsequent events as either recognized subsequent events,those that provide additional evidence about conditions at the balance sheetdate, or nonrecognized subsequent events, those that provide evidence aboutconditions that arose after the balance sheet date. Recognized subsequentevents are recorded in the financial statements for the period being presented,while nonrecognized subsequent events are not. Both types of subsequent eventsrequire disclosure in the consolidated financial statements if those financialstatements would otherwise be misleading. FASB ASC 855-10-25 requires theCompany to disclose the date through which subsequent events have beenevaluated. The adoption of FASB ASC 855-10-25 had no impact on the financialstatements of the Company. The Company has evaluated subsequent events through November9, 2009, the filing date of this Quarterly Report on Form 10-Q and includeddisclosures regarding the Chapter 11 Cases and certain NASDAQ actions (see Note12 for additional discussion).

 

***Recent Accounting Pronouncements Not Yet Adopted***– In December 2008, the SEC issued thefinal rule, *“Modernization of Oil and GasReporting*,” which adopts revisions to the SEC’s oil and natural gasreporting disclosure requirements and is effective for annual reports on Forms 10-Kfor years ending on or after December 31, 2009. Early adoption of the new rulesis prohibited. The new rules are intended to provide investors with a moremeaningful and comprehensive understanding of oil and natural gas reserves tohelp investors evaluate their investments in oil and natural gas companies. Thenew rules are also designed to modernize the oil and natural gas disclosurerequirements to align them with current practices and changes in technology.The new rules include changes to the pricing used to estimate reserves, theability to include nontraditional resources in reserves, the use of newtechnology for determining reserves and permitting disclosure of probable andpossible reserves. The Company is currently evaluating the potential impact ofthese rules. The SEC is discussing the rules with the FASB staff to align FASBaccounting standards with the new SEC rules. These discussions may delay therequired compliance date. Absent any change in the effective date, the Companywill begin complying with the disclosure requirements in our annual report on Form10-K for the year ended December 31, 2009.

 

In September 2009, the FASB issued an exposuredraft of proposed Accounting Standards Update (“ASU”) entitled *Oil and Gas Reserve Estimation and Disclosures.*This proposed ASU would amend the FASB accounting standards to align FASB ASC932, *Extractive Activities – Oil and Gas* withall of the aforementioned new SEC requirements.  This proposal is expected to become an issuedaccounting update within the last quarter of 2009 with an effective date forannual reports for fiscal years ending on or after December 15, 2009.  The Company is currently assessing the impactof this new authoritative accounting guidance on the Company’s consolidatedfinancial statements.

 

In June 2009, the FASBissued guidance which amends the consolidation guidance applicable to variableinterest entities. This guidance is included in FASB ASC 810, *Consolidation.*The amendments significantly reduce thepreviously required quantitative consolidation analysis, and require ongoingreassessments of whether a company is the primary beneficiary of a variableinterest entity. This new guidance also requires enhanced disclosures about anenterprise’s involvement with a variable interest entity. This statement iseffective for the beginning of the first annual reporting period beginningafter November 15, 2009. The Company does not currently expect the adoption ofthe new guidance in FASB ASC 810 to impact its consolidated financialstatements.

 

**4.****             ****DEBT**

 

On January 30, 2007, theCompany entered into a Fourth Amended and Restated Credit Agreement (asamended, the “Revolving Facility”) for a new revolving credit facility withUnion Bank of California (“UBOC”), as administrative agent and issuing lender,and the other lenders party thereto (together with UBOC, the “Lenders”).Pursuant to the Revolving Facility, UBOC acts as the administrative agent for asenior first lien secured borrowing base revolving credit facility in favor ofthe Company and certain of its wholly-owned subsidiaries in an amount equal to$750 million, of which $320 million was available under the borrowing base atthe time of closing (see below for discussion of current availability).  The Revolving Facility had a letter of creditsub-limit of $20 million. The Revolving Facility’s original maturity was scheduledfor January 31, 2011.

 

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The Company’s obligationsunder the Revolving Facility are secured by substantially all of the Company’sassets. The Revolving Facility provides for certain restrictions, including,but not limited to, limitations on additional borrowings, sales of oil andnatural gas properties or other collateral, and engaging in merger or consolidationtransactions. The Revolving Facility restricts dividends on common stock andcertain distributions of cash or properties and certain liens but no longercontains any financial covenants as a result of the Amended Consent (definedbelow).

 

The RevolvingFacility includes certain 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 of control.  “Change of control,” as defined in theRevolving Facility, means any of the following events: (a) any “person” or“group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) hasbecome, directly or indirectly, the “beneficial owner” (as defined in Rules 13d-3and 13d-5 under the Exchange Act, except that a person shall be deemed to have“beneficial ownership” of all such shares that any such person has the right toacquire, whether such right is exercisable immediately or only after thepassage of time, by way of merger, consolidation or otherwise), of a majorityor more of the common stock of the Company on a fully-diluted basis, aftergiving effect to the conversion and exercise of all outstanding warrants,options and other securities of the Company (whether or not such securities arethen currently convertible or exercisable), (b) during any period of twoconsecutive calendar quarters, individuals who at the beginning of such periodwere members of the Company’s 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 the directors of the Company whoconstituted the Board of Directors at the beginning of such period (or bydirectors so elected) or (ii) the reason for such 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 all ofthe equity interests of each of its subsidiaries.

 

At September 30, 2009,borrowings under the Revolving Facility bore interest at Prime plus a margin of2.5% which equated to an interest rate applied to the Company’s outstandingborrowings of 5.75%.  As of September 30,2009, $226.5 million in total borrowings were outstanding under the Revolving Facility.

 

As a result of theredetermination process of the borrowing base by the Lenders under theRevolving Facility, which was completed in January 2009, the Lendersestablished a new borrowing base under the Revolving Facility of $125 million,resulting in a $114 million deficiency (the “Deficiency”).  The reduction to the Company’s borrowing basewas primarily the result of the sale of certain non-core assets during thefirst quarter of 2008 and the reduction of total proved reserves as reported inthe year-end reserve reports of the Company’s independent reserve engineers.

 

Pursuant to the terms of the Revolving Facility,the Company initially elected to prepay the Deficiency in six equal monthlyinstallments, with the first $19 million installment being due on February 9,2009. The Company has entered into the following consents and amendments(collectively, the “Amendments”) with its Lenders in recent months as a resultof its financial and strategic alternatives process:

 

·            OnFebruary 9, 2009, the Company entered into a Consent and Agreement (the “FebruaryConsent”) among the Company and the Lenders under the Revolving Facilitydeferring the payment date of the first $19 million installment until March 10,2009, and extending the due date for each subsequent installment by one monthwith the last of the six installment payments to be due on August 10,2009.  In connection with the February Consent,the Company agreed to prepay $5.0 million of the Company’s outstanding advancesunder the Revolving Facility, in two equal installments.  The first $2.5 million prepayment was paid onFebruary 9, 2009 and the second $2.5 million prepayment was paid on February 23,2009, with each of these prepayments applied on a pro rata basis to reduce thesix remaining $19 million deficiency payments.

 

·            OnMarch 10, 2009, the Company entered into a Consent and Agreement (the “March Consent”)with the Lenders under the Revolving Facility, which provided, among otherthings, for the extension of the due date for the first installment to repaythe Deficiency from March 10, 2009 to March 17, 2009. Notwithstanding suchextension, the Company agreed with the Lenders that each of the other fiveequal installment payments required to eliminate the Deficiency would be dueand payable as provided for in the February Consent.

 

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·    On March 16,2009, the Company entered into Consent and Amendment No. 4 (the “AmendedConsent”) which provided, among other things, (1) that the Company would makea $25 million payment on May 31, 2009 with all remaining principal, feesand interest amounts under the Revolving Facility to be due and payable on June 30,2009, (2) that it will be an event of default (i) if the Companyfailed to have executed and delivered on or before May 15, 2009 at leastone of the following (a) a commitment letter from a lender or group oflenders reasonably satisfactory to the Lenders providing for the provision bysuch lender or group of lenders of a credit facility in an amount sufficient torepay all of the Company’s obligations under the Revolving Facility on orbefore June 30, 2009, (b) a merger agreement or similar agreementinvolving the Company as part of a transaction that results in the repayment ofthe Company’s obligations under the Revolving Facility on or before June 30,2009, and (c) a purchase and sale agreement with a buyer or group ofbuyers reasonably acceptable to the Company’s Lenders providing for a saletransaction by us that results in the repayment of all of the Company’sobligations under the Revolving Facility on or before June 30, 2009, or (ii) ifthe Company is in default under or its hedging arrangements have beenterminated or cease to be effective without the prior written consent of itsLenders, (3) that the Company’s advances under the Revolving Facilitywould bear interest at a rate equal to the greater of (a) the referencerate publicly announced by Union Bank of California, N.A. for such day, (b) theFederal Funds Rate in effect on such day plus 0.50% and (c) a ratedetermined by the Administrative Agent to be the Daily One-Month LIBOR (asdefined in the Revolving Facility), in each case plus 2.5% or, during thecontinuation of an event of default, plus 4.5% (resulting in an effectiveinterest rate of approximately 5.75%), (4) for severe limitations on themaking of capital expenditures and certain investments, and (5) for theelimination of the current ratio, leverage ratio and interest coverage ratiocovenant requirements. The Amended Consent also eliminated the six $19 milliondeficiency payments which were contemplated by the February Consent andthe March Consent.

 

·    On May 15,2009, the Company entered into Amendment No. 5 (“Amendment No. 5”)which provided for, among other things, (1) the elimination of theprovision providing that it would be an event of default if the Company failedto have executed and delivered on or before May 15, 2009 at least one ofthe following (a) a commitment letter from a lender or group of lendersreasonably satisfactory to the lenders providing for the provision by suchlender or group of lenders of a credit facility in an amount sufficient torepay all of the Company’s obligations under the Revolving Facility on orbefore June 30, 2009, (b) a merger agreement or similar agreementinvolving the Company as part of a transaction that resulted in the repaymentof the Company’s obligations under the Revolving Facility on or before June 30,2009, and (c) a purchase and sale agreement with a buyer or group ofbuyers reasonably acceptable to the Lenders providing for a sale transaction bythe Company that resulted in the repayment of all of the Company’s obligationsunder the Revolving Facility on or before June 30, 2009 and (2) theelimination of certain reporting requirements relating to certificates to beprovided by the Company’s auditors and responsible officers.

 

·    On May 29,2009, the Company entered into Amendment No. 6 (“Amendment No. 6”)which eliminated the May 31, 2009 payment obligation and provided that therelated $25 million payment for outstanding advances as well as any unpaidinterest thereon and all remaining principal, fees and interests amounts underthe Revolving Facility would be due on June 30, 2009.

 

·    On June 30,2009, the Company entered into Amendment No. 7 (“Amendment No. 7”)which provided for, among other things, (1) changing the maturity date ofthe Revolving Facility from June 30, 2009 to July 31, 2009, (2) theCompany’s agreement to make a prepayment of interest of $1,142,753.42 millionrepresenting the amount anticipated to be owing in respect of the interestpayment due and payable on July 31, 2009 and (3) the Company’sagreement to make a prepayment of the advances under the Revolving Facility inthe amount of $7.5 million with such prepayment to be made on or before July 10,2009. The Company paid the July interest of approximately $1.1 million on July 1,2009 and also paid $7.5 million on July 10, 2009.

 

·    On July 31,2009 the Company entered into Amendment No. 8 (“Amendment No. 8”)which changed the maturity date of the Company’s Revolving Facility from July 31,2009 to August 31, 2009.

 

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·    On August 31,2009, the Company entered into Amendment No. 9 which changed the maturitydate of the Revolving Facility from August 31, 2009 to September 30,2009.

 

On September 30,2009 all obligations under the Revolving Facility became automatically and immediatelydue and payable. The Company failed to make the payment due under theRevolving Facility on or before September 30, 2009 which has resulted inan event of default under the Revolving Facility. As a result, the Companyfiled for bankruptcy protection on October 1, 2009. The filing of theChapter 11 Cases constitutes an additional event of default under the Company’sRevolving Facility.  The total amount of principal, fees and interestoutstanding under the Revolving Facility was approximately $227.6 million as ofthe Filing Date. However, the ability of the secured creditors to seek remediesto enforce their rights under the Revolving Facility is automatically stayed asa result of the filing of the Chapter 11 Cases.  The automatic stay invokedby the filing of the Chapter 11 Cases effectively precludes any actions by oursecured creditors to collect, assert, or recover a claim against the Debtors,subject to the applicable provisions of the Bankruptcy Code and orders grantedby the Bankruptcy Court.

 

Inconnection with the Plan and to expedite the restructuring and reorganizationof the Debtors as contemplated in the Purchase Agreement, the Company and thelenders to the Company’s Revolving Facility (the “Supporting Lenders”) who holdat least two-thirds of the outstanding principal amount pursuant to theRevolving Facility and who constitute more than one-half of the number oflenders under the Revolving Facility entered into the Plan Support Agreementdated as of September 30, 2009 which contains as exhibits a draft of thePlan and a draft of the Disclosure Statement.  The Plan Support Agreementrequires the Supporting Lenders to (i) vote in favor of and support thePlan, (ii) vote against and not support any restructuring orreorganization that is not consistent with the Plan, and (iii) not (a) seek,solicit, support or encourage any other restructuring plan, (b) object tothe Disclosure Statement or the solicitation of votes for the Plan or supportany objection by any third party, or (c) take any action that isinconsistent with, or that would materially delay or obstruct the proposedsolicitation, confirmation or consummation of, the Plan.

 

Underthe Plan Support Agreement, the Debtors agreed, among other things, to usereasonable commercial efforts to (i) file the Plan and DisclosureStatement no later than five (5) days after the Filing Date, (ii) obtainBankruptcy Court approval of the Disclosure Statement no later than forty-five(45) days after the Filing Date, (iii) obtain confirmation of the Plan bythe Bankruptcy Court within ninety (90) days of the Filing Date, and (iv) consummatethe Purchase Agreement or another agreement entered into pursuant to thebidding procedures order within (11) days of confirmation of the Plan, and nottake any action that is materially inconsistent with, or that would materiallydelay consummation of, either the restructuring of the Debtors or theeffectiveness of the Plan.

 

Thesupport of the Supporting Lenders under the Plan Support Agreement willterminate under certain circumstances, including among others, if (i) thesum of certain proposed adjustments to the Purchase Price with respect to titledefects, environmental matters, retained properties and casualty losses exceeds$5 million, (ii) the sum of certain allowed administrative and priorityclaims exceeds the specified reserve for administrative and priority claims, (iii) theDebtors file a plan of reorganization that is different from the Plan or shallmodify or amend the Plan in any material respect without the written consent ofthe Administrative Agent, (iv) the Bankruptcy Court enters a cashcollateral order or budget without the written consent of the required lendersthat is materially different from those agreed upon by the Supporting Lendersand the Debtors, (v) the Plan shall not have been confirmed by theBankruptcy Court in accordance with its terms within one hundred and five (105)days of the Filing Date, (vi) the Company shall withdraw or revoke thePlan or shall publicly announce its intention not to pursue confirmation of thePlan, (vii) a trustee shall have been appointed in any of the Chapter 11Cases, any of the Chapter 11 Cases shall have been converted to cases underChapter 7 of the Bankruptcy Code or any of the Chapter 11 Cases shall have beendismissed by order of the Bankruptcy Court, or (viii) the Plan shall nothave been substantially consummated in accordance with its terms within onehundred twenty (120) days of the Filing Date.

 

The proceeds from thesale of the Equity Interests will be used to substantially reduce the Company’sindebtedness under the Revolving Facility.  The Company currently hasapproximately $226.5 million of outstanding principal under its RevolvingFacility which is substantially in excess of the proceeds expected to bereceived pursuant to the Purchase Agreement.

 

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**5.   SHELF REGISTRATION STATEMENT**

 

In the third quarter 2007,the SEC declared effective the Company’s registration statement filed with theSEC that registered securities of up to $500 million of any combination of debtsecurities, preferred stock, common stock, warrants for debt securities orequity securities of the Company and guarantees of debt securities by theCompany’s subsidiaries.  In light of theactions taken by the NASDAQ in October 2009 and the Company’s filing ofthe Chapter 11 Cases, the Company does not expect to utilize this registrationstatement.

 

**6.   PREFERRED STOCK**

 

In January 2007,2,875,000 shares of its Convertible Preferred Stock were issued in a publicoffering.

 

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by the Company’s debt agreements,assets are legally available to pay dividends and the Board of Directors or anauthorized committee of the board declares a dividend payable, the Company willpay dividends in cash, every quarter. The first payment was made on April 15,2007 and the Company continued to make quarterly dividends payments through October 15,2008. The Board has not declared a dividend since the third quarter of 2008 dueto the Company’s current reduced liquidity and the Chapter 11 Cases. Cumulativedividends in arrears at September 30, 2009 amounted to approximately $7.9million.

 

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

 

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

 

*Ranking*.  Our Convertible Preferred Stock ranks:

 

·                  senior to all of the shares of common stock and to all of the Company’sother capital stock issued in the future unless the terms of such capital stockexpressly provide that it ranks senior to, or on a parity with, shares of theConvertible Preferred Stock;

 

·                  on a parity with all of the Company’s other capital stock issued in thefuture, the terms of which expressly provide that it will rank on a parity withthe shares of the Convertible Preferred Stock; and

 

·                  junior to all of the Company’s existing and future debt obligations andto all shares of its capital stock issued in the future, the terms of whichexpressly provide that such shares will rank senior to the shares of theConvertible Preferred Stock.

 

*Mandatory conversion*.On or after January 20, 2010, the Company may, at its option, cause sharesof its Convertible Preferred Stock to be automatically converted to shares ofcommon stock of the Company at the

 

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applicableconversion rate, but only if the closing sale price of its common stock for 20trading days within a period of 30 consecutive trading days ending on thetrading day immediately preceding the date the Company gives the conversionnotice equals or exceeds 130% of the conversion price in effect on each suchtrading day.

 

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

 

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

 

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

 

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

 

*Conversion in connection with a fundamental change*. Ifa holder elects to convert its shares of the Convertible Preferred Stock inconnection with certain fundamental changes, the Company will in certaincircumstances increase the conversion rate for such Convertible PreferredStock. Upon a conversion in connection with a fundamental change, the holderwill be entitled to receive a cash payment for all accumulated and unpaiddividends.

 

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

 

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

 

2. consummation of anyshare exchange, consolidation or merger of the Company pursuant to which itscommon stock will be converted into cash, securities or other property or anysale, lease or other transfer in one transaction or a series of transactions ofall or substantially all of the consolidated assets of the Company and itssubsidiaries, taken as a whole, to any person other than one of itssubsidiaries; provided, however, that a transaction where the holders of morethan 50% of all classes of its common equity immediately prior to the transactionown, directly or indirectly, more than 50% of all classes of common equity ofthe continuing or surviving corporation or transferee immediately after theevent shall not be a fundamental change;

 

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

 

4. the Company’s commonstock is neither listed on a national securities exchange nor listed norapproved for quotation on an over-the-counter market in the United States.

 

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

 

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

 

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

 

·                  amend the restated certificate of incorporation, as amended, by mergeror otherwise, if the amendment would alter or change the powers, preferences,privileges or rights of the holders of shares of the Convertible PreferredStock so as to adversely affect them;

 

·                  issue, authorize or increase the authorized amount of, or issue orauthorize any obligation or security convertible into or evidencing a right topurchase, any senior stock; or

 

·                  reclassify any of its authorized stock into any senior stock of anyclass, or any obligation or security convertible into or evidencing a right topurchase any senior stock.

 

*Chapter 11 Cases.*The Company advises investors of its strong belief that it is likely that therewill be no value for the holders of the Company’s Convertible Preferred Stockin the Chapter 11 Cases and that the Plan does not currently contemplate suchholders’ receiving any recovery absent a substantially higher and better offerfor the Equity Interests that is sufficient to pay the Company’s secured andunsecured creditors in full (and with respect to the common stock to pay theliquidation preference on the Convertible Preferred Stock). In this regard,stockholders of a company in Chapter 11 generally receive value only if allclaims of the company’s secured and unsecured creditors are fully satisfied. Inthis case and based on the expected proceeds from the sale of the EquityInterests which is substantially less than the amount the Company’s secured andunsecured creditors are owed, the Company’s management strongly believes allsuch secured and unsecured claims will not be fully satisfied, leading to itsbelief that the holders of the Company’s Convertible Preferred Stock and commonstock will receive no value for their interests.

 

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

 

The Company accounts forearnings (loss) per share in accordance with FASB ASC 260, *Earnings per Share,* which establishes therequirements for presenting earnings per share (“EPS”).  FASB ASC 260 requires the presentation of “basic”and “diluted” EPS on the face of the statement of operations.  Basic EPS amounts are calculated using theweighted average number of common shares outstanding during each period.  Diluted EPS assumes the exercise of all stockoptions, warrants and convertible securities having exercise prices less thanthe average market price of the common stock during the periods, using thetreasury stock method. When a loss from continuing operations exists, as in theperiods presented, potential common shares are excluded in the computation ofdiluted EPS because their inclusion would result in an anti-dilutive effect onper share amounts.

 

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Diluted EPS also includesthe effect of convertible securities by application of the “if-converted”method.  Under this method, if an entityhas convertible preferred stock outstanding, the preferred dividends applicableto the convertible preferred stock are added back to the numerator.  The convertible preferred stock is assumed tohave been converted at the beginning of the period (or at time of issuance, iflater) and the resulting common shares are included in the denominator of theEPS calculation.  In applying theif-converted method, conversion is not assumed for purposes of computingdiluted EPS if the effect would be anti-dilutive. During 2009 and 2008, conversionof the Convertible Preferred Stock is not assumed because the effect would beanti-dilutive. The following tables present the computations of EPS for theperiods indicated.

 
| ** **                                 | ** ** | **Three Months Ended September 30, 2009**    | ** ** | **Three Months Ended September 30, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Loss  (Numerator)**                                                 | ** ** | **Shares  (Denominator)(1)**                                       | ** ** | **Per********Share  Amount** | ** ** | **Loss  (Numerator)** | ** ** | **Shares  (Denominator)(2)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net loss                                   |       | $                                                                     | (8,406     | )                                                                  |       |   |   |   | $ | (40,010 | ) |   |   |   |   |
| Less: Preferred stock dividends paid       |       | —                                                                |       |                                                               |       |   |   | (2,066 | ) |   |   |   |   |
| Less: Preferred stock dividends in arrears |       | (2,066                                                                | )          |                                                               |       |   |   | — |   |   |   |   |   |
| ** **                                 |       |                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                              |       |                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | (10,472                                                               | )          | 28,873                                                             |       | $ | (0.36 | ) | (42,076 | ) | 28,690 |   | $ | (1.47 | ) |
| Effect of dilutive securities:             |       |                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Restricted stock units                     |       | —                                                                |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Common stock options                       |       | —                                                                |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Convertible Preferred Stock                |       | —                                                                |       | —                                                             |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                            |       |                                                                  |       |                                                               |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | $                                                                     | (10,472    | )                                                                  | 28,873     |   | $ | (0.36 | ) | $ | (42,076 | ) | 28,690 |   | $ | (1.47 | ) |

 
| ** **                                 | ** ** | **Nine Months Ended September 30, 2009**     | ** ** | **Nine Months Ended September 30, 2008** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Loss  (Numerator)**                                                 | ** ** | **Shares  (Denominator)(1)**                                      | ** ** | **Per  Share  Amount** | ** ** | **Loss  (Numerator)** | ** ** | **Shares  (Denominator)(2)** | ** ** | **Per  Share  Amount** | ** ** |
| ** **                                 | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net loss                                   |       | $                                                                     | (94,715    | )                                                                 |       |   |   |   | $ | (84,012 | ) |   |   |   |   |
| Less: Preferred stock dividends paid       |       | —                                                                |       |                                                              |       |   |   | (6,199 | ) |   |   |   |   |
| Less: Preferred stock dividends in arrears |       | (6,199                                                                | )          |                                                              |       |   |   | — |   |   |   |   |   |
| ** **                                 |       |                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                              |       |                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | (100,914                                                              | )          | 28,860                                                            |       | $ | (3.50 | ) | (90,211 | ) | 28,636 |   | $ | (3.15 | ) |
| Effect of dilutive securities:             |       |                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Restricted stock units                     |       | —                                                                |       | —                                                            |       | — |   | — |   | — |   | — |   |
| Common stock options                       |       | —                                                                |       | —                                                            |       | — |   | — |   | — |   | — |   |
| Convertible Preferred Stock                |       | —                                                                |       | —                                                            |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                            |       |                                                                  |       |                                                              |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |       | $                                                                     | (100,914   | )                                                                 | 28,860     |   | $ | (3.50 | ) | $ | (90,211 | ) | 28,636 |   | $ | (3.15 | ) |

 

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(1)          In the calculation of dilutedEPS for the three and nine months ended September 30, 2009, the 8.7million shares of common stock resulting from an assumed conversion of theCompany’s Convertible Preferred Stock is excluded because the conversion wouldbe anti-dilutive.

(2)          In the calculation of dilutedEPS for the three and nine months ended September 30, 2008, the 8.7million shares of common stock resulting from an assumed conversion of theCompany’s Convertible Preferred Stock is excluded because the conversion wouldbe anti-dilutive. Additionally, for the three and nine months ended September 30,2008, 20,361 and 53,031, respectively, equivalent shares of the Company’srestricted stock units and common stock options were excluded because theconversion would also be anti-dilutive.

 

**8.   INCOME TAXES**

 

The Company accounts forincome taxes under the asset and liability approach.  Under this approach, deferred tax assets andliabilities are recognized based on anticipated future tax consequences, usingcurrently enacted tax laws, attributable to temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts calculated for income tax purposes.

 

In recording deferredincome tax assets, the Company considers whether it is more likely than notthat some portion or all of the deferred income tax assets will be realized.The ultimate realization of deferred income tax assets is dependent upon thegeneration of future taxable income during the periods in which those deferredincome tax assets would be deductible. The Company considers the scheduledreversal of deferred income tax liabilities and projected future taxable incomefor this determination. The Company believes that after considering all theavailable objective evidence, both positive and negative, historical andprospective, with greater weight given to the historical evidence, and in lightof the current market situation and the uncertainty surrounding the Company’sChapter 11 Cases (see Notes 2 and 4), management is not able to determine thatit is more likely than not that the deferred tax assets will be realized.Therefore, the Company fully provided for additions to its deferred tax assetwith a valuation allowance during the period and did not report a tax benefitfor the three or nine months ended September 30, 2009. The Companyestablished a full valuation allowance and reduced its net deferred tax assetto zero during 2008. The Company will continue to assess the valuationallowance against deferred income tax assets considering all availableinformation obtained in future reporting periods.  If the Company achieves profitable operationsin the future, it may reverse a portion of the valuation allowance in an amountat least sufficient to eliminate any tax provision in that period. Thevaluation allowance has no impact on the Company’s net operating loss (“NOL”)position for tax purposes, and if the Company generates taxable income infuture periods, it will be able to use its NOLs to offset taxes due at thattime.

 

As of September 30,2009, the Company had $0.1 million of unrecognized tax benefits related to FASBASC 740-10-25. There were no significant changes to the calculation since December 31,2008. We do not anticipate that total unrecognized tax benefits willsignificantly change due to the settlements of audits and the expiration ofstatutes of limitations prior to September 30, 2010.

 

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

 

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

 
| **Description**                                                                                           | ** ** | **Number  of  Shares Issued** | ** ** | **Grant  Date Fair  Market Value** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                | ** ** | **(in thousands)**       | ** ** |
| **Nine months ended  September 30, 2009:**                                                           |       |                          |       |                               |       |
| Shares issued to satisfy restricted stock grants                                                          |       | 99                            |       | $                                  | 1,246      |   |
| **Nine months ended  September 30, 2008:**                                                           |       |                          |       |                               |       |
| Shares issued to satisfy restricted stock grants                                                          |       | 86                            |       | $                                  | 1,639      |   |
| Shares issued to fund the Company’s matching  contribution under the Company’s 401(k) plan |       | 90                            |       | $                                  | 462        |   |

 

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For the nine months endedSeptember 30, 2009 and 2008, the non-cash portion of Asset RetirementCosts was approximately $14,400 and $0.6 million, respectively. Preferred stockdividends declared but not yet paid at September 30, 2008 were $2.1million, of which $1.7 million was accrued at September 30, 2008. There wereno dividends declared or accrued at September 30, 2009. A supplementaldisclosure of cash flow information is presented below:

 
| ** **                               | ** ** | **For the  Nine Months Ended  September 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| ** **                               | ** ** | **(in thousands)**                            | ** ** |
| Cash paid during the period for:         |       |                                               |       |   |   |
| Interest, net of amounts capitalized     |       | $                                                  | 7,826      |   | $ | 9,678 |   |
| Current state income tax                 |       | —                                             |       | 7 |   |
| Federal alternative minimum tax payments |       | 42                                                 |       | 220 |   |
|                                          |            |                                                    |            |  |  |  |  |

 

**10. DERIVATIVE ACTIVITIES**

 

The Company utilizes price-risk managementtransactions (e.g., swaps, collars and floors) for a portion of its expectedoil and natural gas production to seek to reduce exposure from the volatilityof oil and natural gas prices and also to achieve a more predictable cash flow.While the use of these arrangements is intended to reduce the Company’spotential exposure to significant commodity price declines, they may limit theCompany’s ability to benefit from increases in the price of oil and naturalgas. The Company’s arrangements, to the extent it enters into any, are intendedto apply to only a portion of its expected production and thereby provide onlypartial price protection against declines in oil and natural gas prices. Noneof these instruments are, at the time of their execution, intended to be usedfor trading or speculative purposes, but a portion of the Company’s 2008instruments was subsequently deemed as such because of the decrease in theCompany’s 2008 production. These price-risk management transactions aregenerally placed with major financial institutions that the Company believesare financially stable; however, in light of the recent global financialcrisis, there can be no assurance of the foregoing. None of the Company’sderivative contracts contain collateral posting requirements; however, thecounterparty to the Company’s 2009 positions is a member of the lending groupof the Company’s Revolving Facility, and certain events of default under theCompany’s Revolving Facility may result in a cross default of derivativeinstruments with such party. On an annual basis, the Company’s management setsall of the Company’s price-risk management policies, including volumes, typesof instruments and counterparties. These policies are implemented by managementthrough the execution of trades by the Chief Financial Officer afterconsultation and concurrence by the President and Chairman of the Board.  The Board of Directors reviews the Company’spolicies and trades monthly.  However,due to the ongoing financial and strategic alternatives process and Chapter 11Cases, the Company has not entered into any new derivative contracts in recentmonths and does not expect to for the foreseeable future.

 

All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with FASB ASC 815-10, *Derivatives and Hedging*.These derivative instruments are intended to hedge the Company’s price risk andmay be considered hedges for economic purposes, but certain of thesetransactions may not qualify for cash flow hedge accounting. All derivativeinstruments, other than those that meet the normal purchases and salesexception, are recorded on the balance sheet at fair value. The estimated fairvalue of these contracts is based upon various factors, including closingexchange prices on the NYMEX, over-the-counter quotations, volatility and, inthe case of collars and floors, the time value of options. The calculation ofthe fair value of collars and floors requires the use of an option-pricingmodel (see Note 11). 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 (“OCI”) on the balance sheet.Rather they are immediately recorded in total revenue on the statement ofoperations. For those derivative instrument contracts that are designated andqualify for cash flow hedge accounting, the effective portion of the changes inthe fair value of the contracts is recorded in OCI on the

 

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balance sheet and theineffective portion of the changes in the fair value of the contracts isrecorded in total revenue on the statement of operations, in either case, assuch changes occur. When the hedged production is sold, the realized gains andlosses on the contracts are removed from OCI and recorded in total revenue onthe statement of operations, which reduces the period to period volatilityimpacting the statement of operations that may occur throughout the contractterm. While the contract is outstanding, the unrealized gain or loss mayincrease or decrease until settlement of the contract depending on the fairvalue at the measurement dates. The Company evaluates the terms of newcontracts entered into to determine whether cash flow hedge accountingtreatment or mark-to-market accounting treatment will be applied. The Companyhas applied mark-to-market accounting treatment to all outstanding contractssince January 1, 2006.

 

The fair value ofoutstanding derivative contracts not designated as hedging instruments underFASB ASC 815-10 reflected on the balance sheet was as follows:

 
| ** **         | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                                                                     | ** ** | **Price**     | ** ** | ** **       | ** ** | ** **                                         | ** ** | **Fair Value of Outstanding  Derivative Contracts as of** | ** ** |
|--------------------|------------|-------------------|------------|---------------|------------|--------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|----------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| **Transaction**    | ** ** | **Transaction**   | ** ** | ** **    | ** ** | ** **                                                                     | ** ** | **Per**       | ** ** | **Volumes**      | ** ** | **Balance Sheet**                             | ** ** | **September 30,**                                                                  | ** ** | **December 31,** | ** ** |
| **Date**           | ** ** | **Type (1)** | ** ** | **Beginning** | ** ** | **Ending**                                                                     | ** ** | **Unit**      | ** ** | **Per Day** | ** ** | **Location**                                       | ** ** | **2009**                                                                                | ** ** | **2008** | ** ** |
| ** **         | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                                                                     | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                                         | ** ** | **(in thousands)**                                                                 | ** ** |
| *Natural Gas (2):* | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                                                                     | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **                                                                              | ** ** | ** ** | ** ** |
| ** **         | ** ** | ** **        | ** ** | ** **    | ** ** | ** **                                                                     | ** ** | ** **    | ** ** | ** **       | ** ** | ** **                                         | ** ** | ** **                                                                              | ** ** | ** ** | ** ** |
| 04/07              |       | Collar            |       | 1/1/2009      |       | 12/31/2009                                                                     |       | $7.75-$10.00  |       | 10,000 MMBtu     |       | Derivative Financial  Instruments - Current Assets |       | $                                                                                       | 2,778      |   | $ | 6,688 | ** ** |
| 10/07              |       | Collar            |       | 1/1/2009      |       | 12/31/2009                                                                     |       | $7.75-$10.08  |       | 10,000 MMBtu     |       | Derivative Financial  Instruments - Current Assets |       | 2,779                                                                                   |       | 6,702 | ** ** |
|               |       |              |       |          |       |                                                                           |       |          |       |             |       |                                               |       |                                                                                    |       |   | ** ** |
| *Crude Oil (3):*   |       |              |       |          |       |                                                                           |       |          |       |             |       |                                               |       |                                                                                    |       |   | ** ** |
| 10/07              |       | Collar            |       | 1/1/2009      |       | 12/31/2009                                                                     |       | $70.00-$93.55 |       | 300 Bbl          |       | Derivative Financial  Instruments - Current Assets |       | 94                                                                                      |       | 2,017 | ** ** |
|               |       |              |       |          |       |                                                                           |       |          |       |             | ** ** |
|               |       |              |       |          |       | Total derivatives  not designated as hedging instruments under FASB ASC 815-10 |       | $             | 5,651      |             | $          | 15,407                                             | ** ** |

 

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(1)          In October 2009, thecaps on all of the Company’s derivative collars for the remaining term of thefourth quarter of 2009 were repurchased such that only the floors remain inplace.   The cost of this transaction wasreimbursed by the Company’s proposed purchaser.

 

(2)          The Company’s natural gascontracts were entered into on a per MMBtu delivered price basis, using theNYMEX Natural Gas Index. Mark-to-market accounting treatment is applied tothese contracts and the change in fair value is reflected in total revenue.

 

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

 

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

 
| **Derivatives Not**                                     | ** ** | ** **                                                             | ** ** | **Amount of Gain or (Loss) Recognized in Income on Derivative** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| **Designated as Hedging  Instruments under**            | ** ** | **Location of Gain or  (Loss) Recognized in** | ** ** | **Three Months Ended  September 30,**                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
| **FASB ASC 815-10**                           | ** ** | **Income on Derivative**                                     | ** ** | **2009**                                                                                                     | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                              | ** ** | ** **                                                             | ** ** | **(in thousands)**                                                                                      | ** ** |
| ** **                                              | ** ** | ** **                                                             | ** ** | ** **                                                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural  gas derivative realized settlements            |       | Gain (loss) on  derivatives – Total revenue                       |       | $                                                                                                            | 8,011      |   | $ | (5,011 | ) | $ | 20,880 |   | $ | (11,381 | ) |
| Crude oil derivative realized settlements               |       | Gain (loss) on derivatives – Total revenue                        |       | 57                                                                                                           |       | (7,195 | ) | 1,064 |   | (19,473 | ) |
| Natural gas derivative unrealized change in fair  value |       | Gain (loss) on derivatives – Total revenue                        |       | (6,937                                                                                                       | )          | 56,417 |   | (7,833 | ) | (61 | ) |
| Crude oil derivative unrealized change in fair  value   |       | Gain (loss) on derivatives – Total revenue                        |       | (120                                                                                                         | )          | 19,294 |   | (1,923 | ) | 8,463 |   |
| Gain (loss) on derivatives                              | ** ** | ** **                                                             |       | $                                                                                                            | 1,011      |   | $ | 63,505 |   | $ | 12,188 |   | $ | (22,452 | ) |

 

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**11.  FAIR VALUE MEASUREMENTS**

 

As defined in FASB ASC820, fair value is the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date (an exit price). Where available, fair value is based onobservable market prices or parameters or derived from such prices orparameters. Where observable prices or inputs are not available, valuationmodels are applied. These valuation techniques involve some level of managementestimation and judgment, the degree of which is dependent on the pricetransparency for the instruments or market and the instruments’ complexity.

 

*Valuation Techniques*

 

In accordance with FASBASC 820, valuation techniques used for assets and liabilities accounted for atfair value are generally categorized into three types:

 

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

 

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

 

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

 

The three approachesdescribed within FASB ASC 820 are consistent with generally accepted valuationmethodologies. While all three approaches are not applicable to all assets orliabilities accounted for at fair value, where appropriate and possible, one ormore valuation techniques may be used. The selection of the valuation method(s) toapply considers the definition of an exit price and the nature of the asset orliability being valued and significant expertise and judgment is required. Forassets and liabilities accounted for at fair value, valuation techniques aregenerally a combination of the market and income approaches. Accordingly, theCompany aims to utilize valuation techniques that maximize the use ofobservable inputs and minimize the use of unobservable inputs.

 

*Input Hierarchy*

 

FASB ASC 820 establishesa fair value hierarchy that prioritizes the inputs to valuation techniques usedto measure fair value directly related to the amount of subjectivity associatedwith the inputs. The hierarchy gives the highest priority to unadjusted quotedprices in active markets for identical assets or liabilities (Level 1measurement) and the lowest priority to unobservable inputs (Level 3measurement). The three levels of the fair value hierarchy defined by FASB ASC820 are as follows:

 

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

 

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·                  Level 2 — Inputs (other than quoted prices included in Level1) are either directly or indirectly observable for the asset or liabilitythrough correlation with market data at the measurement date and for theduration of the instrument’s anticipated life. Level 2 includes those financialinstruments that are valued using models or other valuation methodologies,which consider various assumptions, including quoted forward prices forcommodities, time value, volatility factors, and current market and contractualprices for the underlying instruments, as well as other relevant economicmeasures.

 

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

 

*Fair Value on a Recurring Basis*

 

The following table setsforth by level within the fair value hierarchy the Company’s financial assetsand liabilities that were accounted for at fair value on a recurring basis asof September 30, 2009. As required by FASB ASC 820, financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement. The Company’s assessment ofthe significance of a particular input to the fair value measurement requiresjudgment, and may affect the valuation of fair value assets and liabilities andtheir placement within the fair value hierarchy levels.

 
| ** **             | ** ** | ** **         | ** ** | **Fair  Value Measurements Using:** | ** ** |
|------------------------|------------|--------------------|------------|-------------------------------------|------------|
| ** **             | ** ** | ** **         | ** ** | **Quoted**                          | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **         | ** ** | **Prices  in**                      | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **             | ** ** | ** **         | ** ** | **Active**                          | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **             | ** ** | **Total  Fair**    | ** ** | **Markets**                         | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **             | ** ** | **Value**          | ** ** | **(Level  1)**                      | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| * *               | * *   | **(in thousands)** | ** ** |
| Assets:                |       |               |       |                                |       |   |   |   |   |
| Derivative instruments |       | $                  | 5,651      |                                | $          | — |   | $ | — |   | $ | 5,651 |   |
|                        |            |                    |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 
| ** **                                                                                            | ** ** | **Three  Months Ended   September 30, 2009** | ** ** | **Nine  Months Ended   September 30, 2009** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **Assets**                                        | ** ** | **Liabilities**                                  | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **                                                                                            | ** ** | **(in thousands)**                                | ** ** |
| Balance as of beginning of period                                                                     |       | $                                                 | 12,709     |                                             | $          | — |   | $ | 15,407 |   | $ | — |   |
| Realized and unrealized losses included in earnings                                                   |       | (15,126                                           | )          | —                                           |       | (31,700 | ) | — |   |
| Realized and unrealized gains included in other  comprehensive income                                 |       | —                                            |       | —                                           |       | — |   | — |   |
| Settlements                                                                                           |       | 8,068                                             |       | —                                           |       | 21,944 |   | — |   |
| Transfers in and/or out of Level 3                                                                    |       | —                                            |       | —                                           |       | — |   | — |   |
| Balance as of September 30, 2009                                                                 |       | $                                                 | 5,651      |                                             | $          | — |   | $ | 5,651 |   | $ | — |   |
|                                                                                                  |       |                                              |       |                                             |       |   |   |   |   |
| Change in unrealized gains (losses) relating to  instruments still held as of September 30, 2009 |       | $                                                 | 80         |                                             | $          | — |   | $ | 2,586 |   | $ | — |   |

 

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

 

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

 

*Fair Value on a NonrecurringBasis*

 

On January 1, 2009,the Company adopted the provisions of FASB ASC 820 for non-financial assets andliabilities, which were delayed by FASB ASC 820-10-15. Therefore, the Companyadopted the provisions of FASB ASC 820 for its AROs. The Company uses fairvalue measurements on a nonrecurring basis in its AROs. These liabilities arerecorded at fair value initially and assessed for revisions periodicallythereafter. The lowest level of significant inputs for fair value measurementsfor ARO liabilities are Level 3. A reconciliation of the beginning and endingbalances of the Company’s ARO is presented in Note 3, in accordance with FASBASC 410-20. New assets and liabilities measured at fair value during the ninemonths ended September 30, 2009 include:

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

 

**12.  SUBSEQUENT EVENTS**

 

***Chapter 11 Cases***- On October 1, 2009, the Debtors filed the Chapter 11 Cases forreorganization relief under Chapter 11 of Title 11 of the BankruptcyCode.  The Chapter 11 Cases are being jointly administered under thecaption “In re: Edge Petroleum Corporation, *etal*.,” Case No. 09-20644(RSS).

 

TheDebtors remain in possession of their assets, and will continue to manage andoperate their businesses and properties as “debtors-in-possession” under thejurisdiction of the Bankruptcy Court and in accordance with Bankruptcy CodeSections 1107 and 1108 and other applicable provisions of the Bankruptcy Code,which require, among other things, Bankruptcy Court approval of certain mattersoutside the ordinary course of business.  During the bankruptcy process,with the consent of the Pre-petition Lenders and the approval of the BankruptcyCourt, the Company intends to use cash flow from operations to provide workingcapital and financial resources necessary to allow business operations tocontinue at a minimal level, including meeting obligations to employees andcertain vendors, customers and others.

 

Whileno trustee, examiner, or official committee has been appointed, there can be noassurance that the Debtors will remain in possession of their assets andcontrol of their businesses as debtors-in-possession and that a trustee willnot be appointed to operate the businesses of the Debtors.  The Debtors’current business relationships and arrangements, and the Debtors’ ability tonegotiate future business arrangements may be adversely affected by the filingof the Chapter 11 Cases.

 

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Onthe Filing Date, the Company filed motions for an order granting authority tosell the Equity Interests, establishing bidding and auction procedures pursuantto Bankruptcy Code Sections 105, 363, 365 and 1123(b), designating the ProposedPurchaser as the “stalking horse bidder”, approving the Break-Up Fee and theExpense Reimbursement and setting a hearing date to approve the sale of theEquity Interests.  After entry of the bid procedures order approving thebidding and auction process for all of the Equity Interests, or substantiallyall of the Debtors’ assets, the Debtors intend to engage in an auction processwith any and all interested parties.  The Company intends to request theBankruptcy Court to approve the sale to the highest and best bid at theauction.

 

TheCompany has filed the Plan, which is subject to confirmation by the BankruptcyCourt and the approval of at least one of the impaired classes.  TheCompany expects the Bankruptcy Court to enter a ruling on the Plan in December 2009.There can be no assurance that the Plan will be acceptable to the Company’screditors or confirmed by the Bankruptcy Court, or that the DisclosureStatement will be approved by the Bankruptcy Court.  Accordingly, allinformation contained in the Plan and the Disclosure Statement is subject tochange, whether as a result of amendments or supplements thereto, actions ofthird parties or otherwise.

 

***NASDAQ Actions*** — On October 2,2009, the Company received the Notice from the NASDAQ that the Company’s commonstock and Convertible Preferred Stock would be delisted from the NASDAQ at theopening of business on October 13, 2009 pursuant to the NASDAQ’s Listing Rules 5100,5110(b) and IM-5100-1, and that a Form 25-NSE would be filed with theSEC, which would remove the Company’s securities from listing and registrationon the NASDAQ.  According to the Notice, the determination to delist theCompany’s securities was based on (i) the announcement by the Company on October 2,2009 that it and each of its subsidiaries have filed voluntary petitions forreorganization under Chapter 11 of the U.S. Bankruptcy Code and the associatedpublic interest concerns raised by such bankruptcy petitions; (ii) concernsregarding the residual equity interest of the existing listed securitiesholders; and (iii) concerns about the Company’s ability to sustaincompliance with all requirements for continued listing on the NASDAQ.

 

TheCompany decided not to appeal the NASDAQ’s determination to a Hearings Panel,pursuant to the procedures set forth in the NASDAQ’s Listing Rule 5800 Series andthe Company did not take any further action to appeal the NASDAQ’s decision,and therefore the Company’s securities were delisted on October 13, 2009.

 

**13.  COMMITMENTS AND CONTINGENCIES**

 

***Delivery Commitments —***During 2007, the Company executed a gasgathering and compression services agreement with Frontier Midstream, LLC(“Frontier”). Following execution of such agreement, Frontier expedited theinstallation of the Rose Bud system in White County, Arkansas, including thehigh and low pressure gathering lines, dehydration, compression and theinterconnect with Ozark, in order to accommodate the Company’s desire to beable to deliver natural gas as soon as its wells were completed. At the time ofsigning the contract, the Company had completed and tested two productive wellsin the Moorefield shale. The Rose Bud system was installed, operational andready 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 $75,500 of this commitment through September 30,2009. 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. The Company recorded a long-term liability for the aggregate amountof $2.0 million in the fourth quarter of 2008, which is revised monthly asvolumes produced reduce the liability. This liability was reclassified tocurrent during the third quarter of 2009 as a result of the maturity date beingless than 12 months away. Although the Company believes there is the potentialto develop this area and increase production, it does not currently havesufficient liquidity to ensure that this occurs in the timeframe required bythe gas gathering and compression services agreement with Frontier. The Companyexpects that the Chapter 11 Cases may have a significant impact on thisagreement.

 

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During 2008, the Company executed an agreement withIntegrys Energy Services (“Integrys”) related to the construction andinstallation of a pipeline connecting the Company’s Slick State properties toits Bloomberg properties in order to secure more advantageous plant processing,transportation and gathering fees and access to gas markets. The pipelinesystem was installed, operational and ready to redirect the production in September 2008.The amount due Integrys related to this agreement is $550,000 plus 8% interestper annum, for a total liability of approximately $0.6 million. The Company hasdelivered approximately $231,100 of this amount through September 30,2009. The Company expects that the Chapter 11 Cases may have a significantimpact on this agreement.  This agreementwas terminated by Integrys on October 31, 2009.

 

This contract is not considered a derivative, but hasbeen designated as an annual sales contract under FASB ASC 815-10-15.

 

***Contingencies -*** From time to time the Company is a party to variouslegal proceedings arising in the ordinary course of business.  While the outcome of lawsuits cannot bepredicted with certainty and will be impacted by the Company’s Chapter 11 Cases,the Company is not currently a party to any proceeding that it believes, ifdetermined in a manner adverse to the Company, could have a material adverseeffect on the Company’s financial condition, results of operations or cashflows 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 the Company in state district court in Goliad County, Texas allegingbreach of contract for failure and refusal to transfer overriding royaltyinterests to plaintiffs in several leases in the Nita and Austin prospects inGoliad County, Texas and failure and refusal to pay monies to Blake pursuant tosuch overriding royalty interests for wells completed on the leases. Theplaintiffs seek relief of (1) specific performance of the allegedagreement, including granting of overriding royalty interests by 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. The Company’s subsidiaries, Edge PetroleumExploration Company, Edge Petroleum Operating Company and Edge PetroleumProduction Company, were also added as defendants. The Company filed acounterclaim against plaintiff and joined various related entities that arecontrolled by Blake, seeking lease interests in which the Company contends ithas been wrongfully denied participation and also claim that proprietaryinformation was misappropriated. The parties have moved for summary judgment oneach other’s claims and counterclaims, which the trial court has denied as toboth sides.  In November 2007, the Company filed a separate motionfor summary judgment based on the statute of frauds and; the court has not yetruled on this separate motion. In June 2008, the Plaintiffs filed a SixthAmended Petition conditionally adding claims for certain prospects that hadbeen previously settled by means of a Compromise and Settlement Agreement (the“Settlement Agreement”), entered in settlement of prior litigation among someof the parties, but only to the extent that rescission of the prior SettlementAgreement was being sought by the Company. The Company is not seekingrescission of the prior Settlement Agreement and responded accordingly in its FourthAmended Original Counterclaim and Claims Against Additional Parties filed on October 16,2008.  On October 17, 2008, the Plaintiffs filed their SeventhAmended Petition adding a claim for breach of the Settlement Agreement. In December 2008,one of the Blake counter-defendants filed a motion to arbitrate, which motionhas not been heard by the court. The Company has responded and will continue torespond aggressively to this lawsuit, and believe it has meritorious defensesand counterclaims.  In October 2009,the Company filed a suggestion of bankruptcy in this case.

 

**MaryJane Carol Trahan Champagne, et al. v. Edge Petroleum Exploration Company, etal.** — On September 19,2008 the Company was sued in state district court in Vermilion Parish,Louisiana by Mary Jane Trahan, Carol Trahan Champagne and 29 other plaintiffsalleging breach of obligations under mineral leases in Vermilion Parishregarding the Trahan No. 1 well and the Trahan No. 3 well (MT RC SUBreservoir). Plaintiffs are seeking unspecified damages for lost revenue, lostroyalties and devaluation of property interest sustained as a result of thedefendants’ alleged negligent and improper drilling operations on the Trahan No. 1well and the Trahan No. 3 well, including alleged failure to preventunderground water from flooding and destroying 

 

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plaintiffs’ portion ofthe reservoir beneath plaintiffs’ property.  Plaintiffs also allegedefendants failed to “block squeeze” sections of the Trahan No. 3 well aswould a prudent operator. This lawsuit, previously removed from the state courtto the federal district court for the Western District of Louisiana, LafayetteDivision, has been remanded to state court. The Company’s insurance carrier hasretained counsel to represent the Company in this matter. The Company filedcertain peremptory challenges and exceptions to the Plaintiffs’ petition,including prematurity, no cause of action and prescription. Except for theprescription challenge, these motions were overruled by the court in May 2009. The Company has not established a reserve with respect to this claim and it isnot possible to determine what, if any, its ultimate exposure might be in thismatter. The Company intends to vigorously defend itself in this lawsuit.  In October 2009, the Company filed withthe court a notice of stay due to bankruptcy.

 

**JohnLemke, et al. v. Edge Petroleum Corporation** - In October 2008, the Company was sued in statedistrict court in Harris County, Texas over an alleged contract to receive aroyalty in certain areas in South Louisiana.

 

The Company, along withthe Plaintiffs, settled the dispute in June 2009 by agreement pursuant towhich the Plaintiffs received $17,500 in return for a full release of allclaims and a dismissal of the lawsuit.

 

**LaraEnergy, Inc. v. Edge Petroleum Corporation** - In June 2009, the Company wassued in state district court in Harris County, Texas by a working interestco-owner in the Chapman Ranch prospect located in Nueces County, Texas. Plaintiff alleges various theories of causes of action, including breach ofcontract, breach of duty of good faith and fair dealing, negligent misrepresentation,improper acquisition of leases and seismic data, fraudulent inducement andother causes of action.  The Company believes it has done nothing wrongand has honored the contracts with the Plaintiff that govern operations in theChapman Ranch prospect. The Company filed an answer and intends to vigorouslydefend itself.  In October 2009, theCompany filed a suggestion of bankruptcy in this case.

 

**EncinitasRanch et al v. ExxonMobil Corporation, et al**. - This lawsuit was originally filed in statedistrict court in Brooks County, Texas, against ExxonMobil, Chevron USA andother defendants alleging numerous causes of action relating to Plaintiffs’lands going back several decades, including damage to the surface, improperlyabandoned equipment, spills, contamination, trespass, failure to maintainfacilities, improper or untimely payment of royalties, breach of express andimplied covenants, and various acts of negligence, including an allegedincident regarding a fire that occurred on the ranch in 2008. Plaintiffs amendedtheir petition in May 2008 to name additional defendants, including theCompany. The Company has a non-operating interest in the Encinitas Ranch, andhas never operated the wells or lease in Brooks County, Texas, coveringPlaintiffs’ land. The Company’s liability insurance carrier is providing adefense to this matter under a reservation of rights, and has retained localcounsel for us and filed an answer on our behalf.  No trial date has beenset.  The Company believes it has meritorious defenses to this litigationand intends to vigorously defend itself. In October 2009, the Company filed a suggestion of bankruptcy inthis case.

 

**In re: Edge Petroleum Corporation, *et al*.**- On October 1, 2009, the Company and itssubsidiaries, Edge Petroleum Exploration Company, Miller Exploration Company,Edge Petroleum Operating Company, Inc., Edge Petroleum Production Companyand Miller Oil Corporation, filed voluntary petitions (the “Bankruptcy Cases”)for reorganization relief under Chapter 11 of Title 11 of the United StatesCode, 11 U.S.C. §§ 101 *et. seq.*,as amended (the “Bankruptcy Code”) in the United States Bankruptcy Court forthe Southern District of Texas, Corpus Christi Division (the “BankruptcyCourt”).  The Bankruptcy Cases are being jointly administered under thecaption “In re: Edge Petroleum Corporation, *etal*.,” Case No. 09-20644(RSS).  The Company intends tocontinue to operate its business as a debtor-in-possession under thejurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code and orders of the Bankruptcy Court.  TheBankruptcy Cases are discussed in greater detail in Note 12.

 

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

 

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

 

On June 3, 2009, theFinancial Accounting Standards Board (“FASB”) approved the FASB AccountingStandards Codification (“Codification”) as the single source of generally acceptedaccounting principles in the United States of America (“GAAP”). On June 29,2009, the FASB issued Accounting Standards Codification (“ASC”) 105-10, *Generally Accepted Accounting Principles*. FASB ASC 105-10establishes the Codification to become the source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. The Codification supersedes all existing non-SEC accountingand reporting standards. All other non-grandfathered non-SEC accountingliterature not included in the Codification become non-authoritative. FollowingFASB ASC 105-10, the FASB will not issue new standards in the form ofStatements, FASB Staff Positions, or Emerging Issues Task Force Abstracts.Rather, the FASB will issue Accounting Standards Updates, which will serve onlyto: (a) update the Codification; (b) provide background informationabout such guidance; and (c) provide the bases for conclusions on thechange(s) in the Codification. The content of the Codification carries thesame level of authority as such FASB Accounting Standards Updates. The GAAPhierarchy was modified to include only two levels of GAAP: authoritative andnon-authoritative. FASB ASC 105-10 and the Codification are effective forfinancial statements issued for interim and annual periods ending after September 15,2009. This means that a calendar year-end public entity should follow theguidelines in the Codification beginning with its third quarter starting on July 1,2009. We adopted the Codification on July 1, 2009. Since the Codificationdid not alter existing GAAP, it did not have an impact on our ConsolidatedFinancial Statements. All references to pre-codified GAAP have been removedfrom this Form 10-Q and replaced with the Codification references.

 

### **FORWARD LOOKING STATEMENTS**

###  

The information containedin this quarterly Report on Form 10-Q includes certain forward-lookingstatements.  The words “may,” “will,”“expect,” “anticipate,” “believe,” “continue,” “estimate,” “project,” “intend,”and similar expressions used in this Form 10-Q are intended to identifyforward-looking statements within the meaning of Section 27A of the U.S.Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Youshould not place undue reliance on these forward-looking statements, whichspeak only as of the date made.  We undertakeno obligation to publicly release the result of any revision of theseforward-looking statements to reflect events or circumstances after the datethey are made or to reflect the occurrence of unanticipated events. You shouldalso know that such statements are not guarantees of future performance and aresubject to risks, uncertainties and assumptions.  Should any of these risks or uncertaintiesmaterialize, or should any of our assumptions prove incorrect, actual resultsmay differ materially from those included within the forward-lookingstatements.  Such statements involverisks and uncertainties, including, but not limited to, those set forth under“ITEM 1A. RISK FACTORS” of our 2008 Annual Report and all of our QuarterlyReports on Form 10-Q for 2009.

 

## **GENERAL OVERVIEW**

## ** **

Edge Petroleum Corporation (“Edge”, “we” or the“Company”) is a Houston-based independent energy company that focuses itsexploration, development, production, acquisition and marketing activities inselected onshore basins of the United States. In late 1998, we undertook atop-level management change and began a shift in strategy from pureexploration, which focused more on prospect generation, to a strategy whichfocused 

 

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on a balanced program of exploration, exploitation anddevelopment and acquisition of oil and natural gas properties. In late 2007, inan attempt to enhance shareholder value we began to assess our strategicalternatives and have subsequently expanded this process to include a furtherevaluation of both our financial and strategic alternatives in late 2008 andcontinuing into 2009. Our primary focus in 2009 has been on capitalpreservation and resolving the uncertainty and liquidity challenges we faced,but continued depressed economic conditions and the deteriorating commodityprices of late 2008 and 2009 have made this difficult. Additionally theseconditions were factors in our January 2009 borrowing base redetermination(see “Revolving Facility” below) and the change in the maturity date of ourentire outstanding debt due under our Revolving Facility. Faced with theseconstraints, on October 1, 2009 we filed voluntary petitions (the “Chapter11 Cases”) for reorganization relief under Chapter 11 of Title 11 of the UnitedStates Code, 11 U.S.C. §§ 101 *et. seq.*,as amended (the “Bankruptcy Code”) in the United States Bankruptcy Court forthe Southern District of Texas, Corpus Christi Division (the “BankruptcyCourt”). We are now committed to consummating the Plan of Reorganization thatwe filed in connection with our Chapter 11 Cases.

 

We generate revenues, income and cash flows byproducing and marketing oil and natural gas produced from our oil and naturalgas properties. We have historically made significant capital expenditures inour exploration, development, and production activities that have allowed us tocontinue generating revenue, income and cash flows. In recent years, we havealso spent considerable efforts on acquisitions, including both corporate andasset acquisitions. We have been operating under a severely reduced capitalspending program in 2009 as we sought to resolve our liquidity challenges. Weintend to operate our business as debtor-in-possession under the jurisdictionof the Bankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code and orders of the Bankruptcy Court and consummate the Plan ofReorganization that we filed in connection with our Chapter 11 Cases.

 

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

 

·                  **Recent Developments andOutlook**—additional discussion relating to management’s outlook to the future of ourbusiness and our Chapter 11 Cases.

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  **Fair Value Measurements—**supplementary discussion regarding fair value measurements andimplementation of FASBASC 820, *Fair ValueMeasurements and Disclosure.*

 

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

 

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

 

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

 

**RecentDevelopments and Outlook**

 

***Financialand Strategic Alternatives Process*** - In late 2007, we announced the hiring of afinancial advisor to assist our Board of Directors with an assessment ofstrategic alternatives. The credit crisis and related turmoil in the globalfinancial system and economic recession in the U.S. during the fourth quarterof 2008, along with declines in commodity prices and our stock prices, createda challenging environment for the successful completion of our proposed mergerwith Chaparral Energy, Inc. (“Chaparral”), a privately held company. On December 17,2008, we announced the termination of the Chaparral merger agreement after bothwe and Chaparral determined it was highly unlikely that the conditions to theclosing of the proposed merger would be satisfied or that Chaparral would beable to obtain sufficient debt and equity financing to allow them to completethe proposed merger and operate as a combined company, particularly in light ofthe challenging environment in the financial markets and the energy industry.We continued undertaking the evaluation and assessment of various financial andstrategic alternatives throughout 2009 in order to address our liquidity issuesand the impending maturity of our Fourth Amended and Restated Credit Agreement,as amended (the “Revolving Facility”) (see Liquidity and Capital Resources —Revolving Facility). In connection with this process, we also retained a newinvestment banking firm early in 2009 to assist further in the evaluation ofour financial and strategic alternatives. On August 31, 2009, and after aseries of other amendments extending the maturity date, we entered into AmendmentNo. 9 (“Amendment No. 9”) to our Revolving Facility, which changedthe maturity date of the Revolving Facility from August 31, 2009 to September 30,2009.

 

On September 30,2009, we, along with our subsidiaries, Edge Petroleum Exploration Company (“EPEX”),Miller Exploration Company (“Miller”), Edge Petroleum Operating Company, Inc.(“EPOC”), Edge Petroleum Production Company (“EPPC”) and Miller Oil Corporation(“Miller Oil” and, together with EPEX, Miller, EPOC and EPPC, the“Subsidiaries” and, together with Edge, the “Debtors”) entered into a Purchaseand Sale Agreement (the “Purchase Agreement”) with PGP Gas Supply Pool No. 3LLC (the “Proposed Purchaser”) pursuant to which the Proposed Purchaser willacquire all of the equity interests of each of the reorganized Subsidiaries(together, the “Equity Interests”). The Purchase Agreement contained certaincovenants by the Debtors, including, among others, the agreement by each Debtorto file the Chapter 11 Cases within five (5) business days of the date ofsigning of the Purchase Agreement (such bankruptcy filing date, the “FilingDate”).

 

Pursuant to the PurchaseAgreement, the effective date for the sale of the Equity Interests of thereorganized Subsidiaries is June 30, 2009. The consideration for the EquityInterests to be conveyed pursuant to the Purchase Agreement is $191 million,subject to adjustment for, among other things, a downward adjustment related tocertain changes in the NYMEX Strip Price over the five year period from January 1,2010 through December 31, 2014 (the “Gas Pricing DownwardAdjustment”).  The Gas Pricing Downward Adjustment is capped atapproximately $23.9 million.  In addition to the Gas Pricing DownwardAdjustment, the Purchase Price is subject to further adjustments, as providedin the Purchase Agreement, including, among others, adjustments relating to (i) costsand expenses incurred by the Debtors in connection with the maintenance of theDebtors’ properties before and after the effective date, (ii) changes inthe value of certain of the Company’s hedging contracts in the event of theirearly termination prior to the closing, (iii) gas imbalance volumes, (iv) environmentalconditions, if any, (v) title defects and benefits, if any, (vi) taxes,(vii) proceeds of production before and after the effective date, (viii) unsoldinventory as of the effective date, and (ix) prepaid items.  Theproceeds from the sale of the Equity Interests will be used to substantiallyreduce our indebtedness under the Revolving Facility.  We currently haveapproximately $226.5 million of outstanding principal under our RevolvingFacility which is substantially in excess of the proceeds expected to bereceived pursuant to the Purchase Agreement.

 

The Purchase Agreementalso (i) provides for a break-up fee (the “Break-Up Fee”) of $6 milliontogether with an expense reimbursement (the “Expense Reimbursement”) of up to$500,000 to the Proposed Purchaser under certain circumstances if thetransaction is not ultimately consummated with the Proposed Purchaser, (ii) adeposit by the Proposed Purchaser of $8 million and (iii) a liquidateddamages provision which generally 

 

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provides for a limitationon damages in the amount of $8 million that may be claimed by us in the eventof a breach by the Proposed Purchaser of certain of the terms and conditions ofthe Purchase Agreement (including certain breaches by the Proposed Purchaserwhich may result in the transactions contemplated by the Purchase Agreement notbeing consummated).  The Proposed Purchaser may terminate the PurchaseAgreement under certain circumstances, including if (i) the BankruptcyCourt has not confirmed the joint plan of reorganization (the “Plan”) by theFiling Date plus one hundred five (105) days, (ii) the Bankruptcy Courtdenies the motion for entry of the bidding procedures order, fails to approvethe Break-Up Fee or the Expense Reimbursement, or fails to enter the biddingprocedures order by the Filing Date plus thirty (30) days (which conditionswere each satisfied on October 5, 2009), (iii) the Company hasbreached any representation, warranty or covenant in the Purchase Agreement inany material respect and such breach results in a material adverse effect andwe have failed to cure such breach within a reasonable time period afterreceiving written notice from the Proposed Purchaser of such breach, (iv) theChapter 11 Cases have been converted to cases under Chapter 7 of the BankruptcyCode, (v) the Chapter 11 Cases have been dismissed, (vi) a trustee orexaminer with managerial powers is appointed, other than at the request of theProposed Purchaser, under Bankruptcy Code Section 1104 and such trustee orexaminer takes any action to interfere with or impair the transactionscontemplated by the Purchase Agreement, (vii) we enter into an alternativetransaction to the Purchase Agreement, (viii) we take affirmative steps toeffect an alternative transaction (except as otherwise provided in the biddingprocedures order), or (ix) any event, circumstance, condition, fact,effect or other matter has occurred or exists which would, or would bereasonably likely to, give rise to the failure of any of the conditionsprecedent to the obligations of the Proposed Purchaser and cannot be curedwithin five (5) business days prior to closing.  Consummation of thetransactions contemplated by the Purchase Agreement is subject to higher andbetter offers received in a Bankruptcy Court-supervised auction, approval ofthe Bankruptcy Court and other customary closing conditions.  We canterminate the Purchase Agreement under certain circumstances, including if theProposed Purchaser has breached any representation, warranty or covenant in anymaterial respect and the Proposed Purchaser has failed to cure such breachwithin five (5) business days after receiving written notice from us ofsuch breach.  We and the Proposed Purchaser can each terminate thePurchase Agreement under certain circumstances if the closing has not occurredon or before the 11th day after entry of the confirmation order in theChapter 11 Cases and also if certain of the purchase price adjustments relatinggenerally to title defects, title benefits, environmental matters, retainedproperties and casualty losses exceed a downward adjustment of greater thantwenty percent (20%) of the Purchase Price.

 

***Chapter11 Cases -***OnOctober 1, 2009, we filed the Chapter 11 Cases, which are being jointlyadministered under the caption “In re: Edge Petroleum Corporation, *et al*.,” Case No. 09-20644(RSS). Wewill remain in possession of our assets, and will continue to manage andoperate our businesses and properties as “debtors-in-possession” under thejurisdiction of the Bankruptcy Court and in accordance with Bankruptcy CodeSections 1107 and 1108 and other applicable provisions of the Bankruptcy Code,which require, among other things, Bankruptcy Court approval of certain mattersoutside the ordinary course of business.  During the bankruptcy process,we intend to use cash flow from operations to provide working capital andfinancial resources necessary to allow business operations to continue asnormal, including meeting obligations to employees and certain vendors, customersand others.

 

While no trustee,examiner, or official committee has been appointed, there can be no assurancethat we will remain in possession of our assets and control of our businessesas debtors-in-possession and that a trustee will not be appointed to operateour businesses.  Our current business relationships and arrangements, andour ability to negotiate future business arrangements may be adversely affectedby the filing of the Chapter 11 Cases.

 

On the Filing Date, wefiled motions for an order granting authority to sell the Equity Interests,establishing bidding and auction procedures pursuant to Bankruptcy CodeSections 105, 363, 365 and 1123(b), designating the Proposed Purchaser as the“stalking horse bidder”, approving the Break-Up Fee and the ExpenseReimbursement and setting a hearing date to approve the sale of the EquityInterests.  After entry of the bid procedures order approving the biddingand auction process for all of the Equity Interests, or substantially all ofour assets, we intend to engage in an auction process with any and allinterested parties.  We intend to request the Bankruptcy Court to approvethe sale to the highest and best bid at the auction.

 

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We have filed the Plan,which is subject to confirmation by the Bankruptcy Court and the approval of atleast one of the impaired classes.  We expect the Bankruptcy Court toenter a ruling on the Plan in early December 2009. There can be noassurance that the Plan will be acceptable to our creditors or confirmed by theBankruptcy Court, or that the Disclosure Statement (defined below) will beapproved by the Bankruptcy Court.  Accordingly, all information containedin the Plan and the Disclosure Statement is subject to change, whether as aresult of amendments or supplements thereto, actions of third parties orotherwise.

 

***PlanSupport and Lock-Up Agreement -***In order to expedite the restructuring andreorganization of the Debtors as contemplated in the Purchase Agreement, we andthe lenders to our Revolving Facility (the “Supporting Lenders”) who hold atleast two-thirds of the outstanding principal amount pursuant to the Revolving Facilityand who constitute more than one-half of the number of lenders under theRevolving Facility entered into a Plan Support and Lock-Up Agreement (the “PlanSupport Agreement”) dated as of September 30, 2009 which contains asexhibits a draft of the Plan and a draft of the disclosure statement (the“Disclosure Statement”).  The Plan Support Agreement requires theSupporting Lenders to (i) vote in favor of and support the Plan, (ii) voteagainst and not support any restructuring or reorganization that is notconsistent with the Plan, and (iii) not (a) seek, solicit, support orencourage any other restructuring plan, (b) object to the DisclosureStatement or the solicitation of votes for the Plan or support any objection byany third party, or (c) take any action that is inconsistent with, or thatwould materially delay or obstruct the proposed solicitation, confirmation orconsummation of, the Plan.

 

Under the Plan SupportAgreement, we agreed, among other things, to use reasonable commercial effortsto (i) file the Plan and Disclosure Statement no later than five (5) daysafter the Filing Date, (ii) obtain Bankruptcy Court approval of theDisclosure Statement no later than forty-five (45) days after the Filing Date, (iii) obtainconfirmation of the Plan by the Bankruptcy Court within ninety (90) days of theFiling Date, and (iv) consummate the Purchase Agreement or anotheragreement entered into pursuant to the bidding procedures order within (11)days of confirmation of the Plan, and not take any action that is materiallyinconsistent with, or that would materially delay consummation of, either ourrestructuring or the effectiveness of the Plan.

 

The support of theSupporting Lenders under the Plan Support Agreement will terminate undercertain circumstances, including among others, if (i) the sum of certainproposed adjustments to the Purchase Price with respect to title defects,environmental matters, retained properties and casualty losses exceeds $5million, (ii) the sum of certain allowed administrative and priorityclaims exceeds the specified reserve for administrative and priority claims, (iii) wefile a plan of reorganization that is different from the Plan or shall modifyor amend the Plan in any material respect without the written consent of theAdministrative Agent, (iv) the Bankruptcy Court enters a cash collateralorder or budget without the written consent of the required lenders that ismaterially different from those agreed upon by the Supporting Lenders and theDebtors, (v) the Plan shall not have been confirmed by the BankruptcyCourt in accordance with its terms within one hundred and five (105) days ofthe Filing Date, (vi) we shall withdraw or revoke the Plan or shallpublicly announce its intention not to pursue confirmation of the Plan, (vii) atrustee shall have been appointed in any of the Chapter 11 Cases, any of theChapter 11 Cases shall have been converted to cases under Chapter 7 of the BankruptcyCode or any of the Chapter 11 Cases shall have been dismissed by order of theBankruptcy Court, or (viii) the Plan shall not have been substantiallyconsummated in accordance with its terms within one hundred twenty (120) daysof the Filing Date.

 

***NASDAQActions*** - On September 16,2009, we received notice from The Nasdaq Stock Market (the “NASDAQ”) that theminimum bid price of our common stock was below $1.00 per share for 30consecutive business days and that we were therefore not in compliance with theminimum bid price rule for continued listing set forth in NasdaqMarketplace Rule 5450(a)(1).

 

On October 2, 2009,we received notice (the “Notice”) from the NASDAQ that our common stock and5.75% series A cumulative convertible perpetual preferred stock (the“Convertible Preferred Stock”) would be delisted from the NASDAQ at the openingof business on October 13, 2009 pursuant to the NASDAQ’s Listing Rules 5100,5110(b) and IM-5100-1, and that a Form 25-NSE would be filed with theSEC, which would remove our securities from listing and registration on theNASDAQ. According to the Notice, the determination to delist oursecurities was based on (i) the announcement by us on October 2, 2009that we and each of our subsidiaries have filed voluntary petitions forreorganization under Chapter 11 of the U.S. Bankruptcy Code and 

 

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the associated publicinterest concerns raised by such bankruptcy petitions; (ii) concerns regardingthe residual equity interest of the existing listed securities holders; and (iii)concerns about our ability to sustain compliance with all requirements forcontinued listing on the NASDAQ.

 

We decided not to appealthe NASDAQ’s determination to a Hearings Panel, pursuant to the procedures setforth in the NASDAQ’s Listing Rule 5800 Series and we did not take any furtheraction to appeal the NASDAQ’s decision, and therefore our securities were suspendedfrom trading on the NASDAQ on October 13, 2009 and are expected to be delistedin November 2009.

 

***GoingConcern*******– Inlight of the deficiency in the Company’s Revolving Facility, debt covenantviolations, stock price decline, negative working capital, continued net lossesand the Chapter 11 Cases filed subsequent to September 30, 2009, there issubstantial doubt as to our ability to continue as a going concern for a periodlonger than the next twelve months. Additionally, our independent auditorsincluded an explanatory paragraph in their report on our consolidatedfinancials statements as of and for the year ended December 31, 2008 thatraises substantial doubt about our ability to continue as a going concern. Ourability to continue as a going concern is dependent upon the outcome of theChapter 11 Cases and we do not expect to continue as a going concern at theconclusion of our Chapter 11 Cases.

 

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

 

FASB ASC 852 *Reorganizations*, which is applicable to companies inreorganization proceedings under Chapter 11, generally does not change the mannerin which financial statements are prepared. However, it does require that thefinancial statements for periods subsequent to the filing of the Chapter 11petition distinguish transactions and events that are directly associated withthe reorganization from the ongoing operations of the business. Revenues,expenses (including professional fees), realized gains and losses, andprovisions for losses that can be directly associated with the reorganizationand restructuring of the business must be reported separately as reorganizationitems in the consolidated statements of operations beginning in the quarterending December 31, 2009. The consolidated balance sheet must distinguishpre-petition liabilities subject to compromise from both those pre-petition liabilitiesthat are not subject to compromise and from post-petition liabilities.Liabilities that may be affected by the plan must be reported at the amountsexpected to be allowed, even if they may be settled for lesser amounts. Inaddition, cash provided by reorganization items must be disclosed separately inthe consolidated statement of cash flows. We adopted ASC 852 effective on October1, 2009 and will segregate those items as outlined above for all reportingperiods subsequent to such date.

 

Our outlook and theexpected results described above are both subject to change based upon factorsthat include, but are not limited to, drilling results, commodity prices, theoutcome of the Chapter 11 Cases and factors referred to in “FORWARD LOOKINGINFORMATION” in our 2008 Annual Report.

 

# **Industry and EconomicFactors**

 

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

 

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peaks in July 2008.Although crude oil prices have shown some recovery in 2009 rising toapproximately $80.00 per barrel, natural gas prices have remained weak around$3.00 to $5.00 per Mcf.

 

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

 

Our operations entailsignificant complexities. Advanced technologies requiring highly trainedpersonnel are utilized in both exploration and production.  Even when the technology is properly used, wemay still not know conclusively if hydrocarbons will be present or the rate atwhich they will be produced.  Explorationis a high-risk activity, oftentimes resulting in no commercially productivereserves being discovered.  Thesefactors, together with periods of increased demand for rigs, equipment,supplies and services, have made it difficult at times for us to further ourgrowth, and made timely execution of our planned activities difficult.

 

Our business, as with other extractive businesses, isa depleting one in which each gas equivalent produced must be replaced or ourasset base and capacity to generate revenues in the future will shrink.  In 2008 and the first nine months of 2009, wewere unable to replace the production we generated due to our reduced capitalspending program and higher drilling and operating costs. This will continue tobe a factor in 2009 as we operate under a severely limited capital andoperating budget in connection with our Chapter 11 Cases.

 

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

 

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

 

Poor economic conditions continue to createconsiderable challenges and uncertainties for the energy industry. We areunable to predict the impact on our business of a continued decline incommodity prices and the global economy, but the current conditions have madeit difficult at times for us as we continued our financial and strategic alternativesprocess. We expect that continued weakening in the economy could result infurther declines in our revenue, cash flows and liquidity.

 

# **Approach to the Business**

 

Historically, our goal has been to fund ongoingexploration and development projects with cash flow provided by operatingactivities, occasionally supplemented with external sources of capital. Wenormally hedge our exposure to volatile oil and natural gas prices on a portionof our expected production to reduce price risk. As of September 30, 2009, wehad derivative contracts in place covering 20,000 MMBtu/d of natural gas and300 Bbl/d of crude oil for the remainder of 2009.

 

In 2009 we have operated under a severely limitedcapital spending program as we continued our review of financial and strategicalternatives. Our strategy has been to preserve liquidity and resolve theuncertainty and challenges we faced. We now intend to use cash flow fromoperations to provide working capital and financial resources necessary toallow business operations to continue at a minimal level, including meetingobligations 

 

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to employees and certain vendors, customers and othersas we proceed through consummation of our Plan of Reorganization that we filedin connection with our Chapter 11 Cases.

 

**Divestitures**

 

In the past, we have regularly reviewed our asset basefor the purpose of identifying non-core assets, the disposition of which wouldincrease capital resources available for other activities and createorganizational and operational efficiencies. While we generally do not disposeof assets solely for the purpose of reducing debt, such dispositions can havethe result of furthering our objective of financial flexibility through reduceddebt levels. During the first nine months of 2009, we completed the sale ofvarious non-core properties in Texas for proceeds of $0.3 million and duringthe first nine months of 2008, we completed sales of a pipeline and certainworking interests in approximately 120 properties located in Texas to variousbuyers for aggregate proceeds of approximately $19.2 million.

 

As discussed above, on September30, 2009, the Debtors entered into the Purchase Agreement with the ProposedPurchaser pursuant to which the Proposed Purchaser will acquire the EquityInterests. Pursuant to the Purchase Agreement, the effective date for the saleof the Equity Interests of the reorganized Subsidiaries is June 30, 2009. Theconsideration for the Equity Interests to be conveyed pursuant to the PurchaseAgreement is $191 million, subject to adjustment for, among other things, theGas Pricing Downward Adjustment, which is capped at approximately $23.9million.  In addition to the Gas PricingDownward Adjustment, the Purchase Price is subject to further adjustments, asprovided in the Purchase Agreement, including, among others, adjustmentsrelating to (i) costs and expenses incurred by the Debtors in connection withthe maintenance of the Debtors’ properties before and after the effective date,(ii) changes in the value of certain of our hedging contracts in the event oftheir early termination prior to the closing, (iii) gas imbalance volumes, (iv)environmental conditions, if any, (v) title defects and benefits, if any, (vi) taxes,(vii) proceeds of production before and after the effective date, (viii) unsoldinventory as of the effective date, and (ix) prepaid items.  The proceeds from the sale of the Equity Interestswill be used to substantially reduce our indebtedness under the RevolvingFacility.  We currently haveapproximately $226.5 million of outstanding principal under our RevolvingFacility which is substantially in excess of the proceeds expected to bereceived pursuant to the Purchase Agreement.

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformitywith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenue, expenses, contingent assetsand liabilities and the related disclosures in the accompanying financialstatements. Changes in these estimates and assumptions could materially affectour financial position, results of operations or cash flows. Managementconsiders an accounting estimate to be critical if:

 

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

 

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

 

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

 

*Natureof Critical Estimate Item:*Oil and Natural Gas Reserves - Our estimate of proved reserves isbased on the quantities of oil and natural gas which geological and engineeringdata demonstrate, with reasonable certainty, to be recoverable in future yearsfrom known reservoirs under existing economic and operating conditions.  The accuracy of any reserve estimate is afunction of the quality of available data, engineering and geologicalinterpretation, and judgment, as well as prices and cost levels at that pointin time. Any significant variance in these assumptions could materially affectthe estimated 

 

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quantity and value of ourreserves. Despite the inherent imprecision in these engineering estimates, ourreserves are used throughout our financial statements.  Significant changes to the way we reportreserves are expected for the year ended December 31, 2009 as a result of thenew rules issued by the SEC (see “Recently Issued Accounting Pronouncements(Not Yet Adopted)”). These changes are expected to impact the followingcalculations.

 

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

 

“Ceiling”Test - Thefull-cost method of accounting for oil and natural gas properties requires aquarterly calculation of a limitation on capitalized costs, often referred toas a full-cost ceiling test. The ceiling is the discounted present value of ourestimated total proved reserves (using a 10% discount rate) adjusted for taxesand the impact of cash flow hedges on pricing, if cash flow hedge accounting isapplied. The ceiling test calculation dictates that prices and costs in effectas of the last day of the period are to be used in calculating the discountedpresent value of our estimated total proved reserves.  However, if prices increase subsequent to thebalance sheet date, but before the filing date, SEC guidelines allow a companyto use the subsequent date’s higher prices in calculating the full-costceiling. To the extent that our capitalized costs (net of accumulated depletionand deferred taxes) exceed the ceiling, the excess must be written off toexpense. Once incurred, this impairment of oil and natural gas properties isnot reversible at a later date even if oil and natural gas prices increase. Aceiling test impairment could result in a significant loss for a reportingperiod; however, future depletion expense would be correspondinglyreduced.  Our estimated proved reservesvolumes have decreased during the period from year-end 2008 to September 30,2009, but the average prices for oil, natural gas liquids (“NGL”) and naturalgas at the balance sheet date as of September 30, 2009 were $70.61 per barrel,$42.37 per barrel and $3.30 per MMBtu, respectively. We were not required torecord an impairment during the third quarter of 2009. The impairments taken inthe third and fourth quarters of 2008 and first quarter of 2009 significantlyimpacted our depletion expense in the second and third quarters of 2009. If the2008 and 2009 impairments had not been taken, our depletion rate would havebeen approximately $7.48 per Mcfe as compared to $2.45 per Mcfe reported forthe three months ended September 30, 2009.

 

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

 

“Ceiling” limitation test - Factors that contribute to a ceilingtest impairment include the price used to calculate the reserve limitationthreshold and reserve quantities. A reduction in prices at a measurement datecould trigger a full-cost ceiling impairment. We recorded an impairment ofapproximately $78.3 million, net of tax, at March 31, 2009, but we arereporting a cushion of approximately $24.5 million, net of tax, at September 30,2009. A 10% increase in prices would have increased our cushion byapproximately 144%, net of tax. A 10% decrease in prices would have eliminatedthe cushion and resulted in an impairment of approximately $3.3 million, net oftax. Therefore, should pricesdecline in the fourth quarter of 2009, due to either market conditions or as aresult of the adoption of the modernization of reserves rules applicable atDecember 31, 2009, the potential for an impairment at year-end exists. Although our hedging program is intended tomitigate the economic impact of any significant price decline, it did notimpact our ceiling test at September 30, 2009 because we do not apply cash flowhedge accounting to our derivative contracts. Had we applied cash flow hedgeaccounting to our outstanding derivative contracts, there would have been a 33%increase in the cushion we calculated as a result of the low prices at themeasurement date falling below the derivative price floors. A 10% increase ordecrease in reserve volume would have decreased or increased the cushioncalculated at September 30, 2009 by approximately 80%.

 

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*Natureof Critical Estimate Item:*Asset Retirement Obligations (“ARO”)**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and natural gas production operations. Our removal and restorationobligations are primarily associated with plugging and abandoning wells. Inaccordance with FASB ASC 410-20, *AssetRetirement Obligations,* we estimate asset retirement costs for allof our assets upon acquisition of the asset, adjust those costs for inflationto 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.

 

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

 

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

 

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

 

*Natureof Critical Estimate Item:*Income Taxes**-**In accordance with FASB ASC 740,*Income Taxes,* we have recorded a deferredtax asset and liability to account for the expected future tax benefits andconsequences, respectively, of events that have been recognized in ourfinancial statements and our tax returns. There are several items that resultin deferred tax assets and liabilities on the balance sheet, the largest ofwhich are attributable to tax basis in excess of book basis in oil and naturalgas properties and the impact of net operating loss (“NOL”) carryforwards. Weroutinely assess our ability to use all of our NOL carryforwards that resultedfrom substantial income tax deductions, prior year losses and acquisitions. Weconsider future taxable income in making such assessments.  If we conclude that it is more likely thannot that some portion or all of the deferred tax assets will not be realizedunder accounting standards, it is reduced by a valuation allowance to removethe benefit of those NOL carryforwards from our financial statements.Additionally, in accordance with FASB ASC 740-10-25, *Income Taxes*,**we have recorded a liability of $0.1 million associatedwith uncertain tax positions. FASB ASC 740-10-25 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.  We are required to determine whether it ismore likely than not (a likelihood of more than 50 percent) 

 

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that a tax position willbe sustained upon examination, including resolution of any related appeals orlitigation processes, based on the technical merits of the position in order torecord any financial 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 positionis measured at the largest amount of benefit that is greater than 50 percentlikely of being realized upon ultimate settlement.

 

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

 

*Effect if Different AssumptionsUsed:* Along withconsultation from an independent public accounting firm used in taxconsultation, we continually evaluate complicated tax law requirements andtheir effect on our current and future tax liability and our tax filingpositions.  Despite our attempt to makean accurate estimate, the ultimate utilization of our NOL carryforwards ishighly dependent upon our actual production, the realization of taxable incomein future periods, Internal Revenue Code Section 382 limitations and potentialtax elections.  If we estimate that someor all of our NOL carryforwards are more likely than not going to expire orotherwise not be utilized to reduce future tax, we would be required to recorda valuation allowance to remove the benefit of those NOL carryforwards from ourfinancial statements, as was done most recently in the fourth quarter of 2008and the first, second and third quarters of 2009. Our liability for uncertaintax positions is dependent upon our judgment on the amount of financialstatement benefit that an uncertain tax position will realize upon ultimatesettlement and on the probabilities of the outcomes that could be realized uponultimate settlement of an uncertain tax position using the facts, circumstancesand information available at the reporting date to establish the appropriateamount of financial statement benefit. To the extent that a valuation allowanceor uncertain tax position is established or increased or decreased during aperiod, we may be required to include an expense or benefit within tax expensein the statement of operations. During the first nine months of 2009, werecorded a valuation allowance of approximately $36.0 million. This valuationallowance was recorded as a result of our anticipated inability to utilize allof our deferred tax assets.

 

*Nature of Critical Estimate Item:*Derivative and Hedging Activities**-**Due to the instability of oil and naturalgas prices, we have periodically entered into price-risk management transactions(e.g. swaps, collars and floors) related to our expected oil and natural gasproduction to seek to achieve a more predictable cash flow, as well as toreduce exposure from commodity price fluctuations. While these transactions areintended to be economic hedges of price risk, different accounting treatmentmay apply depending on if they qualify for cash flow hedge accounting. Inaccordance with FASB ASC 815-10,*Derivativesand Hedging,*all derivatives, other than those that meet the normalpurchases and sales exception, are recorded on the balance sheet at fair value.

 

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

 

Mark-to-Market Accounting - For transactions accounted for usingmark-to-market accounting treatment, until the contract settles, the entirechange in the fair value of the outstanding derivative contract is recorded intotal revenue immediately, and not deferred through OCI, and there is no 

 

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measurement ofeffectiveness. Since January 1, 2006, we have applied mark-to-market accountingtreatment to all outstanding derivative contracts.

 

*Assumptions/ApproachUsed:*Estimatingthe fair values of derivative instruments requires complex calculations,including the use of a discounted cash flow technique, estimates of risk andvolatility, and subjective judgment in selecting an appropriate discount rate.In addition, the calculations use future market commodity prices, whichalthough posted for trading purposes, are merely the market consensus of forecastedprice trends. The results of the fair value calculations cannot be expected torepresent exactly the fair value of our commodity derivatives. We currentlyobtain and review the fair value of our positions from our counterparties. Ourpractice of relying on our counterparties who are more specialized andknowledgeable in preparing these complex calculations reduces our management’sinput. It also approximates the fair value of the contracts as it would be thecost to us to terminate a contract at that point in time, as well as thepotential inflows or outflows of cash at the expiration of the contracts. Dueto the fact that we apply mark-to-market accounting treatment, the offset tothe balance sheet asset or liability, or the change in fair value of thecontracts, is included in total revenue on the statement of operations ratherthan deferred in OCI on the balance sheet.

 

*Effectif Different Assumptions Used:* At September 30, 2009, a 10% change in the commodityprice per unit would cause the fair value total of our derivative financialinstruments to increase or decrease by approximately $0.5 million. Had weapplied cash flow hedge accounting treatment to all of our derivative contractsoutstanding at September 30, 2009, our net loss to common stockholders for thenine months would have been approximately $61.2 million, or $2.34 per basic anddiluted loss per share, assuming that all hedges were fully effective, ascompared to our reported net loss to common stockholders for the nine monthsended September 30, 2009 of $94.7 million, or $3.50 basic and diluted loss pershare.

 

# **Results of Operations**

 

Thissection includes discussion of our results of operations for the three and ninemonths ended September 30, 2009 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.

 

**ThirdQuarter 2009 Compared to the Third Quarter 2008**

 

**Revenueand Production**

 

Total revenuedecreased significantly from the third quarter of 2008 to the comparable 2009period. Excluding the effects of derivative activity, revenue decreased 77%from the third quarter of 2008 to the comparable 2009 period.  For the three months ended September 30, 2009and 2008, our product mix contributed the following percentages of revenue andproduction volumes:

 
|                     |       |                                  |       |             |       |                           |       |     |       |     |       |     |       |
|--------------------------|------------|---------------------------------------|------------|------------------|------------|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| ** **               | ** ** | **REVENUE  (1)**                      | ** ** | **REVENUE  (2)** | ** ** | **PRODUCTION  VOLUMES (MCFE)** | ** ** |
| ** **               | ** ** | **Three  Months Ended September 30,** | ** ** |
| ** **               | ** ** | **2009**                              | ** ** | **2008**         | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Natural gas              |       | 59                                    | %          | 73               | %          | 55                             | %          | 61       | %          | 68       | %          | 70       | %          |
| Natural gas liquids      |       | 18                                    | %          | 8                | %          | 20                             | %          | 20       | %          | 22       | %          | 20       | %          |
| Crude oil and condensate |       | 23                                    | %          | 19               | %          | 25                             | %          | 19       | %          | 10       | %          | 10       | %          |
|                     |       |                                  |       |             |       |                           |       |     |       |     |       |     |       |
| Total                    |       | 100                                   | %          | 100              | %          | 100                            | %          | 100      | %          | 100      | %          | 100      | %          |

 

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(1) Includes effect of derivative transactions

(2) Excludes effect of derivative transactions

 

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The followingtable summarizes volume and price information with respect to our oil andnatural gas production:

 
| ** **                                   | ** ** | ** **                                         | ** ** | ** **   | ** ** | **2009  Period Compared********to 2008  Period** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **Three  Months Ended**                            | ** ** | **$**        | ** ** | **%**                                            | ** ** |
| ** **                                   | ** ** | **September  30,**                                 | ** ** | **Increase** | ** ** | **Increase**                                     | ** ** |
| ** **                                   | ** ** | **2009**                                           | ** ** | **2008**     | ** ** | **(Decrease)**                                   | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(in  thousands, except prices and percentages)** | ** ** | ** **   | ** ** | ** **                                       | ** ** |
| **Production Volumes:**                      |       |                                               |       |         |       |                                             |       |   |   |
| Natural gas (MMcf)                           |       | 1,795                                              |       | 2,789        |       | (994                                             | )          | (36 | )% |
| Natural gas liquids (MBbls)                  |       | 95                                                 |       | 132          |       | (37                                              | )          | (28 | )% |
| Crude oil and condensate (MBbls)             |       | 46                                                 |       | 68           |       | (22                                              | )          | (32 | )% |
| Natural gas equivalent (MMcfe)               |       | 2,641                                              |       | 3,989        |       | (1,348                                           | )          | (34 | )% |
| **Average Sales Price(1):**                  |       |                                               |       |         |       |                                             |       |   |   |
| Natural gas ($ per Mcf)(2)              |       | $                                                  | 3.08       |         | $          | 9.45                                             |       | $ | (6.37 | ) | (67 | )% |
| Natural gas liquids ($ per Bbl)         |       | 21.55                                              |       | 64.53        |       | (42.98                                           | )          | (67 | )% |
| Crude oil and condensate ($ per Bbl)(2) |       | 55.29                                              |       | 122.05       |       | (66.76                                           | )          | (55 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |       | 3.85                                               |       | 10.82        |       | (6.97                                            | )          | (64 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |       | 4.22                                               |       | 26.73        |       | (22.51                                           | )          | (84 | )% |
| **Operating Revenue:**                       |       |                                               |       |         |       |                                             |       |   |   |
| Natural gas (2)                              |       | $                                                  | 5,520      |         | $          | 26,375                                           |       | $ | (20,855 | ) | (79 | )% |
| Natural gas liquids                          |       | 2,048                                              |       | 8,516        |       | (6,468                                           | )          | (76 | )% |
| Crude oil and condensate (2)                 |       | 2,557                                              |       | 8,245        |       | (5,688                                           | )          | (69 | )% |
| Gain on derivatives                          |       | 1,011                                              |       | 63,505       |       | (62,494                                          | )          | (98 | )% |
| Total revenue                                |       | $                                                  | 11,136     |         | $          | 106,641                                          |       | $ | (95,505 | ) | (90 | )% |

 

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(1) Prices are calculatedbased on whole numbers, not rounded numbers.

(2) Excludes the effect ofderivative transactions.

(3) Includes the effect ofderivative transactions.

 

**Production****–**For the quarter ended September 30, 2009, productionvolumes decreased as compared to the same 2008 period primarily due to normalproduction declines, asset sales completed during early 2008 and 2009 anddecreased capital re-investment in replacing and maintaining production ascompared to historical levels. The following summarizes our average dailyproduction volumes:

 
| ** **                       | ** ** | **For  the Three Months Ended  September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| ** **                       |       |                                           |       |   |   |
| **Production Volumes per Day:**  |       |                                           |       |   |   |
| ** **                       |       |                                           |       |   |   |
| Natural gas (MMcf/D)             |       | 19.5                                           |       | 30.3 |   |
|                             |       |                                           |       |   |   |
| Natural gas liquids (MBbls/D)    |       | 1.0                                            |       | 1.4 |   |
|                             |       |                                           |       |   |   |
| Oil and condensate (MBbls/D)     |       | 0.5                                            |       | 0.7 |   |
|                             |       |                                           |       |   |   |
| Natural gas equivalent (MMcfe/D) |       | 28.7                                           |       | 43.4 |   |

 

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

 

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Mcf from their peaks in July2008. Although crude oil prices have shown some recovery in late 2009 rising toapproximately $80.00 per barrel, natural gas prices have remained weak around$3.00 to $5.00 per Mcf. This has significantly affected our business, but in2009 our commodity derivatives have provided some protection against thesefalling prices, see “Derivative” discussion below. A continued or extendeddecline in oil or natural gas prices could have a material adverse effect onour financial position, results of operations, cash flows and access to capitaland on the quantities of oil and natural gas reserves that we can economicallyproduce.

 

**Natural gas revenue** - For the three months ended September 30,2009, natural gas revenue, excluding derivative activity, decreased 79% overthe same period in 2008 due to both lower average realized prices andproduction volumes. The overall decrease in production compared to the prioryear period resulted in a decrease in revenue of approximately $9.4 million(based on 2008 comparable period pre-derivative prices). The decrease inaverage price received, excluding derivative activity, resulted in decreasedrevenue of approximately $11.4 million (based on current periodproduction).  See below for a discussionof the impact of natural gas derivatives on prices and revenue.

 

**Natural gas liquids revenue**- For the three months ended September 30,2009, NGL revenue decreased 76% over the same period in 2008 due to decreasesin prices realized and production volumes. The price decrease resulted in adecrease in revenue of approximately $4.1 million (based on current periodproduction).  The decrease in NGLproduction decreased revenue by approximately $2.4 million (based on 2008comparable period average prices).

 

**Crude oil and condensate revenue**- For the three months ended September 30,2009, oil and condensate sales revenue, excluding derivative activity,decreased 69% from the comparable period in 2008 due to both lower averagerealized prices and production volumes. The decreased average realized pricefor oil and condensate for the three months ended September 30, 2009 resultedin a decrease in revenue of approximately $3.1 million (based on current periodproduction). The decrease in oil and condensate production resulted in a decreasein revenue of approximately $2.6 million (based on 2008 comparable periodpre-derivative prices). See below for a discussion of the impact of crude oilderivatives on prices and revenue.

 

**Derivatives**– The volumeand price contract terms of our derivative contracts vary from period to periodand therefore interact differently with the changing pricing environment, whichmakes the comparability of the results for each period difficult. In allperiods presented, we applied mark-to-market accounting treatment to ourderivative contracts; therefore the full volatility of the non-cash change infair value of our outstanding contracts is reflected in total revenue and willcontinue to affect total revenue until outstanding contracts expire. Sincethese gains and 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 net gain on derivatives for eachof the periods indicated and the impact each component had on our realizedprices:

 
| ** **                                                                        | ** ** | **Three  Months Ended September 30,**      | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **$**                                      | ** ** | **$ per unit (1)** | ** ** | **$** | ** ** | **$ per unit (1)** | ** ** |
| ** **                                                                        | ** ** | **(in thousands, except per unit prices)** | ** ** |
|                                                                              |       |                                       |       |   |   |   |   |   |   |
| Natural gas derivative contract settlements (Mcf)                                 |       | $                                          | 8,011      |   | $ | 4.47 |   | $ | (5,011 | ) | $ | (1.79 | ) |
|                                                                              |       |                                       |       |   |   |   |   |   |   |
| Crude oil derivative contract settlements (Bbl)                                   |       | 57                                         |       | 1.25 |   | (7,195 | ) | (106.50 | ) |
|                                                                              |       |                                       |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  gas derivative contracts (Mcf) |       | (6,937                                     | )          | (3.87 | ) | 56,417 |   | 20.20 |   |
|                                                                              |       |                                       |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  oil derivative contracts (Bbl) |       | (120                                       | )          | (2.60 | ) | 19,294 |   | 285.61 |   |
|                                                                              |       |                                       |       |   |   |   |   |   |   |
| Gain on derivatives (Mcfe)                                                        |       | $                                          | 1,011      |   | $ | 0.37 |   | $ | 63,505 |   | $ | 15.91 |   |

 

----

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

 

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Shouldcrude oil or natural gas prices increase or decrease from the current levels,it could materially impact our revenues. In a high price environment, hedgedpositions could result in lost opportunities if there is a cap in place, thuslowering our effective realized prices on hedged production, but in anenvironment of falling prices, these transactions offer some pricing protectionfor hedged production. InOctober 2009, the caps on all of our derivative collars for the remaining termof the fourth quarter of 2009 were repurchased such that only the floors remainin place. The cost of this transaction was reimbursed by the Company’s proposedpurchaser.  Except for this change, we have not enteredinto any new derivative contracts in recent months and do not expect to for theforeseeable future.

 

**Costs and Operating Expenses**

 

The table below detailsour expenses:

 
| ** **                                            | ** ** | ** **                              | ** ** | ** **   | ** ** | **2009  Period Compared********to 2008  Period** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **Three  Months Ended**                 | ** ** | **$**        | ** ** | **%**                                            | ** ** |
| ** **                                            | ** ** | **September  30,**                      | ** ** | **Increase** | ** ** | **Increase**                                     | ** ** |
| ** **                                            | ** ** | **2009**                                | ** ** | **2008**     | ** ** | **(Decrease)**                                   | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in thousands,  except percentages)** | ** ** |
| Oil and natural gas operating expenses                |       | $                                       | 3,171      |         | $          | 4,039                                            |       | $ | (868 | ) | (21 | )% |
| Severance and ad valorem taxes                        |       | 324                                     |       | 2,654        |       | (2,330                                           | )          | (88 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                    |       |         |       |                                             |       |   |   |
| Oil and natural gas property and equipment            |       | 6,459                                   |       | 21,601       |       | (15,142                                          | )          | (70 | )% |
| Other assets                                          |       | 165                                     |       | 181          |       | (16                                              | )          | (9 | )% |
| ARO accretion                                         |       | 96                                      |       | 92           |       | 4                                                |       | 4 | % |
| Impairment of oil and natural gas properties          |       | —                                  |       | 129,520      |       | (129,520                                         | )          | (100 | )% |
| General and administrative expenses                   |       | 5,152                                   |       | 6,380        |       | (1,228                                           | )          | (19 | )% |
| Total operating expenses                              |       | $                                       | 15,367     |         | $          | 164,467                                          |       | $ | (149,100 | ) | (91 | )% |
|                                                  |       |                                    |       |         |       |                                             |       |   |   |
| Other income and expense, net                         |       | 4,133                                   |       | 2,898        |       | 1,235                                            |       | 43 | % |
| Income tax expense (benefit)                          |       | 42                                      |       | (20,714      | )          | 20,756                                           |       | 100 | % |
| Preferred stock dividends                             |       | —                                  |       | 2,066        |       | (2,066                                           | )          | (100 | )% |

 

**Oil and natural gas operatingexpenses** -Oil and natural gas operating expenses include direct operating costs, repairsand maintenance and workover expenses. Operating expenses for the three monthsended September 30, 2009 were 21% lower than operating expenses for the sameperiod in 2008.  In addition to lowerworkover expenses there were reduced costs for saltwater disposal, repairs andmaintenance and contract pumping services in the third quarter of 2009 comparedto the same period in 2008.  Average oiland natural gas operating expenses on a unit-of-production basis were $1.20 perMcfe and $1.01 per Mcfe for the three months ended September 30, 2009 and 2008,respectively. On a per Mcfe basis, the decline in production volume was theprimary reason for the increase in cost per Mcfe.

 

**Severanceand ad valorem taxes** - Severance tax expense for the three months ended September 30, 2009was 87% lower than the prior year period as a result of the lower revenuereceived in the current year.  In addition,our effective severance tax rate was lower due to abatements received during2009. For the three months ended September 30, 2009, severance tax expense wasapproximately 3.1% of revenue subject to severance taxes compared to 5.8% ofrevenue subject to severance taxes for the third quarter of 2008. Ad valoremtax expense for the third quarter of 2009 was significantly lower than thethird quarter of 2008 due to revising estimated expense for 2009. On anequivalent basis, severance and ad valorem taxes averaged $0.12 per Mcfe and$0.67 per Mcfe for the three months ended September 30, 2009 and 2008,respectively.

 

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**Depletion,depreciation, and amortization (“DD&A”) and accretion**- Full-cost depletion on our oil andnatural gas properties has decreased substantially as a result of a decrease inour depletion rate and 34% lower production volumes in the third quarter of2009 compared to the third quarter of 2008. Our depletion rate for the threemonths ended September 30, 2009 was $2.45 per Mcfe, a 55% decreasecompared to the third quarter 2008 rate of $5.41 per Mcfe. The depletion ratehas decreased over the past year due to significant impairments taken in thethird and fourth quarters of 2008 and first quarter of 2009. Depreciation ofother assets for the third quarter of 2009 was slightly lower than the sameperiod in 2008. Accretion expense associated with our ARO for the three monthsended September 30, 2009 increased due to revisions in the ARO liabilitymade during 2008 and the new layers added in 2008 and 2009.

 

**Impairmentof oil and natural gas properties** — No impairment was required for the third quarter of2009. At September 30, 2008 we recorded a non-cash full-cost ceiling testimpairment of oil and natural gas properties in the amount of $129.5 million($84.2 million net of tax). The write-down was the result of declines incommodity prices and negative revisions in our proved reserve quantities atyear-end 2007 and during 2008.

 

**Generaland administrative (“G&A”) expenses** — G&A expense decreased 19% for the three monthsended September 30, 2009 compared to the same period in 2008 due primarilyto the decrease in our salary and benefit costs as a result of the 51% drop inour staffing levels since September 30, 2008. We also had a decrease ingeneral legal fees in the three months ended September 30, 2009 ascompared to the same period of 2008. Partially offsetting these decreases werethe costs associated with our financial and strategic alternative process thatincreased significantly from $1.8 million in the three months ended September 30,2008 to $2.3 million for the three months ended September 30, 2009. Wealso had an increase in contract labor costs in 2009. Capitalized G&A costsfor third quarter 2009 and 2008 were approximately $0.6 million and $1.5million, respectively. G&A on a unit-of-production basis for the threemonths ended September 30, 2009 was $1.95 per Mcfe compared to $1.60 perMcfe for the comparable 2008 period. G&A on a unit-of-production basis,excluding non-cash share-based compensation costs and bad debt expense, for thethree months ended September 30, 2009 averaged $1.88 per Mcfe compared to$1.45 per Mcfe in the same period in 2008.

 

**Other income and expense, net** - During the three months ended September 30,2009, our other income and expense increased primarily due to an increase ininterest expense resulting from lower capitalization rates. For the thirdquarter of 2009, we capitalized less interest due to a 10% lower unprovedproperty base on which we calculate interest expense subject to capitalization.

 
| ** **                 | ** **   | **Three  Months Ended September 30,** | ** **   |
|----------------------------|--------------|--------------------------------------------|--------------|
| ** **                 | ** **   | **2009**                                   | ** **   | **2008** | ** ** |
| *** ***               | *** *** | **(in  thousands)**                        | *** *** |
| Gross interest expense     |         | $                                          | 3,303        |   | $ | 3,470 |   |
| Less: capitalized interest |         | (287                                       | )            | (655 | ) |
| Interest expense, net      |         | $                                          | 3,016        |   | $ | 2,815 |   |
|                       |         |                                       |         |   |   |
| Weighted average debt      |         | $                                          | 227,234      |   | $ | 239,913 |   |

 

We recorded amortization of deferred loan costsrelated to our Revolving Facility during the three months ended September 30,2008 and none in the third quarter of 2009. We also recorded $1.1 million in Reorganization expense for the three monthsended September 30, 2009 as compared to none in the same period in 2008.

 

**Income tax benefit** — For the three months ended September 30,2009, we recorded tax expense of approximately $42,000 related to the valuationallowance established for an alternative minimum tax payment required when wefiled our 2005 amended tax return. During the three months ended September 30, 2008, we recorded anincome tax benefit of $20.7 million with no valuation allowance.

 

**Preferred stock dividends** — Our Board of Directors has notdeclared quarterly dividends on our Convertible Preferred Stock since October 2008.  Such dividends were declared in December 2007,March 2008, June 2008 and September 2008. As a result, there isno dividend expense reported for the three months ended September 30, 2009compared to $2.1 million for the same period in 2008.

 

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**Loss pershare** — We reporteda net loss for the quarters ended September 30, 2009 and 2008.  The loss in the third quarter of 2009 wasprimarily due to reduced revenues as a result of lower prices andproduction.  Basic weighted averageshares outstanding for the three months ended September 30, 2009 and 2008were comparable. At September 30, 2009 and 2008, we excluded the effect ofrestricted stock units, common stock options, and 8.7 million shares ofif-converted common stock from the diluted shares calculations because they wouldhave an anti-dilutive effect on loss per share.

 

**NineMonths Ended September 30, 2009 Compared to the Nine Months Ended September 30,2008**

 

**Revenue and Production**

 

Excluding the effects of derivative activity, revenues decreased 75%from the first nine months of 2008 to the comparable 2009 period. The Company’s decrease in revenue fromthe first nine months of 2008 to the comparable 2009 period was primarily dueto (1) commodity pricing that was significantly lower than first ninemonths of 2008 and (2) a decrease in capital expenditures and drillingactivity resulting from the decreased commodity prices which caused severalproved undeveloped locations to be uneconomic and shortening the economic lifeof many other properties. These declines were partially mitigated bynet gains from derivative activity in the current year period compared to netlosses in the prior year period.  Ourproduct mix contributed the following percentages of revenues and productionvolumes:

 
| ** **               | ** ** | **REVENUES  (1)**                         | ** ** | **REVENUES  (2)** | ** ** | **PRODUCTION  VOLUMES (MCFE)** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|-------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **Nine  Months ended September 30,** | ** ** |
| ** **               | ** ** | **2009**                                  | ** ** | **2008**          | ** ** | **2009**                       | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Natural gas              |       | 73                                        | %          | 66                | %          | 60                             | %          | 63 | % | 68 | % | 70 | % |
| Natural gas liquids      |       | 13                                        | %          | 21                | %          | 18                             | %          | 18 | % | 21 | % | 20 | % |
| Crude oil and condensate |       | 14                                        | %          | 13                | %          | 22                             | %          | 19 | % | 11 | % | 10 | % |
|                     |       |                                      |       |              |       |                           |       |   |   |   |   |   |   |
| Total                    |       | 100                                       | %          | 100               | %          | 100                            | %          | 100 | % | 100 | % | 100 | % |

 

----

| (1) Includes effect of derivative transactions |
|-----------------------------------------------------|
| (2) Excludes effect of derivative transactions |

 

The following table summarizes volume and price information withrespect to our oil and natural gas production for the nine months ended September 30,2009 and 2008:

 
| ** **                                   | ** ** | ** **                                         | ** ** | ** **   | ** ** | **2009  Period Compared** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|---------------------------|------------|
| ** **                                   | ** ** | ** **                                         | ** ** | ** **   | ** ** | **to 2008  Period**       | ** ** |
| ** **                                   | ** ** | **Nine  Months Ended**                             | ** ** | **$**        | ** ** | **%**                     | ** ** |
| ** **                                   | ** ** | **September 30,**                             | ** ** | **Increase** | ** ** | **Increase**              | ** ** |
| ** **                                   | ** ** | **2009**                                           | ** ** | **2008**     | ** ** | **(Decrease)**            | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(in  thousands, except prices and percentages)** | ** ** |
| **Production Volumes:**                      | * *   | * *                                           | * *   | * *     | * *   | * *                  | * *   | * * | * * |
| Natural gas (MMcf)                           |       | 5,971                                              |       | 9,604        |       | (3,633                    | )          | (38 | )% |
| Natural gas liquids (MBbls)                  |       | 299                                                |       | 449          |       | (150                      | )          | (33 | )% |
| Crude oil and condensate (MBbls)             |       | 163                                                |       | 230          |       | (67                       | )          | (29 | )% |
| Natural gas equivalent (MMcfe)               |       | 8,743                                              |       | 13,678       |       | (4,935                    | )          | (36 | )% |
| **Average Sales Price(1):**                  |       |                                               |       |         |       |                      |       |   |   |
| Natural gas ($ per Mcf)(2)              |       | $                                                  | 3.52       |         | $          | 9.17                      |       | $ | (5.65 | ) | (62 | )% |
| Natural gas liquids ($ per Bbl)         |       | 20.72                                              |       | 55.35        |       | (34.63                    | )          | (63 | )% |
| Crude oil and condensate ($ per Bbl)(2) |       | 46.32                                              |       | 114.41       |       | (68.09                    | )          | (60 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |       | 3.97                                               |       | 10.18        |       | (6.21                     | )          | (61 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |       | 5.37                                               |       | 8.54         |       | (3.17                     | )          | (37 | )% |
| **Operating Revenue:**                       |       |                                               |       |         |       |                      |       |   |   |
| Natural gas (2)                              |       | $                                                  | 21,042     |         | $          | 88,069                    |       | $ | (67,027 | ) | (76 | )% |
| Natural gas liquids                          |       | 6,186                                              |       | 24,861       |       | (18,675                   | )          | (75 | )% |
| Crude oil and condensate (2)                 |       | 7,569                                              |       | 26,282       |       | (18,713                   | )          | (71 | )% |
| Gain (loss) on derivatives                   |       | 12,188                                             |       | (22,452      | )          | 34,640                    |       |   | * |
| Total revenue                                |       | $                                                  | 46,985     |         | $          | 116,760                   |       | $ | (69,775 | ) | (60 | )% |

 

----

| (1) | Prices  are calculated based on whole numbers, not rounded numbers. |
|-----|---------------------------------------------------------------------|
| (2) | Excludes  the effect of derivative transactions.                    |
| (3) | Includes  the effect of derivative transactions.                    |
| *   | Not  meaningful                                                     |

 

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**Production****—**For the nine months ended September 30, 2009,production volumes decreased as compared to the same 2008 period primarily dueto normal production declines, asset sales completed during early 2008 and 2009and decreased capital re-investment in replacing and maintaining production ascompared to historical levels. The following summarizes our average dailyproduction volumes:

 
| ** **                       | ** ** | **For  the Nine Months Ended********September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                                 | ** ** | **2008** | ** ** |
| **Production Volumes per Day:**  |       |                                                     |       |   |   |
| Natural gas (MMcf/D)             |       | 21.9                                                     |       | 35.1 |   |
| Natural gas liquids (MBbls/D)    |       | 1.1                                                      |       | 1.6 |   |
| Oil and condensate (MBbls/D)     |       | 0.6                                                      |       | 0.8 |   |
| Natural gas equivalent (MMcfe/D) |       | 32.0                                                     |       | 49.9 |   |

 

**Averagesales price**—Our sales revenue is sensitive to thechanges in prices received for our products.  Asubstantial portion of our production is sold at prevailing market prices,which fluctuate in response to many factors that are outside of our control.Imbalances in the supply and demand for oil and natural gas can have a dramaticeffect on the prices we receive for our production. Political instability andavailability of alternative fuels could impact worldwide supply, while theeconomy, weather and other factors outside of our control could impact demand.In recent years, oil and natural gas commodity prices have generally trendedupwards in response to robust demand and constrained supplies, with oil andnatural gas prices peaking at more than $140.00 per barrel and $13.00 per Mcf,respectively, in July 2008. In the second half of 2008, a world-wideeconomic recession and oversupply of natural gas in North America led to anunprecedented collapse of oil and natural gas prices, with oil falling by morethan $100.00 per barrel and natural gas falling more than $10.00 per Mcf fromtheir peaks in July 2008. Although crude oil prices have shown somerecovery in late 2009 rising to approximately $80.00 per barrel, natural gasprices have remained weak around $3.00 to $5.00 per Mcf. This has significantlyaffected our business, but in 2009 our commodity derivatives have provided someprotection against these falling prices, see “Derivative” discussion below. Acontinued or extended decline in oil or natural gas prices could have amaterial adverse effect on our financial position, results of operations, cashflows and access to capital and on the quantities of oil and natural gasreserves that we can economically produce.

 

**Natural gas revenue** - For thefirst nine months of 2009, natural gas revenue, excluding derivative activity,decreased due to lower production volumes and lower realized prices. Thedecrease in production volumes compared to the prior year period resulted indecreased revenue of approximately $33.3 million (based on 2008 comparableperiod pre-derivative prices). The decrease in average price received resultedin decreased revenue of approximately $33.7 million (based on current periodproduction). Seebelow for a discussion of the impact of natural gas derivatives on prices andrevenue.

 

**NGL revenue**- For the ninemonths ended September 30, 2009, NGL sales revenue decreased 75% over thesame period in 2008 as a result of both lower production volumes and averagerealized prices. We do not hedge our NGL production. Decreased NGL productionvolumes led to decreased revenue of approximately $8.3 million (based on 2008comparable period prices). Lower average realized NGL prices for the ninemonths ended September 30, 2009 resulted in decreased revenue ofapproximately $10.3 million (based on current period production).

 

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**Crude oil and condensate revenue**- For the ninemonths ended September 30, 2009, oil and condensate sales revenue, excludingderivative activity, decreased 71% as compared to the same period in 2008, dueto lower average realized prices and production. Lower average realized pricesresulted in decreased revenue of approximately $11.1 million (based on currentperiod production).  The decrease in oiland condensate production resulted in a decrease in revenue of approximately$7.6 million (based on 2008 comparable period pre-derivative prices).

 

**Derivatives**— The volume and price contract terms ofour derivative 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 and losses are not afunction of the operating performance of our oil and natural gas assets,excluding their impact from the above discussions helps isolate the operatingperformance of those assets. The following table summarizes the variouscomponents of the total gain or loss on derivatives and the impact eachcomponent had on our realized prices.

 
| ** **                                                                                                 | ** **   | **Nine  Months Ended September 30,**   | ** **   |
|------------------------------------------------------------------------------------------------------------|--------------|---------------------------------------------|--------------|
| ** **                                                                                                 | ** **   | **2009**                                    | ** **   | **2008** | ** ** |
| ** **                                                                                                 | ** **   | **$**                                       | ** **   | **$ per  unit (1)** | ** ** | **$** | ** ** | **$ per  unit(1)** | ** ** |
| *** ***                                                                                               | *** *** | **(in  thousands, except per unit prices)** | *** *** |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Natural gas contract settlements (Mcf)                                                                     |         | $                                           | 20,880       |   | $ | 3.50 |   | $ | (11,381 | ) | $ | (1.18 | ) |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Crude oil contract settlements (Bbl)                                                                       |         | 1,064                                       |         | 6.52 |   | (19,473 | ) | (84.77 | ) |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Mark-to-market reversal of prior period unrealized  change in fair value of gas derivative contracts (Mcf) |         | (13,390                                     | )            | (2.24 | ) | (2,626 | ) | (0.27 | ) |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  gas derivative contracts (Mcf)                          |         | 5,557                                       |         | 0.93 |   | 2,565 |   | 0.26 |   |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Mark-to-market reversal of prior period unrealized  change in fair value of oil derivative contracts (Bbl) |         | (2,015                                      | )            | (12.34 | ) | 14,954 |   | 65.10 |   |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  oil derivative contracts (Bbl)                          |         | 92                                          |         | 0.58 |   | (6,491 | ) | (28.25 | ) |
|                                                                                                       |         |                                        |         |   |   |   |   |   |   |
| Gain (loss) on derivatives (Mcfe)                                                                          |         | $                                           | 12,188       |   | $ | 1.40 |   | $ | (22,452 | ) | $ | (1.64 | ) |

 

----

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

 

Should crude oil or natural gas prices increase ordecrease from the current levels, it could materially impact our revenues. Ourphysical sales of these commodities are vulnerable to the volatility of marketprice movements.  Therefore, we haveentered into contracts covering a portion of our anticipated 2009 production toensure certain cash flows that we expect will allow us to plan our businessactivities. In a high price environment, hedged positions could result in lostopportunities if there is a cap in place, thus lowering our effective realizedprices on hedged production, but in an environment of falling prices, thesetransactions offer some pricing protection for hedged production.  In October 2009, the caps on all of ourderivative collars for the remaining term of the fourth quarter of 2009 wererepurchased such that only the floors remain in place. The cost of thistransaction was reimbursed by the Company’s proposed purchaser.  Except for this change, we have not enteredinto any new derivative contracts in recent months and do not expect to for theforeseeable future. Our 2008 derivative position exceeded our 2008 productionexposing us to greater cash losses and risk of losses during that period.

 

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**Costs andOperating Expenses**

 

The table below detailsour expenses:

 
| ** **                                            | ** ** | ** **                              | ** ** | ** **   | ** ** | **2009  Period Compared** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|--------------|------------|---------------------------|------------|
| ** **                                            | ** ** | ** **                              | ** ** | ** **   | ** ** | **to 2008  Period**       | ** ** |
| ** **                                            | ** ** | **Nine  Months Ended**                  | ** ** | **$**        | ** ** | **%**                     | ** ** |
| ** **                                            | ** ** | **September 30,**                  | ** ** | **Increase** | ** ** | **Increase**              | ** ** |
| ** **                                            | ** ** | **2009**                                | ** ** | **2008**     | ** ** | **(Decrease)**            | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in  thousands, except percentages)** | ** ** |
| Oil and natural gas operating expenses                |       | $                                       | 10,820     |         | $          | 12,452                    |       | $ | (1,632 | ) | (13 | )% |
| Severance and ad valorem taxes                        |       | 2,672                                   |       | 8,136        |       | (5,464                    | )          | (67 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                    |       |         |       |                      |       |   |   |
| Oil and gas property and equipment                    |       | 23,548                                  |       | 69,926       |       | (46,378                   | )          | (66 | )% |
| Other assets                                          |       | 512                                     |       | 558          |       | (46                       | )          | (8 | )% |
| ARO accretion                                         |       | 288                                     |       | 283          |       | 5                         |       | 2 | % |
| Impairment of oil and natural gas properties          |       | 78,254                                  |       | 129,520      |       | (51,266                   | )          | (40 | )% |
| General and administrative expenses                   |       | 14,666                                  |       | 15,592       |       | (926                      | )          | (6 | )% |
| Total operating expenses                              |       | $                                       | 130,760    |         | $          | 236,467                   |       | $ | (105,707 | ) | (45 | )% |
|                                                  |       |                                    |       |         |       |                      |       |   |   |
| Other income and expense, net                         |       | $                                       | 10,898     |         | $          | 9,783                     |       | $ | 1,115 |   | 11 | % |
| Income tax expense (benefit)                          |       | 42                                      |       | (45,478      | )          | 45,520                    |       | 100 | % |
| Preferred stock dividends                             |       | —                                  |       | 6,199        |       | (6,199                    | )          | (100 | )% |

 

**Oil and natural gas operatingexpenses** - For the nine months ended September 30,2009, operating expenses decreased as compared to the same period of 2008 dueprimarily to decreased costs associated with saltwater disposal, repairs andmaintenance and compressor rent, partially offset by increased costs for wellworkover activity. On an equivalent Mcfe basis we had an overall increase inour average oil and natural gas operating expenses on a unit-of-productionbasis, which were $1.24 per Mcfe for the nine months ended September 30,2009 as compared to $0.91 per Mcfe in the same period of 2008 as a result ofthe production declines in 2009 as compared to 2008.

 

**Severanceand ad valorem taxes** - For the nine months ended September 30, 2009, severance and advalorem taxes decreased significantly from the first nine months of 2008.  Severance tax expense for the nine monthsended September 30, 2009 was 81% lower than the prior year period dueprimarily to lower revenue and decreased realized rates.  Our severance tax expense is levied on ouroil and natural gas revenue from physical production (i.e. excluding derivativeactivity). For the nine months ended September 30, 2009, severance taxexpense was approximately 4.5% of revenue subject to severance taxes comparedto 5.8% of revenue subject to severance taxes for the first nine months of2008. Ad valorem tax expense for the first nine months of 2009 wassignificantly higher than the prior year because our 2007 year-end estimateswere too high which impacted 2008 offsetting normal expense. On an equivalentbasis, severance and ad valorem taxes averaged $0.31 per Mcfe and $0.59 perMcfe for the nine months ended September 30, 2009 and 2008, respectively.

 

**DD&Aand accretion**-Depletion on our oil and natural gas properties decreased for the first ninemonths of 2009 compared to the same period of 2008 due to a decrease in ourunit-of-production depletion rate and lower production volumes, which isdiscussed under “Revenue and Production” above. The depletion rate decreasedfrom $5.11 per Mcfe in the first nine months of 2008 to $2.69 per Mcfe in thefirst nine months of 2009, primarily as a result of the impairments of our oiland natural gas properties taken during 2008 and the first quarter of 2009.Depreciation of furniture and fixtures and accretion expense for the first ninemonths of 2009 were slightly lower than the first nine months of 2008.

 

**Impairmentof oil and natural gas properties** - We recorded a net non-cash ceiling testimpairment of $78.3 million, net of tax, during the quarter ended March 31,2009, as discussed inNote 3 to the consolidated financial statements, and have not recorded anyfurther impairments in the second and third quarters of 2009. At September 30, 2008 we recorded anon-cash full-cost ceiling test impairment of oil and natural gas properties inthe amount of $129.5 million ($84.2 million, net of tax), which was the resultof declines in commodity prices and negative revisions in our provedreserve quantities at year-end 2007 and during 2008. No such impairment was reported in thefirst and second quarters of 2008.

 

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**G&Aexpense** -G&A expense for the first nine months of 2009 was 6% lower than the sameperiod of 2008. We had two primary offsetting items that contributed to thevariance. We recorded an increase in costs of our financial and strategicalternatives process from $2.1 million in the nine months of 2008 to $5.9million in the comparable period of 2009. This increase was offset by a $6.0million decrease in salaries and benefit costs related to our reducedworkforce. We also had increases in contract labor costs, bad debt expense andbuilding rent, which were partially offset by decreases in general legalexpenses. During the first nine months of 2009 and 2008, we recorded bad debtexpense of approximately $0.3 million and $0.1 million, respectively, toincrease our reserve allowance on certain accounts receivable that we believeto be potentially uncollectible. G&A expense is typically reduced byoverhead reimbursements and capitalized G&A. Overhead reimbursements, whichdecrease overall G&A expense, decreased in 2009 as compared to 2008.Capitalized G&A costs for the nine months of 2009 were lower at $2.0million as compared to $3.6 million for the comparable prior year period.G&A expense on a unit-of-production basis for the nine months ended September 30,2009 increased to $1.68 per Mcfe as compared to $1.14 per Mcfe for thecomparable 2008 period. G&A expense on a unit-of-production basis, excludingnon-cash share-based compensation costs and bad debt expense, for the ninemonths ended September 30, 2009 also increased due to lower productionvolumes, averaging $1.58 per Mcfe as compared to $0.99 per Mcfe for thecomparable 2008 period.

 

**Other income and expense, net** - During thenine months ended September 30, 2009, other income and expense in totalwas higher than the same period of 2008 as a result of amortization of deferredloan costs and Reorganization expense. The amortization of deferred loan costsin 2009 was higher than 2008 due to the acceleration of amortization of thosecapitalized costs resulting from the change in maturity date of the RevolvingFacility. We alsorecorded $1.1 million in Reorganization expense in the three months ended September 30,2009 as compared to none in 2008.

 

Gross interest expense in2008 was higher than 2009 due to higher outstanding debt balances. For thefirst nine months of 2009, only 8% of our gross interest expense wascapitalized, as compared to 18% in the same period of 2008. We calculate theamount of interest we can capitalize based on the comparison of our unprovedproperty costs to our weighted average debt balance.

 
| ** **                 | ** **   | **For the  Nine Months Ended September 30,** | ** ** |
|----------------------------|--------------|---------------------------------------------------|------------|
| ** **                 | ** **   | **2009**                                          | ** ** | **2008** | ** ** |
| *** ***               | *** *** | **(in  thousands)**                               | ** ** |
| Gross interest expense     |         | $                                                 | 9,087      |   | $ | 11,368 |   |
| Less: capitalized interest |         | (759                                              | )          | (2,045 | ) |
| Interest expense, net      |         | $                                                 | 8,328      |   | $ | 9,323 |   |
|                       |         |                                              |       |   |   |
| Weighted average debt      |         | $                                                 | 232,562    |   | $ | 246,825 |   |

 

We recorded lower interestincome in the first nine months of 2009 as compared to the first nine months of2008. During the ninemonths ended September 30, 2008, we recorded a gain on ARO settlements ofapproximately $82,700.

 

**Income tax expense** - For the nine months ended September 30,2009, we recorded tax expense of approximately $42,000 related to the valuationallowance established for an alternative minimum tax payment required when wefiled our 2005 amended tax return.  Wedid not report a tax benefit for the nine months ended September 30, 2009because we fully provided for additions to our deferred tax asset with avaluation allowance during the period. During the nine months ended September 30,2008, we recorded an income tax benefit of $45.4 million with no valuationallowance.

 

**Preferred stock dividends** — Our Board ofDirectors declared dividends on our Convertible Preferred Stock in March, June andSeptember 2008 and none in 2009.

 

**Loss per share** - For thefirst nine months of 2009 and 2008, we reported a loss per share. In 2009 theloss per share was primarily the result of the $78.3 million impairment of oiland natural gas properties and declines in our oil and natural sales revenueboth as a result of decreased oil and natural gas prices.  In 2008 the loss per share was primarily theresult of the impairment of oil and natural gas properties of $129.5 million 

 

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($84.2 million, net of tax)and derivative lossesof approximately $22.5 million. Basic weighted average shares outstanding forthe nine months ended September 30, 2009 were comparable to the prioryear. We excluded approximately 8.7 million shares of if-converted common stockattributable to our Convertible Preferred Stock which, when converted, have ananti-dilutive effect and, therefore, are not included in the calculation ofdiluted earnings per share for the nine months ended September 30, 2009 or2008.

 

## **Liquidity and Capital Resources**

## ** **

Our primary cash requirements are forexploration, development and acquisition of oil and natural gas properties,payment of any preferred stock dividends when and if declared by our Board ofDirectors, payment of any derivative loss settlements when and if they occur,and the repayment of principal and interest on outstanding debt.

 

Historically, our primary ongoing source ofcapital was the cash flow generated from our operating activities. 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. Less predictable than production declines from our proved reservesis the impact of constantly changing oil and natural gas prices on cashflows.  In the past, we have attempted to mitigate price risk with ourhedging program. Reserves and production volumes are influenced, in part, bythe amount of future capital expenditures. In turn, capital expenditures areinfluenced by many factors including drilling results, oil and natural gasprices, industry conditions, availability and cost of goods and services andthe extent to which oil and natural gas properties are acquired. We routinelyadjust capital expenditures in response to changes in oil and natural gasprices, drilling and acquisition costs, and cash flow. We typically have fundedacquisitions from borrowings under our credit facilities, cash flow fromoperations and sales of common stock and preferred stock, though we do notanticipate making any acquisitions in the foreseeable future. In the past, wehave also used proceeds of asset divestitures to supplement our cash flows andreduce outstanding debt.

 

As a result of the strategic alternativesprocess we began in late 2007, we reduced our planned capital spending for 2008as compared to previous years. The recent worldwide financial and credit crisishas reduced the availability of liquidity and credit worldwide, and the recentsubstantial declines in worldwide equity markets, including our stock prices,made it more difficult to effectively raise capital through equity issuances.Additionally, prices for oil and natural gas declined materially during thefourth quarter of 2008, and natural gas prices remained weak in 2009. In2009, our capital expenditures have been and will continue to be impacted byour liquidity issues and our Chapter 11 Cases, which impose significantconstraints on our capital expenditures. In the past we have supplementedshortfalls in our primary resources of capital with borrowings under our FourthAmended and Restated Credit Agreement (as amended, the “Revolving Facility”).We currently do not have any available borrowing capacity under our RevolvingFacility (see “Revolving Facility” below for additional discussion) and allremaining principal, fees and interest amounts under our Revolving Facilitywere due and payable on September 30, 2009 to the Lenders (defined below).Our primary focus in 2009 has been capital preservation and resolving theuncertainty and liquidity challenges we faced, but continued depressed economicconditions and the deteriorating commodity prices of late 2008 and 2009 havemade this difficult. Additionally these conditions were factors in ourborrowing base redetermination and the change in the maturity date of ourentire outstanding debt balance. We failed to make the required payments to ourLenders and are in default under our Revolving Facility and as a result, wefiled for bankruptcy protection October 1, 2009. We intend to operate ourbusiness as debtor-in-possession under the jurisdiction of the Bankruptcy Courtand in accordance with the applicable provisions of the Bankruptcy Code andorders of the Bankruptcy Court. We intend to use cash flow from operations toprovide working capital and financial resources necessary to allow businessoperations to continue as normal, including meeting obligations to employeesand certain vendors, customers and others as we proceed through the Chapter 11Cases.

 

We had cash and cashequivalents at September 30, 2009 of $13.4 million consisting primarily ofshort-term money market investments, as compared to $8.5 million at December 31,2008.  Our working capital deficit was$206.4 million at September 30, 2009, as compared to a working capitaldeficit of $203.3 million at 

 

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December 31, 2008.At September 30, 2009 and December 31, 2008, we classified all of ouroutstanding debt as current due to the various amendments in the maturity dateof the Revolving Facility.  Our sourcesand uses of cash were as follows:

** **
| ** **                                   | ** **   | **For the  Nine Months Ended September 30,** | ** **   |
|----------------------------------------------|--------------|---------------------------------------------------|--------------|
| ** **                                   | ** **   | **2009**                                          | ** **   | **2008** | ** ** |
| *** ***                                 | *** *** | **(in  thousands)**                               | *** *** |
| *Net Cash Provided By Operating  Activities* |         | $                                                 | 26,375       |   | $ | 77,207 |   |
| * *                                     |         |                                              |         |   |   |
| *Net Cash Used In Investing  Activities*     |         | (8,901                                            | )            | (41,449 | ) |
| * *                                     |         |                                              |         |   |   |
| *Net Cash Used In Financing  Activities*     |         | (12,500                                           | )            | (27,199 | ) |
|                                              |              |                                                   |              |  |  |  |  |

 

**Net Cash Provided By Operating Activities***-*The decrease in cash flows provided byoperating activities for the nine months of 2009 as compared to the same periodin 2008 is primarily a result of a decrease in production revenue, partiallyoffset by a decrease in cash costs such as severance taxes and oil and naturalgas operating expenses. Changes in working capital increased total cash flowsby $6.4 million in the first nine months of 2009 as compared to $11.7 millionin the same period of 2008.

 

**Net Cash Used In Investing Activities***-*We spent approximately $11.1 million during the first nine months of2009, including $2.8 million on our drilling and operating program. We drilled4 wells in the first nine months of 2009, three of which were apparentsuccesses. Leasehold and geological and geophysical activities accounted forexpenditures of $8.3 million through September 30, 2009. During the firstnine months of 2008, we spent $46.7 million on our drilling and operatingprogram. We drilled 20 wells in the first nine months of 2008, 19 of which wereapparent successes.  Leasehold andgeological and geophysical activities accounted for expenditures of $3.8million through September 30, 2008. There were also minimal capitalexpenditures associated with computer hardware, office equipment and othermiscellaneous capital charges.  Duringthe nine months ended September 30, 2009, proceeds from the sale ofcertain non-core properties in Texas to various buyers totaled approximately$0.3 million. In the same period last year, proceeds from the sale of certainnon-core properties in Texas and a pipeline to various buyers totaledapproximately $19.2 million.

 

**Due to the overhedged position in2008 and 2009, cash settlements related to the overhedged position arereflected in investing activities because they do not apply to operatingrevenues and are similar in nature to an investment. For the nine months ended September 30,2009, approximately 3% of our natural gas settlements are represented by the$0.7 million of speculative settlements in this section of the statement ofcash flows. The remainder is located in net cash provided by operating activities.For the nine months ended September 30, 2008, approximately 45% of our oilsettlements and 19% of our natural gas settlements are represented by the $10.9million of speculative settlements in this section of the statement of cashflows. The remainder is located in net cash provided by operating activities.**

** **

**Net Cash Used In Financing Activities***-*During the nine months ended September 30,2009, we repaid $12.5 million under our Revolving Facility. In the comparableperiod of 2008, we repaid $21.0 million using proceeds from our asset sales. Wealso paid quarterly dividends on our preferred stock in January, April andJuly 2008, but none in 2009.

 

*RevolvingFacility*

 

On January 30, 2007, we entered into theRevolving Facility with Union Bank of California (“UBOC”), as administrativeagent and issuing lender, and the other lenders party thereto (together withUBOC, the “Lenders”), in favor of the Company and certain of its wholly-ownedsubsidiaries in an amount equal to $750 million. The Revolving Facility had aletter of credit sub-limit of $20 million. The Revolving Facility wasoriginally scheduled to mature on January 31, 2011. The Revolving Facilityprovides for certain restrictions, including, but not limited to, limitationson additional borrowings, sales of oil and natural gas properties or othercollateral, and engaging in merger or consolidation transactions. The RevolvingFacility restricts common stock dividends and certain distributions of cash orproperties and certain liens but no longer contains any financial covenants asa result of the Amended Consent (defined below).

 

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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 of control. “Change of control,” as defined in the RevolvingFacility, means any of the following events: (a) any “person” or “group”(within the meaning of Section 13(d) or 14(d) of the ExchangeAct) has become, directly or indirectly, the “beneficial owner” (as defined in Rules 13d-3and 13d-5 under the Exchange Act, except that a person shall be deemed to have“beneficial ownership” of all such shares that any such person has the right toacquire, whether such right is exercisable immediately or only after thepassage of time, by way of merger, consolidation or otherwise), of a majorityor more of our common stock on a fully-diluted basis, after giving effect tothe conversion and exercise of all of our outstanding warrants, options andother securities (whether or not such securities are then currently convertibleor exercisable), (b) during any period of two consecutive calendarquarters, individuals who at the beginning of such period were members of ourBoard of Directors cease for any reason to constitute a majority of thedirectors then in office unless (i) such new directors were elected by amajority of our directors who constituted the Board of Directors at thebeginning of such period (or by directors so elected) or (ii) the reasonfor such directors failing to constitute a majority is a result of retirementby directors due to age, death or disability, or (c) we cease to owndirectly or indirectly all of the equity interests of each of our subsidiaries.

 

At September 30, 2009, borrowings under theRevolving Facility bore interest at Prime plus an applicable margin of 2.50%.At September 30, 2009, the interest rate applied to our outstandingborrowings was 5.75%. As of September 30, 2009, we had $226.5 million intotal borrowings outstanding under the Revolving Facility. During January 2009, the Lenders established a newborrowing base of $125 million under the Revolving Facility resulting in aborrowing base deficiency of $114 million.

 

Pursuant to the terms of the Revolving Facility,we initially elected to prepay the Deficiency in six equal monthlyinstallments, with the first $19 million installment being due on February 9,2009. We have entered into the following consents and amendments (collectively,the “Amendments”) with our Lenders in recent months as a result of ourfinancial and strategic alternatives process:

 

·                  OnFebruary 9, 2009, we entered into a Consent and Agreement (the “February Consent”)among us and the Lenders under the Revolving Facility deferring the paymentdate of the first $19 million installment until March 10, 2009, andextending the due date for each subsequent installment by one month with thelast of the six installment payments to be due on August 10, 2009.  In connection with the February Consent,we prepaid $5.0 million of our outstanding advances under the RevolvingFacility, in two equal installments of $2.5 million on February 9, 2009and February 23, 2009, with each of these prepayments applied on a prorata basis to reduce the six remaining $19 million deficiency payments.

·                  OnMarch 10, 2009, we entered into a Consent and Agreement (the “March Consent”)with the Lenders under the Revolving Facility, which provided, among otherthings, for the extension of the due date for the first installment to repaythe Deficiency from March 10, 2009 to March 17, 2009.  Notwithstanding such extension, we agreedwith the Lenders that each of the other five equal installment paymentsrequired to eliminate the Deficiency would be due and payable as provided forin the February Consent.

·                  OnMarch 16, 2009, we entered into Consent and Amendment No. 4 to ourRevolving Facility (the “Amended Consent”) which provided, among other things, (1) thatwe would make a $25 million payment on May 31, 2009 with all remainingprincipal, fees and interest amounts under our Revolving Facility to be due andpayable on June 30, 2009, (2) that it would be an event of default (i) ifwe failed to have executed and delivered on or before May 15, 2009 atleast one of the following (a) a commitment letter from a lender or groupof lenders reasonably satisfactory to our Lenders providing for the provisionby such lender or group of lenders of a credit facility in an amount sufficientto repay all of our obligations under the Revolving Facility on or before June 30,2009, (b) a merger agreement or similar agreement involving us as part ofa transaction that results in the repayment of our obligations under theRevolving Facility on or before June 30, 2009, and (c) a purchase andsale agreement with a buyer or group of buyers reasonably acceptable to ourLenders providing for a sale transaction by us that results in the repayment ofall of our obligations under the Revolving Facility on or before June 30,2009, or (ii) if we were in default under or our 

 

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hedgingarrangements have been terminated or cease to be effective without the priorwritten consent of our Lenders, (3) that our advances under the RevolvingFacility would bear interest at a rate equal to the greater of (a) thereference rate publicly announced by Union Bank of California, N.A. for suchday, (b) the Federal Funds Rate in effect on such day plus 0.50% and (c) arate determined by the Administrative Agent to be the Daily One-Month LIBOR (asdefined in the Revolving Facility), in each case plus 2.5% or, during thecontinuation of an event of default, plus 4.5% (resulting in an effectiveinterest rate of approximately 5.75%), (4) for limitations on the makingof capital expenditures and certain investments, and (5) for theelimination of the current ratio, leverage ratio and interest coverage ratiocovenant requirements. The Amended Consent also eliminated the six $19 milliondeficiency payments which were contemplated by the February Consent andthe March Consent.

·                  On May 15, 2009, we entered intoAmendment No. 5 (“Amendment No. 5”) which provided for, among otherthings, (1) the elimination of the provision providing that it would be anevent of default if we failed to have executed and delivered on or before May 15,2009 at least one of the following (a) a commitment letter from a lenderor group of lenders reasonably satisfactory to the lenders providing for theprovision by such lender or group of lenders of a credit facility in an amountsufficient to repay all of our obligations under the Revolving Facility on orbefore June 30, 2009, (b) a merger agreement or similar agreementinvolving us as part of a transaction that resulted in the repayment of ourobligations under the Revolving Facility on or before June 30, 2009, and (c) apurchase and sale agreement with a buyer or group of buyers reasonablyacceptable to the Lenders providing for a sale transaction by us that resultedin the repayment of all of our obligations under the Revolving Facility on orbefore June 30, 2009 and (2) the elimination of certain reportingrequirements relating to certificates to be provided by our auditors andresponsible officers.

·                  On May 29, 2009, we entered intoAmendment No. 6 (“Amendment No. 6”) which eliminated the May 31,2009 payment obligation and provided that the related $25 million payment foroutstanding advances as well as any unpaid interest thereon and all remaining principal,fees and interests amounts under the Revolving Facility would be due on June 30,2009.

·                  On June 30, 2009, we entered intoAmendment No. 7 (“Amendment No. 7”) which provided for, among otherthings, (1) changing the maturity date of the Revolving Facility from June 30,2009 to July 31, 2009, (2) the Company’s agreement to make aprepayment of interest of approximately $1,142,753.42 representing the amountanticipated to be owing in respect of the interest payment due and payable on July 31,2009 and (3) the Company’s agreement to make a prepayment of the advancesunder the Revolving Facility in the amount of $7.5 million with such prepaymentto be made on or before July 10, 2009. The Company paid the July interestof approximately $1.1 million on July 1, 2009 and also paid $7.5 millionon July 10, 2009.

·                  On July 31, 2009 we entered intoAmendment No. 8 (“Amendment No. 8”) which changed the maturity dateof the Company’s Revolving Facility from July 31, 2009 to August 31,2009.

·                  On August 31, 2009, the Companyentered into Amendment No. 9 which changed the maturity date of theRevolving Facility from August 31, 2009 to September 30, 2009.

 

On September 30,2009 all obligations under the Revolving Facility became automatically andimmediately due and payable. We failed to make the payment due under theRevolving Facility on or before September 30, 2009 which has resulted inan event of default under the Revolving Facility. As a result, we filedfor bankruptcy protection on October 1, 2009. The filing of the Chapter 11Cases constitutes an additional event of default under our RevolvingFacility.  The total amount of principal, fees and interest outstandingunder the Revolving Facility was approximately $227.6 million as of the FilingDate. However, the ability of the secured creditors to seek remedies to enforcetheir rights under the Revolving Facility is automatically stayed as a resultof the filing of the Chapter 11 Cases.  The automatic stay invoked by thefiling of the Chapter 11 Cases effectively precludes any actions by our securedcreditors to collect, assert, or recover a claim against the Debtors, subjectto the applicable provisions of the Bankruptcy Code and orders granted by theBankruptcy Court.

 

In connection with the Plan and to expedite therestructuring and reorganization of the Debtors as contemplated in the PurchaseAgreement, we and the lenders to our Revolving Facility (the “SupportingLenders”) who hold at least two-thirds of the outstanding principal amountpursuant to the Revolving Facility 

 

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andwho constitute more than one-half of the number of lenders under the RevolvingFacility entered into the Plan Support Agreement dated as of September 30,2009 which contains as exhibits a draft of the Plan and a draft of theDisclosure Statement.  The Plan Support Agreement requires the SupportingLenders to (i) vote in favor of and support the Plan, (ii) voteagainst and not support any restructuring or reorganization that is notconsistent with the Plan, and (iii) not (a) seek, solicit, support orencourage any other restructuring plan, (b) object to the DisclosureStatement or the solicitation of votes for the Plan or support any objection byany third party, or (c) take any action that is inconsistent with, or thatwould materially delay or obstruct the proposed solicitation, confirmation orconsummation of, the Plan.

 

Under the Plan Support Agreement, the Debtorsagreed, among other things, to use reasonable commercial efforts to (i) filethe Plan and Disclosure Statement no later than five (5) days after theFiling Date, (ii) obtain Bankruptcy Court approval of the DisclosureStatement no later than forty-five (45) days after the Filing Date, (iii) obtainconfirmation of the Plan by the Bankruptcy Court within ninety (90) days of theFiling Date, and (iv) consummate the Purchase Agreement or anotheragreement entered into pursuant to the bidding procedures order within (11)days of confirmation of the Plan, and not take any action that is materiallyinconsistent with, or that would materially delay consummation of, either therestructuring of the Debtors or the effectiveness of the Plan.

 

The support of the Supporting Lenders under thePlan Support Agreement will terminate under certain circumstances, includingamong others, if (i) the sum of certain proposed adjustments to thePurchase Price with respect to title defects, environmental matters, retainedproperties and casualty losses exceeds $5 million, (ii) the sum of certainallowed administrative and priority claims exceeds the specified reserve foradministrative and priority claims, (iii) the Debtors file a plan ofreorganization that is different from the Plan or shall modify or amend thePlan in any material respect without the written consent of the AdministrativeAgent, (iv) the Bankruptcy Court enters a cash collateral order or budgetwithout the written consent of the required lenders that is materiallydifferent from those agreed upon by the Supporting Lenders and the Debtors, (v) thePlan shall not have been confirmed by the Bankruptcy Court in accordance withits terms within one hundred and five (105) days of the Filing Date, (vi) weshall withdraw or revoke the Plan or shall publicly announce its intention notto pursue confirmation of the Plan, (vii) a trustee shall have beenappointed in any of the Chapter 11 Cases, any of the Chapter 11 Cases shallhave been converted to cases under Chapter 7 of the Bankruptcy Code or any ofthe Chapter 11 Cases shall have been dismissed by order of the BankruptcyCourt, or (viii) the Plan shall not have been substantially consummated inaccordance with its terms within one hundred twenty (120) days of the FilingDate.

 

The proceeds from the sale of the Equity Interests will beused to substantially reduce our indebtedness under the RevolvingFacility.  We currently have approximately $226.5 million of outstandingprincipal under our Revolving Facility which is substantially in excess of theproceeds expected to be received pursuant to the Purchase Agreement.

 

*Shelf Registration Statement & Offerings*

 

In the third quarter of2007, the SEC declared effective our registration statement filed with the SECthat registered securities of up to $500 million of any combination of debtsecurities, preferred stock, common stock, warrants for debt securities orequity securities of the Company and guarantees of debt securities by oursubsidiaries.   In light of the actions taken by theNASDAQ in October 2009 and our filing of the Chapter 11 Cases, we do notexpect to utilize this registration statement.

 

*Convertible Preferred Stock*

 

We completed the public offering of 2,875,000 sharesof Convertible Preferred Stock in January 2007.

 

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by our debt agreements, assetsare legally available to pay dividends and 

 

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ourBoard of Directors or an authorized committee of our board declares a dividendpayable, we will pay dividends in cash, every quarter.  The first payment was made on April 15,2007 and we continued to make quarterly dividends payments through October 15,2008. The Board has not declared a dividend since the third quarter of 2008 dueto our current lack of liquidity and the Chapter 11 Cases. Cumulative dividendsin arrears at September 30, 2009 amounted to $7.9 million.

 

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

 

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

 

*Ranking*.  Our Convertible Preferred Stock ranks:

 

·                  senior to all of the shares of our common stock and to all of our othercapital stock issued in the future unless the terms of such capital stockexpressly provide that it ranks senior to, or on a parity with, shares of ourConvertible Preferred Stock;

 

·                  on a parity with all of our other capital stock issued in the future,the terms of which expressly provide that it will rank on a parity with theshares of our Convertible Preferred Stock; and

 

·                  junior to all of our existing and future debt obligations and to allshares of our capital stock issued in the future, the terms of which expresslyprovide that such shares will rank senior to the shares of our ConvertiblePreferred Stock.

 

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

 

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

 

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

 

Upon any conversion, the holder will not receiveany cash payment representing accumulated and unpaid dividends on theConvertible Preferred Stock, whether or not in arrears, except in limitedcircumstances. The conversion rate is equal to $50.00 divided by the conversionprice at the time. The conversion price is subject to adjustment upon theoccurrence of certain events. The conversion price on the conversion date andthe number 

 

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ofshares of our common stock, as applicable, to be delivered upon conversion maybe adjusted if certain events occur.

 

*Purchase upon fundamental change*. Ifwe become subject to a fundamental change (as defined herein), each holder ofshares of Convertible Preferred Stock will have the right to require us topurchase any or all of its shares at a purchase price equal to 100% of theliquidation preference, plus accumulated and unpaid dividends, to the date ofthe purchase. We will have the option to pay the purchase price in cash, sharesof common stock or a combination of cash and shares. Our ability to purchaseall or a portion of the Convertible Preferred Stock for cash is subject to ourobligation to repay or repurchase any outstanding debt required to be repaid orrepurchased in connection with a fundamental change and to any contractualrestrictions then contained in our debt.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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·                  amend our restated certificate of incorporation, as amended, by mergeror otherwise, if the amendment would alter or change the powers, preferences,privileges or rights of the holders of shares of our Convertible PreferredStock so as to adversely affect them;

 

·                  issue, authorize or increase the authorized amount of, or issue orauthorize any obligation or security convertible into or evidencing a right topurchase, any senior stock; or

 

·                  reclassify any of our authorized stock into any senior stock of anyclass, or any obligation or security convertible into or evidencing a right topurchase any senior stock.

 

*Chapter 11 Cases.*We advise investors of our strong belief that it is likely that there will beno value for the holders of our Convertible Preferred Stock in the Chapter 11Cases and that the Plan does not currently contemplate such holders’ receivingany recovery absent a substantially higher and better offer for the EquityInterests that is sufficient to pay our secured and unsecured creditors in full(and with respect to the common stock to pay the liquidation preference on theConvertible Preferred Stock). In this regard, stockholders of a company inChapter 11 generally receive value only if all claims of the company’s securedand unsecured creditors are fully satisfied. In this case and based on theexpected proceeds from the sale of the Equity Interests which is substantiallyless than the amount our secured and unsecured creditors are owed, we stronglybelieve all such secured and unsecured claims will not be fully satisfied,leading to our belief that the holders of our Convertible Preferred Stock andcommon stock will receive no value for their interests.

 

*Off Balance Sheet Arrangements*

 

We currently do not have any off balance sheet arrangements.

 

**Fair Value Measurements**

 

Effective January 1,2008, we partially adopted FASB ASC 820, which provides a common definition offair value, establishes a framework for measuring fair value and expandsdisclosures about fair value measurements, but does not require any new fairvalue measurements. The partial adoption of FASB ASC 820 had no impact on ourfinancial statements, but it did result in additional required disclosures asset forth in Note 11 to our consolidated financial statements. In February 2008,the FASB issued FASB ASC 820-10-15, *FairValue Measurements and Disclosure — Scope and Scope Exceptions*,which delayed the effective date of FASB ASC 820 for all non-financial assetsand non-financial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually). Accordingly, we applied the provisions of FASB ASC 820 to our AROson January 1, 2009.

 

FASB ASC 820 defines fairvalue 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 on the NYMEX, over-the-counter quotations,volatility, historical correlations of pricing data and LIBOR and, in the caseof collars and floors, the time value of options, and other liquid money marketinstrument rates. Our counterparties utilize internally developed basis curvesthat incorporate observable and unobservable market data. Although we believethese valuations are the best estimates of the fair value of the derivativecontracts we have executed, the ultimate market prices realized could differ fromthese estimates, and the differences could be material.

 

FASB ASC 820 establishesa fair value hierarchy that prioritizes the inputs to valuation techniques usedto measure fair value based on observable and unobservable data and categorizesthe inputs into three levels, with the highest priority given to Level 1 andthe lowest priority given to Level 3. The three levels of the fair valuehierarchy defined by FASB ASC 820 are as follows:

 

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·                  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 and our AROsas Level 3. As interpretations of FASB ASC 820 evolve, our classification of certaininstruments within the hierarchy may be revised. See “Critical Accounting Policies and Estimates — Derivative and HedgingActivities” above, “Risk Management Activities” below and Note 11 to ourconsolidated financial statements for additional discussion of our derivativeinstruments.

 

**Risk Management Activities**

 

In the past, we haveutilized price-risk management transactions (e.g., swaps, collars and floors)for a portion of our expected oil and natural gas production to seek to reduceexposure from the volatility of oil and natural gas prices and also to achievea more predictable cash flow. While the use of these arrangements is intendedto reduce our potential exposure to significant commodity price declines, theymay limit our ability to benefit from increases in the price of oil and naturalgas. Our arrangements, to the extent we enter into any, are intended to applyto only a portion of our expected production and thereby provide only partialprice protection against declines in oil and natural gas prices. None of theseinstruments are, at the time of their execution, intended to be used fortrading or speculative purposes, but a portion of our 2008 instruments wassubsequently deemed as such because of the decrease in our 2008 production.These price-risk management transactions are generally placed with majorfinancial institutions that we believe are financially stable; however, inlight of the recent global financial crisis, there can be no assurance of theforegoing. In the event any such counterparty fails to perform, our financialresults could be adversely affected and we could incur losses and our liquiditycould be negatively impacted. None of our derivative contracts containcollateral posting requirements; however, the counterparty to our 2009positions is a member of the lending group of our Revolving Facility, andcertain events of default under our Revolving Facility may result in a crossdefault of derivative instruments with such party. On an annual basis, ourmanagement sets all of our price-risk management policies, including volumes,types of instruments and counterparties. These policies are implemented bymanagement through the execution of trades by the Chief Financial Officer afterconsultation and concurrence by the President and Chairman of the Board. OurBoard of Directors monitors our price-risk management policies and trades on amonthly basis. In October 2009, the caps on all of our derivative collarsfor the remaining term of the fourth quarter of 2009 were repurchased such thatonly the floors remain in place.  Thecost of this transaction was reimbursed by the Company’s proposedpurchaser.  Except for this change, wehave not entered into any new derivative contracts in recent months and do notexpect to for the foreseeable future..

 

All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with FASB ASC 815-10. These derivative instruments are intendedto hedge our price risk and may be considered hedges for economic purposes.There are two types of accounting treatments for derivatives, (i) mark-to-marketaccounting and (ii) cash flow hedge accounting. For a discussion of theseaccounting treatments, see Note 10 to our consolidated financial statements. Wecurrently apply mark-to-market accounting treatment to all of our derivativecontracts. All derivatives are recorded on the balance sheet at fair value andthe changes in fair value are presented in total revenue on the statement ofoperations. The cash flows resulting from settlement of derivative transactionswhich relate to economically hedging our physical production volumes areclassified in operating activities on the statement of cash flows and the cashflows resulting from settlement of derivative transactions considered“overhedged” positions are classified in investing activities on 

 

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the statement of cashflows. The following table provides additional information regarding ourvarious derivative transactions that were recorded at fair value on the balancesheet as of September 30, 2009.

 
| *** ***                                                                           | *** *** | **(in  thousands)** | *** *** |
|----------------------------------------------------------------------------------------|--------------|---------------------|--------------|
| Fair value of contracts  outstanding at December 31, 2008                         |         | $                   | 15,407       |   |
| Contracts realized or  otherwise settled during the period                             |         | 21,944              |         |
| Fair value at  September 30, 2009 of new contracts entered into during 2009:      |         |                |         |
| Asset                                                                                  |         | —              |         |
| Liability                                                                              |         | —              |         |
| Changes in fair value  attributable to changes in valuation techniques and assumptions |         | —              |         |
| Other changes in fair  value                                                           |         | (31,700             | )            |
| Fair value of contracts  outstanding at September 30, 2009                        |         | $                   | 5,651        |   |

 

The following table details the fair value of ourcommodity-based derivative contracts by year of maturity and valuation methodologyas of September 30, 2009.

 
| ** **                                           | ** **   | **Fair Value of Contracts at September 30, 2009** | ** ** |
|------------------------------------------------------|--------------|--------------------------------------------------------|------------|
| **Source of Fair Value**                             | ** **   | **Maturity less  than 1 year**                         | ** ** | **Maturity  1-3 years** | ** ** | **Maturity  4-5 years** | ** ** | **Maturity in  excess of 5  years** | ** ** | **Total fair  value** | ** ** |
| *** ***                                         | *** *** | **(in thousands)**                                     | ** ** |
| Prices actively quoted:                              |         | $                                                      | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Prices provided by other external sources:           |         |                                                   |       |   |   |   |   |   |   |   |   |
| Asset                                                |         | 5,651                                                  |       | — |   | — |   | — |   | 5,651 |   |
| Liability                                            |         | —                                                 |       | — |   | — |   | — |   | — |   |
| Prices based on models and other valuation  methods: |         | —                                                 |       | — |   | — |   | — |   | — |   |
| Total                                                |         | $                                                      | 5,651      |   | $ | — |   | $ | — |   | $ | — |   | $ | 5,651 |   |

 

**Tax Matters**

 

At September 30, 2009, we had cumulative netoperating loss carryforwards (“NOLs”) for federal and state income tax purposesof approximately $199.7 million and $5.7 million, respectively, withoutconsideration of valuation allowances. The federal and state NOL carryforwardswill expire in varying amounts between 2009 and 2029. In addition to thedeferred tax assets associated with NOLs discussed above, we have additionalnet deferred tax assets of approximately $73.7 million related to both federaland state tax positions.

 

In recording deferred income tax assets, we considerwhether it is more likely than not that some portion or all of the deferredincome tax assets will be realized. The ultimate realization of deferred incometax assets is dependent upon the generation of future taxable income during theperiods in which those deferred income tax assets would be deductible. Weconsider the scheduled reversal of deferred income tax liabilities andprojected future taxable income for this determination. We believe that afterconsidering all the available objective evidence, both positive and negative,historical and prospective, with greater weight given to the historicalevidence, and in light of the current market situation and the uncertaintysurrounding our Chapter 11 Cases, management is not able to determine that itis more likely than not that the deferred tax assets will be realized andtherefore established a full valuation allowance to reduce our net deferred taxasset to zero at September 30, 2009 and December 31, 2008. We willcontinue to assess the valuation allowance against deferred tax assetsconsidering all available information obtained in future reporting periods. Ifwe achieve profitable operations in the future, we may reverse a portion of thevaluation allowance in an amount at least sufficient to eliminate any taxprovision in that period. The valuation allowance has no impact on our NOLposition for tax purposes, and if we generate taxable income in future periods,we will be able to use our NOLs to offset taxes due at that time.

 

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

 

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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 stockholders at any time during the testingperiod, which is generally the three-year period preceding the potentialownership 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. If we were to undergo amajority ownership change, we will likely be required to record a reserve forsome or all of the asset that may be recorded on our balance sheet at that time.During 2007, we believe that there was a change of ownership pursuant to Section 382as a result of the concurrent public offerings of our common and preferredstock that occurred in January 2007. The 2007 limitation did not result inthe requirement to record a reserve.  Wecannot make assurances that we will not undergo a majority ownership change inthe future because an ownership change for federal tax purposes can occur basedon trades among our existing stockholders. Whether we undergo a majority ownershipchange may be a matter beyond our control. Further, in light of the ongoingfinancial and strategic alternatives process, we cannot provide any assurancethat a potential sale or merger will not reduce the availability of our NOLcarryforward and other federal income tax attributes, which may besignificantly limited or possibly eliminated.

 

Additionally, theconsummation of the Plan of Reorganization that we filed in connection with theChapter 11 Cases will likely result in further limitations on our ability tofully utilize our NOLs.

 

FASB ASC740-10-25**provides guidance on recognition andmeasurement of uncertainties in income taxes. FASB ASC 740-10-25 requires thatwe recognize the financial statement benefit of a tax position only afterdetermining that the relevant tax authority would more likely than not sustainthe position following an audit. For tax positions meeting themore-likely-than-not threshold, the amount recognized in the financialstatements is the largest benefit that has a greater than 50 percent likelihoodof being realized upon ultimate settlement with the relevant tax authority. Wehave recorded our FASB ASC 740-10-25 liability of approximately $0.1 millionunder long term liabilities on the balance sheet and there has been no changesince December 31, 2008. See Notes 3 and 8 to our consolidated financialstatements.

 

**RecentlyIssued Accounting Pronouncements (Not Yet Adopted)**

 

In December 2008,the SEC issued the final rule, *“Modernizationof Oil and Gas Reporting*,” which adopts revisions to the SEC’s oiland natural gas reporting disclosure requirements and is effective for annualreports on Forms 10-K for years ending on or after December 31, 2009.Early adoption of the new rules is prohibited. The new rules areintended to provide investors with a more meaningful and comprehensiveunderstanding of oil and natural gas reserves to help investors evaluate theirinvestments in oil and natural gas companies. The new rules are alsodesigned to modernize the oil and natural gas disclosure requirements to alignthem with current practices and changes in technology. The new rules includechanges to the pricing used to estimate reserves, the ability to includenontraditional resources in reserves, the use of new technology for determiningreserves and permitting disclosure of probable and possible reserves. We arecurrently evaluating the potential impact of these rules. The SEC is discussingthe rules with the FASB staff to align FASB accounting standards with thenew SEC rules. These discussions may delay the required compliance date. Absentany change in the effective date, we will begin complying with the disclosurerequirements in our annual report on Form 10-K for the year ended December 31,2009.

 

In September 2009, the FASB issued anexposure draft of proposed Accounting Standards Update (“ASU”) entitled *Oil and Gas Reserve Estimation and Disclosures.*This proposed ASU would amend the FASB accounting standards to align FASB ASC932, *Extractive Activities — Oil and Gas* withall of the aforementioned new SEC requirements.  This proposal is expectedto become an issued accounting update within the last quarter of 2009 with aneffective date for annual reports for fiscal years ending on or after 

 

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December 15,2009.  We are currently assessing the impact of this newauthoritative accounting guidance on our consolidated financial statements.

 

In June 2009, theFASB issued guidance which amends the consolidation guidance applicable tovariable interest entities. This guidance is included in FASB ASC 810, *Consolidation.*The amendments significantly reduce thepreviously required quantitative consolidation analysis, and require ongoingreassessments of whether a company is the primary beneficiary of a variableinterest entity. This new guidance also requires enhanced disclosures about anenterprise’s involvement with a variable interest entity. This statement iseffective for the beginning of the first annual reporting period beginningafter November 15, 2009. We do not currently expect the adoption of thenew guidance in FASB ASC 810 to impact our consolidated financial statements.

 

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

 

We are exposed to market risk from changes in interestrates and commodity prices.  We use aRevolving Facility, which has a floating interest rate. We are not subject tofair value risk resulting from changes in our floating interest rates.  The use of floating rate debt instrumentsprovides a benefit due to downward interest rate movements but does not limitus to exposure from future increases in interest rates.  Based on the September 30, 2009outstanding borrowings and an interest rate of 5.75%, a 10% change in theseinterest rates would result in an increase or decrease in interest expense ofapproximately $1.2 million on an annual basis.

 

The debt and equity markets have recently exhibitedadverse conditions. The unprecedented volatility and upheaval in the capitalmarkets may increase costs associated with issuing debt instruments due toincreased spreads over relevant interest rate benchmarks and affect our abilityto access those markets. We believe the recent events in the global markets hadsignificant impact on our January 2009 borrowing base redetermination thatresulted in our filing for bankruptcy protection. The continued credit crisisand related turmoil in the global financial system and economic recession inthe U.S. has created financial challenges that have prohibited our ability toaccess credit markets. We will continue to monitor our liquidity as we continueto pursue the consummation of our Plan of Reorganization filed in connection withour Chapter 11 Cases.

 

As of December 31, 2008 and September 30,2009, our outstanding debt was classified as current due to the amendment inthe maturity date of our Revolving Facility to June 30, 2009 as providedby the Amended Consent and September 30, 2009 as provided by Amendment No. 9,respectively.

 

In the normal course ofbusiness, we enter into derivative transactions, including commodity pricecollars, swaps and floors, to mitigate our exposure to commodity pricemovements. At the time of their execution, they are not intended for trading orspeculative purposes.  While the use ofthese arrangements may limit the benefit to us of increases in the price of oiland natural gas, it also limits the downside risk of adverse pricemovements.  During 2007, we put in placeseveral natural gas and crude oil derivatives to hedge our expected 2009production to achieve a more predictable cash flow. Please refer to Note 10 toour consolidated financial statements for a discussion of these contracts. Thefollowing is a list of contracts outstanding at September 30, 2009:

 
| **Transaction  Date**   | ** ** | **Transaction  Type (1)** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes Per  Day** | ** ** | **Fair Value  Outstanding as of  September 30, 2009** | ** ** |
|-------------------------|------------|---------------------------|------------|---------------|------------|------------|------------|--------------------------|------------|----------------------|------------|------------------------------------------------------------|------------|
| *** ***            |       |                      |       |          |       |       |       |                     |       |                 |       | **(in  thousands)**                                        | * *   |
| ***Natural  Gas (2):*** |       |                      |       |          |       |       |       |                     |       |                 |       | * *                                                   | * *   |
| 04/07                   |       | Collar                    |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.00             |       | 10,000 MMBtu         |       | $                                                          | 2,778      |   |
| 10/07                   |       | Collar                    |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.08             |       | 10,000 MMBtu         |       | 2,779                                                      |       |
| ***Crude  Oil (3):***   |       |                      |       |          |       |       |       |                     |       |                 |       |                                                       |       |
| 10/07                   |       | Collar                    |       | 01/01/09      |       | 12/31/09   |       | $70.00-$93.55            |       | 300 Bbl              |       | 94                                                         |       |
|                    |       |                      |       |          |       |       |       |                     |       |                 |       | $                                                          | 5,651      |   |

 

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(1)          In October 2009, thecaps on all of our derivative collars for the remaining term of the fourthquarter of 2009 were repurchased such that only the floors remain inplace.  The cost of this transaction wasreimbursed by the Company’s proposed purchaser.

 

(2)          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.

 

(3)          Our crude oil contract wasentered into on a per barrel delivered price basis, using the West TexasIntermediate Light Sweet Crude Oil Index. Mark-to-market accounting treatmentis applied to this contract and the change in fair value is reflected in totalrevenue.

 

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At September 30, 2009, the fair value of theoutstanding derivatives was a net asset of approximately $5.7 million. A 10%change in the commodity price per unit, as long as the price is either abovethe ceiling or below the floor price, would cause the fair value total of thederivative instruments to increase or decrease by approximately $0.5 million.

 

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

#####  

In accordance with ExchangeAct Rules 13a-15 and 15d-15, we carried out an evaluation, under thesupervision and with the participation of management, including our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of September 30, 2009to 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 change inour internal controls over financial reporting that occurred during the threemonths ended September 30, 2009 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 and will be impacted by the Company’sChapter 11 Cases, we are not currently a party to any proceeding that webelieve, if determined in a manner adverse to us, could have a material adverseeffect on our financial condition, results of operations or cash flows, exceptas 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. Our subsidiaries, Edge Petroleum Exploration Company, Edge PetroleumOperating Company and Edge Petroleum Production Company, were also added asdefendants. We filed a counterclaim against plaintiff and joined variousrelated entities that are controlled by Blake, seeking lease interests in whichwe contend we have been wrongfully denied participation and also claim thatproprietary information was misappropriated. The parties have moved for summaryjudgment on each other’s claims and counterclaims, which the trial court hasdenied as to both sides.  In November 2007, we filed a separatemotion for summary judgment based on the statute of frauds and; the court hasnot yet ruled on this separate motion. In June 2008, the Plaintiffs fileda Sixth Amended Petition conditionally adding claims for certain prospects thathad been previously settled by means of a Compromise and Settlement Agreement(the “Settlement Agreement”), entered in settlement of prior litigation amongsome of the parties, but only to the extent that rescission of the priorSettlement Agreement was being sought by us. We are not seeking rescission ofthe prior Settlement Agreement and responded accordingly in its Fourth AmendedOriginal Counterclaim and Claims Against Additional Parties filed on October 16,2008.  On October 17, 2008, the Plaintiffs filed their SeventhAmended Petition adding a claim for breach of the Settlement Agreement. In December 2008,one of the Blake counter-defendants filed a motion to arbitrate, which motionhas not been heard by the court. We have responded and will continue to respondaggressively to this lawsuit, and believe we have meritorious defenses andcounterclaims.  In October 2009, wefiled a suggestion of bankruptcy in this case.

 

**MaryJane Carol Trahan Champagne, et al. v. Edge Petroleum Exploration Company, etal.** — On September 19,2008 we were sued in state district court in Vermilion Parish, Louisiana byMary Jane Trahan, Carol Trahan Champagne and 29 other plaintiffs allegingbreach of obligations under mineral leases in Vermilion Parish regarding theTrahan No. 1 well and the Trahan No. 3 well (MT RC SUB reservoir).Plaintiffs are seeking unspecified damages for lost revenue, lost royalties anddevaluation of property interest sustained as a result of the defendants’alleged negligent and improper drilling operations on the Trahan No. 1well and the Trahan No. 3 well, including alleged failure to preventunderground water from flooding and destroying plaintiffs’ portion of thereservoir beneath plaintiffs’ property.  Plaintiffs also allege defendantsfailed to “block squeeze” sections of the Trahan No. 3 well as would aprudent operator. This lawsuit, previously removed from the state court to thefederal district court for the Western District of Louisiana, LafayetteDivision, has been remanded to state court. Our insurance carrier has retainedcounsel to represent us in this matter. We filed certain peremptory challengesand exceptions to the Plaintiffs’ petition, including prematurity, no cause ofaction and prescription. Except for the prescription challenge, these motionswere overruled by the court in May 2009.  We have not established areserve with respect to this claim and it is not possible to determine what, ifany, its ultimate exposure might be in this matter. We intend to vigorouslydefend ourselves in this lawsuit.  In October 2009,we filed with the court a notice of stay due to bankruptcy.

 

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**JohnLemke, et al. v. Edge Petroleum Corporation** - In October 2008, we were sued in statedistrict court in Harris County, Texas over an alleged contract to receive aroyalty in certain areas in South Louisiana.

 

We, along with thePlaintiffs, settled the dispute in June 2009 by agreement pursuant towhich we paid the Plaintiffs $17,500 in return for a full release of all claimsand a dismissal of the lawsuit.

 

**LaraEnergy, Inc. v. Edge Petroleum Corporation** - In June 2009, we were sued instate district court in Harris County, Texas by a working interest co-owner inthe Chapman Ranch prospect located in Nueces County, Texas.  Plaintiffalleges various theories of causes of action, including breach of contract,breach of duty of good faith and fair dealing, negligent misrepresentation,improper acquisition of leases and seismic data, fraudulent inducement andother causes of action.  We believe we have done nothing wrong and havehonored the contracts with the Plaintiff that govern operations in the ChapmanRanch prospect. We have filed an answer and intend to vigorously defendourselves.  In October 2009, wefiled a suggestion of bankruptcy in this case.

 

**EncinitasRanch et al v. ExxonMobil Corporation, et al**. — This lawsuit was originally filed in statedistrict court in Brooks County, Texas, against ExxonMobil, Chevron USA andother defendants alleging numerous causes of action relating to Plaintiffs’lands going back several decades, including damage to the surface, improperlyabandoned equipment, spills, contamination, trespass, failure to maintainfacilities, improper or untimely payment of royalties, breach of express andimplied covenants, and various acts of negligence, including an allegedincident regarding a fire that occurred on the ranch in 2008. Plaintiffsamended their petition in May 2008 to name additional defendants,including the Company. The Company has a non-operating interest in theEncinitas Ranch, and has never operated the wells or lease in Brooks County,Texas, covering Plaintiffs’ land. Our liability insurance carrier is providinga defense to this matter under a reservation of rights, and has retained localcounsel for us and filed an answer on our behalf.  No trial date has beenset.  We believe we have meritorious defenses to this litigation andintend to vigorously defend ourselves. In October 2009, we filed a suggestion of bankruptcy in this case.

 

**Inre: Edge Petroleum Corporation, *et al*.**- On October 1,2009, the Company and its subsidiaries, Edge Petroleum Exploration Company,Miller Exploration Company, Edge Petroleum Operating Company, Inc., EdgePetroleum Production Company and Miller Oil Corporation, filed voluntarypetitions (the “Bankruptcy Cases”) for reorganization relief under Chapter 11of Title 11 of the United States Code, 11 U.S.C. §§ 101 *et. seq.*, as amended (the “BankruptcyCode”) in the United States Bankruptcy Court for the Southern District ofTexas, Corpus Christi Division (the “Bankruptcy Court”).  The BankruptcyCases are being jointly administered under the caption “In re: Edge PetroleumCorporation, *et al*.,” Case No. 09-20644(RSS). The Company intends to continue to operate its business as adebtor-in-possession under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code and orders ofthe Bankruptcy Court.  The Bankruptcy Cases are discussed in greaterdetail in Note 12.

 

**Item 1A — Risk Factors**

 

In addition to the other information and riskfactors set forth in this report, you should carefully consider the riskfactors discussed in Part I, “Item 1A. Risk Factors” in our 2008 AnnualReport on Form 10-K, as supplemented by the risk factors disclosed in ourQuarterly Reports on Form 10-Q for the quarters ended March 31, 2009and June 30, 2009 and the information presented below (which furthersupplements and updates those risk factors), all of which could materiallyaffect our business, financial condition or future results. These risk factorsare not the only risks we face. Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially adversely affect our business, financial condition and/or operatingresults.

 

**All of our debt obligations under our RevolvingFacility became due on September 30, 2009 and we failed to make any of thepayments which were then due on our Revolving Facility.  On October 1, 2009, we filed forbankruptcy protection (the “Chapter 11 Cases”) under Chapter 11 of title 11 of the United States Code (the “BankruptcyCode”).  We believe that it is unlikelythat our common stockholders will**

 

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**receive a recovery or that the holders of ourConvertible Preferred Stock will receive any meaningful recovery (if anyrecovery at all) in the Chapter 11 Cases.**

 

Pursuant to Amendment No. 9 to our RevolvingFacility, all of our debt obligations under our Revolving Facility became dueon September 30, 2009.  We failed tomake any of the payments which were then due with respect to these debtobligations. Because substantially all of our assets are pledged as collateralunder the Revolving Facility and as a result of our failure to make therequired payments (which constitutes an event of default) our lenders wouldhave been entitled to declare an event of default and to foreclose on and takepossession of our assets. As a result, on October 1, 2009 we soughtbankruptcy protection under the Bankruptcy Code and in connection therewith weentered into a purchase and sale agreement with a “stalking horse” bidder whichcontemplates the sale of substantially all of our assets (including the equityinterests in all of our subsidiaries) for a stated purchase price of $191million (subject to numerous adjustments) pursuant to an auction process to beconducted in accordance with pre-agreed bidding procedures and in accordancewith the Bankruptcy Code.  The aggregateconsideration contemplated to be received from the proposed “stalking horse”bidder is substantially less than the amount owing under our Revolving Facilityand is subject to numerous adjustments (none of which is expected in theaggregate to result in an increase to the purchase price in an amount whichwould be sufficient to provide for a recovery for our common stockholders orthe holders of our Convertible Preferred Stock), including a downward priceadjustment of up to approximately $23.9 million based on the NYMEX five-yearstrip price for natural gas.

 

Under the priority scheme established by theBankruptcy Code, unless creditors agree otherwise in accordance with theBankruptcy Code, pre-petition liabilities and post-petition liabilities(including certain fees and interest) must be satisfied in full beforestockholders are entitled to receive any distribution or retain any propertyunder a plan of reorganization.  Amountsthat must be satisfied in full before any recovery by our stockholders(including common stockholders and holders of our Convertible Preferred Stock)include, among other things, approximately $226.5 million in principal plus anyaccrued interest which is owed under our Revolving Facility.  In addition, the holders of our ConvertiblePreferred Stock have a liquidation preference of $50 per share which, whilestill being junior to the claims of our debt and other obligations, will needto be satisfied before any proceeds are received by our commonstockholders.  The total amount of thisliquidation preference is approximately $143.75 million and any recovery forour common stockholders would only be available if the proceeds available inany Bankruptcy Code proceeding exceeded the amount required to repay all of ouroutstanding indebtedness and other obligations (including trade payables andother unsecured claims) and to also satisfy the $143.75 million ConvertiblePreferred Stock liquidation preference.

 

Although the Convertible Preferred Stock isentitled to a liquidation preference as discussed above, the holders of theConvertible Preferred Stock would only be entitled to receive a recovery in theevent the proceeds available for distribution in the Bankruptcy Code proceedingwere in excess of the amount required to repay all of our outstandingindebtedness (including indebtedness under the Revolving Facility) and otherobligations (including trade payables and other unsecured claims). The ultimaterecovery to creditors and/or stockholders, if any, will not be finallydetermined until the confirmation of any plan of reorganization and the relatedsale of substantially all of our assets (including the equity interests in allof our subsidiaries). No assurance can be given as to what values, if any, willbe ascribed in the Chapter 11 filing to each of these constituencies or whattypes or amounts of distributions, if any, they would receive. If certainrequirements of the Bankruptcy Code are met, a plan of reorganization can beconfirmed notwithstanding its rejection by equity holders and notwithstandingthe fact that equity holders do not receive or retain any property on accountof their equity interests under the plan of reorganization. Unless there issignificant improvement in market conditions and we are able to successfullyconsummate a sale to a purchaser for substantially all of our assets (includingthe equity interests in all of our subsidiaries) which is substantially inexcess of the current consideration contemplated to be received with respect toour “stalking horse” bidder, we believe it is very unlikely that our commonstockholders would receive any recovery in the Chapter 11 proceeding and it isalso unlikely that the holders of our Convertible Preferred Stock would receiveany meaningful recovery (if any recovery at all) due in both cases to theirrelative positions with respect to our outstanding obligations which are seniorto their respective equity interests.

 

In addition, upon consummation of our proposed Planwhich we have filed with the Bankruptcy Court, we expect that substantially allof our assets will have been sold (including the equity interests in all of our

 

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subsidiaries) with the proceeds that are generatedtherefrom being distributed as set forth above. As a result, following confirmation of any such Plan, we expect that theCompany may be dissolved and a liquidating trustee will be appointed and thatit is unlikely that any of our common stockholders will receive any recovery orthat the holders of our Convertible Preferred Stock will receive any meaningfulrecovery (if any recovery at all) or that either of them will have anycontinuing interest in the Company.

 

**The Company is subject to the risks anduncertainties associated with the Chapter 11 Cases.**

 

For the duration of theChapter 11 Cases, our operations and our ability to execute our businessstrategy will be subject to the risks and uncertainties associated withbankruptcy. These risks include:

 

·                  our ability to continue as a goingconcern; 

 

·                  our ability to operate within therestrictions of any cash collateral order entered by the Bankruptcy Court inconnection with the Chapter 11 Cases; 

 

·                  our ability to obtain Bankruptcy Courtapproval with respect to motions filed in the Chapter 11 Cases from time totime; 

 

·                  our ability to develop, prosecute,confirm and consummate the Plan with respect to the Chapter 11 Cases; 

 

·                  the ability of third parties to seek andobtain Bankruptcy Court approval to terminate or shorten the exclusivity periodfor us to propose and confirm the Plan, to appoint a Chapter 11 trustee or toconvert the Chapter 11 Cases to Chapter 7 cases; 

 

·                  our ability to obtain and maintain normalpayment and other terms with customers, vendors and service providers; 

 

·                  our ability to maintain contracts thatare critical to our operations; 

 

·                  our ability to attract, motivate andretain key employees; 

 

·                  our ability to attract and retaincustomers; and 

 

·                  our ability to fund and execute ourbusiness plan. 

 

We will also be subjectto risks and uncertainties with respect to the actions and decisions of ourcreditors and other third parties who have interests in the Chapter 11 Casesthat may be inconsistent with our plans.

 

These risks anduncertainties could affect our business and operations in various ways. Forexample, negative events or publicity associated with the Chapter 11 Casescould adversely affect our relationships with our vendors and employees, aswell as with customers, which in turn could adversely affect our operations andfinancial condition. Also, pursuant to the Bankruptcy Code, we need BankruptcyCourt approval for transactions outside the ordinary course of business, whichmay limit our ability to respond timely to events or take advantage ofopportunities. Because of the risks and uncertainties associated with theChapter 11 Cases, we cannot predict or quantify the ultimate impact that eventsoccurring during the Chapter 11 reorganization 

 

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process will have on ourbusiness, financial condition, results of operations and our ability toconsummate a sale of substantially all of our assets (including the equityinterests in all of our subsidiaries), and it is highly unlikely that we willbe able to continue as a going concern.

 

As a result of theChapter 11 Cases, realization of assets and liquidation of liabilities aresubject to uncertainty. While operating under the protection of the BankruptcyCode, and subject to Bankruptcy Court approval or otherwise as permitted in thenormal course of business, we may sell or otherwise dispose of assets andliquidate or settle liabilities for amounts other than those reflected in ourconsolidated financial statements. Further, a plan of reorganization couldmaterially change the amounts and classifications reported in our consolidatedhistorical financial statements, which do not give effect to any adjustments tothe carrying value of assets or amounts of liabilities that might be necessaryas a consequence of confirmation of a plan of reorganization.

 

**A long period of operating under Chapter 11 couldharm our business and adversely impact our ability to consummate****a sale of substantially all ofour assets (including the equity interests in all of our subsidiaries)****.**

 

A long period ofoperating under Chapter 11 could adversely affect our business and operations.So long as the Chapter 11 Cases continue, our senior management will berequired to spend a significant amount of time and effort dealing with theChapter 11 Cases instead of focusing exclusively on business operations. Aprolonged period of operating under Chapter 11 will also make it more difficultto attract and retain management and other key personnel necessary to thesuccess and growth of our business. In addition, the longer the Chapter 11Cases continue, the more likely it is that our vendors will seek to establishalternative arrangements for providing us with goods and services, includingalternative payment arrangements, which in turn could have an adverse effect onour liquidity and/or results of operations. Our having sought bankruptcyprotection may also adversely affect our ability to negotiate favorable termsfrom suppliers, contract or trading counterparties and others and to attractand retain customers and counterparties. The failure to obtain such favorableterms and to attract and retain customers and other contract or tradingcounterparties could adversely affect our financial performance and the amountfor which we might ultimately be able to sell substantially all of our assets(including the equity interests in our subsidiaries).

 

**We may not be able to obtain confirmation of ourPlan, and our emergence from Chapter 11 proceedings is not assured.**

 

To successfully emergefrom Chapter 11 bankruptcy protection, we must obtain requisite BankruptcyCourt and creditor approval of a viable Chapter 11 plan of reorganization. Thisprocess requires us to meet statutory requirements with respect to adequacy ofdisclosure with respect to a plan, soliciting and obtaining creditor acceptanceof a plan, and fulfilling other statutory conditions for plan confirmation. Wemay not receive the requisite acceptances to confirm the Plan. Even if therequisite acceptances of the Plan are received, the Bankruptcy Court may notconfirm the Plan if it determines that the Plan does not meet the requirementsof the Bankruptcy Code.

 

**We have substantial liquidity needs and may berequired to seek additional financing.**

 

Our principal sources ofliquidity have historically consisted of cash provided by operations, cash andcash equivalents on hand and available borrowings under our Revolving Facility.Our liquidity position is significantly influenced by our operating results,which in turn are substantially dependent on oil and gas prices. As a result,adverse commodity price movements adversely impact our liquidity.

 

We face uncertaintyregarding the adequacy of our liquidity and capital resources and haveextremely limited, if any, access to additional financing. In addition to thecash requirements necessary to fund ongoing operations, we have incurredsignificant professional fees and other costs in connection with the Chapter 11Cases and expect that we will continue to incur significant professional feesand costs. We cannot assure you that the amounts of cash available fromoperations will be sufficient to fund our operations, including operationsduring the period until such time as we are able to receive the requisiteacceptance by creditors and have our Plan confirmed by the Bankruptcy Court.

 

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Our liquidity and ourability to continue as a going concern, including our ability to meet ourongoing operational obligations, is dependent upon, among other things: (i) ourability to comply with the terms and conditions of  any cash collateral order entered by theBankruptcy Court in connection with the Chapter 11 Cases; (ii) our abilityto maintain adequate cash on hand; (iii) our ability to generate cash fromoperations; (iv) our ability to obtain confirmation of and to consummatethe Plan under the Bankruptcy Code; and (v) the cost, duration and outcomeof the Chapter 11 Cases. Our ability to maintain adequate liquidity depends inpart upon industry conditions and general economic, financial, competitive,regulatory and other factors beyond our control. Accordingly, there can be noassurance as to the success of our efforts. In the event that cash flows arenot sufficient to meet our cash requirements, we may be required to seekadditional financing. We can provide no assurance that additional financingwould be available or, if available, offered to us on acceptable terms. Ouraccess to additional financing is, and for the foreseeable future will likelycontinue to be, extremely limited if it is available at all. Our long-termliquidity requirements and the adequacy of our capital resources are difficultto predict at this time.

 

**The market prices for our commonstock and Convertible Preferred Stock have been volatile and both classes ofequity have been suspended from trading on the NASDAQ and are expected to bedelisted in November 2009.  In additionand in connection with our Chapter 11 Cases, all of the outstanding shares ofcommon stock and Convertible Preferred Stock will likely be cancelled, and webelieve that it is unlikely that holders of our common stock and ConvertiblePreferred Stock will be entitled to any payment in respect of their shares.**

 

Prior to the filing of the Chapter 11 Cases, the marketprice for our common stock was extremely volatile and, following our bankruptcyfiling, the price of our common stock has generally been less than $0.13 pershare. The price for our Convertible Preferred Stock is also volatile. Inaddition, our common stock and Convertible Preferred Stock were suspended fromtrading on the NASDAQ following the filing of the Chapter 11 Cases and areexpected to be delisted in November 2009. Accordingly, trading in thesecurities of the Company may be limited, and holders of such securities maynot be able to resell their securities for their purchase price or at all. Wecan make no assurance that the price of our securities will not fluctuatesubstantially in the future. As discussed in the above risk factors, we do notbelieve that the proceeds from the sale of substantially all of our assets(including the equity interests in our subsidiaries) will result in anyrecovery for our common stockholders or any meaningful recovery (if anyrecovery at all) for any of the holders of our Convertible Preferred Stock.

 

We expect that, inconnection with our proposed Plan, all of the outstanding shares of commonstock and Convertible Preferred Stock will be cancelled, and holders of ourcommon stock and Convertible Preferred Stock may not be entitled to any paymentin respect of their shares.

 

Accordingly,trading in our securities during the pendency of the Chapter 11 Cases is highlyspeculative and poses substantial risks to purchasers of such securities, asholders may not be able to resell such securities or, in connection with ourproposed Plan, may receive no payment.

 

**We may be subject to claims that will not bedischarged in the Bankruptcy Cases, which could have a material adverse effecton our results of operations and profitability.**

 

The Bankruptcy Codeprovides that the confirmation of a plan of reorganization discharges a debtorfrom substantially all debts arising prior to confirmation and specified debtsarising afterwards. With few exceptions, all claims that arose prior to theFiling Date and before confirmation of the plan of reorganization (i) wouldbe subject to compromise and/or treatment under a plan of reorganization or (ii) wouldbe discharged in accordance with the Bankruptcy Code and the terms of the planof reorganization. Any claims not ultimately discharged by the Bankruptcy Courtcould have an adverse effect on our results of operations and profitability ifwe were to continue our operations.

 

**Bankruptcy laws may limit our secured creditors’ability to realize value from their collateral.**

 

Upon the commencement ofa case for relief under Chapter 11, a secured creditor is prohibited fromrepossessing its security from a debtor in a Chapter 11 case, or from disposingof security repossessed from such debtor, without Bankruptcy Court approval.Moreover, the Bankruptcy Code generally permits the debtor to continue toretain and use collateral even though the debtor is in default under theapplicable debt instruments, provided that the secured creditor is given“adequate protection.” The meaning of the term “adequate protection” may varyaccording to circumstance, but it is intended in general to protect the valueof 

 

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the secured creditor’sinterest in the collateral and may include cash payments or the granting ofadditional security if and at such times as the Bankruptcy Court in itsdiscretion determines that the value of the secured creditor’s interest in thecollateral is declining during the pendency of the Chapter 11 proceedings. TheBankruptcy Court may determine that a secured creditor may not requirecompensation for a diminution in the value of its collateral if the value ofthe collateral exceeds the debt it secures which in our case and based upon ourexpected proceeds from a sale to our “stalking horse” bidder does not appearlikely.

 

In view of the lack of aprecise definition of the term “adequate protection” and the broaddiscretionary power of the Bankruptcy Court, we cannot reliably predict:

 

·                  how long payments under our secured debt could bedelayed as a result of the Chapter 11 proceedings; 

 

·                  whether or when secured creditors (ortheir applicable agents) could repossess or dispose of collateral; 

 

·                  the value of the collateral; or 

 

·                  whether or to what extent securedcreditors would be compensated for any delay in payment or loss of value of thecollateral through the requirement of “adequate protection.” 

 

Furthermore, if theBankruptcy Court determines that the value of the collateral is not sufficientto repay all amounts due on applicable secured indebtedness (which is likely tobe the case in our Plan), the holders of such indebtedness would hold a securedclaim only to the extent of the value of their collateral and would otherwisehold unsecured claims with respect to any shortfall. The Bankruptcy Codegenerally permits the payment and accrual of post-petition interest, costs andattorneys’ fees to a secured creditor during a debtor’s Chapter 11 proceedingsonly to the extent the value of its collateral is determined by the BankruptcyCourt to exceed the aggregate outstanding principal amount of the obligationssecured by the collateral.

 

**Our financial results may be volatile and may notreflect historical trends and e****ven if we emerge from bankruptcy, we do not expect to continue ouroperations in a manner consistent with past operations since we expect thatsubstantially all of our assets (including the equity interests in all of oursubsidiaries) will have been sold and our outstanding equity interests willhave been cancelled.**

 

While the Chapter 11Cases are pending, we expect our financial results to continue to be volatileas asset impairments, asset dispositions, restructuring activities, contractterminations and rejections, and claims assessments may significantly impactour consolidated financial statements. As a result, our historical financialperformance is likely not indicative of our financial performance after theFiling Date. In addition, in the event we were to emerge from bankruptcy, theamounts reported in subsequent consolidated financial statements may materiallychange relative to historical consolidated financial statements, including as aresult of revisions to our operating plans pursuant to a plan ofreorganization. In addition, if we were to emerge from bankruptcy, we may berequired to adopt fresh start accounting. If fresh start accounting isapplicable, our assets and liabilities will be recorded at fair value as of thefresh start reporting date. The fair value of our assets and liabilities maydiffer materially from the recorded values of assets and liabilities on ourconsolidated balance sheets. In addition, if fresh start accounting isrequired, our financial results after the application of fresh start accountingmay be different from historical trends. Even if we emerge from bankruptcy, we do not expect to continue ouroperations in a manner consistent with past operations since we expect thatsubstantially all of our assets (including the equity interests in all of oursubsidiaries) will have been sold and our outstanding equity interests willhave been cancelled. See Note 1 of the notes to the consolidated financialstatements in Item 1 of Part I of this report for further informationon our accounting during the pendency of the Chapter 11 Cases.

 
| **Item 2 - Unregistered Sale of Equity Securities  and Use of Proceeds** |   | None |
|--------------------------------------------------------------------------|--------|------|

 

**Item 3 - Defaults UponSenior Securities**

 

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The filing of the Chapter 11 Cases constitutesan event of default under the Revolving Facility.  In addition, theCompany failed to make the payment due under the Revolving Facility on orbefore September 30, 2009 which has resulted in an additional event ofdefault under the Revolving Facility. As a result, the Company filed theChapter 11 Cases on October 1, 2009 (the “Filing Date”). The total amountof principal, fees and interest outstanding under the Revolving Facility wasapproximately $227.6 million as of the Filing Date. On September 30, 2009all obligations under the Revolving Facility became automatically andimmediately due and payable.  However, the ability of the securedcreditors to seek remedies to enforce their rights under the Revolving Facilityis automatically stayed as a result of the filing of the Chapter 11Cases.  The automatic stay invoked by the filing of the Chapter 11 Caseseffectively precludes any actions by the Company’s secured creditors tocollect, assert, or recover a claim against the Debtors, subject to theapplicable provisions of the Bankruptcy Code and orders granted by theBankruptcy Court.

 

The Company’sBoard of Directors did not declare a dividend on the Company’s 5.75% Series Acumulative convertible perpetual preferred stock (“Convertible PreferredStock”) for the fourth quarter of 2008 or the first, second or third quartersof 2009, which dividends would have been paid on January 15, April 15,July 15, and October 15, 2009. Therefore, as of November 9,2009, the Company has Convertible Preferred Stock dividends in arrears thattotal approximately $8.3 million.

 
| **Item 4 - Submission of Matters to a Vote of  Security Holders** |   | None |
|-------------------------------------------------------------------|--------|------|
| **Item 5 - Other Information**                                    |   | None |

 

**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 Appendix A to the Joint Proxy  Statement/Prospectus contained in the Company’s Registration Statement on  Form S-4/A filed on January 15, 1997 (Registration  No. 333-17269)). |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.2 —      |   | Agreement and Plan of  Merger dated as of May 28, 2003 among Edge Petroleum Corporation, Edge  Delaware Sub Inc. and Miller Exploration Company (“Miller”) (Incorporated by  reference from Annex A to the Joint Proxy Statement/Prospectus contained in  the Company’s Registration Statement on Form S-4/A filed on  October 31, 2003 (Registration No. 333-106484)).                                                                                                                                                 |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.3 —      |   | Asset Purchase  Agreement by and among Contango STEP, L.P., Contango Oil & Gas  Company, Edge Petroleum Exploration Company and Edge Petroleum Corporation,  dated as of October 7, 2004 (Incorporated by reference from exhibit 2.1  to the Company’s Current Report on Form 8-K filed October 12,  2004).                                                                                                                                                                                                                   |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.4 —      |   | Purchase and Sale  Agreement, dated as of September 21, 2005 among Pearl Energy Partners,  Ltd., and Cibola Exploration Partners, L.P., as Sellers; and Edge Petroleum  Exploration Company as Buyer and Edge Petroleum Corporation as Guarantor  (Incorporated by reference from exhibit 2.1 to the Company’s Current Report  on Form 8-K filed October 19, 2005).                                                                                                                                                                    |
|                 |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.5 —      |   | Stock Purchase  Agreement by and among Jon L. Glass, Craig D. Pollard, Leigh T. Prieto,  Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P., Cinco  Energy                                                                                                                                                                                                                                                                                                                                                                                |

 

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|                         |   | 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.            |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.8 -    |   | Purchase and Sale  Agreement dated September 30, 2009 between the Company, EPEX, Miller,  EPOC, EPPC, Miller Oil and PGP Gas Supply Pool No. 3 LLC. (Incorporated  by reference from exhibit 2.1 to the Company’s Current Report on  Form 8-K filed on October 2, 2009.)                                                                                                                                                                                                                                                                  |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 2.9 -    |   | Plan Support Agreement  dated September 30, 2009 among the Company, the Subsidiaries and the  Supporting Lenders. (Incorporated by reference from exhibit 2.2 to the  Company’s Current Report on Form 8-K filed on October 2, 2009.)                                                                                                                                                                                                                                                                                                          |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.1 —              |   | Restated Certificate of  Incorporation of the Company effective January 27, 1997 (Incorporated by  reference from exhibit 3.1 to the Company’s Current Report on Form 8-K  filed April 29, 2005).                                                                                                                                                                                                                                                                                                                                              |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.2 —              |   | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective January 31, 1997 (Incorporated by reference from exhibit 3.2  to the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                              |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.3 —              |   | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective April 27, 2005 (Incorporated by reference from exhibit 3.3 to  the Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                                                                |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.4 —              |   | Bylaws of the Company  (Incorporated by reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999  (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                                   |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.5 —              |   | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by reference  from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 1999 (File No. 000-22149)).                                                                                                                                                                                                                                                                                                     |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.6 —              |   | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from exhibit  3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                                         |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.7 —              |   | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to the Company’s Current Report on Form 8-K  filed January 30, 2007).                                                                                                                                                                                                                                                                                   |
|                         |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 3.8 —              |   | Third Amendment to  Bylaws of Edge Petroleum Corporation on October 21, 2008 (Incorporated  by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K  filed October 23, 2008).                                                                                                                                                                                                                                                                                                                                                  |

 

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| 4.1 —  |   | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                            |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2 —  |   | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3 —  |   | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4 —  |   | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                            |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5 —  |   | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                           |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6 —  |   | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated as of  July 11, 2007, December 10, 2007 and May 8, 2008,  respectively, by and among Edge Petroleum Corporation, as borrower, and Union  Bank of California, N.A., as Administrative Agent and Issuing Lender, and the  other lenders party thereto (Incorporated by reference from exhibit 4.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending March 31, 2008 filed on May 12, 2008). |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7 —  |   | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                                      |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8 —  |   | Letter Agreement dated  November 5, 2008 by and among Edge Petroleum Corporation, Union Bank of  California, N.A., as Administrative Agent and Issuing Lender, and the other  lenders party thereto (Incorporated by reference from exhibit 4.11 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ending  September 30, 2008 filed November 10, 2008).                                                                                                                                              |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.9 —  |   | Consent and Agreement,  executed February 9, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed February 9, 2009).                                                                                                                                                                                                                 |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.10 — |   | Consent and Agreement,  executed March 10, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed March 10, 2009).                                                                                                                                                                                                                     |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.11 — |   | Consent and Amendment  No. 4 executed March 16, 2009, among Edge Petroleum Corporation,  the lenders party thereto and Union Bank of California, N.A., as  administrative agent for such lenders. (Incorporated by reference from  exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 16,  2009).                                                                                                                                                                                                          |
|             |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.12 — |   | Amendment No. 5,  executed May 15, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed May 15, 2009).                                                                                                                                                                                                                          |

 

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| 4.13 —       |   | Amendment No. 6,  executed May 29, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed May 29, 2009).                                                 |
|------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.14 —       |   | Amendment No. 7,  executed June 30, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed July 1, 2009).                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.15 —       |   | Amendment No. 8,  executed July 31, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank, N.A. (f/k/a 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  August 3, 2009).                    |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| 4.16 —       |   | Amendment No. 9,  executed August 31, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank, N.A. (f/k/a 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  September 1, 2009).               |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.1 — |   | Form of  Indemnification Agreement between the Company and each of its directors  (Incorporated by reference from exhibit 10.7 to the Company’s Registration  Statement on Form S-4 (Registration No. 333-17269)).                                                                                                                                      |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.2 — |   | Stock Option Plan of  Edge Petroleum Corporation, a Texas corporation (Incorporated by reference  from exhibit 10.13 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                     |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.3 — |   | Employment Agreement  dated as of November 16, 1998, by and between the Company and John W.  Elias (Incorporated by reference from exhibit 10.12 to the Company’s Annual  Report on Form 10-K for the year ended December 31, 1998 (File  No. 000-22149)).                                                                                         |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.4 — |   | Amended and Restated  Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of August 1, 2006 (Incorporated by reference from exhibit  10.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ending June 30, 2006).                                                                                |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.5 — |   | Edge Petroleum  Corporation Incentive Plan “Standard Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Officers named therein  (Incorporated by reference from exhibit 10.2 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)).  |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.6 — |   | Edge Petroleum  Corporation Incentive Plan “Director Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Directors named therein  (Incorporated by reference from exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30,  1999 (File No. 000-22149)). |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.7 — |   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended  June 30, 2004).                                                                                         |
|                   |   |                                                                                                                                                                                                                                                                                                                                                                        |
| †10.8 — |   | Form of Employee  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended  March 31, 1999 (File No. 000-22149)).                                                                   |

 

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|   | †10.9 —   |   | Edge Petroleum  Corporation Amended and Restated Elias Stock Incentive Plan. (Incorporated by  reference from exhibit 4.5 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                            |
|--------|---------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.10 —  |   | Form of Edge Petroleum  Corporation John W. Elias Non-Qualified Stock Option Agreement (Incorporated  by reference from exhibit 4.6 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                  |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.11 —  |   | Summary of Compensation  of Non-Employee Directors (Incorporated by reference from exhibit  10.11 to the Company’s Annual Report on Form 10-K for the year ended December  31, 2008).                                                                                                       |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.12 —  |   | Salaries and Certain  Other Compensation of Executive Officers (Incorporated by reference  from exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2008).                                                                                           |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.13 —  |   | Description of Annual  Cash Bonus Program for Executive Officers (Incorporated by reference from  exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 12,  2007).                                                                                                          |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.14 —  |   | New Base Salaries and  Long-Term Incentive Awards for Certain Executive Officers (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K filed  August 29, 2006).                                                                                         |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.15 — |   | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated by  reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed  January 16, 2007).                    |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.16 — |   | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated by  reference to exhibit 10.2 to the Company’s Current Report on Form 8-K filed  January 16, 2007).                    |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.17 — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated December 16, 2006  (Incorporated by reference to exhibit 10.3 to the Company’s Current Report on  Form 8-K filed January 16, 2007). |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.18 — |   | Second Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 15, 2007  (Incorporated by reference to exhibit 10.1 to the Company’s Current Report on  Form 8-K filed January 19, 2007). |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.19 — |   | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 15, 2007  (Incorporated by reference to exhibit 10.2 to the Company’s Current Report on  Form 8-K filed January 19, 2007).  |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   |   10.20 — |   | Third Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 31, 2007  (Incorporated by reference to exhibit 10.6 to the Company’s Current Report on  Form 8-K filed February 5, 2007).  |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.21 —  |   | New Base Salaries of  Executive Officers (Incorporated by reference from Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                                   |
|   |                |   |                                                                                                                                                                                                                                                                                             |
|   | †10.22 —  |   | Form of Amended and Restated Severance Agreement  dated April 3, 2008, between the Company and Executive Officers of the  Company Named Therein (Incorporated by reference from exhibit 10.1 to the  Company’s Current Report on Form 8-K filed April 4, 2008).                             |

 

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|   | †10.23 —  |   | Amended and Restated  Severance Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.2 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                                                                                                                                                            |
|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | †10.24 —  |   | Amended and Restated  Employment Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.3 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                                                                                                                                                           |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | †10.25 —  |   | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between the  Company and John W. Elias (Incorporated by reference from exhibit 10.1 to the  Company’s Current Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                        |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | †10.26 —  |   | First Amendment to  Second Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and Executive Officers of the Company Named Therein (Incorporated  by reference from exhibit 10.2 to the Company’s Current Report on Form 8-K  filed July 15, 2008).                                                                                                                                              |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | †10.27 —  |   | Fourth Amended and  Restated Severance Agreement among Edge Petroleum Corporation and Kirsten A.  Hink (Incorporated by reference from exhibit 10.1 to the Company’s Current  Report on Form 8-K filed April 6, 2009).                                                                                                                                                                                                           |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   10.28 — |   | Merger Termination  Agreement, dated December 16, 2008, among Chaparral Energy, Inc., Chaparral  Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by reference  to exhibit 10.1 to the Company’s Current Report on Form 8-K filed December  17, 2008).                                                                                                                                                           |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   10.29 — |   | Termination and  Settlement Agreement, dated December 16, 2008, among Magnetar Financial LLC**,**Investment Partners II (B), LLC, QRA  SR, LLC, Triangle Peak Partners Private Equity, LP, Post Oak Energy Capital,  LP, Chaparral Energy, Inc., Chaparral Exploration, L.L.C. and Edge Petroleum  Corporation (Incorporated by reference to exhibit 10.2 to the Company’s  Current Report on Form 8-K filed December 17, 2008). |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | *31.1 —        |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                 |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | *31.2 —        |   | Certification by Gary  L. Pittman, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                                                                                                                                               |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | *32.1 —        |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                 |
|   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   | *32.2 —        |   | Certification by Gary  L. Pittman, Chief Financial Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                               |

 

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* Filed herewith.

† Denotes management orcompensatory contract, arrangement or agreement.

 

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## **SIGNATURES**

 

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

 

 
|                                    |   | EDGE PETROLEUM  CORPORATION,          |
|-----------------------------------------|--------|---------------------------------------|
|                                    |   | A DELAWARE CORPORATION                |
|                                    |   | (REGISTRANT)                          |
|                                    |   |                                  |
|                                    |   |                                  |
| Date   November  9, 2009 |   | /s/ John W.  Elias                    |
|                                    |   | John W. Elias                         |
|                                    |   | Chairman of the  Board, President and |
|                                    |   | Chief Executive  Officer              |
|                                    |   |                                  |
|                                    |   |                                  |
| Date   November  9, 2009 |   | /s/ Gary L.  Pittman                  |
|                                    |   | Gary L. Pittman                       |
|                                    |   | Executive Vice  President and         |
|                                    |   | Chief Financial  Officer              |
|                                    |   |                                  |
|                                    |   |                                  |
| Date   November  9, 2009 |   | /s/ Kirsten A.  Hink                  |
|                                    |   | Kirsten A. Hink                       |
|                                    |   | Vice President and  Controller        |

 

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# **INDEXTO EXHIBITS**

 
| **Exhibit No.** | ** **        | ** ** |
|----------------------|-------------------|------------|
|                 |              |       |   |
|                 | 2.1 —        |       | Amended and Restated  Combination Agreement by and among (i) Edge Group II Limited Partnership,  (ii) Gulfedge Limited Partnership, (iii) Edge Group Partnership, (iv) Edge Petroleum  Corporation, (v) Edge Mergeco, Inc. and (vi) the Company, dated as of January  13, 1997 (Incorporated by reference from Appendix A to the Joint Proxy  Statement/Prospectus contained in the Company’s Registration Statement on  Form S-4/A filed on January 15, 1997 (Registration No. 333-17269)). |
|                 |              |       |   |
|                 | 2.2 —        |       | Agreement and Plan of  Merger dated as of May 28, 2003 among Edge Petroleum Corporation, Edge  Delaware Sub Inc. and Miller Exploration Company (“Miller”) (Incorporated by  reference from Annex A to the Joint Proxy Statement/Prospectus contained in  the Company’s Registration Statement on Form S-4/A filed on October 31, 2003  (Registration No. 333-106484)). |
|                 |              |       |   |
|                 | 2.3 —        |       | Asset Purchase  Agreement by and among Contango STEP, L.P., Contango Oil & Gas Company,  Edge Petroleum Exploration Company and Edge Petroleum Corporation, dated as  of October 7, 2004 (Incorporated by reference from exhibit 2.1 to the  Company’s Current Report on Form 8-K filed October 12, 2004). |
|                 |              |       |   |
|                 | 2.4 —        |       | Purchase and Sale  Agreement, dated as of September 21, 2005 among Pearl Energy Partners, Ltd.,  and Cibola Exploration Partners, L.P., as Sellers; and Edge Petroleum  Exploration Company as Buyer and Edge Petroleum Corporation as Guarantor  (Incorporated by reference from exhibit 2.1 to the Company’s Current Report  on Form 8-K filed October 19, 2005). |
|                 |              |       |   |
|                 | 2.5 —        |       | Stock Purchase  Agreement by and among Jon L. Glass, Craig D. Pollard, Leigh T. Prieto,  Yorktown Energy Partners V, L.P., Yorktown Energy Partners VI, L.P., Cinco  Energy Corporation, and Edge Petroleum Exploration Company and Edge Petroleum  Corporation, dated as of September 21, 2005 (Incorporated by reference from  exhibit 2.5 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 2005). |
|                 |              |       |   |
|                 | 2.6 —        |       | Letter Agreement dated  November 18, 2005 by and among Edge Petroleum Exploration Company, Cinco  Energy Corporation and Sellers (Incorporated by reference from exhibit 2.02  to the Company’s Current Report on Form 8-K filed December 6, 2005). Pursuant  to Item 601(b)(2) of Regulation S-K, the Company had omitted certain  Schedules to the Letter Agreement (all of which are listed therein) from this  Exhibit 2.6. It hereby agrees to furnish a supplemental copy of any such  omitted item to the SEC on its request. |
|                 |              |       |   |
|                 | 2.7 —        |       | Agreement and Plan of  Merger, dated July 14, 2008, among Chaparral Energy, Inc., Chaparral  Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by reference  from exhibit 2.1 to the Company’s Current Report on Form 8-K filed July 15,  2008). Pursuant to Item 601(b)(2) of Regulation S-K, the Company had omitted  the disclosure schedules to the Merger Agreement from this Exhibit 2.1. It  hereby agrees to furnish a supplemental copy of any such omitted item to the  SEC on its request |
|                 |              |       |   |
|                 | 2.8 -   |       | Purchase and Sale  Agreement dated September 30, 2009 between the Company, EPEX, Miller, EPOC,  EPPC, Miller Oil and PGP Gas Supply Pool No. 3 LLC. (Incorporated by  reference from exhibit 2.1 to the Company’s Current Report on Form 8-K filed on  October 2, 2009.) |
|                 |              |       |   |
|                 | 2.9 -   |       | Plan Support Agreement  dated September 30, 2009 among the Company, the Subsidiaries and the  Supporting Lenders. (Incorporated by reference from exhibit 2.2 to the  Company’s Current Report on Form 8-K filed on October 2, 2009.) |
|                 |              |       |   |
|                 | 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). |

 

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|   | 3.2 — |   | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective January 31, 1997 (Incorporated by reference from exhibit 3.2 to the  Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                            |
|--------|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.3 — |   | Certificate of  Amendment to the Restated Certificate of Incorporation of the Company  effective April 27, 2005 (Incorporated by reference from exhibit 3.3 to the  Company’s Current Report on Form 8-K filed April 29, 2005).                                                                                                                                                                                                                                                                              |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.4 — |   | Bylaws of the Company  (Incorporated by reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999 (File No.  000-22149)).                                                                                                                                                                                                                                                                                                                 |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.5 — |   | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by reference from  exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarterly  period ended September 30, 1999 (File No. 000-22149)).                                                                                                                                                                                                                                                                        |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.6 — |   | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from exhibit  3.4 to the Company’s Quarterly Report on Form 10-Q for the quarterly period  ended March 31, 2003).                                                                                                                                                                                                                                                                                                       |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.7 — |   | Certificate of  Designations establishing the 5.75% Series A cumulative convertible perpetual  preferred stock, dated January 25, 2007 (Incorporated by reference to exhibit  3.1 to the Company’s Current Report on Form 8-K filed January 30, 2007).                                                                                                                                                                                                                                                       |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 3.8 — |   | Third Amendment to  Bylaws of Edge Petroleum Corporation on October 21, 2008 (Incorporated by  reference to exhibit 3.4 to the Company’s Current Report on Form 8-K filed  October 23, 2008).                                                                                                                                                                                                                                                                                                                |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.1 — |   | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller’s Annual Report on Form 10-K for the  year ended December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                              |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.2 — |   | Amendment No. 1 to the  Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                        |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.3 — |   | Amendment No. 2 to the  Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration No. 333-58678)).                                                                                                                                                                                                                                                        |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.4 — |   | Form of Miller Stock  Option Agreement (Incorporated by reference from exhibit 10.1(b) to Miller’s  Annual Report on Form 10-K for the year ended December 31, 1997 (File No.  000-23431)).                                                                                                                                                                                                                                                                                                                  |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.5 — |   | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge Petroleum  Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                       |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.6 — |   | Amendments No. 1, 2 and  3 to the Fourth Amended and Restated Credit Agreement dated as of July 11,  2007, December 10, 2007 and May 8, 2008, respectively, by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.9 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ending March 31, 2008 filed on May 12,  2008). |
|   |       |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 4.7 — |   | Consent, executed July  11, 2008, among Edge Petroleum Corporation, the Lenders party thereto and  Union Bank of California, N.A., as administrative agent for such Lenders  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                  |

 

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|   | 4.8 —        |   | Letter Agreement dated  November 5, 2008 by and among Edge Petroleum Corporation, Union Bank of  California, N.A., as Administrative Agent and Issuing Lender, and the other  lenders party thereto (Incorporated by reference from exhibit 4.11 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ending  September 30, 2008 filed November 10, 2008). |
|--------|-------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.9 —        |   | Consent and Agreement,  executed February 9, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed February 9, 2009).                                                               |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.10 —       |   | Consent and Agreement,  executed March 10, 2009, among Edge Petroleum Corporation, the lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  lenders. (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed March 10, 2009).                                                                   |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.11 —       |   | Consent and Amendment  No. 4 executed March 16, 2009, among Edge Petroleum Corporation, the lenders  party thereto and Union Bank of California, N.A., as administrative agent for  such lenders. (Incorporated by reference from exhibit 4.1 to the Company’s  Current Report on Form 8-K filed March 16, 2009).                                                              |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.12 —       |   | Amendment No. 5,  executed May 15, 2009, among Edge Petroleum Corporation, the lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  lenders. (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed May 15, 2009).                                                                             |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.13 —       |   | Amendment No. 6,  executed May 29, 2009, among Edge Petroleum Corporation, the lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  lenders. (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed May 29, 2009).                                                                             |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.14 —       |   | Amendment No. 7, executed  June 30, 2009, among Edge Petroleum Corporation, the lenders party thereto  and Union Bank of California, N.A., as administrative agent for such lenders.  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed July 1, 2009).                                                                            |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.15 —       |   | Amendment No. 8,  executed July 31, 2009, among Edge Petroleum Corporation, the lenders party  thereto and Union Bank, N.A. (f/k/a 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 August 3,  2009).                                                |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | 4.16 —       |   | Amendment No. 9,  executed August 31, 2009, among Edge Petroleum Corporation, the lenders party  thereto and Union Bank, N.A. (f/k/a 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 September 1,  2009).                                           |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | †10.1 — |   | Form of Indemnification  Agreement between the Company and each of its directors (Incorporated by  reference from exhibit 10.7 to the Company’s Registration Statement on Form  S-4 (Registration No. 333-17269)).                                                                                                                                                             |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | †10.2 — |   | Stock Option Plan of  Edge Petroleum Corporation, a Texas corporation (Incorporated by reference  from exhibit 10.13 to the Company’s Registration Statement on Form S-4  (Registration No. 333-17269)).                                                                                                                                                                       |
|   |              |   |                                                                                                                                                                                                                                                                                                                                                                                |
|   | †10.3 — |   | Employment Agreement  dated as of November 16, 1998, by and between the Company and John W. Elias  (Incorporated by reference from exhibit 10.12 to the Company’s Annual Report  on Form 10-K for the year ended December 31, 1998 (File No. 000-22149)).                                                                                                                      |
|        |                   |        |                                                                                                                                                                                                                                                                                                                                                                                     |  |

 

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| †10.4 —   | Amended and Restated  Incentive Plan of Edge Petroleum Corporation as Amended and Restated  Effective as of August 1, 2006 (Incorporated by reference from exhibit 10.4  to the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending June 30, 2006).                                                                                |
|---------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.5 —   | Edge Petroleum  Corporation Incentive Plan “Standard Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Officers named therein  (Incorporated by reference from exhibit 10.2 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999 (File No.  000-22149)).  |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.6 —   | Edge Petroleum  Corporation Incentive Plan “Director Non-Qualified Stock Option Agreement” by  and between Edge Petroleum Corporation and the Directors named therein  (Incorporated by reference from exhibit 10.3 to the Company’s Quarterly  Report on Form 10-Q for the quarterly period ended September 30, 1999 (File  No. 000-22149)). |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.7 —   | Form of Director’s  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.12 to the Company’s  Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).                                                                                          |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.8 —   | Form of Employee  Restricted Stock Award Agreement under the Incentive Plan of Edge Petroleum  Corporation (Incorporated by reference from exhibit 10.15 to the Company’s  Quarterly Report on Form 10-Q/A for the quarterly period ended March 31, 1999  (File No. 000-22149)).                                                                        |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.9 —   | Edge Petroleum  Corporation Amended and Restated Elias Stock Incentive Plan. (Incorporated by  reference from exhibit 4.5 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                                                        |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.10 —  | Form of Edge Petroleum  Corporation John W. Elias Non-Qualified Stock Option Agreement (Incorporated  by reference from exhibit 4.6 to the Company’s Registration Statement on Form  S-8 filed May 30, 2001 (Registration No. 333-61890)).                                                                                                              |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.11 —  | Summary of Compensation  of Non-Employee Directors (Incorporated by reference from exhibit  10.11 to the Company’s Annual Report on Form 10-K for the year ended December  31, 2008).                                                                                                                                                                   |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.12 —  | Salaries and Certain  Other Compensation of Executive Officers (Incorporated by reference  from exhibit 10.12 to the Company’s Annual Report on Form 10-K for the year  ended December 31, 2008).                                                                                                                                                       |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.13 —  | Description of Annual  Cash Bonus Program for Executive Officers (Incorporated by reference from  exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 12,  2007).                                                                                                                                                                      |
|                |                                                                                                                                                                                                                                                                                                                                                         |
| †10.14 —  | New Base Salaries and  Long-Term Incentive Awards for Certain Executive Officers (Incorporated by  reference from exhibit 10.1 to the Company’s Current Report on Form 8-K filed  August 29, 2006).                                                                                                                                                     |
|                |                                                                                                                                                                                                                                                                                                                                                         |
|   10.15 — | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated by  reference to exhibit 10.1 to the Company’s Current Report on Form 8-K filed  January 16, 2007).                                                                                |
|                |                                                                                                                                                                                                                                                                                                                                                         |
|   10.16 — | Purchase and Sale  Agreement between Smith Production, Inc., as seller, and Edge Petroleum  Exploration Company, as purchaser, dated November 16, 2006 (Incorporated by  reference to exhibit 10.2 to the Company’s Current Report on Form 8-K filed  January 16, 2007).                                                                                |
|                |                                                                                                                                                                                                                                                                                                                                                         |
|   10.17 — | First Amendment of Purchase and Sale Agreement  between Smith Production, Inc., as seller, and Edge Petroleum Exploration  Company, as purchaser, dated December 16, 2006 (Incorporated by reference to  exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 16,  2007).                                                             |

 

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|   10.18 — | Second Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 15, 2007  (Incorporated by reference to exhibit 10.1 to the Company’s Current Report on  Form 8-K filed January 19, 2007).                                                                                                                                      |
|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   10.19 — | First Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 15, 2007  (Incorporated by reference to exhibit 10.2 to the Company’s Current Report on  Form 8-K filed January 19, 2007).                                                                                                                                       |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   10.20 — | Third Amendment of  Purchase and Sale Agreement between Smith Production, Inc., as seller, and  Edge Petroleum Exploration Company, as purchaser, dated January 31, 2007  (Incorporated by reference to exhibit 10.6 to the Company’s Current Report on  Form 8-K filed February 5, 2007).                                                                                                                                       |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.21 —  | New Base Salaries of  Executive Officers (Incorporated by reference from Exhibit 10.1 to the  Company’s Current Report on Form 8-K filed March 12, 2007).                                                                                                                                                                                                                                                                        |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.22 —  | Form of Amended and  Restated Severance Agreement dated April 3, 2008, between the Company and  Executive Officers of the Company Named Therein (Incorporated by reference  from exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 4,  2008).                                                                                                                                                                 |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.23 —  | Amended and Restated  Severance Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.2 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                                                                                                                                                            |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.24 —  | Amended and Restated  Employment Agreement dated April 3, 2008, between the Company and John W.  Elias (Incorporated by reference from exhibit 10.3 to the Company’s Current  Report on Form 8-K filed April 4, 2008).                                                                                                                                                                                                           |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.25 —  | First Amendment to  Amended and Restated Severance Agreement, dated July 14, 2008, between the  Company and John W. Elias (Incorporated by reference from exhibit 10.1 to the  Company’s Current Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                        |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.26 —  | First Amendment to  Second Amended and Restated Severance Agreement, dated July 14, 2008, between  the Company and Executive Officers of the Company Named Therein (Incorporated  by reference from exhibit 10.2 to the Company’s Current Report on Form 8-K  filed July 15, 2008).                                                                                                                                              |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| †10.27 -       | Fourth Amended and  Restated Severance Agreement among Edge Petroleum Corporation and Kirsten A.  Hink (Incorporated by reference from exhibit 10.1 to the Company’s Current  Report on Form 8-K filed April 6, 2009).                                                                                                                                                                                                           |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   10.28 — | Merger Termination  Agreement, dated December 16, 2008, among Chaparral Energy, Inc., Chaparral  Exploration, L.L.C. and Edge Petroleum Corporation (Incorporated by reference  to exhibit 10.1 to the Company’s Current Report on Form 8-K filed December  17, 2008).                                                                                                                                                           |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   10.29 — | Termination and  Settlement Agreement, dated December 16, 2008, among Magnetar Financial LLC**,**Investment Partners II (B), LLC, QRA  SR, LLC, Triangle Peak Partners Private Equity, LP, Post Oak Energy Capital,  LP, Chaparral Energy, Inc., Chaparral Exploration, L.L.C. and Edge Petroleum  Corporation (Incorporated by reference to exhibit 10.2 to the Company’s  Current Report on Form 8-K filed December 17, 2008). |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *31.1 —        | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                 |
|                |                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| *31.2 —        | Certification by Gary  L. Pittman, Chief Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                               |

 

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| *32.1 — |   | Certification by John  W. Elias, Chief Executive Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.   |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                    |
| *32.2 — |   | Certification by Gary  L. Pittman, Chief Financial Officer, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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* Filed herewith.

† Denotes management orcompensatory contract, arrangement or agreement.

 

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