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** **

 

** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**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 thequarterly period ended June 30, 2009**

 

**OR**

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

 

**For thetransition period from         to        **

 

**Commissionfile number 0-22149**

 

 

**EDGE PETROLEUM CORPORATION**

(Exact Name of Registrant asSpecified in Its Charter)

 

| **Delaware**                                                      | ** ** | **76-0511037**                          |
|-------------------------------------------------------------------|------------|-----------------------------------------|
| (State  or Other Jurisdiction of   Incorporation or Organization) |       | (I.R.S.  Employer

Identification  No.) |
|                                                              |       |                                    |
| **1301 Travis, Suite 2000**                                  | ** ** | ** **                              |
| **Houston, Texas**                                                | ** ** | **77002**                               |
| (Address of Principal  Executive Offices)                         |       | (Zip Code)                              |

 

**(713) 654-8960**

(Registrant’s 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. x Yes  ̈ 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). ̈ Yes  ̈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.(Check one):

 

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

 

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

 

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

 
| **Class**    | ** ** | **Outstanding  at****August 4,  2009** |
|--------------|------------|---------------------------------------------|
| Common Stock |       | 28,867,675                                  |

 

 

 

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**EDGE PETROLEUM CORPORATION**

 

**Table of Contents**

** **
| ** **                                                                                            | **Page No.** |
|-------------------------------------------------------------------------------------------------------|-------------------|
| Part I. Financial Information                                                                    |              |
| Item 1. Financial Statements  (Unaudited):                                                            |              |
| Consolidated Balance Sheets as of  June 30, 2009 and December 31, 2008                      | 3                 |
| Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2009 and 2008 | 4                 |
| Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2009 and 2008           | 5                 |
| Consolidated Statement of  Stockholders’ Equity for the Six Months Ended June 30, 2009      | 6                 |
| Notes to the  Consolidated Financial Statements                                                       | 7                 |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations  | 27                |
| Item 3.  Qualitative and Quantitative Disclosures About Market Risk                                   | 56                |
| Item 4. Controls and  Procedures                                                                      | 57                |
| Part II. Other  Information                                                                      |              |
| Item 1. Legal Proceedings                                                                             | 58                |
| Item 1A. Risk Factors                                                                                 | 59                |
| Item 2.  Unregistered Sale of Equity Securities and Use of Proceeds                                   | 60                |
| Item 3.  Defaults Upon Senior Securities                                                              | 60                |
| Item 4.  Submission of Matters to a Vote of Security Holders                                          | 60                |
| Item 5. Other Information                                                                             | 60                |
| Item 6. Exhibits                                                                                      | 61                |
| Signatures                                                                                            | 66                |

 

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** **

**PART I.FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

### **EDGE PETROLEUM CORPORATION**

** **

**CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                                                                                                                                              | ** ** | **June 30,**                      | ** **    | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|---------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                              | ** ** | **2009**                               | ** **    | **2008**              | ** ** |
| ** **                                                                                                                                                                                                                              | ** ** | **(Unaudited)**                        | ** **    | ** **            | ** ** |
| ** **                                                                                                                                                                                                                              | ** ** | **(in  thousands, except share data)** | ** **    |
| ASSETS                                                                                                                                                                                                                                  |       |                                   |          |                  |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| CURRENT ASSETS:                                                                                                                                                                                                                         |       |                                   |          |                  |       |
| Cash  and cash equivalents                                                                                                                                                                                                              |       | $                                      |  15,693  |                  | $          |  8,475 |   |
| Accounts  receivable, trade, net of allowance                                                                                                                                                                                           |       | 9,864                                  |          | 14,548                |       |
| Accounts  receivable, joint interest owners and other, net of allowance                                                                                                                                                                 |       | 1,595                                  |          | 5,689                 |       |
| Derivative  financial instruments                                                                                                                                                                                                       |       | 12,709                                 |          | 15,407                |       |
| Other  current assets                                                                                                                                                                                                                   |       | 3,297                                  |          | 4,591                 |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| Total  current assets                                                                                                                                                                                                                   |       | 43,158                                 |          | 48,710                |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| PROPERTY  AND EQUIPMENT, net — full cost method of accounting for oil and natural gas  properties (including unevaluated costs of $23.0 million and $16.4 million at  June 30, 2009 and December 31, 2008, respectively) |       | 220,259                                |          | 307,059               |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| OTHER ASSETS                                                                                                                                                                                                                            |       | 613                                    |          | 1,828                 |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| TOTAL ASSETS                                                                                                                                                                                                                            |       | $                                      |  264,030 |                  | $          |  357,597 |   |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                          |       |                                   |          |                  |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| Accounts  payable, trade                                                                                                                                                                                                                |       | $                                      |  1,691   |                  | $          |  3,086 |   |
| Accrued  liabilities                                                                                                                                                                                                                    |       | 7,948                                  |          | 8,779                 |       |
| Accrued  interest payable                                                                                                                                                                                                               |       | 22                                     |          | 579                   |       |
| Current  portion of debt                                                                                                                                                                                                                |       | 234,000                                |          | 239,000               |       |
| Asset  retirement obligation                                                                                                                                                                                                            |       | 555                                    |          | 547                   |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| Total  current liabilities                                                                                                                                                                                                              |       | 244,216                                |          | 251,991               |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| ASSET RETIREMENT  OBLIGATION — long-term                                                                                                                                                                                           |       | 6,181                                  |          | 6,011                 |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| OTHER NON-CURRENT  LIABILITIES                                                                                                                                                                                                          |       | 102                                    |          | 102                   |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| DELIVERY COMMITMENT                                                                                                                                                                                                                     |       | 1,993                                  |          | 2,005                 |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| Total  liabilities                                                                                                                                                                                                                      |       | 252,492                                |          | 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 June 30, 2009 and December 31, 2008                                                                                      |       | 29                                     |          | 29                    |       |
| Common  stock, $0.01 par value; 60,000,000 shares authorized; 28,867,366, and  28,833,546  shares issued and  outstanding at June 30, 2009 and December 31, 2008, respectively                                           |       | 289                                    |          | 288                   |       |
| Additional  paid-in capital                                                                                                                                                                                                             |       | 424,309                                |          | 423,951               |       |
| Retained  deficit                                                                                                                                                                                                                       |       | (413,089                               | )             | (326,780              | )          |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| Total  stockholders’ equity                                                                                                                                                                                                        |       | 11,538                                 |          | 97,488                |       |
|                                                                                                                                                                                                                                    |       |                                   |          |                  |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                        |       | $                                      |  264,030 |                  | $          |  357,597 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

** **

**CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**

 
| ** **                                                    | ** **   | **Three Months Ended June 30,**         | ** **   | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------|--------------|----------------------------------------------|--------------|------------------------------------|------------|
| ** **                                                    | ** **   | **2009**                                     | ** **   | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                    | *** *** | **(in thousands, except per share amounts)** | ** **   |
| OIL  AND NATURAL GAS REVENUE:                                 |         |                                         |         |                               |       |   |   |   |   |
| Oil  and natural gas sales                                    |         | $                                            |  11,674 |                               | $          |  49,060 |   | $ |  24,672 |   | $ |  96,076 |   |
| Gain  (loss) on derivatives                                   |         | 109                                          |         | (56,598                            | )          | 11,177 |   | (85,957 | ) |
| Total  revenue                                                |         | 11,783                                       |         | (7,538                             | )          | 35,849 |   | 10,119 |   |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| OPERATING EXPENSES:                                           |         |                                         |         |                               |       |   |   |   |   |
| Oil and natural gas operating expenses                        |         | 3,824                                        |         | 3,941                              |       | 7,649 |   | 8,413 |   |
| Severance and ad valorem taxes                                |         | 1,257                                        |         | 3,297                              |       | 2,348 |   | 5,482 |   |
| Depletion, depreciation, amortization and  accretion          |         | 7,549                                        |         | 21,522                             |       | 17,628 |   | 48,893 |   |
| Impairment of oil and natural gas properties                  |         | —                                       |         | —                             |       | 78,254 |   | — |   |
| General and administrative expenses                           |         | 4,919                                        |         | 5,152                              |       | 9,514 |   | 9,212 |   |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| Total operating expenses                                      |         | 17,549                                       |         | 33,912                             |       | 115,393 |   | 72,000 |   |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| OPERATING LOSS                                                |         | (5,766                                       | )            | (41,450                            | )          | (79,544 | ) | (61,881 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| OTHER INCOME AND EXPENSE:                                     |         |                                         |         |                               |       |   |   |   |   |
| Other income                                                  |         | 5                                            |         | 32                                 |       | 12 |   | 101 |   |
| Interest expense, net of amounts capitalized                  |         | (3,069                                       | )            | (2,284                             | )          | (5,312 | ) | (6,508 | ) |
| Amortization of deferred loan costs                           |         | (539                                         | )            | (239                               | )          | (1,465 | ) | (478 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES                                      |         | (9,369                                       | )            | (43,941                            | )          | (86,309 | ) | (68,766 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| INCOME TAX BENEFIT                                            |         | —                                       |         | 16,118                             |       | — |   | 24,764 |   |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| NET LOSS                                                      |         | (9,369                                       | )            | (27,823                            | )          | (86,309 | ) | (44,002 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| Preferred Stock Dividends                                     |         | —                                       |         | (2,067                             | )          | — |   | (4,133 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| NET LOSS TO COMMON STOCKHOLDERS                               |         | $                                            |  (9,369 | )                                  | $          |  (29,890 | ) | $ |  (86,309 | ) | $ |  (48,135 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| BASIC LOSS PER SHARE                                          |         | $                                            |  (0.40  | )                                  | $          |  (1.04 | ) | $ |  (3.13 | ) | $ |  (1.68 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| DILUTED LOSS PER SHARE                                        |         | $                                            |  (0.40  | )                                  | $          |  (1.04 | ) | $ |  (3.13 | ) | $ |  (1.68 | ) |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING   |         | 28,867                                       |         | 28,652                             |       | 28,854 |   | 28,609 |   |
|                                                          |         |                                         |         |                               |       |   |   |   |   |
| DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES  OUTSTANDING |         | 28,867                                       |         | 28,652                             |       | 28,854 |   | 28,609 |   |

 

See accompanyingnotes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

** **

**CONSOLIDATED STATEMENTS OFCASH FLOWS (Unaudited)**

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** **    |
|----------------------------------------------------------------------------------|------------|------------------------------------|---------------|
| ** **                                                                       | ** ** | **2009**                           | ** **    | **2008** | ** ** |
| ** **                                                                       | ** ** | **(in  thousands)**                | ** **    |
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                       | ** ** | ** **                         | ** **    | ** ** | ** ** |
| Net loss                                                                         |       | $                                  |  (86,309 | ) | $ |  (44,002 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                               |          |   |   |
| Unrealized loss on the fair value of derivatives                                 |       | 2,699                              |          | 67,309 |   |
| Loss on property                                                                 |       | —                             |          | 34 |   |
| Deferred income taxes                                                            |       | —                             |          | (25,092 | ) |
| Depletion, depreciation, amortization and  accretion                             |       | 17,628                             |          | 48,893 |   |
| Impairment of oil and natural gas properties                                     |       | 78,254                             |          | — |   |
| Gain on ARO settlement                                                           |       | —                             |          | (9 | ) |
| Amortization of deferred loan costs                                              |       | 1,465                              |          | 478 |   |
| Bad debt expense                                                                 |       | 263                                |          | 90 |   |
| Share based compensation costs                                                   |       | 359                                |          | 1,636 |   |
| Changes in assets and liabilities:                                               |       |                               |          |   |   |
| Decrease (increase) in accounts receivable, trade                                |       | 4,581                              |          | (1,508 | ) |
| Decrease in accounts receivable, joint interest  owners                          |       | 3,934                              |          | 7,381 |   |
| Increase in other assets                                                         |       | (232                               | )             | (355 | ) |
| Decrease in accounts payable, trade                                              |       | (1,395                             | )             | (4,533 | ) |
| Increase (decrease) in accrued liabilities                                       |       | (831                               | )             | 3,505 |   |
| Decrease in other liabilities                                                    |       | (12                                | )             | — |   |
| Decrease in accrued interest payable                                             |       | (557                               | )             | (387 | ) |
|                                                                             |       |                               |          |   |   |
| Net cash provided by operating activities                                        |       | 19,847                             |          | 53,440 |   |
|                                                                             |       |                               |          |   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                       |       |                               |          |   |   |
| Oil and natural gas property and equipment  additions                            |       | (9,232                             | )             | (36,646 | ) |
| Decrease in drilling advances                                                    |       | 1,275                              |          | 708 |   |
| Proceeds from the sale of oil and natural gas  properties                        |       | 328                                |          | 18,172 |   |
| Overhedge derivative settlements                                                 |       | —                             |          | (6,249 | ) |
|                                                                             |       |                               |          |   |   |
| Net cash used in investing activities                                            |       | (7,629                             | )             | (24,015 | ) |
|                                                                             |       |                               |          |   |   |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                       |       |                               |          |   |   |
| Repayments of debt                                                               |       | (5,000                             | )             | (20,000 | ) |
| Preferred stock dividends paid                                                   |       | —                             |          | (4,133 | ) |
|                                                                             |       |                               |          |   |   |
| Net cash used in financing activities                                            |       | (5,000                             | )             | (24,133 | ) |
|                                                                             |       |                               |          |   |   |
| **NET INCREASE IN CASH AND CASH  EQUIVALENTS**                                   |       | 7,218                              |          | 5,292 |   |
| ** **                                                                       |       |                               |          |   |   |
| **CASH AND CASH EQUIVALENTS, BEGINNING  OF PERIOD**                              |       | 8,475                              |          | 7,163 |   |
| ** **                                                                       |       |                               |          |   |   |
| **CASH AND CASH EQUIVALENTS, END  OF PERIOD**                                    |       | $                                  |  15,693  |   | $ |  12,455 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

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

 
|                           |   | ** **           | ** ** | ** **        |       |        |       |         |       | **Additional**         |       |        |       | **Total**  |   |
|--------------------------------|--------|----------------------|------------|-------------------|------------|-------------|------------|--------------|------------|------------------------|------------|-------------|------------|------------|--------|
|                           |   | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-In** |       | **Retained** |       | **Stockholders’** |       |
|                           |   | **Shares**           | ** ** | **Amount**        | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **Deficit** | ** ** | **Equity** |   |
|                           |   | **(in thousands)**   |       |
| BALANCE, DECEMBER 31, 2008     |   | 2,875                |       | $                 | 29         |        | 28,833     |         | $          | 288                    |       | $           | 423,951    |       | $      | (326,780 | ) | $ | 97,488 |   |
|                           |   |                 |       |              |       |        |       |         |       |                   |       |        |       |       |   |
| Issuance of common stock       |   | —               |       | —            |       | 34          |       | 1            |       | (1                     | )          | —      |       | —     |   |
|                           |   |                 |       |              |       |        |       |         |       |                   |       |        |       |       |   |
| Share-based compensation costs |   | —               |       | —            |       | —      |       | —       |       | 359                    |       | —      |       | 359        |   |
|                           |   |                 |       |              |       |        |       |         |       |                   |       |        |       |       |   |
| Net loss                       |   | —               |       | —            |       | —      |       | —       |       | —                 |       | (86,309     | )          | (86,309    | )      |
|                           |   |                 |       |              |       |        |       |         |       |                   |       |        |       |       |   |
| BALANCE, JUNE 30, 2009         |   | 2,875                |       | $                 | 29         |        | 28,867     |         | $          | 289                    |       | $           | 424,309    |       | $      | (413,089 | ) | $ | 11,538 |   |

 

Seeaccompanying notes to consolidated financial statements.

 

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**EDGE PETROLEUM CORPORATION**

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

 

**1.     ORGANIZATION AND BASIS FORPRESENTATION**

** **

**Thefinancial statements included herein have been prepared by Edge PetroleumCorporation, a Delaware corporation (“we”, “our”, “us” or the “Company”),without audit pursuant to the rules and regulations of the Securities andExchange Commission (“SEC”), and reflect all adjustments which are, in theopinion of management, necessary to present a fair statement of the results forthe interim periods on a basis consistent with the annual audited consolidatedfinancial statements. All such adjustments are of a normal recurring nature,except for the impairment of the Company’s oil and natural gas properties, asdiscussed below.  The results ofoperations for the interim periods are not necessarily indicative of theresults to be expected for an entire year. Certain information, accounting policies and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen omitted pursuant to such rules and regulations, although we believethat the disclosures are adequate to make the information presented notmisleading. These financial statements should be read in conjunction with ouraudited consolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.**

** **

**2.     RECENT DEVELOPMENTS**

** **

***Financialand Strategic Alternatives Process*** - In late 2007, the Company announced the hiring of afinancial advisor to assist its 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, the Company announced the termination of the Chaparral merger agreementafter both the Company and Chaparral determined it was highly unlikely that theconditions to the closing of the proposed merger would be satisfied or thatChaparral would be able to obtain sufficient debt and equity financing to allowthem to complete the proposed merger and operate as a combined company,particularly in light of the challenging environment in the financial marketsand the energy industry. The Company has continued undertaking the evaluationand assessment of various financial and strategic alternatives in the firsthalf of 2009 in order to address its liquidity issues and the impendingmaturity of the Company’s Revolving Facility (defined in Note 4) on August 31,2009. In connection with this process, the Company also retained a newinvestment banking firm early in 2009 to assist further in the evaluation ofour financial and strategic alternatives. The Company continues to pursue andreview its financial and strategic alternatives as it seeks to resolve the manychallenges it currently faces.

 

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

 

***Going Concern*** —  In addition to the Deficiencyunder our Revolving Facility created by the January borrowing baseredetermination (see discussion in Note 4), the capital expenditures requiredto maintain and/or grow production and reserves are substantial. Prices for oiland natural gas declined materially during the fourth quarter of 2008, andnatural gas prices continued to decline during the first half of 2009.  Acontinued or extended decline in oil or natural gas prices will have a materialadverse effect on the Company’s financial position, results of operations, cashflows and access to capital and on the quantities of oil and natural gasreserves that the Company can economically produce. The Company’s stock pricehas significantly declined over the past year which also makes it moredifficult to obtain equity financing on acceptable terms to address the Company’sliquidity issues. In addition, the Company is reporting negative workingcapital at June 30, 2009 and continued to report net losses in the threeand six months ended June 30, 2009, following three consecutive years ofnet losses.  Therefore, there is substantial doubt as to the Company’sability to continue as a going concern for a period longer than the next twelvemonths. Additionally, our independent auditors included an explanatoryparagraph in their report on our consolidated financial statements in our Form 10-Kfor the year 

 

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ended December 31,2008 that raises substantial doubt about our ability to continue as a goingconcern. The Company’s ability to continue as a going concern is dependent uponthe success of its financial and strategic alternatives process, which mayinclude the sale of some or all of our assets, a merger or other businesscombination involving the Company or the restructuring or recapitalization ofthe Company. Until the possible completion of the financial and strategicalternatives process, the Company’s future remains uncertain and there can beno assurance that its efforts in this regard will be successful.

 

The accompanying consolidated financial statements have been preparedin accordance with generally accepted accounting principles applicable to agoing concern, which implies that the Company will continue to meet itsobligations and continue its operations for the next twelve months. Realizationvalues may be substantially different from carrying values as shown, and theseconsolidated financial statements do not include any adjustments relating tothe recoverability or classification of recorded asset amounts or the amountand classification of liabilities that might be necessary as a result of thisuncertainty.

 

**3.     SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

** **

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

 

In the measurement ofimpairment of oil and natural gas properties, the successful-efforts methodfollows the guidance provided in Statement of Financial Accounting Standards (“SFAS”)No. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets*, where the first measurement forimpairment is to compare the net book value of the related asset to itsundiscounted future cash flows using commodity prices consistent withmanagement expectations. The full-cost method follows guidance provided in SECRegulation S-X Rule 4-10, where impairment is determined by the “ceilingtest,” whereby to the extent that such capitalized costs subject toamortization in the full-cost pool (net of accumulated depletion, depreciationand amortization, prior impairments, and related tax effects) exceed thepresent value (using a 10% discount rate) of estimated future net after-tax cashflows from proved oil and natural gas reserves, such excess costs are chargedto expense. Once incurred, an impairment of oil and natural gas properties isnot reversible at a later date.  Aceiling test impairment could result in a significant loss for a reportingperiod; however, future depletion expense would be correspondingly reduced.Impairment of oil and natural gas properties is assessed on a quarterly basisin conjunction with the Company’s quarterly and annual SEC filings. The Companyrecorded a net non-cash ceiling test impairment of $78.3 million during thequarter ended March 31, 2009 as a result of further declines in commodityprices since December 31, 2008. No ceiling test impairment was requiredduring the quarters ended June 30, 2009 or 2008.

 

In accordance with SEC StaffAccounting Bulletin (“SAB”) No. 103, *Updateof Codification of Staff Accounting Bulletins*, derivativeinstruments qualifying as cash flow hedges are to be included in thecomputation of limitation on capitalized costs. Since January 1, 2006, the Company has not applied cash flow hedgeaccounting to any derivative contracts (see Note 10), therefore the ceilingtests at June 30, 2009 and 2008 were not impacted by the value of ourderivatives.

 

Oil and natural gasproperties are amortized based on a unit-of-production method using estimatesof proved reserve quantities. Oil and natural gas liquids (“NGL”) are convertedto a gas equivalent basis (“Mcfe”) at the rate of one barrel equals six Mcf. Inaccordance with SAB No. 106, *Interactionof Statement 143 and the*

 

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*Full Cost Rules,*the amortizablebase includes estimated future development and dismantlement costs, andrestoration and abandonment costs, net of estimated salvage values. Investmentsin unproved properties are not amortized until proved reserves associated withthe prospects can be determined or until impairment occurs. Unproved propertiesare evaluated quarterly, and as needed, for impairment on aproperty-by-property basis. If the results of an assessment indicate that anunproved property is impaired, the amount of impairment is added to the provedoil and natural gas property costs to be amortized. Costs excluded fromamortization related to unproved properties were $23.0 million and $16.4million at June 30, 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 FASB FSP FAS 107-1 and AccountingPrinciples Bulletin (“APB”) No. 28-1, *Interim Disclosures aboutFair Value of Financial Instruments,* effective April 1, 2009.FSP FAS 107-1 and APB No. 28-1 requires disclosures about fair value offinancial instruments for publicly traded companies for both interim and annualperiods. Historically, these disclosures were only required annually. Theinterim disclosures are intended to provide financial statement users with moretimely and transparent information about the effects of current marketconditions on an entity’s financial instruments that are not otherwise reportedat fair value. The Company’s financial instruments consist of 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 December 31,2008 approximated fair value because the interest rates were variable andreflective of market rates, but as of June 30, 2009 the Company believesit is not practicable to estimate the fair value of its outstanding debt inlight of the impending maturity on August 31, 2009 that the Company iscurrently seeking to address. The carrying amount of the Company’s debt as of June 30,2009 was $234 million and the interest rate applied at June 30, 2009 was5.75%. As provided by Amendment No. 8, the maturity date of theoutstanding debt is August 31, 2009.

 

***AccountsReceivable 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 June 30, 2009 and December 31, 2008,respectively. Accounts Receivable, Trade included an allowance for doubtfulaccounts of approximately $167,500 and $64,500 at June 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 —***TheCompany records a liability for legal obligations associated with theretirement of tangible long-lived assets in the period in which they areincurred in accordance with SFAS No. 143, *Accountingfor Asset Retirement Obligations.* Under SFAS No. 143, whenliabilities for dismantlement and abandonment costs, excluding salvage values,are initially recorded, the carrying amount of the related oil and natural gasproperties is increased. Accretion of the liability is recognized each periodusing the interest method of allocation, and the capitalized cost is depletedover the useful life of the related asset. The changes to the Asset RetirementObligations (“ARO”) for oil and natural gas properties and related equipmentduring the six months ended June 30, 2009 and 2008 are as follows:

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------|------------|
| ** **                                      | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | **(in thousands)**                 | ** ** |
| ARO,  Beginning of Period                       |       | $                                  | 6,558      |   | $ | 6,634 |   |
| Liabilities  incurred in the current period     |       | 11                                 |       | 490 |   |
| Liabilities  settled/sold in the current period |       | (12                                | )          | (1,143 | ) |
| Accretion  expense                              |       | 192                                |       | 191 |   |
| Revisions                                       |       | (13                                | )          | 151 |   |
| ARO,  End of Period                             |       | $                                  | 6,736      |   | $ | 6,323 |   |
|                                            |       |                               |       |   |   |
| Current  Portion                                |       | $                                  | 555        |   | $ | 431 |   |
| Long-Term  Portion                              |       | $                                  | 6,181      |   | $ | 5,892 |   |

 

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During the six monthsended June 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 thebasis of total gas actually sold by the Company. The Company uses the salesmethod of accounting for gas balancing and an asset or a liability isrecognized to the extent that there is a material imbalance in excess of theremaining gas reserves on the underlying properties.  As of June 30,2009 and December 31, 2008, our gas production was materially in balance,i.e. our cumulative portion of gas production taken and sold from wells inwhich we have an interest was not materially different from our entitledinterest in gas production from those wells.

 

***Share-BasedCompensation***— The Company accounts for share-basedcompensation in accordance with the provisions of SFAS No. 123R, *Share-Based Payment,* which requires that the compensationcost relating to share-based payment transactions be recognized in financialstatements. Share-based compensation for the six months ended June 30,2009 was approximately $0.4 million, of which approximately $0.2 million wasincluded in general and administrative expenses (“G&A”) and approximately$0.2 million was capitalized to oil and natural gas properties. Share-basedcompensation for the six months ended June 30, 2008 was approximately $1.3million, of which $1.1 million was included in G&A and $0.2 million wascapitalized to oil and natural gas properties.

 

During the six monthsended June 30, 2009, no restricted stock units (“RSUs”) were granted. At June 30,2009, there were 211,504 RSUs outstanding, all of which were classified asequity instruments.  No options weregranted during the six months ended June 30, 2009, and at period end,there were 381,000 vested unexercised options outstanding.

 

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

 

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

 
| ** **                                    | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2009**                              | ** ** | **2008**                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                    |       | **(in thousands)**                    |       |
| Net Loss                                      |       | $                                     | (9,369     | )                                   | $          | (27,823 | ) | $ | (86,309 | ) | $ | (44,002 | ) |
| Preferred Stock Dividends                     |       | —                                |       | (2,067                              | )          | — |   | (4,133 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Net Loss to Common Stockholders               |       | (9,369                                | )          | (29,890                             | )          | (86,309 | ) | (48,135 | ) |
|                                          |       |                                  |       |                                |       |   |   |   |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Other Comprehensive Income (Loss), Net of Tax |       | —                                |       | —                              |       | — |   | — |   |
| Other Comprehensive Loss                      |       | $                                     | (9,369     | )                                   | $          | (29,890 | ) | $ | (86,309 | ) | $ | (48,135 | ) |

 

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

 

***SubsequentEvents —***TheCompany adopted SFAS No. 165, *Subsequent Events,*effective April 1, 2009. SFAS No. 165 does not change the Company’saccounting policy for subsequent events, but instead incorporates existingaccounting and disclosure requirements related to subsequent events intogenerally accepted accounting principles in the United States of America (“GAAP”).SFAS No. 165 defines subsequent events as either recognized subsequentevents, those that provide additional evidence about conditions at the balancesheet date, or nonrecognized subsequent events, those that provide evidenceabout conditions 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. SFAS No. 165 requires theCompany to disclose the date through which subsequent events have beenevaluated. The adoption of SFAS No. 165 had no impact on the financialstatements of the Company. The Company has evaluated subsequent events through August 6,2009, the filing date of this Quarterly Report on Form 10-Q (see Note 12).

 

***Recent Accounting Pronouncements Not Yet Adopted***— In December 2008, the SEC issuedthe final rule, *“Modernization of Oil andGas Reporting*,” which adopts revisions to the SEC’s oil and naturalgas reporting disclosure requirements and is effective for annual reports onForms 10-K for years ending on or after December 31, 2009. Earlyadoption of the new rules is prohibited. The new rules are intendedto provide investors with a more meaningful and comprehensive understanding ofoil and natural gas reserves to help investors evaluate their investments inoil and natural gas companies. The new rules are also designed tomodernize the oil and natural gas disclosure requirements to align them withcurrent practices and changes in technology. The new rules include changesto the pricing used to estimate reserves, the ability to include nontraditionalresources in reserves, the use of new technology for determining reserves andpermitting disclosure of probable and possible reserves. The Company iscurrently 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, the Company will begin complying with thedisclosure requirements in our annual report on Form 10-K for the yearended December 31, 2009.

 

In June 2009, theFASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R)*, which amends the consolidationguidance applicable to variable interest entities. The amendments significantlyreduce the previously required quantitative consolidation analysis, and requireongoing reassessments of whether the Company is the primary beneficiary of avariable interest entity. SFAS No. 167 also requires enhanced 

 

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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 theadoption of SFAS No. 167 to impact its consolidated financial statements.

 

On June 3, 2009, the FASB approved the FASB Accounting StandardsCodificationTM (“Codification”) as the single source of GAAP. On June 29,2009, the FASB issued SFAS No. 168, *The FASB AccountingStandards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*. SFAS No. 168 establishes the Codification to become the sourceof authoritative GAAP recognized by the FASB to be applied by nongovernmentalentities. Rules and interpretive releases of the SEC under authority offederal securities laws are also sources of authoritative GAAP for SECregistrants. Codification supersedes all existing non-SEC accounting andreporting standards. All other non-grandfathered non-SEC accounting literaturenot included in the Codification becomes non-authoritative. Following SFAS No. 168,the FASB will not issue new standards in the form of Statements, FASB StaffPositions, or Emerging Issues Task Force Abstracts. Instead, the FASB willissue Accounting Standards Updates, which will serve only to: (a) updatethe Codification; (b) provide background information about the guidance;and (c) provide the bases for conclusions on the change(s) in the Codification.The content of the Codification carries the same level of authority. The GAAPhierarchy will be modified to include only two levels of GAAP: authoritativeand non-authoritative. SFAS No. 168 and the Codification are effective forfinancial statements issued for interim and annual periods ending after September 15,2009, which means that a calendar year-end public entity should follow theguidelines in the Codification beginning with its third quarter starting on July 1,2009. The Company adopted Codification on July 1, 2009 which will providefor changes in disclosures on its Quarterly Report on Form 10-Q for theperiod ended September 30, 2009 but no impact to its financial position,results of operations or cash flows.

 

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

 

On January 30, 2007, the Company entered into a Fourth Amended andRestated Credit Agreement (as amended, the “Revolving Facility”) for a newrevolving credit facility with Union Bank of California (“UBOC”), asadministrative 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 a senior first lien secured borrowingbase revolving credit facility in favor of the Company and certain of itswholly-owned subsidiaries in an amount equal to $750 million, of which $320million was available under the borrowing base at the time of closing (seebelow for discussion of current availability). The Revolving Facility has a letter of credit sub-limit of $20 million.The Revolving Facility’s original maturity was scheduled for January 31,2011.

 

At June 30, 2009, borrowings under the Revolving Facility boreinterest at Prime plus a margin of 2.5% which equated to an interest rateapplied to the Company’s outstanding borrowings of 5.75%.  As of June 30, 2009, $234 million intotal borrowings were outstanding under the Revolving Facility.

 

As a result of the redetermination process of the borrowing base by theLenders under the Revolving Facility, which was completed in January 2009,the Lenders established a new borrowing base under the Revolving Facility of$125 million, resulting in a $114 million deficiency (the “Deficiency”). The reduction to our borrowing base was primarily the result of the sale ofcertain non-core assets during the first quarter of 2008 and the reduction oftotal proved reserves as reported in the year-end reserve reports of theCompany’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 the ongoing financial and strategic alternatives process:

 

·                  On February 9, 2009, the Companyentered into a Consent and Agreement (the “February Consent”) among theCompany and the Lenders under the Revolving Facility deferring the payment dateof the first $19 million installment until March 10, 2009, and extendingthe due date for each subsequent installment by one month with the last of thesix 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 

 

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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.

 

·                  On March 10, 2009, the Companyentered into a Consent and Agreement (the “March Consent”) with theLenders under the Revolving Facility, which provided, among other things, forthe extension of the due date for the first installment to repay the Deficiencyfrom 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.

 

·                  On March 16, 2009, the Companyentered into Consent and Amendment No. 4 (the “Amended Consent”) whichprovided, among other things, (1) that the Company would make a $25million payment on May 31, 2009 with all remaining principal, fees andinterest 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 or beforeJune 30, 2009, (b) a merger agreement or similar agreement involvingthe Company as part of a transaction that results in the repayment of theCompany’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 enteredinto Amendment No. 5 (“Amendment No. 5”) which provided for, amongother things, (1) the elimination of the provision providing that it wouldbe an event of default if the Company failed to have executed and delivered onor before May 15, 2009 at least one of the following (a) a commitmentletter from a lender or group of lenders reasonably satisfactory to the lendersproviding for the provision by such lender or group of lenders of a creditfacility in an amount sufficient to repay all of the Company’s obligationsunder the Revolving Facility on or before June 30, 2009, (b) a mergeragreement or similar agreement involving the Company as part of a transactionthat resulted in the repayment of the Company’s obligations under the RevolvingFacility on or before June 30, 2009, and (c) a purchase and saleagreement with a buyer or group of buyers reasonably acceptable to the Lendersproviding for a sale transaction by the Company that resulted in the repaymentof all of the Company’s obligations under the Revolving Facility on or before June 30,2009 and (2) the elimination of certain reporting requirements relating tocertificates to be provided by the Company’s auditors and responsible officers.

 

·                  On May 29, 2009, the Company enteredinto Amendment 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 remainingprincipal, fees and interests amounts under the Revolving Facility would be dueon June 30, 2009.

 

·                  On June 30, 2009, the Companyentered into Amendment No. 7 (“Amendment No. 7”) which provided for,among other things, (1) changing the maturity date of the RevolvingFacility from June 30, 2009 to July 31, 2009, (2) the Company’sagreement to make a prepayment of interest of $1,142,753.42 millionrepresenting the amount anticipated to be owing in respect of the interest 

 

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payment due andpayable on July 31, 2009 and (3) the Company’s agreement to make aprepayment of the advances under the Revolving Facility in the amount of $7.5million with such prepayment to be made on or before July 10, 2009. TheCompany 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 enteredinto Amendment No. 8 (“Amendment No. 8”) which changed the maturitydate of the Company’s Revolving Facility from July 31, 2009 to August 31,2009.

 

If the Company breachesany of the provisions of the Amended Consent or Revolving Facility, as amended,the Lenders thereto will be entitled to declare an event of default, at whichpoint the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to our Lenders, wouldbecome immediately due and payable.  Inany event, the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to the Lenders, willbe payable on August 31, 2009 unless earlier paid or a further extensionwith respect to payment is negotiated with the Lenders. The Lenders may takeaction to enforce their rights with respect to the outstanding obligationsunder the Revolving Facility. Because substantially all of the Company’s assetsare pledged as collateral under the Revolving Facility, if the Lenders declarean event of default, they would be entitled to foreclose on and take possessionof the Company’s assets.  In such anevent, the Company may be forced to liquidate or to otherwise seek protectionunder Chapter 11 of the U.S. Bankruptcy Code. Such action in itself wouldconstitute an event of default under the terms of the Revolving Facility. Thesematters, as well as the other risk factors related to the Company’s liquidityand financial position raise substantial doubt as to our ability to continue asa going concern (see Note 2)*.*With respect to the Company’s compliance with the Amended Consent, there can beno assurance that the Company will be able to further negotiate the terms ofthe Amended Consent or negotiate a further restructuring of the relatedindebtedness or that it will be able to either make any required payments whenthey become due. Moreover, there can be no assurance that the Company will besuccessful in its efforts to comply with the terms of the Amended Consent,including its ongoing efforts to evaluate and assess our various financial andstrategic alternatives (which may include the sale of some or all of ourassets, a merger or other business combination involving the Company, or therestructuring or recapitalization of the Company).  If such efforts are not successful, theCompany may be required to seek protection under Chapter 11 of the U.S.Bankruptcy Code, which would constitute an event of default under the RevolvingFacility. See Item 1A. *RISK FACTORS*.

 

The Company’s obligations under the Revolving Facility are secured bysubstantially all of the Company’s assets. The Revolving Facility provides forcertain restrictions, including, but not limited to, limitations on additionalborrowings, sales of oil and natural gas properties or other collateral, andengaging in merger or consolidation transactions. The Revolving Facilityrestricts dividends on common stock and certain distributions of cash orproperties and certain liens but no longer contains any financial covenants asa result of the Amended Consent.

 

The Revolving Facilityincludes certain other covenants and events of default that are customary forsimilar facilities. It is an event of default under the Revolving Facility ifthe Company undergoes a change of control. “Change of control,” as defined in the Revolving Facility, means any ofthe following events: (a) any “person” or “group” (within the meaning of Section 13(d) or14(d) of the Exchange Act) has become, directly or indirectly, the “beneficialowner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, exceptthat a person shall be deemed to have “beneficial ownership” of all such sharesthat any such person has the right to acquire, whether such right is exercisableimmediately or only after the passage of time, by way of merger, consolidationor otherwise), of a majority or more of the common stock of the Company on afully-diluted basis, after giving effect to the conversion and exercise of alloutstanding warrants, options and other securities of the Company (whether ornot such securities are then currently convertible or exercisable), (b) duringany period of two consecutive calendar quarters, individuals who at thebeginning of such period were members of the Company’s Board of Directors ceasefor any reason to constitute a majority of the directors then in office unless (i) suchnew directors were elected by a majority of the directors of the Company whoconstituted the Board of Directors at the beginning of such period (or bydirectors so elected) or (ii) the reason for such directors failing toconstitute a majority is a result of retirement by directors due to age, deathor disability, or (c) the Company ceases to own directly or indirectly allof the equity interests of each of its subsidiaries.

 

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**5.   SHELF REGISTRATION STATEMENT**

 

In the third quarter 2007, the SEC declared effectivethe Company’s registration statement filed with the SEC that registeredsecurities of up to $500 million of any combination of debt securities,preferred stock, common stock, warrants for debt securities or equitysecurities of the Company and guarantees of debt securities by the Company’ssubsidiaries. Net proceeds, terms and pricing of the offering of securitiesissued under the shelf registration statement will be determined at the time ofthe offerings. The shelf registration statement does not provide assurance thatthe Company will or could sell any such securities. The Company’s ability toutilize the shelf registration statement for the purpose of issuing, from timeto time, any combination of debt securities, preferred stock, common stock orwarrants for debt securities or equity securities will depend upon, among otherthings, market conditions and the existence of investors who wish to purchasethe Company’s securities at prices acceptable to the Company.  As of August 4, 2009, the Company had$500 million available under its shelf registration statement. However, becausethe aggregate market value of the Company’s outstanding common stock is lessthan $75 million, the type and amount of any securities offering under theregistration statement may be limited.

 

**6.   PREFERRED STOCK**

 

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

 

*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by the Company’s debt agreements,assets are legally available to pay dividends and the Board of Directors or anauthorized committee of the board declares a dividend payable, the Company willpay dividends in cash, every quarter. The first payment was made on April 15,2007 and the Company continued to make quarterly dividends payments through October 15,2008. The Board has not declared a dividend since the third quarter of 2008 dueto the Company’s current reduced liquidity. Cumulative dividends in arrears at June 30,2009 amounted to approximately $5.9 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 the Company (except byconversion into or exchange for shares of a like or junior ranking) unless allaccumulated and unpaid dividends have been paid or funds therefor have been setapart on the Convertible Preferred Stock and any parity shares.

 

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

 

*Ranking*.  Our Convertible Preferred Stock ranks:

 

·                  senior to all of the shares of 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

 

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·                  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 applicable conversion rate, but only if theclosing sale price of its common stock for 20 trading days within a period of30 consecutive trading days ending on the trading day immediately preceding thedate the Company gives the conversion notice equals or exceeds 130% of theconversion price in effect on each such trading day.

 

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

 

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

 

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

 

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

 

*Conversion in connection with a fundamental change*. Ifa holder elects to convert its shares of the Convertible Preferred Stock 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

 

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of the Company and itssubsidiaries, taken as a whole, to any person other than one of itssubsidiaries; provided, however, that a transaction where the holders of morethan 50% of all classes of its common equity immediately prior to thetransaction own, directly or indirectly, more than 50% of all classes of commonequity of the continuing or surviving corporation or transferee immediatelyafter the event shall not be a fundamental change;

 

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

 

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

 

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

 

*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.

 

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

 

The Company accounts forearnings (loss) per share in accordance with SFAS No. 128, *Earnings per Share,* which establishes therequirements for presenting earnings per share (“EPS”).  SFAS No. 128 requires the presentationof “basic” and “diluted” EPS on the face of the statement of operations.  Basic EPS amounts are calculated using theweighted average number of common shares outstanding during each period.  Diluted EPS assumes the exercise of all stockoptions, 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.

 

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 the if-convertedmethod, conversion is not assumed for purposes of computing diluted EPS if theeffect would be anti-dilutive. During 2009 and 

 

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2008, conversion of the5.75% Series A cumulative convertible preferred stock is not assumedbecause the effect would be anti-dilutive. The following tables present thecomputations of EPS for the periods indicated.

 
|                                       |   | **Three  Months Ended June 30, 2009**    |       | **Three  Months Ended June 30, 2008** |       |
|--------------------------------------------|--------|-----------------------------------------------|------------|--------------------------------------------|------------|
|                                       |   | **Loss  (Numerator)**                         | ** ** | **Shares  (Denominator)(1)**               | ** ** | **Per  Share  Amount** | ** ** | **Loss  (Numerator)** | ** ** | **Shares  (Denominator)** | ** ** | **Per  Share  Amount** |   |
|                                       |   | **(in  thousands, except per share amounts)** |       |
| Net loss                                   |   | $                                             | (9,369     | )                                          |       |   |   |   | $ | (27,823 | ) |   |   |   |   |
| Less: Preferred stock dividends paid       |   | —                                        |       |                                       |       |   |   | (2,067 | ) |   |   |   |   |
| Less: Preferred stock dividends in arrears |   | (2,067                                        | )          |                                       |       |   |   | — |   |   |   |   |   |
| ** **                                 |   |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                              |   |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |   | (11,436                                       | )          | 28,867                                     |       | $ | (0.40 | ) | (29,890 | ) | 28,652 |   | $ | (1.04 | ) |
| Effect of dilutive securities:             |   |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Restricted stock units                     |   | —                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Common stock options                       |   | —                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| Convertible preferred stock                |   | —                                        |       | —                                     |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                            |   |                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |   | $                                             | (11,436    | )                                          | 28,867     |   | $ | (0.40 | ) | $ | (29,890 | ) | 28,652 |   | $ | (1.04 | ) |

 
|                                       |   | **Six  Months Ended June 30, 2009**      |       | **Six  Months Ended June 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                                   |   | $                                             | (86,309    | )                                        |       |   |   |   | $ | (44,002 | ) |   |   |   |   |
| Less: Preferred stock dividends paid       |   | —                                        |       |                                     |       |   |   | (4,133 | ) |   |   |   |   |
| Less: Preferred stock dividends in arrears |   | (4,133                                        | )          |                                     |       |   |   | — |   |   |   |   |   |
| ** **                                 |   |                                          |       |                                     |       |   |   |   |   |   |   |   |   |
| **Basic EPS**                              |   |                                          |       |                                     |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |   | (90,442                                       | )          | 28,854                                   |       | $ | (3.13 | ) | (48,135 | ) | 28,609 |   | $ | (1.68 | ) |
| Effect of dilutive securities:             |   |                                          |       |                                     |       |   |   |   |   |   |   |   |   |
| Restricted stock units                     |   | —                                        |       | —                                   |       | — |   | — |   | — |   | — |   |
| Common stock options                       |   | —                                        |       | —                                   |       | — |   | — |   | — |   | — |   |
| Convertible preferred stock                |   | —                                        |       | —                                   |       | — |   | — |   | — |   | — |   |
| **Diluted EPS**                            |   |                                          |       |                                     |       |   |   |   |   |   |   |   |   |
| Net loss to common stockholders            |   | $                                             | (90,442    | )                                        | 28,854     |   | $ | (3.13 | ) | $ | (48,135 | ) | 28,609 |   | $ | (1.68 | ) |

 

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(1)          In the calculation of dilutedEPS for the three and six months ended June 30, 2009, the 8.7 millionshares of common stock resulting from an assumed conversion of the Company’sConvertible Preferred Stock is excluded because the conversion would beanti-dilutive.

 

(2)          In the calculation of dilutedEPS for the three and six months ended June 30, 2008, the 8.7 millionshares of common stock resulting from an assumed conversion of the Company’sConvertible Preferred Stock is excluded because the conversion would beanti-dilutive. Additionally, for the three and six months ended June 30,2008, 63,839 and 65,109, respectively, equivalent shares of the Company’srestricted stock units and common stock options were excluded because theconversion would also be anti-dilutive.

 

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**8.   INCOME TAXES**

 

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

 

In recording deferred income tax assets, the Company considers whetherit is more likely than not that some portion or all of the deferred income taxassets will be realized. The ultimate realization of deferred income tax assetsis dependent upon the generation of future taxable income during the periods inwhich those deferred income tax assets would be deductible. The Companyconsiders the scheduled reversal of deferred income tax liabilities and projectedfuture taxable income for this determination. The Company believes 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 the Company’s Revolving Facility, as amended, and related AmendedConsent (see Notes 2 and 4), management is not able to determine that it ismore likely than not that the deferred tax assets will be realized Therefore,the Company fully provided for additions to its deferred tax asset with avaluation allowance during the period and did not record a tax benefit for thethree or six months ended June 30, 2009. The Company established a fullvaluation allowance and reduced its net deferred tax asset to zero during 2008.The Company will continue to assess the valuation allowance against deferredincome tax assets considering all available information obtained in futurereporting periods.  If the Companyachieves profitable operations in the future, it 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 the Company’snet operating loss (“NOL”) position for tax purposes, and if the Companygenerates taxable income in future periods, it will be able to use its NOLs tooffset taxes due at that time.

 

As of June 30, 2009, the Company had $0.1 million of unrecognizedtax benefits related to FIN 48. There were no significant changes to thecalculation since December 31, 2008. The Company does not expect theamount of unrecognized tax benefits to materially change in 2009.

 

**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)**           | ** ** |
| **Six Months Ended June 30,  2009:**                                                                 |       |                          |       |                               |       |
| Shares issued to satisfy restricted stock grants                                                          |       | 34                            |       | $                                  | 622        |   |
| **Six Months Ended June 30,  2008:**                                                                 |       |                          |       |                               |       |
| Shares issued to satisfy restricted stock grants                                                          |       | 52                            |       | $                                  | 1,074      |   |
| Shares issued to fund the Company’s matching  contribution under the Company’s 401(k) plan |       | 61                            |       | $                                  | 324        |   |

 

For the six months ended June 30,2009 and 2008, the non-cash portion of Asset Retirement Costs was approximately$14,400 and $0.5 million, respectively. Preferred stock dividends declared butnot yet paid at June 30, 2008 were $2.1 million, of which $1.7 million wasaccrued at June 30, 2008. There were no dividends declared or accrued at June 30,2009. A supplemental disclosure of cash flow information is presented below:

 
| ** **                           | ** ** | **For the  Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                           | ** ** | **(in  thousands)**                         | ** ** |
| Cash paid during the period for:     |       |                                        |       |   |   |
| Interest, net of amounts capitalized |       | $                                           | 5,881      |   | $ | 6,896 |   |
|                                      |            |                                             |            |  |  |  |  |

 

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**10. HEDGING AND DERIVATIVE ACTIVITIES**

 

The Company utilizesprice-risk management transactions (e.g., swaps, collars and floors) for aportion of its 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 the Company’s potential exposure to significant commodity pricedeclines, they may limit the Company’s ability to benefit from increases in theprice of oil and natural gas. The Company’s arrangements, to the extent itenters into any, are intended to apply to only a portion of its expectedproduction and thereby provide only partial price protection against declinesin oil and natural gas prices. None of these instruments are, at the time oftheir execution, intended to be used for trading or speculative purposes, but aportion of the Company’s 2008 instruments was subsequently deemed as suchbecause of the decrease in the Company’s 2008 production. These price-riskmanagement transactions are generally placed with major financial institutionsthat the Company believes are financially stable; however, in light of therecent global financial crisis, there can be no assurance of the foregoing.None of the Company’s derivative contracts contain collateral postingrequirements; however, the counterparty to the Company’s 2009 positions is a memberof the lending group of the Company’s Revolving Facility, and certain events ofdefault under the Company’s Revolving Facility may result in a cross default ofderivative instruments with such party. In addition, the Company’s counterpartyis entitled to terminate the derivative contracts in the event that the fairmarket value of the derivative contracts (currently valued at approximately$12.7 million as of June 30, 2009) falls to less than $1.5 million (i.e.the approximate amount that the Company’s counterparty would owe the Companyupon termination of the derivative contracts following the decline of thederivative fair market value from the approximate $12.7 million as of June 30,2009 to less than $1.5 million at any time thereafter).  In the event of atermination of the derivative contracts by the Company’s counterparty underthese circumstances, there can be no assurance that this counterparty wouldactually remit the funds owed to the Company as opposed to attempting to applysuch funds as an offset to the Company’s indebtedness under the RevolvingFacility of which they are a lender.  However, to the extent that anydecrease in the fair market value of the derivative contracts is driven byhigher commodity prices, such rising commodity prices should result in somebenefit to the Company’s expected oil and natural gas sales revenue. On anannual basis, the Company’s management sets all of the Company’s price-riskmanagement policies, including volumes, types of instruments andcounterparties. These policies are implemented by management through theexecution of trades by the Chief Financial Officer after consultation andconcurrence by the President and Chairman of the Board.  The Board of Directors reviews the Company’spolicies and trades monthly.  However,due to the ongoing financial and strategic alternatives process the Company hasnot entered into any new derivative contracts in recent months and does notexpect to for the foreseeable future.

 

All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with SFAS No. 133(as amended). These derivative instruments are intended to hedge theCompany’s price risk and may be considered hedges for economic purposes, butcertain of these transactions may not qualify for cash flow hedge accounting.All derivative instruments, other than those that meet the normal purchases andsales exception, are recorded on the balance sheet at fair value. The estimatedfair value 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 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 

 

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settlement of thecontract depending on the fair value at the measurement dates. The Companyevaluates the terms of new contracts entered into to determine whether cashflow hedge accounting treatment or mark-to-market accounting treatment will beapplied. The Company has applied mark-to-market accounting treatment to alloutstanding contracts since January 1, 2006.

 

The fair value ofoutstanding derivative contracts not designated as hedging instruments underSFAS No. 133 (as amended) reflected on the balance sheet was as follows:

 
| ** **                                                                       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **   | ** ** | ** **                                         | ** ** | **Fair Value of Outstanding**  | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------|------------|---------------|------------|------------|------------|---------------|------------|--------------|------------|----------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | **Price**     | ** ** | ** **   | ** ** | ** **                                         | ** ** | **Derivative Contracts as of** | ** ** |
| **Transaction**                                                                  | ** ** | **Transaction** | ** ** | ** **    | ** ** | ** ** | ** ** | **Per**       | ** ** | **Volumes**  | ** ** | **Balance  Sheet**                                 | ** ** | **June 30,**              | ** ** | **December 31,** | ** ** |
| **Date**                                                                         | ** ** | **Type**        | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Unit**      | ** ** | **Per  Day** | ** ** | **Location**                                       | ** ** | **2009**                       | ** ** | **2008** | ** ** |
| ** **                                                                       | ** ** | ** **      | ** ** | ** **    | ** ** | ** ** | ** ** | ** **    | ** ** | ** **   | ** ** | ** **                                         | ** ** | **(in thousands)**             | ** ** |
| *Natural Gas (1):*                                                               |       |            |       |          |       |       |       |          |       |         |       |                                               |       |                           |       |   |   |
| 04/07                                                                            |       | Collar          |       | 1/1/2009      |       | 12/31/2009 |       | $7.75-$10.00  |       | 10,000 MMBtu |       | Derivative  Financial Instruments - Current Assets |       | $                              | 6,247      |   | $ | 6,688 |   |
| 10/07                                                                            |       | Collar          |       | 1/1/2009      |       | 12/31/2009 |       | $7.75-$10.08  |       | 10,000 MMBtu |       | Derivative  Financial Instruments - Current Assets |       | 6,248                          |       | 6,702 |   |
| *Crude Oil (2):*                                                                 |       |            |       |          |       |       |       |          |       |         |       |                                               |       |                           |       |   |   |
| 10/07                                                                            |       | Collar          |       | 1/1/2009      |       | 12/31/2009 |       | $70.00-$93.55 |       | 300Bbl       |       | Derivative  Financial Instruments - Current Assets |       | 214                            |       | 2,017 |   |
| Total derivatives not  designated as hedging instruments under SFAS No. 133 |       | $               | 12,709     |          | $          | 15,407     |       |
|                                                                                  |            |                 |            |               |            |            |            |               |            |              |            |                                                    |            |                                |            |  |  |  |  |  |  |  |

 

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(1)          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.

 

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

 

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

 
| **Derivatives Not  Designated as Hedging**              | ** ** | **Location  of Gain or**                         | ** ** | **Amount  of Gain or (Loss) Recognized in Income on Derivative** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------|------------|
| **Instruments under**                                   | ** ** | **(Loss) Recognized  in**                        | ** ** | **Three  Months Ended June 30,**                            | ** ** | **Six  Months Ended June 30,** | ** ** |
| **SFAS No. 133**                                   | ** ** | **Income  on Derivative**                        | ** ** | **2009**                                                         | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                              | ** ** | ** **                                       | ** ** | **(in thousands)**                                               | ** ** |
| Natural gas derivative realized settlements             |       | Gain  (loss) on derivatives — Total revenue |       | $                                                                | 7,744      |   | $ | (6,733 | ) | $ | 12,869 |   | $ | (6,370 | ) |
| Crude oil derivative realized settlements               |       | Gain  (loss) on derivatives — Total revenue |       | 284                                                              |       | (7,916 | ) | 1,007 |   | (12,278 | ) |
| Natural gas derivative unrealized change in fair  value |       | Gain  (loss) on derivatives — Total revenue |       | (6,744                                                           | )          | (30,914 | ) | (896 | ) | (56,478 | ) |
| Crude oil derivative unrealized change in fair  value   |       | Gain  (loss) on derivatives — Total revenue |       | (1,175                                                           | )          | (11,035 | ) | (1,803 | ) | (10,831 | ) |
| Gain (loss) on derivatives                              |       |                                             |       | $                                                                | 109        |   | $ | (56,598 | ) | $ | 11,177 |   | $ | (85,957 | ) |

 

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**11.  FAIR VALUE MEASUREMENTS**

 

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

 

*Valuation Techniques*

 

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

 

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

 

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

 

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

 

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

 

*Input Hierarchy*

 

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

 

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

 

·                  Level 2 — Inputs (other than quoted prices included in 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.

 

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·                  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 June 30, 2009. As required by SFAS No. 157, financial assets andliabilities are classified in their entirety based on the lowest level of inputthat is significant to the fair value measurement. The Company’s assessment ofthe significance of a particular input to the fair value measurement requiresjudgment, and may affect the valuation of fair value assets and liabilities andtheir placement within the fair value hierarchy levels.

 
| ** **             | ** ** | ** **         | ** ** | **Fair  Value Measurements Using:** | ** ** |
|------------------------|------------|--------------------|------------|-------------------------------------|------------|
| ** **             | ** ** | ** **         | ** ** | **Quoted**                          | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **             | ** ** | ** **         | ** ** | **Prices  in**                      | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **             | ** ** | ** **         | ** ** | **Active**                          | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **             | ** ** | **Total  Fair**    | ** ** | **Markets**                         | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| ** **             | ** ** | **Value**          | ** ** | **(Level  1)**                      | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
| ** **             | ** ** | **(in thousands)** | ** ** |
| Assets:                |       |               |       |                                |       |   |   |   |   |
| Derivative instruments |       | $                  | 12,709     |                                | $          | — |   | $ | — |   | $ | 12,709 |   |
|                        |            |                    |            |                                     |            |  |  |  |  |  |  |  |  |

 

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   June 30, 2009** | ** ** | **Six  Months Ended   June 30, 2009** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                       | ** ** | **Assets**                                   | ** ** | **Liabilities**                            | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| ** **                                                                                       | ** ** | **(in thousands)**                           | ** ** |
| Balance as of beginning of period                                                                |       | $                                            | 20,627     |                                       | $          | — |   | $ | 15,407 |   | $ | — |   |
| Realized and unrealized losses included in earnings                                              |       | (15,946                                      | )          | —                                     |       | (16,574 | ) | — |   |
| Realized and unrealized gains included in other  comprehensive income                            |       | —                                       |       | —                                     |       | — |   | — |   |
| Settlements                                                                                      |       | 8,028                                        |       | —                                     |       | 13,876 |   | — |   |
| Transfers in and/or out of Level 3                                                               |       | —                                       |       | —                                     |       | — |   | — |   |
| Balance as of June 30, 2009                                                                 |       | $                                            | 12,709     |                                       | $          | — |   | $ | 12,709 |   | $ | — |   |
|                                                                                             |       |                                         |       |                                       |       |   |   |   |   |
| Change in unrealized gains (losses) relating to  instruments still held as of June 30, 2009 |       | $                                            | (177       | )                                          | $          | — |   | $ | 5,713 |   | $ | — |   |

 

Gains and losses(realized and unrealized) for Level 3 recurring items are included in totalrevenue on the Consolidated Statements of Operations. Settlements representcash settlements of contracts during the period, which are included in totalrevenue on the Consolidated Statements of Operations.

 

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

 

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*Fair Value on a NonrecurringBasis*

 

On January 1, 2009,the Company adopted the provisions of SFAS No. 157 for non-financialassets and liabilities, which were delayed by FSP FAS 157-2. Therefore, theCompany adopted the provisions of SFAS No. 157 for its AROs. The Companyuses fair value measurements on a nonrecurring basis in its AROs. Theseliabilities are recorded at fair value initially and assessed for revisionsperiodically thereafter. The lowest level of significant inputs for fair valuemeasurements for ARO liabilities are Level 3. A reconciliation of the beginningand ending balances of the Company’s ARO is presented in Note 3, in accordancewith SFAS No. 143. New assets and liabilities measured at fair valueduring the six months ended June 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**

 

On July 31, 2009 theCompany entered into Amendment No. 8 (“Amendment No. 8”) whichchanged the maturity date of the Company’s Revolving Facility from July 31,2009 to August 31, 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 the installation ofthe Rose Bud system in White County, Arkansas, including the high and lowpressure gathering lines, dehydration, compression and the interconnect withOzark, in order to accommodate the Company’s desire to be able to delivernatural gas as soon as its wells were completed. At the time of signing the contract,the Company had completed and tested two productive wells in the Moorefieldshale. The Rose Bud system was installed, operational and ready to receive theCompany’s production in June 2007. The contract minimum commitment toFrontier is 2.7 Bcf over a three-year period for the pipeline interconnect.This line carries a $0.29 per Mcf deficiency rate, for a total commitment forthe pipeline of approximately $0.8 million. The Company has deliveredapproximately $72,700 of this commitment through June 30, 2009. Inaddition to the pipeline, Frontier also built and installed lateral gatheringlines to eight locations. The remaining commitment on these laterals isapproximately $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. Although the Company believes there isthe potential to develop this area and increase production, it does notcurrently have sufficient liquidity to ensure that this occurs in the timeframerequired by the gas gathering and compression services agreement with Frontier.

 

During 2008, the Company executed a gas gathering andcompression services agreement with Integrys Energy Services (“Integrys”)related to the construction and installation of a pipeline connecting theCompany’s Slick State properties to its Bloomberg properties in order to securemore advantageous plant 

 

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processing, transportation and gathering fees andaccess to gas markets. The pipeline system was installed, operational and readyto redirect the production in September 2008. The contract minimumcommitment to Integrys is approximately 11.2 Bcf over a three year period forthe pipeline interconnect. The amount of total commitment is $550,000 plus 8%interest per annum, for a total liability of approximately $0.6 million. TheCompany has delivered approximately $177,300 of this commitment through June 30,2009. The Company has not recorded a liability for this commitment as itexpects to meet the minimum physical delivery based on estimated anticipatedproduction.

 

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

 

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

 

**David Blake, et al. v. Edge Petroleum Corporation** — On September 19, 2005, DavidBlake and David Blake, Trustee of the David and Nita Blake 1992 Children’sTrust, filed suit against the Company in state district court in Goliad County,Texas alleging breach of contract for failure and refusal to transferoverriding royalty interests to plaintiffs in several leases in the Nita andAustin prospects in Goliad County, Texas and failure and refusal to pay moniesto Blake pursuant to such overriding royalty interests for wells completed onthe leases. The plaintiffs seek relief of (1) specific performance of thealleged agreement, including granting of overriding royalty interests by us toBlake; (2) monetary damages for failure to grant the overriding royaltyinterests; (3) exemplary damages for his claims of business disparagement andslander; (4) monetary damages for 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 ithad been wrongfully denied participation and also claiming 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, theCompany filed a separate motion for summary judgment based on the statute offrauds and; the court has not yet ruled on this separate motion. In June 2008,the Plaintiffs filed a Sixth Amended Petition conditionally adding claims forcertain prospects that had been previously settled by means of a Compromise andSettlement Agreement (the “Settlement Agreement”), entered in settlement ofprior litigation among some of the parties, but only to the extent thatrescission of the prior Settlement Agreement was being sought by the Company.The Company is not seeking rescission of the prior Settlement Agreement andresponded accordingly in its Fourth Amended Original Counterclaim and ClaimsAgainst Additional Parties filed on October 16, 2008.  On October 17, 2008, the plaintiffsfiled their Seventh Amended Petition adding a claim for breach of theSettlement Agreement. In December 2008, one of the Blakecounter-defendants filed a motion to arbitrate, which motion has not been heardby the court. The Company has responded and will continue to respondaggressively to this lawsuit, and believes it has meritorious defenses andcounterclaims.

 

**Mary Jane Carol Trahan Champagne, et al. v. EdgePetroleum Exploration Company, et al.** — On September 19, 2008 the Company was sued instate district court in Vermilion Parish, Louisiana by Mary Jane Trahan, CarolTrahan Champagne and 29 other plaintiffs alleging breach of obligations undermineral leases in Vermilion Parish regarding the Trahan No. 1 well and theTrahan No. 3 well (MT RC SUB reservoir). Plaintiffs are seekingunspecified damages for lost revenue, lost royalties and devaluation ofproperty interest sustained as a result of the defendants’ alleged negligentand improper drilling operations on the Trahan No. 1 well and the Trahan No. 3well, including alleged failure to prevent underground water from flooding anddestroying plaintiffs’ portion of the reservoir beneath plaintiffs’property.  Plaintiffs also allegedefendants failed to “block squeeze” sections of the Trahan No. 3 well aswould a prudent operator. This lawsuit, previously removed from the state courtto the federal district court for the Western District of Louisiana, LafayetteDivision, has been remanded to state court. The Company’s insurance carrier hasretained counsel to represent the Company in this matter. The Company filedcertain peremptory challenges and exceptions to the

 

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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 areserve with respect to this claim and it is not possible to determine what, ifany, its ultimate exposure might be in this matter. The Company intends tovigorously defend itself in this lawsuit.

 

**John Lemke, et al. v. Edge Petroleum Corporation** - In October 2008, the Company wassued in state district court in Harris County, Texas over an alleged contractto receive a royalty in certain areas in South Louisiana. The Company and thePlaintiffs settled the dispute by agreement pursuant to which the Company paidthe Plaintiffs $17,500 in return for a full release of all claims and adismissal of the lawsuit.

 

**Lara Energy, Inc. v. Edge PetroleumCorporation** -In June 2009, the Company was sued in state district court in HarrisCounty, Texas by a working interest co-owner in the Chapman Ranch prospectlocated in Nueces County, Texas. Plaintiff alleges various theories of causes of action, including breachof contract, breach of duty of good faith and fair dealing, negligentmisrepresentation, improper acquisition of leases and seismic data, fraudulentinducement and other causes of action. The Company believes it has done nothing wrong and has honored thecontracts with the Plaintiff that govern operations in the Chapman Ranchprospect.  The Company has filed ananswer and intends to vigorously defend itself.

 

**Encinitas Ranch et al v. ExxonMobil Corporation,et al**. — Thislawsuit was originally filed in state district court in Brooks County, Texas,against ExxonMobil, Chevron USA and other defendants alleging numerous causesof action relating to Plaintiffs’ lands going back several decades, includingdamage to the surface, improperly abandoned equipment, spills, contamination,trespass, failure to maintain facilities, improper or untimely payment ofroyalties, breach of express and implied covenants, and various acts ofnegligence, including an alleged incident regarding a fire that occurred on theranch in 2008. Plaintiffs amended their petition in May 2008 to nameadditional defendants, including the Company. The Company has a non-operatinginterest in the Encinitas Ranch, and has never operated the wells or lease inBrooks County, Texas, covering Plaintiffs’ land. The Company’s liabilityinsurance carrier is providing a defense to this matter under a reservation ofrights, and has retained local counsel for the Company and filed an answer onthe Company’s behalf.  No trial date hasbeen set.  The Company believes it hasmeritorious defenses to this litigation and intends to vigorously defenditself.

 

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

 

The following isManagement’s Discussion and Analysis (“MD&A”) of significant factors thathave affected certain aspects of our financial position and operating resultsduring the periods included in the accompanying unaudited condensedconsolidated financial statements. The following MD&A is intended to helpthe reader understand Edge Petroleum Corporation (“Edge”). This discussionshould be read in conjunction with the accompanying unaudited condensedconsolidated financial statements included elsewhere in this Form 10-Q and withMD&A of Financial Condition and Results of Operations and our auditedconsolidated financial statements included in our annual report on Form 10-Kfor the year ended December 31, 2008 (“2008 Annual Report”).

 

### **FORWARD LOOKING STATEMENTS**

###  

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

 

## **GENERAL OVERVIEW**

## ** **

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**Outlook and Review of Financialand Strategic Alternatives**

 

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

 

Since December 2008,we have continued with our evaluation and assessment of various financial andstrategic alternatives in order to address our liquidity issues and the impendingmaturity of our Revolving Facility (see discussion below) on August 31, 2009.We are working with an investment banking firm to assist further in theevaluation of our financial and strategic alternatives.

 

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

 

Pursuant to the terms of the Revolving Facility,we 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 the ongoingfinancial 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

 

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onemonth with the last 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 hedging arrangements havebeen terminated or cease to be effective without the prior written consent ofour Lenders, (3) that our advances under the Revolving Facility would bearinterest at a rate equal to the greater of (a) the reference rate publiclyannounced by Union Bank of California, N.A. for such day, (b) the FederalFunds Rate in effect on such day plus 0.50% and (c) a rate determined bythe Administrative Agent to be the Daily One-Month LIBOR (as defined in theRevolving Facility), in each case plus 2.5% or, during the continuation of anevent of default, plus 4.5% (resulting in an effective interest rate ofapproximately 5.75%), (4) for limitations on the making of capitalexpenditures and certain investments, and (5) for the elimination of thecurrent ratio, leverage ratio and interest coverage ratio covenantrequirements. 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) our agreement to make a prepayment ofinterest of $1,142,753.42 representing the amount anticipated to be owing inrespect of the interest payment due and payable 

 

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on July 31,2009 and (3) our agreement to make a prepayment of the advances under theRevolving Facility in the amount of $7.5 million with such prepayment to bemade on or before July 10, 2009. We paid the July interest ofapproximately $1.1 million on July 1, 2009 and also paid $7.5 million on July 10,2009.

 

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

 

If we breach any of theprovisions of the Amended Consent, subsequent Amendments or the RevolvingFacility, our Lenders will be entitled to declare an event of default, at whichpoint the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to our Lenders, wouldbecome immediately due and payable.  Inany event, the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to our Lenders, willbe payable on August 31, 2009 unless earlier paid or a further extensionwith respect to payment is negotiated with our Lenders. Our Lenders may takeaction to enforce their rights with respect to the outstanding obligationsunder the Revolving Facility. Because substantially all of our assets arepledged as collateral under the Revolving Facility, if our Lenders declare anevent of default, they would be entitled to foreclose on and take possession ofour assets.  In such an event, we may beforced to liquidate or to otherwise seek protection under Chapter 11 of theU.S. Bankruptcy Code. These matters, as well as the other risk factors relatedto our liquidity and financial position raise substantial doubt as to ourability to continue as a going concern. See *ITEM2. “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS* — LIQUIDITY AND CAPITAL RESOURCES — *REVOLVING FACILITY.”* With respect to ourcompliance with the Amended Consent, there can be no assurance that we will beable to further negotiate the terms of the Amended Consent or negotiate afurther restructuring of the related indebtedness or that we will be able tomake any required payments when they become due.  Moreover, there can be no assurance that wewill be successful in our efforts to comply with the terms of the AmendedConsent, including our ongoing efforts to evaluate and assess our variousfinancial and strategic alternatives (which may include the sale of some or allof our assets, a merger or other business combination involving the Company, orthe restructuring or recapitalization of the Company).  If such efforts are not successful, we may berequired to seek protection under Chapter 11 of the U.S. Bankruptcy Code. SeeItem 1A. *RISK FACTORS*.

 

*GoingConcern* — Inaddition to the impending maturity of our Revolving Facility on August 31, 2009,the capital expenditures required to maintain and/or grow production and reservesare substantial. Prices for oil and natural gas declined materially during thefourth quarter of 2008, and natural gas prices continued to decline during thefirst half of 2009.  A continued or extended decline in oil ornatural gas prices will have a material adverse effect on our financialposition, results of operations, cash flows and access to capital and on thequantities of oil and natural gas reserves that we can economically produce.Our stock price has significantly declined over the past year which also makesit more difficult to obtain equity financing on acceptable terms to address ourliquidity issues. In addition, we are reporting negative working capital at June 30,2009 and continue to report net losses in the first six months of 2009 followingthree consecutive years of net losses.  Therefore, there issubstantial doubt as to our ability to continue as a going concern for a periodlonger than the next twelve months. Additionally, our independent auditorsincluded an explanatory paragraph in their report on our consolidatedfinancials statements as of and for the year ended December 31, 2008 thatraises substantial doubt about our ability to continue as a going concern. Ourability to continue as a going concern is dependent upon the success of ourfinancial and strategic alternatives process, which may include the sale ofsome or all of our assets, a merger or other business combination involving theCompany or the restructuring or recapitalization of the Company and an increasein commodity prices. Until the possible completion of the financial andstrategic alternatives process, our future remains uncertain and there can beno assurance that our efforts in this regard will be successful.

 

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

 

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

 

# **Industry and Economic Factors**

# ** **

In managing our business,we must deal with many factors inherent to our industry.  First and foremost is the fluctuation of oiland natural gas prices. Our revenues, the value of our assets, our ability toobtain bank loans or additional capital on attractive terms have been and willcontinue to be affected by changes in oil and natural gas prices and the coststo produce our reserves. Oil and natural gas prices are subject to significantfluctuations that are beyond our ability to control or predict without losingsome advantage of the upside potential. In recent years, oil and natural gascommodity prices have generally trended upwards in response to robust demandand constrained supplies, with oil and natural gas prices peaking at more than$140.00 per barrel and $13.00 per Mcf, respectively, in July 2008. In late2008 and early 2009, a world-wide economic recession and oversupply of naturalgas in North America led to an unprecedented decline in oil and natural gasprices, with oil falling by more than $100.00 per barrel and natural gasfalling more than $10.00 per Mcf from their peaks in July 2008. Althoughcrude oil prices have shown some recovery in the second quarter of 2009 risingto approximately $70.00 per barrel, natural gas prices have remained weakaround $3.00 to $4.00 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 for oilfield services. The increased demand for these services resulted in significantinflation in both operating and capital costs in 2008. Although commodityprices have declined significantly in recent months, the inflated cost of oilfield services resulting from recent historically high commodity prices did notdecrease as rapidly. While these costs are declining, they have lagged incomparison to the rapid commodity price decline; thus the prospect of continuedlow commodity prices and disproportionately higher service costs will constrainthe 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 half of 2009, we wereunable to replace the production we generated due to our reduced capitalspending program and higher drilling and operating costs. This will continue tobe a factor in 2009 as we operate under a severely limited capital andoperating budget.

 

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

 

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

 

Poor economic conditions continue to create considerable challenges anduncertainties for the energy industry. We are unable to predict the impact onour business of a continued decline in commodity prices and 

 

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the global economy, butthe current conditions have made it difficult at times for us in our ongoingfinancial and strategic alternatives process. We expect that continuedweakening in the economy could result in further declines in our revenue, cashflows and liquidity.

 

# **Approach to the Business**

# ** **

Historically, our goal has been to fund ongoingexploration and development projects with cash flow provided by operatingactivities, occasionally supplemented with external sources of capital. Inconnection with our ongoing financial and strategic alternatives process andour liquidity issues resulting from the impending maturity of our RevolvingFacility on August 31, 2009 and the related Amended Consent and subsequentAmendments, we have operated and will continue to operate with a severelylimited capital spending program in 2009 as we continue to pursue the sale ofsome or all of our assets, a merger or other business combination involving theCompany or the restructuring or recapitalization of the Company. Our strategyis currently to continue under a severely limited capital and operating budget,thereby reducing our normal exploration and development activities as we seekto preserve liquidity and resolve the uncertainty and challenges that we faceas we pursue various financial and strategic alternatives.

 

We normally hedge ourexposure to volatile oil and natural gas prices on a portion of our expectedproduction to reduce price risk. As of June 30, 2009, we had derivativecontracts in place covering 20,000 MMBtu/d of natural gas and 300 Bbl/d ofcrude oil for the remainder of 2009.

 

**Divestitures**

 

We regularly review our asset base for the purpose ofidentifying non-core assets, the disposition of which would increase capitalresources available for other activities and create organizational andoperational efficiencies. While we generally do not dispose of assets solelyfor the purpose of reducing debt, such dispositions can have the result offurthering our objective of financial flexibility through reduced debt levels.During the first half of 2009, we completed the sale of various non-coreproperties in Texas for proceeds of $0.3 million and during the first half of2008, we completed the sale of certain working interests in approximately 100properties located in Texas to various buyers for aggregate proceeds ofapproximately $18.2 million.

 

**Critical Accounting Policies and Estimates**

 

The preparation of financial statements in conformitywith generally accepted accounting principles in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue, expenses, contingent assets and liabilitiesand the related disclosures in the accompanying financial statements. Changesin these estimates and assumptions could materially affect our financialposition, results of operations or cash flows. Management considers anaccounting 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 

 

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and operatingconditions.  The accuracy of any reserveestimate is a function of the quality of available data, engineering andgeological interpretation, and judgment, as well as prices and cost levels atthat point in time. Any significant variance in these assumptions couldmaterially affect the estimated quantity and value of our reserves. Despite theinherent imprecision in these engineering estimates, our reserves are usedthroughout our financial statements.

 

*Assumptions/Approach Used:*Units-of-production method to amortizeour oil and natural gas properties - The quantity of reservesis used in calculating depletion expense and could significantly impact ourdepletion expense. Any reduction inproved reserves without a corresponding reduction in capitalized costs willincrease the 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, Securities and ExchangeCommission (“SEC”) guidelines allow a company to use the subsequent date’shigher prices in calculating the full-cost ceiling. To the extent that ourcapitalized costs (net of accumulated depletion and deferred taxes) exceed theceiling, the excess must be written off to expense. Once incurred, thisimpairment of oil and natural gas properties is not reversible at a later dateeven if oil and natural gas prices increase. A ceiling test impairment couldresult in a significant loss for a reporting period; however, future depletionexpense would be correspondingly reduced. Our estimated proved reserves volumes have decreased during the periodfrom year-end 2008 to June 30, 2009, but the average oil, NGL and naturalgas prices at the balance sheet date as of June 30, 2009 were $69.89 perbarrel, $41.93 per barrel and $3.89 per MMBtu, respectively. We were notrequired to record an impairment during the second quarter of 2009. Theimpairments taken in the third and fourth quarters of 2008 and first quarter of2009 significantly impacted our depletion expense in the second quarter of2009. If the 2008 and 2009 impairments had not been taken, our depletion ratewould have been approximately $6.25 per Mcfe as compared to $2.43 per Mcfereported for the three months ended June 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 $51.7 million, net of tax, at June 30,2009. A 10% increase or decrease in prices would have decreased or increasedour cushion by approximately 70%, net of tax, respectively. If however, prices should decline in the third orfourth quarter of 2009, the potential for additional impairments at upcomingquarter-ends exists. Although our hedging program is intended to mitigate theeconomic impact of any significant price decline, it did not impact our ceilingtest at June 30, 2009 because we do not apply cash flow hedge accountingto our derivative contracts. Had we applied cash flow hedge accounting to ouroutstanding derivative contracts, there would have been a 27% increase in thecushion we calculated as a result of the low prices at the measurement datefalling below the derivative price floors. A 10% increase or decrease inreserve volume would have decreased or increased the cushion calculated at June 30,2009 by approximately 40%.

 

*Natureof Critical Estimate Item:*Asset Retirement Obligations**-**Wehave certain obligations to remove tangible equipment and restore land at theend of oil and natural gas production operations. Our 

 

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removal and restorationobligations are primarily associated with plugging and abandoning wells. Inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 143,*Accounting for Asset Retirement Obligations,*we estimate asset retirement costs for all of our assets upon acquisition ofthe asset, adjust those costs for inflation to the forecast abandonment date,discount that amount using a credit-adjusted-risk-free rate back to the date weacquired the asset or obligation to retire the asset and record an AROliability in that amount with a corresponding addition to our asset value. Whennew obligations are incurred, i.e. a new well is drilled or acquired, we add tothe ARO liability. Should either the estimated life or the estimatedabandonment costs of a property change upon our quarterly review, our estimatemust be revised. When well obligations are relieved by sale of the property orplugging and abandoning the well, the related estimated liability and asset costsare removed from our balance sheet and replaced by the costs actually spent onretiring 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 the legal,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 ofretiring assets or the reserve life of our assets would have significant impacton our estimated ARO.

 

*Natureof Critical Estimate Item:*Income Taxes**-**In accordance with SFAS No. 109, *Accounting for Income Taxes,* we haverecorded a deferred tax asset and liability to account for the expected futuretax benefits and consequences, respectively, of events that have beenrecognized in our financial statements and our tax returns. There are severalitems that result in deferred tax assets and liabilities on the balance sheet,the largest of which are attributable to tax basis in excess of book basis inoil and natural gas properties and the impact of net operating loss (“NOL”)carryforwards. We routinely assess our ability to use all of our NOLcarryforwards that resulted from substantial income tax deductions, prior yearlosses and acquisitions. We consider future taxable income in making suchassessments.  If we conclude that it ismore likely than not that some portion or all of the deferred tax assets willnot be realized under accounting standards, it is reduced by a valuationallowance to remove the benefit of those NOL carryforwards from our financialstatements. Additionally, in accordance with Financial Accounting StandardsBoard (“FASB”) Interpretation 48, *Accounting for Uncertaintyin Income Taxes, an Interpretation of FASB Statement No. 109* (“FIN48”)**we have recorded a liability of $0.1million associated with uncertain tax positions. FIN 48 prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  We are required to determine whether it is more likely thannot (a likelihood of more than 50 percent) that a tax position will besustained upon examination, including resolution of 

 

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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, thenwe must measure the tax position to determine the amount of benefit torecognize in the financial statements.  The tax position is measured atthe largest amount of benefit that is greater than 50 percent likely of beingrealized upon ultimate settlement.

 

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

 

*Effect if Different AssumptionsUsed:* Along withconsultation from an independent public accounting firm used in taxconsultation, we continually evaluate complicated tax law requirements andtheir effect on our current and future tax liability and our tax filingpositions.  Despite our attempt to makean accurate estimate, the ultimate utilization of our NOL carryforwards ishighly dependent upon our actual production, the realization of taxable incomein future periods, Internal Revenue Code Section 382 limitations andpotential tax elections.  If we estimate thatsome or all of our NOL carryforwards are more likely than not going to expireor otherwise not be utilized to reduce future tax, we would be required torecord a valuation allowance to remove the benefit of those NOL carryforwardsfrom our financial statements, as was done most recently in the fourth quarterof 2008 and the first and second 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 half of 2009, we recorded avaluation allowance of approximately $30.2 million which completely offsetdeferred tax assets recorded during the first half of 2009. 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 may enter into, from time to time, 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 SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities (as amended),*allderivatives, other than those that meet the normal purchases and salesexception, are recorded on the balance sheet at fair value.

 

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

 

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

 

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

 

*Assumptions/ApproachUsed:*Estimatingthe fair values of derivative instruments requires complex calculations,including the use of a discounted cash flow technique, estimates of risk andvolatility, and subjective judgment in selecting an appropriate discount rate.In addition, the calculations use future market commodity prices, whichalthough posted for trading purposes, are merely the market consensus offorecasted price trends. The results of the fair value calculations cannot beexpected to represent exactly the fair value of our commodity derivatives. Wecurrently obtain and review the fair value of our positions from ourcounterparties. Our practice of relying on our counterparties who are morespecialized and knowledgeable in preparing these complex calculations reducesour management’s input. It also approximates the fair value of the contracts asit would be the cost to us to terminate a contract at that point in time, aswell as the potential inflows or outflows of cash at the expiration of thecontracts. Due to the fact that we apply mark-to-market accounting treatment, theoffset to the balance sheet asset or liability, or the change in fair value ofthe contracts, is included in total revenue on the statement of operationsrather than deferred in OCI on the balance sheet.

 

*Effectif Different Assumptions Used:* At June 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 $1.2 million. Had weapplied cash flow hedge accounting treatment to all of our derivative contractsoutstanding at June 30, 2009, our net loss to common stockholders for thesix months would have been approximately $61.0 million, or $2.26 per basic anddiluted loss per share, assuming that all hedges were fully effective, ascompared to our reported net loss to common stockholders for the six monthsended June 30, 2009 of $86.3 million, or $3.13 basic and diluted loss pershare.

 

# **Results of Operations**

# ** **

This section includes discussion of our results of operations for thethree and six months ended June 30, 2009 as compared to the same period ofthe prior year.  We are an independentoil and natural gas company engaged in the exploration, development,acquisition and production of crude oil and natural gas properties in theUnited States.  Our resources and assetsare managed and our results reported as one operating segment. We conduct ouroperations primarily along the onshore United States Gulf Coast, with ourprimary emphasis in Texas, Mississippi, New Mexico and Louisiana.

 

**SecondQuarter 2009 Compared to the Second Quarter 2008**

 

**Revenueand Production**

 

Total revenueincreased significantly from the second quarter of 2008 to the comparable 2009period. Excluding the effects of derivative activity, revenue decreased 76%from the second quarter of 2008 to the comparable 2009 period.  For the three months ended June 30, 2009and 2008, our product mix contributed the following percentages of revenue andproduction volumes:

 
| ** **               | ** ** | ** **       | ** ** | **REVENUE  (2)**                      | ** ** | **PRODUCTION**      | ** ** |
|--------------------------|------------|------------------|------------|---------------------------------------|------------|---------------------|------------|
| ** **               | ** ** | **REVENUE  (1)** | ** ** | **Three  Months Ended June 30,** | ** ** | **VOLUMES  (MCFE)** | ** ** |
| ** **               | ** ** | **2009**         | ** ** | **2008**                              | ** ** | **2009**            | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Natural gas              |       | 64               | %          | *                                     |       | 57                  | %          | 67 | % | 67 | % | 71 | % |
| Natural gas liquids      |       | 18               | %          | *                                     |       | 18                  | %          | 14 | % | 21 | % | 18 | % |
| Crude oil and condensate |       | 18               | %          | *                                     |       | 25                  | %          | 19 | % | 12 | % | 11 | % |
|                     |       |             |       | *                                     |       |                |       |   |   |   |   |   |   |
| Total                    |       | 100              | %          | *                                     |       | 100                 | %          | 100 | % | 100 | % | 100 | % |

 

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(1) Includes effect of derivative transactions

(2) Excludes effect of derivative transactions

* Not meaningful due to derivative losses

 

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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**                            |       | **$**        |       | **%**                     |       |
| ** **                                   | ** ** | **June 30,**                                  | ** ** | **Increase** | ** ** | **Increase**              | ** ** |
| ** **                                   | ** ** | **2009**                                           | ** ** | **2008**     | ** ** | **(Decrease)**            | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(in  thousands, except prices and percentages)** | ** ** | ** **   | ** ** |
| **Production Volumes:**                      | * *   |                                               |       |         |       |                      |       |   |   |
| Natural gas (MMcf)                           |       | 2,006                                              |       | 3,042        |       | (1,036                    | )          | (34 | )% |
| Natural gas liquids (MBbls)                  |       | 107                                                |       | 126          |       | (19                       | )          | (15 | )% |
| Crude oil and condensate (MBbls)             |       | 58                                                 |       | 77           |       | (19                       | )          | (25 | )% |
| Natural gas equivalent (MMcfe)               |       | 2,996                                              |       | 4,260        |       | (1,264                    | )          | (30 | )% |
| **Average Sales Price(1):**                  |       |                                               |       |         |       |                      |       |   |   |
| Natural gas ($ per Mcf)(2)              |       | $                                                  | 3.28       |         | $          | 10.84                     |       | $ | (7.56 | ) | (70 | )% |
| Natural gas liquids ($ per Bbl)         |       | 20.23                                              |       | 53.08        |       | (32.85                    | )          | (62 | )% |
| Crude oil and condensate ($ per Bbl)(2) |       | 50.41                                              |       | 122.57       |       | (72.16                    | )          | (59 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |       | 3.90                                               |       | 11.52        |       | (7.62                     | )          | (66 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |       | 3.93                                               |       | (1.77        | )          | 5.70                      |       | * |   |
| **Operating Revenue:**                       |       |                                               |       |         |       |                      |       |   |   |
| Natural gas (2)                              |       | $                                                  | 6,594      |         | $          | 32,950                    |       | $ | (26,356 | ) | (80 | )% |
| Natural gas liquids                          |       | 2,156                                              |       | 6,718        |       | (4,562                    | )          | (68 | )% |
| Crude oil and condensate (2)                 |       | 2,924                                              |       | 9,392        |       | (6,468                    | )          | (69 | )% |
| Gain (loss) on derivatives                   |       | 109                                                |       | (56,598      | )          | 56,707                    |       | 100 | % |
| Total revenue                                |       | $                                                  | 11,783     |         | $          | (7,538                    | )          | $ | 19,321 |   | * |   |

 

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* Not meaningful

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

(2) Excludes the effect of derivative transactions.

(3) Includes the effect of derivative transactions.

 

 

**Production****—**For the quarter ended June 30, 2009, productionvolumes decreased as compared to the same 2008 period primarily due to normalproduction declines, asset sales completed during early 2008 and decreasedcapital re-investment in replacing and maintaining production as compared tohistorical levels. The following summarizes our average daily productionvolumes:

 
| ** **                       | ** ** | **For  the Three Months Ended  June 30,** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| **Production Volumes per Day:**  |       |                                           |       |   |   |
| Natural gas (MMcf/D)             |       | 22.0                                           |       | 33.4 |   |
| Natural gas liquids (MBbls/D)    |       | 1.2                                            |       | 1.4 |   |
| Oil and condensate (MBbls/D)     |       | 0.6                                            |       | 0.8 |   |
| Natural gas equivalent (MMcfe/D) |       | 32.9                                           |       | 46.8 |   |

 

**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 trended upwardsin response to robust demand and constrained supplies, with oil and natural gasprices 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 

 

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economic recession andoversupply of natural gas in North America led to an unprecedented decline inoil and natural gas prices, with oil falling by more than $100.00 per barreland natural gas falling more than $10.00 per Mcf from their peaks in July 2008.Although crude oil prices have shown some recovery in the second quarter of2009 rising to approximately $70.00 per barrel, natural gas prices haveremained weak around $3.00 to $4.00 per Mcf. This has significantly affectedour 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 the three months ended June 30,2009, natural gas revenue, excluding derivative activity, decreased 80% 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 $11.2 million(based on 2008 comparable period pre-derivative prices). The decrease inaverage price received, excluding derivative activity, resulted in decreasedrevenue of approximately $15.2 million (based on current periodproduction).  See below for a discussionof the impact of natural gas derivatives on prices and revenue.

 

**Natural gas liquids (“NGL”) revenue**- For the three months ended June 30,2009, NGL revenue decreased 68% over the same period in 2008 due to decreasesin prices realized and production volumes. The price decrease resulted in adecrease in revenue of approximately $3.5 million (based on current periodproduction).  The decrease in NGLproduction decreased revenue by approximately $1.1 million (based on 2008comparable period average prices).

 

**Crude oil and condensate revenue**- For the three months ended June 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 June 30, 2009 resultedin a decrease in revenue of approximately $4.2 million (based on current periodproduction). The decrease in oil and condensate production resulted in adecrease in revenue of approximately $2.3 million (based on 2008 comparableperiod pre-derivative prices). See below for a discussion of the impact of crudeoil derivatives 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/losses are not a function of the operating performance of our oiland natural gas assets, excluding their impact from the above discussions helpsisolate the operating performance of those assets. The following tablesummarizes the various components of the total gain or loss on derivatives foreach of the periods indicated and the impact each component had on our realizedprices:

 
| ** **                                                                        | ** ** | **Three  Months Ended June 30,**       | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                        | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                                                        | ** ** | **$**                                       | ** ** | **$ per  unit (1)** | ** ** | **$** | ** ** | **$ per  unit(1)** | ** ** |
| ** **                                                                        | ** ** | **(in  thousands, except per unit prices)** | ** ** |
| Natural gas derivative contract settlements (Mcf)                                 |       | $                                           | 7,744      |   | $ | 3.86 |   | $ | (6,733 | ) | $ | (2.21 | ) |
| Crude oil derivative contract settlements (Bbl)                                   |       | 284                                         |       | 4.89 |   | (7,916 | ) | (103.31 | ) |
| Mark-to-market unrealized change in fair value of  gas derivative contracts (Mcf) |       | (6,744                                      | )          | (3.36 | ) | (30,914 | ) | (10.17 | ) |
| Mark-to-market unrealized change in fair value of  oil derivative contracts (Bbl) |       | (1,175                                      | )          | (20.25 | ) | (11,035 | ) | (144.01 | ) |
| Gain (loss) on derivatives (Mcfe)                                                 |       | $                                           | 109        |   | $ | 0.03 |   | $ | (56,598 | ) | $ | (13.29 | ) |

 

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

 

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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. Dueto the ongoing financial and strategic alternatives process the Company has notentered into any new derivative contracts in recent months and does not expectto for the foreseeable future, therefore beyond 2009 we will not be impacted bythe benefits or consequences of derivative contracts.

 

**Costs and Operating Expenses**

 

The table below detailsour expenses:

 
| ** **                                            | ** ** | ** **                                   | ** ** | ** **      | ** ** | **2009  Period Compared********to 2008  Period** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------------|------------|-----------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **Three  Months Ended********June 30,** | ** ** | **$  Increase** | ** ** | **%********Increase**                            | ** ** |
| ** **                                            | ** ** | **2009**                                     | ** ** | **2008**        | ** ** | **(Decrease)**                                   | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in  thousands, except percentages)**      | ** ** |
| Oil and natural gas operating expenses                |       | $                                            | 3,824      |            | $          | 3,941                                            |       | $ | (117 | ) | (3 | )% |
| Severance and ad valorem taxes                        |       | 1,257                                        |       | 3,297           |       | (2,040                                           | )          | (62 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                         |       |            |       |                                             |       |   |   |
| Oil and natural gas property and equipment            |       | 7,285                                        |       | 21,237          |       | (13,952                                          | )          | (66 | )% |
| Other assets                                          |       | 171                                          |       | 184             |       | (13                                              | )          | (7 | )% |
| ARO accretion                                         |       | 93                                           |       | 101             |       | (8                                               | )          | (8 | )% |
| General and administrative expenses                   |       | 4,919                                        |       | 5,152           |       | (233                                             | )          | (5 | )% |
| Total operating expenses                              |       | $                                            | 17,549     |            | $          | 33,912                                           |       | $ | (16,363 | ) | (48 | )% |
|                                                  |       |                                         |       |            |       |                                             |       |   |   |
| Other income and expense, net                         |       | 3,603                                        |       | 2,491           |       | 1,112                                            |       | 45 | % |
| Income tax benefit                                    |       | —                                       |       | (16,118         | )          | 16,118                                           |       | 100 | % |
| Preferred stock dividends                             |       | —                                       |       | 2,067           |       | (2,067                                           | )          | (100 | )% |

 

**Oil and natural gas operatingexpenses** -Oil and natural gas operating expenses include direct operating costs, repairsand maintenance and workover expenses. Although operating expenses for thethree months ended June 30, 2009 were comparable to the same prior yearperiod, our base costs were actually lower in the three months ended June 302009 as compared to the same period in 2008, but were offset partially by anincrease in workover expenses incurred in the second quarter of 2009. Averageoil and natural gas operating expenses were $1.28 per Mcfe and $0.93 per Mcfefor the three months ended June 30, 2009 and 2008, respectively. On a perMcfe basis, the decline in production volume was the primary reason for theincrease in cost per Mcfe.

 

**Severanceand ad valorem taxes** - Severance tax expense for the three months ended June 30, 2009was 80% lower than the prior year period as a result of the lower revenuereceived in the current year.  Inaddition, our effective severance tax rate was lower due to abatements receivedduring the first quarter of 2009. For the three months ended June 30,2009, severance tax expense was approximately 5.2% of revenue subject toseverance taxes compared to 6.1% of revenue subject to severance taxes for thesecond quarter of 2008. Ad valorem tax expense for the second quarter of 2009was significantly higher than the second quarter of 2008 due to timingdifferences in recording costs in 2008 as compared to 2009, but the estimatedexpense for 2009 is expected to be lower overall than 2008 due to lowerproperty valuations. On an equivalent basis, severance and ad valorem taxesaveraged $0.42 per Mcfe and $0.77 per Mcfe for the three months ended June 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 30% lower production volumes in the second quarter of2009 compared to the second quarter of 2008. Our depletion rate for the threemonths ended June 30, 2009 was $2.43 per Mcfe, a 51% decrease compared tothe second quarter 2008 rate of $4.99 per Mcfe. The depletion rate hasdecreased over the past year due to significant impairments taken in the thirdand fourth quarters of 2008 and first quarter of 2009. Depreciation of otherassets for the second quarter of 2009 was comparable to the same period in2008. Accretion expense associated with our ARO for the three months ended June 30,2009 decreased due to revisions in the ARO liability made during 2008.

 

**Generaland administrative (“G&A”) expenses** — G&A expense decreased 5% for the three monthsended June 30, 2009 compared to the same period in 2008 due primarily tothe decrease in our salary and benefit costs as a result of the 36% drop in ourstaffing levels since June 30, 2008. We also had a decrease in generallegal fees in the three months ended June 30, 2009 as compared to the sameperiod of 2008. Partially offsetting these decreases were the costs associatedwith our ongoing financial and strategic alternative process that increasedsignificantly from $0.7 million in the three months ended June 30, 2008 to$1.9 million for the three months ended June 30, 2009. We also had an increasein contract labor costs in 2009. Capitalized G&A costs for second quarter2009 and 2008 were approximately $0.6 million and $1.1 million, respectively.G&A on a unit-of-production basis for the three months ended June 30,2009 was $1.64 per Mcfe compared to $1.21 per Mcfe for the comparable 2008period. G&A, excluding non-cash share-based compensation costs and bad debtexpense, for the three months ended June 30, 2009 averaged $1.54 per Mcfecompared to $1.06 per Mcfe in the same period in 2008.

 

**Other income and expense** - During the three months ended June 30,2009, our other income and expense increased primarily due to an increase ingross interest expense resulting from higher interest rates applied to ouroutstanding debt balance. For the second quarter of 2009, we capitalized lessinterest due to a 14% lower unproved property base on which we calculateinterest expense subject to capitalization.

 
| ** **                 | ** ** | **Three  Months Ended June 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|
| ** **                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                 | ** ** | **(in  thousands)**                   | ** ** |
| Gross interest expense     |       | $                                     | 3,363      |   | $ | 2,883 |   |
| Less: capitalized interest |       | (294                                  | )          | (599 | ) |
| Interest expense, net      |       | $                                     | 3,069      |   | $ | 2,284 |   |
|                       |       |                                  |       |   |   |
| Weighted average debt      |       | $                                     | 234,000    |   | $ | 243,385 |   |

 

We recorded amortization of deferred loan costs related to ourRevolving Facility during the three months ended June 30, 2009 and 2008.These costs for 2009 were higher than the prior year due to changes to thematurity date of our Revolving Facility which resulted in acceleration of theamortization.

 

**Income tax benefit** — We did not record a tax benefit forthe three months ended June 30, 2009. We fully provided for additions toour deferred tax asset with a valuation allowance during the period.  During the three months ended June 30,2008, we recorded an income tax benefit of $16.1 million with no valuation allowance.

 

**Preferred stock dividends** — Our Board of Directors did not declarequarterly dividends on our 5.75% Series A cumulative convertible perpetualpreferred stock in December 2008, March 2009 or June 30,2009.  Such dividends were declared in December 2007,March 2008 and June 2008. As a result, there is no dividend expensereported for the three months ended June 30, 2009 compared to $2.1 millionfor the same period in 2008.

 

**Loss pershare** — Wereported a net loss for the quarters ended June 30, 2009 and 2008.  The loss in the second quarter of 2009 wasprimarily due to reduced revenues as a result of lower prices andproduction.  Basic weighted averageshares outstanding for the three months ended June 30, 2009 and 2008 werecomparable. At June 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 theywould have an anti-dilutive effect on loss per share.

 

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**SixMonths Ended June 30, 2009 Compared to the Six Months Ended June 30,2008**

 

**Revenue and Production**

 

Total revenue increased significantly from the first six months of 2008to the comparable 2009 period primarily as a result of our derivativeactivity.  Excluding the effects ofderivative activity, revenues decreased 74% from the first six months of 2008to the comparable 2009 period. The Company’s decrease in revenue from the first sixmonths of 2008 to the comparable 2009 period was primarily due to (1) commoditypricing that was significantly lower than first six months of 2008 and (2) adecrease in capital expenditures and drilling activity resulting from thedecreased commodity prices which caused several proved undeveloped locations tobe uneconomic and shortening the economic life of many other properties. Our productmix contributed the following percentages of revenues and production volumes:

 
| ** **               | ** ** | ** **        | ** ** | **REVENUES  (2)**                   | ** ** | **PRODUCTION**      | ** ** |
|--------------------------|------------|-------------------|------------|-------------------------------------|------------|---------------------|------------|
| ** **               | ** ** | **REVENUES  (1)** | ** ** | **Six  months ended June 30,** | ** ** | **VOLUMES  (MCFE)** | ** ** |
| ** **               | ** ** | **2009**          | ** ** | **2008**                            | ** ** | **2009**            | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Natural gas              |       | 77                | %          | *                                   |       | 63                  | %          | 64 | % | 68 | % | 70 | % |
| Natural gas liquids      |       | 11                | %          | *                                   |       | 17                  | %          | 17 | % | 20 | % | 20 | % |
| Crude oil and condensate |       | 12                | %          | *                                   |       | 20                  | %          | 19 | % | 12 | % | 10 | % |
|                     |       |              |       |                                |       |                |       |   |   |   |   |   |   |
| Total                    |       | 100               | %          | *                                   |       | 100                 | %          | 100 | % | 100 | % | 100 | % |

 

----

(1) Includes effect of derivative transactions

(2) Excludes effect of derivative transactions

* Not meaningful due to derivative losses

 

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

 
| ** **                                   | ** ** | ** **                                         | ** ** | ** **   | ** ** | **2009  Period Compared** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------|------------|--------------|------------|---------------------------|------------|
| ** **                                   | ** ** | ** **                                         | ** ** | ** **   | ** ** | **to 2008  Period**       | ** ** |
| ** **                                   | ** ** | **Six  Months Ended**                              | ** ** | **$**        | ** ** | **%**                     | ** ** |
| ** **                                   | ** ** | **June 30,**                                  | ** ** | **Increase** | ** ** | **Increase**              | ** ** |
| ** **                                   | ** ** | **2009**                                           | ** ** | **2008**     | ** ** | **(Decrease)**            | ** ** | **(Decrease)** | ** ** |
| ** **                                   | ** ** | **(in  thousands, except prices and percentages)** | ** ** |
| **Production Volumes:**                      | * *   | * *                                           |       |         |       |                      |       |   |   |
| Natural gas (MMcf)                           |       | 4,176                                              |       | 6,815        |       | (2,639                    | )          | (39 | )% |
| Natural gas liquids (MBbls)                  |       | 204                                                |       | 317          |       | (113                      | )          | (36 | )% |
| Crude oil and condensate (MBbls)             |       | 117                                                |       | 162          |       | (45                       | )          | (28 | )% |
| Natural gas equivalent (MMcfe)               |       | 6,102                                              |       | 9,689        |       | (3,587                    | )          | (37 | )% |
| **Average Sales Price(1):**                  |       |                                               |       |         |       |                      |       |   |   |
| Natural gas ($ per Mcf)(2)              |       | $                                                  | 3.72       |         | $          | 9.05                      |       | $ | (5.33 | ) | (59 | )% |
| Natural gas liquids ($ per Bbl)         |       | 20.33                                              |       | 51.54        |       | (31.21                    | )          | (61 | )% |
| Crude oil and condensate ($ per Bbl)(2) |       | 42.78                                              |       | 111.23       |       | (68.45                    | )          | (62 | )% |
| Natural gas equivalent ($ per Mcfe)(2)  |       | 4.04                                               |       | 9.91         |       | (5.87                     | )          | (59 | )% |
| Natural gas equivalent ($ per Mcfe)(3)  |       | 5.88                                               |       | 1.04         |       | 4.84                      |       | * |   |
| **Operating Revenue:**                       |       |                                               |       |         |       |                      |       |   |   |
| Natural gas (2)                              |       | $                                                  | 15,522     |         | $          | 61,694                    |       | $ | (46,172 | ) | (75 | )% |
| Natural gas liquids                          |       | 4,137                                              |       | 16,345       |       | (12,208                   | )          | (75 | )% |
| Crude oil and condensate (2)                 |       | 5,013                                              |       | 18,037       |       | (13,024                   | )          | (72 | )% |
| Gain (loss) on derivatives                   |       | 11,177                                             |       | (85,957      | )          | 97,134                    |       | * |   |
| Total revenue                                |       | $                                                  | 35,849     |         | $          | 10,119                    |       | $ | 25,730 |   | * |   |

 

----

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

(2) Excludes the effect of derivative transactions.

(3) Includes the effect of derivative transactions.

*    Not meaningful

 

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

 
| ** **                       | ** ** | **For  the Six Months Ended********June 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| **Production Volumes per Day:**  |       |                                               |       |   |   |
| Natural gas (MMcf/D)             |       | 23.1                                               |       | 37.4 |   |
| Natural gas liquids (MBbls/D)    |       | 1.1                                                |       | 1.7 |   |
| Oil and condensate (MBbls/D)     |       | 0.6                                                |       | 0.9 |   |
| Natural gas equivalent (MMcfe/D) |       | 33.7                                               |       | 53.2 |   |

 

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

 

**Natural gas revenue** - For thefirst half 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 $23.9 million (based on 2008 comparableperiod pre-derivative prices). The decrease in average price received resultedin decreased revenue of approximately $22.3 million (based on current periodproduction). Seebelow for a discussion of the impact of natural gas derivatives on prices andrevenue.

 

**NGL revenue**- For the sixmonths ended June 30, 2009, NGL sales revenue decreased 75% over the sameperiod 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 $5.9 million (based on 2008comparable period prices). Lower average realized NGL prices for the six monthsended June 30, 2009 resulted in decreased revenue of approximately $6.3million (based on current period production).

 

**Crude oil and condensate revenue**- For the sixmonths ended June 30, 2009, oil and condensate sales revenue, excludingderivative activity, decreased 72% as compared to the same period in 2008, dueto lower average realized prices and production. Lower average realized pricesresulted in decreased revenue of approximately $8.0 million (based on currentperiod production).  The decrease in oiland condensate production resulted in a decrease in revenue of approximately$5.0 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/losses are not a functionof the operating performance of our oil and natural gas assets, excluding theirimpact from the above discussions helps isolate the operating performance ofthose assets. The following table summarizes the variouscomponents of the total gain or loss on derivatives and the impact eachcomponent had on our realized prices.

 

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| ** **                                                                                                 | ** ** | **Six  Months Ended June 30,**         | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                                                                                 | ** ** | **$**                                       | ** ** | **$ per  unit (1)** | ** ** | **$** | ** ** | **$ per  unit(1)** | ** ** |
| ** **                                                                                                 | ** ** | **(in  thousands, except per unit prices)** | ** ** |
| Natural gas contract settlements (Mcf)                                                                     |       | $                                           | 12,869     |   | $ | 3.08 |   | $ | (6,370 | ) | $ | (0.93 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Crude oil contract settlements (Bbl)                                                                       |       | 1,007                                       |       | 8.59 |   | (12,278 | ) | (75.72 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Mark-to-market reversal of prior period unrealized  change in fair value of gas derivative contracts (Mcf) |       | (13,390                                     | )          | (3.21 | ) | (2,626 | ) | (0.39 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  gas derivative contracts (Mcf)                          |       | 12,494                                      |       | 2.99 |   | (53,852 | ) | (7.90 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Mark-to-market reversal of prior period unrealized  change in fair value of oil derivative contracts (Bbl) |       | (2,015                                      | )          | (17.21 | ) | 14,954 |   | 92.23 |   |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Mark-to-market unrealized change in fair value of  oil derivative contracts (Bbl)                          |       | 212                                         |       | 1.83 |   | (25,785 | ) | (159.02 | ) |
|                                                                                                       |       |                                        |       |   |   |   |   |   |   |
| Gain (loss) on derivatives (Mcfe)                                                                          |       | $                                           | 11,177     |   | $ | 1.84 |   | $ | (85,957 | ) | $ | (8.87 | ) |

 

----

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

 

Should crude oil ornatural gas prices increase or decrease from the current levels, it couldmaterially impact our revenues. Our physical sales of these commodities arevulnerable to the volatility of market price movements.  Therefore, we have entered into contractscovering a portion of our anticipated 2009 production to ensure certain cashflows that we expect will allow us to plan our business activities. In a highprice environment, hedged positions could result in lost opportunities if thereis a cap in place, thus lowering our effective realized prices on hedgedproduction, but in an environment of falling prices, these transactions offersome pricing protection for hedged production. Due to the ongoing financial andstrategic alternatives process the Company has not entered into any newderivative contracts in recent months and does not expect to for theforeseeable future, therefore beyond 2009 we will not be impacted by thebenefits or consequences of derivative contracts. Our 2008 derivative positionexceeded our 2008 production exposing us to greater cash losses and risk oflosses during that period.

 

**Costs andOperating Expenses**

 

The table below detailsour expenses:

 
| ** **                                            | ** ** | ** **                                 | ** ** | ** **      | ** ** | **2009  Period Compared********to 2008  Period** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------|------------|-----------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **Six  Months Ended********June 30,** | ** ** | **$  Increase** | ** ** | **%  Increase**                                  | ** ** |
| ** **                                            | ** ** | **2009**                                   | ** ** | **2008**        | ** ** | **(Decrease)**                                   | ** ** | **(Decrease)** | ** ** |
| ** **                                            | ** ** | **(in  thousands, except percentages)**    | ** ** |
| Oil and natural gas operating expenses                |       | $                                          | 7,649      |            | $          | 8,413                                            |       | $ | (764 | ) | (9 | )% |
| Severance and ad valorem taxes                        |       | 2,348                                      |       | 5,482           |       | (3,134                                           | )          | (57 | )% |
| Depletion, depreciation, amortization and  accretion: |       |                                       |       |            |       |                                             |       |   |   |
| Oil and gas property and equipment                    |       | 17,089                                     |       | 48,325          |       | (31,236                                          | )          | (65 | )% |
| Other assets                                          |       | 347                                        |       | 377             |       | (30                                              | )          | (8 | )% |
| ARO accretion                                         |       | 192                                        |       | 191             |       | 1                                                |       | 1 | % |
| Impairment of oil and natural gas properties          |       | 78,254                                     |       | —          |       | 78,254                                           |       | 100 | % |
| General and administrative expenses                   |       | 9,514                                      |       | 9,212           |       | 302                                              |       | 3 | % |
| Total operating expenses                              |       | $                                          | 115,393    |            | $          | 72,000                                           |       | $ | 43,393 |   | 60 | % |
|                                                  |       |                                       |       |            |       |                                             |       |   |   |
| Other income and expense, net                         |       | $                                          | 6,765      |            | $          | 6,885                                            |       | $ | (120 | ) | (2 | )% |
| Income tax benefit                                    |       | —                                     |       | (24,764         | )          | 24,764                                           |       | 100 | % |
| Preferred stock dividends                             |       | —                                     |       | 4,133           |       | (4,133                                           | )          | (100 | )% |

 

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**Oil and natural gas operatingexpenses** - For the six months ended June 30, 2009,operating expenses decreased as compared to the same period of 2008 dueprimarily to decreased well workover activity in 2009 and asset divestituresthat occurred in 2008. However, we had an overall increase in our average oiland natural gas operating expenses, which were $1.25 per Mcfe for the sixmonths ended June 30, 2009 as compared to $0.87 per Mcfe in the sameperiod of 2008 as a result of the production declines in 2009 as compared to2008.

 

**Severanceand ad valorem taxes** - For the six months ended June 30, 2009, severance and advalorem taxes decreased significantly from the first half of 2008.  Severance tax expense for the six monthsended June 30, 2009 was 78% lower than the prior year period due primarilyto decreased realized rates.  Ourseverance tax expense is levied on our oil and natural gas revenue fromphysical production (i.e. excluding derivative activity). For the six monthsended June 30, 2009, severance tax expense was approximately 5.0% ofrevenue subject to severance taxes compared to 5.6% of revenue subject toseverance taxes for the first half of 2008. Ad valorem tax expense for the firsthalf of 2009 was significantly higher than the prior year because our 2007year-end estimates were too high which impacted 2008 offsetting normal expensecompletely. On an equivalent basis, severance and ad valorem taxes averaged$0.38 per Mcfe and $0.57 per Mcfe for the six months ended June 30, 2009and 2008, respectively.

 

**DD&Aand accretion**-Depletion on our oil and natural gas properties decreased for the first half of2009 compared to the same period of 2008 due to an decrease in ourunit-of-production depletion rate and production volumes, which are discussedunder “Revenue and Production” above. The depletion rate decreased from $4.99per Mcfe in the first half of 2008 to $2.80 per Mcfe in the first half of 2009,primarily as a result of the impairments of our oil and natural gas propertiestaken during the second half of 2008 and the first quarter of 2009.Depreciation of furniture and fixtures and accretion expense for the first halfof 2009 were comparable to the first half of 2008.

 

**G&Aexpense** -G&A expense for the first six months of 2009 was comparable to the sameperiod of 2008. Although it was comparable in total, we had two primaryoffsetting items that contributed to the variance. We recorded an increase incosts of our ongoing financial and strategic alternatives process from $0.7million in the first half of 2008 to $3.6 million in the first half of 2009.This increase was completely offset by a $3.7 million decrease in salaries andbenefit costs related to our reduced workforce. We also had increases incontract labor costs, bad debt expense and building rent, which were partiallyoffset by decreases in general legal expenses. During the first half of 2009and 2008, we recorded bad debt expense of approximately $0.3 million and $0.1 million,respectively, to increase our reserve allowance on certain accounts receivablethat we believe to be potentially uncollectible. G&A expense is typicallyreduced by overhead reimbursements and capitalized G&A. Overheadreimbursements, which decrease overall G&A expense, decreased in 2009 ascompared to 2008. Capitalized G&A costs for the first half of 2009 werelower at $1.3 million as compared to $2.1 million for the comparable prior yearperiod. G&A expense on a unit-of-production basis for the six months ended June 30,2009 increased to $1.56 per Mcfe as compared to $0.95 per Mcfe for thecomparable 2008 period. G&A, excluding non-cash share-based compensationcosts and bad debt expense, for the six months ended June 30, 2009 alsoincreased due to lower production volumes, averaging $1.46 per Mcfe as comparedto $0.81 per Mcfe for the comparable 2008 period.

 

**Otherexpense, net** - During the six months ended June 30, 2009,other income and expense in total was slightly lower than the same period of2008. We recorded lower interest income in the first half of 2009 as comparedto the first half of 2008. For the first half of 2009, 8% of our gross interestexpense was capitalized, as compared to 18% in the same period of 2008. Wecalculate the amount of interest we can capitalize based on the comparison ofour unproved property costs and our weighted average debt balance. Grossinterest expense in 2008 was higher than 2009 due to higher outstanding debtbalances. Although average debt balances outstanding in 2008 were higher thanin 2009, the interest rates were lower in 2009 which partially offset theincrease in total gross interest.

 
| ** **                 | ** ** | **For the  Six Months Ended June 30,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|
| ** **                 | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
|                       |       | **(in  thousands)**                         |       |
| Gross interest expense     |       | $                                           | 5,784      |   | $ | 7,898 |   |
| Less: capitalized interest |       | (472                                        | )          | (1,390 | ) |
| Interest expense, net      |       | $                                           | 5,312      |   | $ | 6,508 |   |
|                       |       |                                        |       |   |   |
| Weighted average debt      |       | $                                           | 235,271    |   | $ | 250,319 |   |

 

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We also recorded amortization of deferredloan costs related to our Revolving Facility during the six months ended June 30,2009 and 2008. The costs in 2009 were higher than 2008 due to the accelerationof amortization of those capitalized costs resulting from the change inmaturity date of the Revolving Facility. During the six months ended June 30, 2008, werecorded a gain on ARO settlements of approximately $9,400.

 

**Income tax expense** - We did not record a tax benefit for thesix months ended June 30, 2009. We fully provided for additions to ourdeferred tax asset with a valuation allowance during the period.  During the six months ended June 30,2008, we recorded an income tax benefit of $24.8 million with no valuationallowance.

 

**Preferred stock dividends** — Our Board ofDirectors declared dividends on our 5.75% Series A cumulative convertibleperpetual preferred stock in March and June 2008 and none in 2009.

 

**Loss per share** - For the first half of2009 and 2008, we reported a loss per share. In 2009 the loss per share wasprimarily the result of the $78.3 million impairment of oil and natural gasproperties and declines in our oil and natural sales revenue both as a resultof decreased oil and natural gas prices. In 2008 the loss per share was primarily the result of unrealizedderivative losses ofapproximately $67.3 million. Basic weighted average shares outstanding for thesix months ended June 30, 2009 were comparable to the prior year. Weexcluded approximately 8.7 million shares of if-converted common stockattributable to our 5.75% Series A cumulative convertible perpetualpreferred stock which, when converted, have an anti-dilutive effect and,therefore, are not included in the calculation of diluted earnings per sharefor the six months ended June 30, 2009 or 2008.

 

## **Liquidity and Capital Resources**

## ** **

Historically, our primaryongoing source of capital was the cash flow generated from our operatingactivities supplemented by borrowings under our Revolving Facility. Wecurrently 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 Facility aredue and payable on August 31, 2009 to our lenders. Net cash generated fromoperating activities is a function of production volumes and commodity prices,both of which are inherently volatile and unpredictable, as well as operatingefficiency and costs. Our business, as with other extractive businesses, is adepleting one in which each gas equivalent unit produced must be replaced orour asset base and capacity to generate revenues in the future will shrink.Less predictable than production declines from our proved reserves is theimpact of constantly changing oil and natural gas prices on cash flows.  We attempt to mitigate the price risk withour hedging program. Reserves and production volumes are influenced, in part,by the amount of future capital expenditures. In turn, capital expenditures areinfluenced by many factors including drilling results, oil and natural gasprices, industry conditions, availability and cost of goods and services andthe extent to which oil and natural gas properties are acquired. In 2009, ourcapital expenditures have been and will continue to be impacted by ourliquidity issues and the impending maturity of our Revolving Facility on August31, 2009, as well as the Amended Consent and subsequent Amendments which imposesignificant constraints on our capital expenditures.

 

Our primary cashrequirements are for exploration, development and acquisition of oil andnatural gas properties, payment of any preferred stock dividends when and ifdeclared by our Board of Directors, payment of any derivative loss settlements whenand if they occur, and the repayment of principal and interest on outstandingdebt (including the Deficiency under our Revolving Facility). We havehistorically attempted to fund our exploration and development activitiesprimarily through internally generated cash flows and budget capitalexpenditures based largely on projected cash flows, however we do notanticipate that our cash flows will be sufficient to fund our primary cashrequirements. We routinely adjust capital expenditures in response to 

 

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changes in oil andnatural gas prices, drilling and acquisition costs, and cash flow. We typicallyhave funded acquisitions from borrowings under our credit facilities, cash flowfrom operations and sales of common stock and preferred stock, though we do notanticipate making any acquisitions in the foreseeable future.

 

Significant changes to working capital affects our liquidity in theshort term. Since December 31, 2008 and continuing as of June 30,2009, our outstanding debt was classified as current due to the variousamendments in the maturity date of our Revolving Facility. As provided byAmendment No. 8 (see “Revolving Facility” below for additional discussion)the current maturity date of the revolving Facility is August 31, 2009.Our derivative instrument asset is indicative of potential future cashsettlement inflows on our outstanding oil and natural gas derivative positions,which are scheduled to settle in future months. The fair market valuerepresents the potential settlement for those contracts if the market pricesremain unchanged. Should commodity prices increase or decrease, the fair valueof those outstanding contracts would also change.  When our derivatives result in cashsettlement outflows, we receive higher cash inflows on the sale of our physicalproduction at those higher market prices, thus providing us with funds to coverat least a portion of any derivative payments that may come due in the future.

 

We have historically used our credit facilities to supplement anydeficiencies between operating cash flow and capital expenditures. We have alsoused proceeds of asset divestitures to supplement these deficiencies and reduceoutstanding debt. Our outstanding debt balance on August 4, 2009 was$226.5 million.

 

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

 

As a result of the strategic alternatives process we began in late2007, we reduced our planned capital spending for 2008 as compared to previousyears. The recent worldwide financial and credit crisis has reduced theavailability of liquidity and credit worldwide, and the recent substantialdeclines in worldwide equity markets, including our stock prices, make it moredifficult to effectively raise capital through equity issuances. Additionally,prices for oil and natural gas declined materially during the fourth quarter of2008, and natural gas prices continued to decline during the first half of2009.  A continued or extended decline in oil or natural gas priceswill have a material adverse effect on our financial position, results ofoperations, cash flows and access to capital and on the quantities of oil andnatural gas reserves that we can economically produce.

 

We had cash and cash equivalents at June 30, 2009 of $15.7 millionconsisting primarily of short-term money market investments, as compared to$8.5 million at December 31, 2008. Our working capital deficit was $201.1 million at June 30, 2009, ascompared to a working capital deficit of $203.3 million at December 31,2008. At June 30, 2009 and December 31, 2008, we classified all ofour outstanding debt as current due to the various amendments in the maturitydate of the Revolving Facility.  Oursources and uses of cash were as follows:

** **
| ** **                                   | ** ** | **For the  Six Months Ended June 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                    | ** ** | **2008** | ** ** |
| ** **                                   | ** ** | **(in  thousands)**                         | ** ** |
| *Net Cash Provided By Operating  Activities* |       | $                                           | 19,847     |   | $ | 53,440 |   |
| * *                                     |       |                                        |       |   |   |
| *Net Cash Used In Investing  Activities*     |       | (7,629                                      | )          | (24,015 | ) |
| * *                                     |       |                                        |       |   |   |
| *Net Cash Used In Financing  Activities*     |       | (5,000                                      | )          | (24,133 | ) |
|                                              |            |                                             |            |  |  |  |  |

 

**Net Cash Provided By Operating Activities***-*The decrease in cash flows provided byoperating activities for the first half 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 $5.5 million in the first half of 2009 as compared to $4.1 million in thesame period of 2008.

 

**Net Cash Used InInvesting Activities***-*Wehave historically reinvested a substantial portion of our cash flows in ourdrilling, acquisition, land and geophysical activities.  We are operating under a limited capital

 

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investment program and spent approximately $9.2million during the first half of 2009, including $2.4 million on our drillingand operating program. We drilled 4 wells in the first quarter of 2009, threeof which were apparent successes. Leasehold and geological and geophysicalactivities accounted for expenditures of $6.8 million through June 30,2009. During the first six months of 2008, we spent $33.9 million on ourdrilling and operating program. We drilled 15 wells in the first half of 2008,14 of which were apparent successes. Leasehold and geological and geophysicalactivities accounted for expenditures of $2.7 million through June 30,2008. There were also minimal capital expenditures associated with computerhardware, office equipment and other miscellaneous capital charges. During thesix months ended June 30, 2009, proceeds from the sale of certain non-coreproperties in Texas to various buyers totaled approximately $0.3 million. Inthe same period last year, proceeds from the sale of certain non-coreproperties in Texas and a pipeline to various buyers totaled approximately$18.2 million.

 

**Due to the overhedged position in2008, cash settlements related to the overhedged position are reflected ininvesting activities because they do not apply to operating revenues and aresimilar in nature to an investment. Approximately 42% of our oil settlementsand 17% of our natural gas settlements are represented by the $6.2 million ofspeculative settlements in this section of the statement of cash flows. Theremainder is located in net cash provided by operating activities. There was nooverhedged position in the first half of 2009.**

** **

**Net Cash Used In Financing Activities***-*During the six months ended June 30,2009, we repaid $5.0 million under our Revolving Facility (as defined below).In the comparable period of 2008, we repaid $20.0 million using proceeds fromour asset sales. We also paid quarterly dividends on our preferred stock in January andApril 2008, but none in 2009.

 

*RevolvingFacility*

 

On January 30, 2007, we entered into theRevolving Facility with the Lenders, in favor of the Company and certain of itswholly-owned subsidiaries in an amount equal to $750 million. The RevolvingFacility has a letter of credit sub-limit of $20 million. The RevolvingFacility was scheduled to mature on January 31, 2011. At June 30,2009, borrowings under the Revolving Facility bore interest at Prime plus anapplicable margin of 2.50%. At June 30, 2009, the interest rate applied toour outstanding borrowings was 5.75%. As of June 30, 2009, we had $234million in total borrowings outstanding under the Revolving Facility. During January 2009, the Lenders established a newborrowing base of $125 million under the Revolving Facility resulting in aborrowing base deficiency of $114 million.

 

Pursuant to the terms of the Revolving Facility,we 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 the ongoingfinancial 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 

 

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RevolvingFacility to be due and payable on June 30, 2009, (2) that it would bean event of default (i) if we failed to have executed and delivered on orbefore May 15, 2009 at least one of the following (a) a commitmentletter from a lender or group of lenders reasonably satisfactory to our Lendersproviding for the provision by such lender or group of lenders of a creditfacility in an amount sufficient to repay all of our obligations under theRevolving Facility on or before June 30, 2009, (b) a merger agreementor similar agreement involving us as part of a transaction that results in the repaymentof our 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 our Lenders providing for a sale transaction byus that results in the repayment of all of our obligations under the RevolvingFacility on or before June 30, 2009, or (ii) if we were in defaultunder or our hedging arrangements have been terminated or cease to be effectivewithout the prior written consent of our Lenders, (3) that our advancesunder the Revolving Facility would bear interest at a rate equal to the greaterof (a) the reference rate publicly announced by Union Bank of California,N.A. for such day, (b) the Federal Funds Rate in effect on such day plus0.50% and (c) a rate determined by the Administrative Agent to be theDaily One-Month LIBOR (as defined in the Revolving Facility), in each case plus2.5% or, during the continuation of an event of default, plus 4.5% (resultingin an effective interest rate of approximately 5.75%), (4) for limitationson the making of capital expenditures and certain investments, and (5) forthe elimination of the current ratio, leverage ratio and interest coverageratio covenant requirements. The Amended Consent also eliminated the six $19million deficiency payments which were contemplated by the February Consentand the 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.

 

If we breach any of theprovisions of the Amended Consent or the Revolving Facility, as amended, ourLenders thereto will be entitled to declare an event of default, at which pointthe entire unpaid principal balance of the loans, together with all accrued andunpaid interest and other amounts then owing to our Lenders, would becomeimmediately due and payable.  In anyevent, the entire unpaid principal balance of the loans, together with allaccrued and unpaid interest and other amounts then owing to our Lenders, willbe payable on August 31, 2009 unless earlier paid or a further extensionwith respect to payment is negotiated with our Lenders. Our Lenders may takeaction to enforce their rights with respect to the outstanding obligationsunder the Revolving 

 

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Facility. Becausesubstantially all of our assets are pledged as collateral under the RevolvingFacility, if our Lenders declare an event of default, they would be entitled toforeclose on and take possession of our assets. In such an event, we may be forced to liquidate or to otherwise seekprotection under Chapter 11 of the U.S. Bankruptcy Code. Such action in itselfwould constitute an event of default under the terms of the Revolving Facility.These matters, as well as the other risk factors related to our liquidity andfinancial position raise substantial doubt as to our ability to continue as agoing concern. With respect to our compliance with the Amended Consent, therecan be no assurance that we will be able to further negotiate the terms of theAmended Consent or negotiate a further restructuring of the relatedindebtedness or that we will be able to make any required payments when theybecome due.  Moreover, there can be noassurance that we will be successful in our efforts to comply with the terms ofthe Amended Consent, including our ongoing efforts to evaluate and assess ourvarious financial and strategic alternatives (which may include the sale ofsome or all of our assets, a merger or other business combination involving theCompany, or the restructuring or recapitalization of the Company).  If such efforts are not successful, we may berequired to seek protection under Chapter 11 of the U.S. Bankruptcy Code, whichwould constitute an event of default under the Revolving Facility. See Item 1A.*RISK FACTORS.*

 

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.

 

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 “beneficialownership” of all such shares that any such person has the right to acquire,whether such right is exercisable immediately or only after the passage oftime, by way of merger, consolidation or otherwise), of a majority or more ofour common stock on a fully-diluted basis, after giving effect to theconversion and exercise of all of our outstanding warrants, options and othersecurities (whether or not such securities are then currently convertible orexercisable), (b) during any period of two consecutive calendar quarters,individuals who at the beginning of such period were members of our Board ofDirectors cease for any reason to constitute a majority of the directors thenin office unless (i) such new directors were elected by a majority of ourdirectors who constituted the Board of Directors at the beginning of suchperiod (or by directors so elected) or (ii) the reason for such directorsfailing to constitute a majority is a result of retirement by directors due toage, death or disability, or (c) we cease to own directly or indirectlyall of the equity interests of each of our subsidiaries.

 

*Shelf Registration Statement & Offerings*

 

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

 

*Convertible Preferred Stock*

 

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

 

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*Dividends*.  The Convertible Preferred Stock accumulatesdividends at a rate of $2.875 for each share of Convertible Preferred Stock peryear. Dividends are cumulative from the date of first issuance and, to theextent payment of dividends is not prohibited by our debt agreements, assetsare legally available to pay dividends and our Board of Directors or anauthorized committee of our board declares a dividend payable, we will paydividends in cash, every quarter.  Thefirst payment was made on April 15, 2007 and we continued to make quarterlydividends payments through October 15, 2008. The Board did not declare adividend in the fourth quarter of 2008, first quarter of 2009 or second quarterof 2009 due to our current lack of liquidity. Cumulative dividends in arrearsat June 30, 2009 amounted to $5.9 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 sale priceof 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 or sharesof our common stock. If we elect to settle all or any portion of our conversionobligation in cash, the conversion value and the number of shares of our commonstock we will deliver upon conversion (if any) will be based upon a 20 tradingday averaging period.

 

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

 

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

 

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

 

A “fundamental change” will be deemed to 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.

 

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

 

·                  amend our restated certificate 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.

 

*Off Balance Sheet Arrangements*

 

Wecurrently do not have any off balance sheet arrangements.

 

**Fair Value Measurements**

 

Effective January 1, 2008, we partially adopted SFAS No. 157,*Fair Value Measurements* whichprovides a common definition of fair value, establishes a framework formeasuring fair value and expands disclosures about fair value measurements, butdoes not require any new fair value measurements. The partial adoption of SFAS No. 157had no impact on our financial statements, but it did result in additionalrequired disclosures as set forth in Note 11 to our consolidated financialstatements. In February 2008, the FASB issued FSP FAS 157-2, *Effective Date of FASB Statement No. 157*, which delayedthe effective date of SFAS No. 157 for all non-financial assets andnon-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 SFAS No. 157 to ourAROs on January 1, 2009.

 

SFAS No. 157 defines fair value as the price that would bereceived to sell an asset or transfer a liability in an orderly transactionbetween market participants at the measurement date. Currently the only fairvalue measurements we utilize are related to our AROs and derivativeinstruments. While our derivative instruments are executed in liquid marketswhere price transparency exists, we are not involved in the monthly calculationof fair value. We utilize valuations provided by our counterparties, whichinclude inputs such as commodity exchange prices on the NYMEX, over-the-counterquotations, volatility, historical correlations of pricing data and LIBOR and,in the case of collars and floors, the time value of options, and other liquidmoney market instrument rates. Our counterparties utilize internally developedbasis curves that incorporate observable and unobservable market data. Althoughwe believe these valuations are the best estimates of the fair value of thederivative contracts we have executed, the ultimate market prices realizedcould differ from these estimates, and the differences could be material.

 

SFAS No. 157 establishes a fair value hierarchy that prioritizesthe inputs to valuation techniques used to measure fair value based onobservable and unobservable data and categorizes the inputs into three levels,with the highest priority given to Level 1 and the lowest priority given toLevel 3. The three levels of the fair value hierarchy defined by SFAS No. 157are as follows:

 

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

 

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

 

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·                  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 the appropriateclassification of our fair value measurements within the fair value hierarchyrequires management’s judgment regarding the degree to which market data isobservable or corroborated by observable market data. Currently we havecategorized derivative instruments’ fair value measurements and our AROs asLevel 3. As interpretations of SFAS No. 157 evolve, our classification ofcertain instruments within the hierarchy may be revised. See “Critical Accounting Policies and Estimates —Derivative and Hedging Activities” above, “Risk Management Activities”below and Note 11 to our consolidated financial statements for additionaldiscussion of our derivative instruments.

 

**Risk Management Activities**

 

We utilize price-riskmanagement transactions (e.g., swaps, collars and floors) for a portion of ourexpected oil and natural gas production to seek to reduce exposure from thevolatility of oil and natural gas prices and also to achieve a more predictablecash flow. While the use of these arrangements is intended to reduce ourpotential exposure to significant commodity price declines, they may limit ourability to benefit from increases in the price of oil and natural gas. Ourarrangements, to the extent we enter into any, are intended to apply to only aportion of our expected production and thereby provide only partial priceprotection 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, in lightof 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. In addition, ourcounterparty is entitled to terminate the derivative contracts in the eventthat the fair market value of the derivative contracts (currently valued atapproximately $12.7 million as of June 30, 2009) falls to less than $1.5million (i.e. the approximate amount that our counterparty would owe us upontermination of the derivative contracts following the decline of the derivativefair market value from the approximate $12.7 million as of June 30, 2009 toless than $1.5 million at any time thereafter).  In the event of atermination of the derivative contracts by our counterparty under thesecircumstances, there can be no assurance that this counterparty would actuallyremit the funds owed to us as opposed to attempting to apply such funds as anoffset to our indebtedness under the Revolving Facility of which they are alender.  However, to the extent that any decrease in the fair market valueof the derivative contracts is driven by higher commodity prices, such risingcommodity prices should result in some benefit to our expected oil and naturalgas sales revenue. On an annual basis, our management sets all of ourprice-risk management policies, including volumes, types of instruments andcounterparties. These policies are implemented by management through theexecution of trades by the Chief Financial Officer after consultation andconcurrence by the President and Chairman of the Board. Our Board of Directorsmonitors our price-risk management policies and trades on a monthly basis.However, due to the ongoing financial and strategic alternatives process theCompany has not entered into any new derivative contracts in recent months anddoes not expect to for the foreseeable future.

 

All of these price-riskmanagement transactions are considered derivative instruments and accounted forin accordance with SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*(as amended). These derivativeinstruments are intended to hedge our price risk and may be considered hedgesfor economic purposes. There are two types of accounting treatments forderivatives, (i) mark-to-market accounting and (ii) cash flow hedgeaccounting. For a discussion of these accounting treatments, see Note 10 to ourconsolidated financial statements. We currently apply mark-to-market accountingtreatment to all of our derivative contracts. All derivatives are recorded onthe balance sheet at fair value and the changes in fair value are presented in totalrevenue on the statement of operations. The cash flows resulting fromsettlement of derivative transactions which relate to economically hedging ourphysical production volumes are classified in operating activities on thestatement of cash flows and the cash flows resulting from settlement ofderivative transactions considered “overhedged” positions are classified ininvesting activities on the statement of cash flows. The following tableprovides additional information regarding our various derivative transactionsthat were recorded at fair value on the balance sheet as of June 30, 2009.

 
| *** ***                                                                           | *** *** | **(in  thousands)** | *** *** |
|----------------------------------------------------------------------------------------|--------------|---------------------|--------------|
| Fair value of contracts  outstanding at December 31, 2008                         |         | $                   | 15,407       |   |
| Contracts realized or  otherwise settled during the period                             |         | 13,876              |         |
| Fair value at  June 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                                                           |         | (16,574             | )            |
| Fair value of contracts  outstanding at June 30, 2009                             |         | $                   | 12,709       |   |

 

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The following table details the fair value of ourcommodity-based derivative contracts by year of maturity and valuationmethodology as of June 30, 2009.

 
| ** **                                           | ** ** | **Fair Value of Contracts at June 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                                                |       | 12,709                                            |       | — |   | — |   | — |   | 12,709 |   |
| Liability                                            |       | —                                            |       | — |   | — |   | — |   | — |   |
| Prices based on models and other valuation  methods: |       | —                                            |       | — |   | — |   | — |   | — |   |
| Total                                                |       | $                                                 | 12,709     |   | $ | — |   | $ | — |   | $ | — |   | $ | 12,709 |   |

 

**Tax Matters**

 

At June 30, 2009, we had cumulative net operatingloss carryforwards (“NOLs”) for federal and state income tax purposes ofapproximately $153.2 million and $5.7 million, respectively, without considerationof valuation allowances. The federal and state NOL carryforwards will expire invarying amounts between 2009 and 2028. In addition to the deferred tax assetsassociated with NOLs discussed above, we have additional net deferred taxassets of approximately $85.2 million related to both federal and state taxpositions.

 

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 and projectedfuture taxable income for this determination. We believe that after consideringall the available objective evidence, both positive and negative, historicaland prospective, with greater weight given to the historical evidence, and inlight of the current market situation and the uncertainty surrounding ourRevolving Facility, the related Amended Consent and subsequent Amendments,management is not able to determine that it is more likely than not that thedeferred tax assets will be realized and therefore established a full valuationallowance to reduce our net deferred tax asset to zero at June 30, 2009and December 31, 2008. We will continue to assess the valuation allowanceagainst deferred tax assets considering all available information obtained infuture reporting periods. If we achieve profitable operations in the future, wemay reverse a portion of the valuation allowance in an amount at leastsufficient to eliminate any tax provision in that period. The valuationallowance has no impact on our NOL position for tax purposes, and if wegenerate taxable income in future periods, we will be able to use our NOLs tooffset 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.

 

We would undergo a majorityownership change if, among other things, the stockholders who own or haveowned, directly or indirectly, five percent or more of our common stock or areotherwise treated as five percent stockholders under Section 382 and theregulations promulgated thereunder, increase their aggregate percentage 

 

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ownership of our stock bymore than 50 percentage points over the lowest percentage of stock owned bythese stockholders at any time during the testing period, which is generallythe three-year period preceding the potential ownership change. In the event ofa majority ownership change, Section 382 imposes an annual limitation onthe amount of taxable income a corporation may offset with the NOLcarryforwards. Any unused annual limitation may be carried over to later yearsuntil the applicable expiration of the respective NOL carryforwards. The amountof the limitation may, under certain circumstances, be increased by built-ingains held by us at the time of the change that are recognized in the five-yearperiod after the change. Any built-in losses on assets held subsequent to amerger are subject to the limitation. If we were to undergo a majorityownership change, we will likely be required to record a reserve for some orall of the asset that may be recorded on our balance sheet at that time. During2007, 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 majorityownership change 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.

 

FASB Interpretation No. 48 (“FIN 48”), *Accounting for Uncertainty in Income Taxes*, providesguidance on recognition and measurement of uncertainties in income taxes. FIN48 requires that we recognize the financial statement benefit of a tax positiononly after determining that the relevant tax authority would more likely thannot sustain the 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. SeeNotes 3 and 8 to our consolidated financial statements. We have recorded ourFIN 48 liability of approximately $0.1 million under long term liabilities onthe balance sheet and there has been no change since December 31, 2008.

 

**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 June 2009, theFASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R)*, which amends the consolidationguidance applicable to variable interest entities. The amendments significantlyreduce the previously required quantitative consolidation analysis, and requireongoing reassessments of whether the Company is the primary beneficiary of avariable interest entity. SFAS No. 167 also requires enhanced disclosuresabout an enterprise’s involvement with a variable interest entity. Thisstatement is effective for the beginning of the first annual reporting periodbeginning after November 15, 2009. The Company does not currently expectthe adoption of SFAS No. 167 to impact its consolidated financialstatements.

 

On June 3, 2009, the FASB approved the FASBAccounting Standards CodificationTM (“Codification”) as the single source ofgenerally accepted accounting principles in the United States of America (“GAAP”).On June 29, 2009, the FASB issued SFAS No. 168, *The FASBAccounting Standards Codification**TM** and the*

 

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*Hierarchyof Generally Accepted Accounting Principles*. SFAS No. 168 establishes the Codification tobecome the source of authoritative GAAP recognized by the FASB to be applied bynongovernmental entities. Rules and interpretive releases of the SEC underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. Codification supersedes all existing non-SEC accounting andreporting standards. All other non-grandfathered non-SEC accounting literaturenot included in the Codification becomes non-authoritative. Following SFAS No. 168,the FASB will not issue new standards in the form of Statements, FASB StaffPositions, or Emerging Issues Task Force Abstracts. Instead, the FASB willissue Accounting Standards Updates, which will serve only to: (a) updatethe Codification; (b) provide background information about the guidance;and (c) provide the bases for conclusions on the change(s) in theCodification. The content of the Codification carries the same level ofauthority. The GAAP hierarchy will be modified to include only two levels ofGAAP: authoritative and non-authoritative. SFAS No.168 and the Codification areeffective for financial statements issued for interim and annual periods endingafter September 15, 2009. This means that a calendar year-end publicentity should follow the guidelines in the Codification beginning with itsthird quarter starting on July 1, 2009. We adopted Codification on July 1,2009 which will provide for changes in disclosures on our Quarterly Report on Form 10-Qfor the period ended September 30, 2009 but no impact to our financialposition, results of operations or cash flows.

 

**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 June 30, 2009 outstandingborrowings and an interest rate of 5.75%, a 10% change in these interest rateswould result in an increase or decrease in interest expense of approximately$1.3 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 recent borrowing base redetermination that resultedin our significant borrowing base deficiency. The continued credit crisis andrelated turmoil in the global financial system and economic recession in theU.S. create financial challenges if conditions do not improve and will affectour ability to access credit markets. We will continue to monitor our liquidityand the capital markets as we continue to assess our financial and strategicalternatives.

 

As of December 31, 2008 and June 30, 2009,our outstanding debt was classified as current due to the amendment in thematurity date of our Revolving Facility to June 30, 2009 as provided bythe Amended Consent and August 31, 2009 as provided by Amendment No. 8,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 June 30, 2009:

 
| **Transaction  Date**  | ** ** | **Transaction  Type** | ** ** | **Beginning** | ** ** | **Ending** | ** ** | **Price  Per Unit** | ** ** | **Volumes  Per  Day** | ** ** | **Fair  Value  Outstanding as of  June 30, 2009** | ** ** |
|------------------------|------------|-----------------------|------------|---------------|------------|------------|------------|--------------------------|------------|-----------------------|------------|--------------------------------------------------------|------------|
| ** **             |       |                  |       |          |       |       |       |                     |       |                  |       | **(in  thousands)**                                    |       |
| ***Natural Gas (1):*** |       |                  |       |          |       |       |       |                     |       |                  | * *   | ** **                                             | * *   |
| 04/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.00             |       | 10,000 MMBtu          |       | $                                                      | 6,247      |   |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $7.75-$10.08             |       | 10,000 MMBtu          |       | 6,248                                                  |       |
| ***Crude Oil (2):***   |       |                  |       |          |       |       |       |                     |       |                  |       |                                                   |       |
| 10/07                  |       | Collar                |       | 01/01/09      |       | 12/31/09   |       | $70.00-$93.55            |       | 300 Bbl               |       | 214                                                    |       |
|                   |       |                  |       |          |       |       |       |                     |       |                  |       | $                                                      | 12,709     |   |

 

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

 

(2)          Our crude oil 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 June 30, 2009, the fair value of theoutstanding derivatives was a net asset of approximately $12.7 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 $1.2 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 June 30, 2009 toprovide reasonable assurance that information required to be disclosed in ourreports filed or submitted under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms.

 

There has been no change inour internal controls over financial reporting that occurred during the threemonths ended June 30, 2009 that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II - OTHERINFORMATION**

 

**Item 1 - Legal Proceedings**

 

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

 

**David Blake, et al. v. Edge Petroleum Corporation** — On September 19, 2005, DavidBlake and David Blake, Trustee of the David and Nita Blake 1992 Children’sTrust, filed suit against us in state district court in Goliad County, Texasalleging breach of contract for failure and refusal to transfer overridingroyalty interests to plaintiffs in several leases in the Nita and Austinprospects in Goliad County, Texas and failure and refusal to pay monies to Blakepursuant to such overriding royalty interests for wells completed on theleases. The plaintiffs seek relief of (1) specific performance of thealleged agreement, including granting of overriding royalty interests by us 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. Our subsidiaries, Edge Petroleum ExplorationCompany, Edge Petroleum Operating Company and Edge Petroleum ProductionCompany, were also added as defendants. We filed a counterclaim againstplaintiff and joined various related entities that are controlled by Blake,seeking lease interests in which we contend we have been wrongfully deniedparticipation and also claim that proprietary information was misappropriated.The parties have moved for summary judgment on each other’s claims andcounterclaims, which the trial court has denied 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, thePlaintiffs filed their Seventh Amended Petition adding a claim for breach ofthe Settlement Agreement. In December 2008, one of the Blakecounter-defendants filed a motion to arbitrate, which motion has not been heardby the court. We have responded and will continue to respond aggressively tothis lawsuit, and believe we have meritorious defenses and counterclaims.

 

**Mary Jane Carol Trahan Champagne, et al. v. EdgePetroleum Exploration Company, et al.** — On September 19, 2008 we were sued in statedistrict court in Vermilion Parish, Louisiana by Mary Jane Trahan, Carol TrahanChampagne and 29 other plaintiffs alleging breach of obligations under mineralleases in Vermilion Parish regarding the Trahan No. 1 well and the Trahan No. 3well (MT RC SUB reservoir). Plaintiffs are seeking unspecified damages for lostrevenue, lost royalties and devaluation of property interest sustained as aresult of the defendants’ alleged negligent and improper drilling operations onthe Trahan No. 1 well and the Trahan No. 3 well, including allegedfailure to prevent underground water from flooding and destroying plaintiffs’portion of the reservoir beneath plaintiffs’ property.  Plaintiffs also allege defendants failed to “blocksqueeze” sections of the Trahan No. 3 well as would a prudent operator.This lawsuit, previously removed from the state court to the federal districtcourt for the Western District of Louisiana, Lafayette Division, has beenremanded to state court. Our insurance carrier has retained counsel torepresent us in this matter. We filed certain peremptory challenges andexceptions 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 a reserve with respect to this claim and it isnot possible to determine what, if any, its ultimate exposure might be in thismatter. We intend to vigorously defend ourselves in this lawsuit.

 

**John Lemke, et al. v. Edge Petroleum Corporation** - In October 2008, we were sued instate district court in Harris County, Texas over an alleged contract toreceive a royalty in certain areas in South Louisiana.

 

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We, along with thePlaintiffs, settled the dispute by agreement pursuant to which we paid thePlaintiffs $17,500 in return for a full release of all claims and a dismissalof the lawsuit.

 

**Lara Energy, Inc. v. Edge PetroleumCorporation** -In June 2009, we were sued in state district court in Harris County, Texasby a working interest co-owner in the Chapman Ranch prospect located in NuecesCounty, Texas.  Plaintiff alleges varioustheories of causes of action, including breach of contract, breach of duty ofgood faith and fair dealing, negligent misrepresentation, improper acquisitionof leases and seismic data, fraudulent inducement and other causes ofaction.  We believe we have done nothingwrong and have honored the contracts with the Plaintiff that govern operationsin the Chapman Ranch prospect. We have filed an answer and intend to vigorouslydefend ourselves.

 

**Encinitas Ranch et al v. ExxonMobil Corporation,et al**. — Thislawsuit was originally filed in state district court in Brooks County, Texas,against ExxonMobil, Chevron USA and other defendants alleging numerous causesof action relating to Plaintiffs’ lands going back several decades, includingdamage to the surface, improperly abandoned equipment, spills, contamination,trespass, failure to maintain facilities, improper or untimely payment ofroyalties, breach of express and implied covenants, and various acts ofnegligence, including an alleged incident regarding a fire that occurred on theranch in 2008. Plaintiffs amended their petition in May 2008 to nameadditional defendants, including the Company. The Company has a non-operating interestin the Encinitas Ranch, and has never operated the wells or lease in BrooksCounty, Texas, covering Plaintiffs’ land. Our liability insurance carrier isproviding a defense to this matter under a reservation of rights, and hasretained local counsel for us and filed an answer on our behalf.  No trial date has been set.  We believe we have meritorious defenses tothis litigation and intend to vigorously defend ourselves.

 

**Item 1A — Risk Factors**

 

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

 

**All of our debt obligations underour Revolving Facility are due on or before August 31, 2009.  Our attempts to further extend or renegotiatesuch obligations or to otherwise complete our restructuring efforts (includinga sale of some or all of our assets or a recapitalization, merger or businesscombination involving the Company) may not be successful and we may be requiredto seek bankruptcy protection under Chapter 11 of title 11 of the United StatesCode (the “Bankruptcy Code”).  Even ifthese restructuring efforts are successful, we may still be required to seekprotection under the Bankruptcy Code to consummate the sale of some or all ofour assets or to effect a recapitalization, merger, other business combinationor other restructuring strategy involving the Company.**

 

Pursuant to Amendment No. 8to our Revolving Facility, all of our debt obligations under the RevolvingFacility are due on or before August 31, 2009.  There can be no assurance that we will beable to further extend or renegotiate the terms of our Revolving Facility orotherwise complete our restructuring efforts (including a sale of some or all of our assetsor a recapitalization, merger or business combination involving the Company). Becausesubstantially all of our assets are pledged as collateral under the RevolvingFacility, if our lenders declare an event of default, they would be entitled toforeclose on and take possession of our assets. In the event our debt obligations under theRevolving Facility become due and absent a significant restructuring of thatindebtedness, we will be unable to make the required payments and insuch event we would likely be required to seek protection under the BankruptcyCode.  Moreover, there can be noassurance that we will be successful in our restructuring efforts, includingour efforts to sell some or all of our assets or to consummate arecapitalization, merger or other business combination involving the Company.If such efforts are not successful, we may be required to seek protection underthe Bankruptcy Code. Even if such efforts are successful, we may still berequired to seek protection under the Bankruptcy Code to consummate such atransaction or series of transactions.

 

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Under the priority schemeestablished by the Bankruptcy Code, unless creditors agree otherwise inaccordance with the Bankruptcy Code, pre-petition liabilities and post-petitionliabilities (including certain fees and interest) must be satisfied in fullbefore stockholders are entitled to receive any distribution or retain anyproperty under a plan of reorganization. Amounts that would need to be satisfied in full before any recovery byour stockholders (including common stockholders and holders of our ConvertiblePreferred Stock) would include, among other things, approximately $226.5million in principal plus any accrued interest which is owed under our RevolvingFacility.  In addition, the holders ofour Convertible Preferred Stock have a liquidation preference of $50 per sharewhich, while still being junior to the claims of our debt and otherobligations, would need to be satisfied before any proceeds would be receivedby our common stockholders.  The totalamount of this liquidation preference is approximately $143.75 million and anyrecovery for our common stockholders would only be available if the proceedsavailable in any Bankruptcy Code proceeding exceeded the amount required torepay all of our outstanding indebtedness and other obligations (includingtrade payables and other unsecured claims) and to also satisfy the $143.75million Convertible Preferred 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 any 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, would not be determineduntil the confirmation of any plan of reorganization. No assurance can be givenas to what values, if any, would be ascribed in any potential Chapter 11 filingto each of these constituencies or what types or amounts of distributions, ifany, they would receive. If certain requirements of the Bankruptcy Code aremet, a plan of reorganization can be confirmed notwithstanding its rejection byequity holders and notwithstanding the fact that equity holders do not receiveor retain any property on account of their equity interests under the plan ofreorganization. Unless there is significant improvement in market conditions orwe are otherwise able to restructure our indebtedness without filing for Chapter11 protection, we believe it is very unlikely that our common stockholderswould receive any recovery in a Chapter 11 proceeding and it is also unlikelythat the holders of our Convertible Preferred Stock would receive anymeaningful recovery due in both cases to their relative positions with respectto our outstanding obligations which are senior to their respective equityinterests.

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

 

**Item 3 - Defaults UponSenior Securities**

 

The Company’sBoard of Directors did not declare a dividend on the Company’s 5.75% Series Acumulative convertible perpetual preferred stock (“Convertible Preferred Stock”)for the fourth quarter of 2008 or the first and second quarters of 2009, whichdividends would have been paid on January 15, April 15, 2009 andJuly 15, 2009. Therefore, as of August 4, 2009, the Company hasConvertible Preferred Stock dividends in arrears that total approximately $6.2million.

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

 

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**Item 6 - Exhibits**

 

The following exhibitsare filed as part of this report:

 

# **INDEX TO EXHIBITS**

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

 

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| 3.5 — | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by reference  from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 1999 (File No. 000-22149)).                                                                                                                                                                                                                                                                                       |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.6 — | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from  exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.7 — | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to the Company’s Current Report on Form 8-K  filed January 30, 2007).                                                                                                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.8 — | Third Amendment to  Bylaws of Edge Petroleum Corporation on October 21, 2008 (Incorporated  by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K  filed October 23, 2008).                                                                                                                                                                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1 — | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2 — | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3 — | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4 — | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5 — | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6 — | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated as of  July 11, 2007, December 10, 2007 and May 8, 2008,  respectively, by and among Edge Petroleum Corporation, as borrower, and Union  Bank of California, N.A., as Administrative Agent and Issuing Lender, and the  other lenders party thereto (Incorporated by reference from exhibit 4.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending March 31, 2008 filed on May 12, 2008). |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7 — | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8 — | Letter Agreement dated  November 5, 2008 by and among Edge Petroleum Corporation, Union Bank of  California, N.A., as Administrative Agent and Issuing Lender, and the other  lenders party thereto (Incorporated by reference from exhibit 4.11 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ending  September 30, 2008 filed November 10, 2008).                                                                                                                                              |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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                                                                                                                                                                                                                                                                                                                                                           |

 

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|              | 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).                   |
|              |                                                                                                                                                                                                                                                                                                                                                                       |
| †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                                                                                                                                                                           |

 

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|               | 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). |
|               |                                                                                                                                                                                                                                                                                                                 |
| 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).  |

 

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| 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.                                                                                                                                                                                                                                                                                                                               |
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *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   | August 6, 2009 |                           | /s/ John W.  Elias                    |   |
|   |                |                           | John W. Elias                         |   |
|   |                |                           | Chairman of the  Board, President and |   |
|   |                |                           | Chief Executive  Officer              |   |
|   |                |                           |                                  |   |
|   |                |                           |                                  |   |
| Date   | August 6, 2009 |                           | /s/ Gary L.  Pittman                  |   |
|   |                |                           | Gary L. Pittman                       |   |
|   |                |                           | Executive Vice  President and         |   |
|   |                |                           | Chief Financial  Officer              |   |
|   |                |                           |                                  |   |
|   |                |                           |                                  |   |
| Date   | August 6, 2009 |                           | /s/ Kirsten A.  Hink                  |   |
|   |                |                           | Kirsten A. Hink                       |   |
|   |                | Vice President  and Controller |                                  |

 

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# **INDEX TO EXHIBITS**

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

 

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| 3.4 — | Bylaws of the Company  (Incorporated by reference from exhibit 3.3 to the Company’s Quarterly Report  on Form 10-Q for the quarterly period ended September 30, 1999  (File No. 000-22149)).                                                                                                                                                                                                                                                                                                                                     |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.5 — | First Amendment to  Bylaws of the Company on September 28, 1999 (Incorporated by reference  from exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended September 30, 1999 (File No. 000-22149)).                                                                                                                                                                                                                                                                                       |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.6 — | Second Amendment to  Bylaws of the Company on May 7, 2003 (Incorporated by reference from  exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q for the  quarterly period ended March 31, 2003).                                                                                                                                                                                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.7 — | Certificate of  Designations establishing the 5.75% Series A cumulative convertible  perpetual preferred stock, dated January 25, 2007 (Incorporated by  reference to exhibit 3.1 to the Company’s Current Report on Form 8-K  filed January 30, 2007).                                                                                                                                                                                                                                                                     |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.8 — | Third Amendment to  Bylaws of Edge Petroleum Corporation on October 21, 2008 (Incorporated  by reference to exhibit 3.4 to the Company’s Current Report on Form 8-K  filed October 23, 2008).                                                                                                                                                                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.1 — | Miller Exploration  Company Stock Option and Restricted Stock Plan of 1997 (Incorporated by  reference from exhibit 10.1(a) to Miller’s Annual Report on  Form 10-K for the year ended December 31, 1997 (File  No. 000-23431)).                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.2 — | Amendment No. 1 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference to Exhibit 4.2 from Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.3 — | Amendment No. 2 to  the Miller Exploration Company Stock Option and Restricted Stock Plan of 1997  (Incorporated by reference from Exhibit 4.3 to Miller’s Registration  Statement on Form S-8 filed on April 11, 2001 (Registration  No. 333-58678)).                                                                                                                                                                                                                                                                 |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.4 — | Form of Miller  Stock Option Agreement (Incorporated by reference from exhibit  10.1(b) to Miller’s Annual Report on Form 10-K for the year ended  December 31, 1997 (File No. 000-23431)).                                                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.5 — | Fourth Amended and  Restated Credit Agreement dated January 31, 2007 by and among Edge  Petroleum Corporation, as borrower, and Union Bank of California, N.A., as  Administrative Agent and Issuing Lender, and the other lenders party thereto  (Incorporated by reference from exhibit 4.1 to the Company’s Current Report  on Form 8-K filed on February 5, 2007).                                                                                                                                                           |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.6 — | Amendments No. 1,  2 and 3 to the Fourth Amended and Restated Credit Agreement dated as of  July 11, 2007, December 10, 2007 and May 8, 2008,  respectively, by and among Edge Petroleum Corporation, as borrower, and Union  Bank of California, N.A., as Administrative Agent and Issuing Lender, and the  other lenders party thereto (Incorporated by reference from exhibit 4.9 to  the Company’s Quarterly Report on Form 10-Q for the quarterly period  ending March 31, 2008 filed on May 12, 2008). |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.7 — | Consent, executed  July 11, 2008, among Edge Petroleum Corporation, the Lenders party  thereto and Union Bank of California, N.A., as administrative agent for such  Lenders (Incorporated by reference from exhibit 4.1 to the Company’s Current  Report on Form 8-K filed July 15, 2008).                                                                                                                                                                                                                                      |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 4.8 — | Letter Agreement dated  November 5, 2008 by and among Edge Petroleum Corporation, Union Bank of  California, N.A., as Administrative Agent and Issuing Lender, and the other  lenders party thereto (Incorporated by reference from exhibit 4.11 to the  Company’s Quarterly Report on Form 10-Q for the quarterly period ending  September 30, 2008 filed November 10, 2008).                                                                                                                                              |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 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.                                                                                                                                                                                                                                                                                                                                                  |

 

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|              | (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).                    |
|              |                                                                                                                                                                                                                                                                                                                                                                        |
| †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)). |

 

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| †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). |
|               |                                                                                                                                                                                                                                                                                                                 |
| 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).                                                                                                                                        |

 

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| †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.                                                                                                                                                                                                                                                                                                                               |
|               |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *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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