##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2006                                                 
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission File
Number: 001-16295


ENCORE ACQUISITION COMPANY


(Exact name of registrant as specified in its charter)


|                                                                 |  |                                         
|---------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                         |  | 75-2759650                              
|State or other jurisdiction
    of incorporation or organization |  | (I.R.S. Employer
    Identification No.)
|                                                                
|777 Main Street, Suite 1400, Fort Worth, Texas                   |  | 76102                                   
|(Address of principal executive offices)                         |  | (Zip Code)                              

Registrants telephone number, including area code:
(817) 877-9955


Securities registered pursuant to Section 12(b) of the
Act:


|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|                    |  |                                          
|Common Stock        |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the
Act: None


þ o


o þ


þ o


S-K 10-K 10-K. o


12b-2


þ o o


12b-2).  o þ


|                                                                                                                                                                                                                                                                                                                 |  |               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Aggregate market value of the voting and non-voting common
    equity held by non-affiliates computed by reference to the price
    at which the common equity of the Registrant was last sold as of
    June 30, 2006 (the last business day of
    Registrants most recently completed second fiscal quarter) |  | $1,324,038,526
|Number of shares of Common Stock, $0.01 par value,
    outstanding as of February 20, 2007                                                                                                                                                                                                                       |  | 53,113,534    

DOCUMENTS INCORPORATED BY REFERENCE


10-K.










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##### 










ENCORE ACQUISITION COMPANY


INDEX


|                                                                     |  |                                                                                                                      |  |      |     | 
|-------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                     |  |                                                                                                                      |  | Page
|                                                                     |  |                                                                                                                      |  |     
|PART I                                                              
|Items 1 and 2.                                                       |  | Business and Properties                                                                                              |  |      | 1   | 
|Item 1A.                                                             |  | Risk Factors                                                                                                         |  |      | 20  | 
|Item 1B.                                                             |  | Unresolved Staff Comments                                                                                            |  |      | 29  | 
|Item 3.                                                              |  | Legal Proceedings                                                                                                    |  |      | 29  | 
|Item 4.                                                              |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 29  | 
|PART II                                                             
|Item 5.                                                              |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 30  | 
|Item 6.                                                              |  | Selected Financial Data                                                                                              |  |      | 32  | 
|Item 7.                                                              |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operation                             |  |      | 34  | 
|Item 7A.                                                             |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 65  | 
|Item 8.                                                              |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 68  | 
|Item 9.                                                              |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 105 | 
|Item 9A.                                                             |  | Controls and Procedures                                                                                              |  |      | 105 | 
|Item 9B.                                                             |  | Other Information                                                                                                    |  |      | 107 | 
|PART III                                                            
|Item 10.                                                             |  | Directors, Executive Officers and Corporate
    Governance                                                           |  |      | 107 | 
|Item 11.                                                             |  | Executive Compensation                                                                                               |  |      | 107 | 
|Item 12.                                                             |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 107 | 
|Item 13.                                                             |  | Certain Relationships and Related
    Transactions, and Director Independence                                        |  |      | 108 | 
|Item 14.                                                             |  | Principal Accounting Fees and Services                                                                               |  |      | 108 | 
|PART IV                                                             
|Item 15.                                                             |  | Exhibits, Financial Statement Schedules                                                                              |  |      | 108 | 
|Statement Showing Computation of Ratio of Earnings to Fixed Charges 
|Subsidiaries of the Company                                         
|Consent of Ernst & Young LLP                                        
|Consent of Miller and Lents, Ltd.                                   
|Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)
|Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)
|Section 1350 Certification (Principal Executive Officer)            
|Section 1350 Certification (Principal Financial Officer)            



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ENCORE ACQUISITION COMPANY


GLOSSARY OF OIL AND NATURAL GAS TERMS


10-K




| |   |                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bbl. One stock tank barrel, or 42 U.S. gallons
    liquid volume, used in reference to oil or other liquid
    hydrocarbons.                                                                                                                                                                                       
|
| |  | Bcf. One billion cubic feet of natural gas.                                                                                                                                                                                                                                                                        
|
| |  | Bbl/ D. One Bbl per day.                                                                                                                                                                                                                                                                                           
|
| |  | BOE. One barrel of oil equivalent, calculated by
    converting natural gas to oil equivalent barrels at a ratio of
    six Mcf to one Bbl of oil.                                                                                                                                                                 
|
| |  | BOE/ D. One BOE per day.                                                                                                                                                                                                                                                                                           
|
| |  | Completion. The installation of permanent equipment for
    the production of oil or natural gas.                                                                                                                                                                                                                  
|
| |  | Delay Rentals. Fees paid to the lessor of the oil and
    natural gas lease during the primary term of the lease prior to
    the commencement of production from a well.                                                                                                                                          
|
| |  | Developed Acreage. The number of acres which are
    allocated or assignable to producing wells or wells capable of
    production.                                                                                                                                                                                
|
| |  | Development Well. A well drilled within the proved area
    of an oil or natural gas reservoir to the depth of a
    stratigraphic horizon known to be productive.                                                                                                                                                 
|
| |  | Drill-to-Earn. The acquisition of an ownership interest
    in the reserves and production found and developed on properties
    in which no ownership interest exists prior to the onset of
    drilling.                                                                                                         
|
| |  | Encore or the Company. Encore Acquisition Company, a
    Delaware corporation, together with its subsidiaries.                                                                                                                                                                                                     
|
| |  | Exploratory Well. A well drilled to find and produce oil
    or natural gas in an unproved area, to find a new reservoir in a
    field previously found to be productive of oil or natural gas in
    another reservoir, or to extend a known reservoir.                                                          
|
| |  | Farm-out. Transfer of all or part of the operating rights
    from the working interest owner to an assignee, who assumes all
    or some of the burden of development, in return for an interest
    in the property.                                                                                             
|
| |  | Gross Acres or Gross Wells. The total acres or wells, as
    the case may be, in which we have a working interest.                                                                                                                                                                                                 
|
| |  | High-Pressure Air Injection (HPAI). HPAI
    involves utilizing compressors to inject air into previously
    produced oil and natural gas formations in order to displace
    remaining resident hydrocarbons and force them under pressure to
    a common lifting point for production.                       
|
| |  | Horizontal Drilling. A drilling operation in which a
    portion of the well is drilled horizontally within a productive
    or potentially productive formation. This operation usually
    yields a well which has the ability to produce higher volumes
    than a vertical well drilled in the same formation. 
|
| |  | Lease Operations Expense (LOE). All direct
    and allocated indirect costs of producing oil and natural gas
    after completion of drilling and before removal of production
    from the property. Such costs include labor, superintendence,
    supplies, repairs, maintenance, and direct overhead charges.
|
| |  | LIBOR. London Interbank Offered Rate.                                                                                                                                                                                                                                                                              
|
| |  | MBbl. One thousand Bbls.                                                                                                                                                                                                                                                                                           
|
| |  | MBOE. One thousand BOE.                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MBOE/ D. One thousand BOE per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Mcf. One thousand cubic feet of natural gas.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Mcf/ D. One Mcf per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Mcfe. One Mcf equivalent, calculated by converting oil to
    natural gas equivalent at a ratio of one Bbl of oil to six Mcf.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Mcfe/ D. One Mcfe per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | MMBbl. One million Bbls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | MMBOE. One million BOE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | MMBtu. One million British thermal units. One British
    thermal unit is the amount of heat required to raise the
    temperature of one pound of water one degree Fahrenheit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | MMcf. One million Mcf.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | MMcf/ D. One MMcf per day.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Net Acres or Net Wells. Gross acres or wells, as the case
    may be, multiplied by the percentage working interest owned by
    us.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Net Production. Production that is owned by us less
    royalties and production due others.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | NYMEX. New York Mercantile Exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Oil. Crude oil or condensate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Operating Income. Gross oil and natural gas revenue less
    applicable production, ad valorem, and severance taxes and LOE.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Operator. The individual or company responsible for the
    exploration, exploitation, and production of an oil or natural
    gas well or lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Present Value of Future Net Revenues or Present Value or
    PV-10. The pretax
    present value of estimated future revenues to be generated from
    the production of proved reserves, net of estimated production
    and future development costs, using prices and costs as of the
    date of estimation without future escalation, without giving
    effect to hedging activities, non-property related expenses such
    as general and administrative expenses, debt service and
    depletion, depreciation, and amortization, and discounted using
    an annual discount rate of 10 percent.                                                                                                          
|
| |  | Productive Well. A well that produces commercial
    quantities of hydrocarbons, exclusive of its capacity to produce
    at a reasonable rate of return.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Proved Developed Reserves. Reserves that can be expected
    to be recovered through existing wells with existing equipment
    and operating methods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Proved Reserves. The estimated quantities of oil, natural
    gas, and natural gas liquids that geological and engineering
    data demonstrate with reasonable certainty are recoverable in
    future years from known reservoirs under existing economic and
    operating conditions.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Proved Undeveloped Reserves. Proved undeveloped reserves
    are proved reserves that are expected to be recovered from new
    wells drilled to known reservoirs on acreage yet to be drilled
    for which the existence and recoverability of such reserves can
    be estimated with reasonable certainty, or from existing wells
    where a relatively major expenditure is required to establish
    production. Proved undeveloped reserves include unrealized
    production response from fluid injection and other improved
    recovery techniques, such as high-pressure air injection, where
    such techniques have been proved effective by actual tests in
    the area and in the same reservoir.

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ENCORE ACQUISITION COMPANY




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Reserve-To-Production Index (R/ P Index). An
    estimate expressed in years of the total estimated proved
    reserves attributable to a producing property divided by
    production from the property for the 12 months preceding
    the date as of which the proved reserves were estimated.                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Royalty. An interest in an oil and natural gas lease that
    gives the owner of the interest the right to receive a portion
    of the production from the leased acreage (or of the proceeds of
    the sale thereof), but does not require the owner to pay any
    portion of the costs of drilling or operating the wells on the
    leased acreage. Royalties may be either landowners
    royalties, which are reserved by the owner of the leased acreage
    at the time the lease is granted, or overriding royalties, which
    are usually reserved by an owner of the leasehold in connection
    with a transfer to a subsequent owner.
|
| |  | SEC. The United States Securities and Exchange Commission.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Standardized Measure. Future cash inflows from proved oil
    and natural gas reserves, less future development and production
    costs and future income tax expenses, discounted at
    10 percent per annum to reflect the timing of future cash
    flows. Standardized Measure differs from
    PV-10 because
    Standardized Measure includes the effect of future income taxes.                                                                                                                                                                                                                                                              
|
| |  | Tertiary Recovery. An enhanced recovery operation that
    normally occurs after waterflooding in which chemicals or
    natural gasses are used as the injectant. HPAI is a form of
    tertiary recovery.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Unit. A specifically defined area within which acreage is
    treated as a single consolidated lease for operations and for
    allocations of costs and benefits without regard to ownership of
    the acreage. Units are established for the purpose of recovering
    oil and natural gas from specified zones or formations.                                                                                                                                                                                                                                                                                                                     
|
| |  | Waterflood. A secondary recovery operation in which water
    is injected into the producing formation in order to maintain
    reservoir pressure and force oil toward and into the producing
    wells.                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Working Interest. An interest in an oil and natural gas
    lease that gives the owner of the interest the right to drill
    for and produce oil and natural gas on the leased acreage and
    requires the owner to pay a share of the costs of drilling and
    production operations.                                                                                                                                                                                                                                                                                                                                                             

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ENCORE ACQUISITION COMPANY







PART I







|               |                        
|-------------- | -----------------------
|ITEMS 1 and 2. | BUSINESS AND PROPERTIES

General


Our Business.




| |   |                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Cedar Creek Anticline (CCA) in the Williston
    Basin of Montana and North Dakota;                                                                                                
|
| |  | the Permian Basin of west Texas and southeastern New Mexico;                                                                                                                             
|
| |  | the Rockies, which includes non-CCA assets in the Williston and
    Powder River Basins of Montana and North Dakota and the Paradox
    Basin of southeastern Utah; and                  
|
| |  | the Mid-Continent area, which includes the Arkoma and Anadarko
    Basins of Oklahoma, the North Louisiana Salt Basin, the East
    Texas Basin, and the Barnett Shale of northern Texas.

Proved Reserves.


Most Valuable Asset.


Drilling.


Oil and Natural Gas Reserve Replacement.


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ENCORE ACQUISITION COMPANY




|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |        |        | 
|------------------------------------- | ------------------------------------- | ---------------------------------------------- | ------------------------- | --- | ---------- | ------ |  | ---- | ------ | ------ | ------- | --- | ------ | ------ |  | --- | ------ | ------ | 
|                                      |                                       | Year Ended December 31,                        |                           |     |           
|                                      |                                       |                                                |                           |     | Three-Year |       
|                                      |                                       | 2006                                           |                           |     | 2005       |        |  | 2004 |        |        | Average |    
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      |                                       | (In MBOE, except percentages)                  |                          
|Acquisition Reserve Replacement Ratio |                                       |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |    
|                                      | Changes in Proved Reserves:           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Acquisitions of minerals-in-place              |                           |     | 64         |        |  |      | 14,796 |        |         |     | 22,239 |        |  |     | 12,366 |       
|                                      | Divided by:                           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Production                                     |                           |     | 11,244     |        |  |      | 10,381 |        |         |     | 9,027  |        |  |     | 10,217 |       
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      | Acquisition reserve replacement ratio |                                                |                           | 1   | %          |        |  | 142  | %      |        |         | 246 | %      |        |  | 121 | %     
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|Development Reserve Replacement Ratio |                                       |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |    
|                                      | Changes in Proved Reserves:           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Extensions, discoveries, and improved recovery |                           |     | 27,504     |        |  |      | 19,158 |        |         |     | 20,580 |        |  |     | 22,414 |       
|                                      |                                       | Revisions of estimates                         |                           |     | (7,461     | )      |  |      | (928   | )      |         |     | (1,629 | )      |  |     | (3,339 | )     
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      |                                       |                                                | Total development program |     |            | 20,043 |  |      |        | 18,230 |         |     |        | 18,951 |  |     |        | 19,075 | 
|                                      | Divided by:                           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Production                                     |                           |     | 11,244     |        |  |      | 10,381 |        |         |     | 9,027  |        |  |     | 10,217 |       
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      | Development reserve replacement ratio |                                                |                           | 178 | %          |        |  | 176  | %      |        |         | 210 | %      |        |  | 187 | %     
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|Total Reserve Replacement Ratio       |                                       |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |    
|                                      | Changes in Proved Reserves:           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Acquisitions of minerals-in-place              |                           |     | 64         |        |  |      | 14,796 |        |         |     | 22,239 |        |  |     | 12,366 |       
|                                      |                                       | Extensions, discoveries, and improved recovery |                           |     | 27,504     |        |  |      | 19,158 |        |         |     | 20,580 |        |  |     | 22,414 |       
|                                      |                                       | Revisions of estimates                         |                           |     | (7,461     | )      |  |      | (928   | )      |         |     | (1,629 | )      |  |     | (3,339 | )     
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      |                                       |                                                | Total reserve additions   |     |            | 20,107 |  |      |        | 33,026 |         |     |        | 41,190 |  |     |        | 31,441 | 
|                                      | Divided by:                           |                                                |                           |     |            |        |  |      |        |        |         |     |        |        |  |     |       
|                                      |                                       | Production                                     |                           |     | 11,244     |        |  |      | 10,381 |        |         |     | 9,027  |        |  |     | 10,217 |       
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    
|                                      | Total reserve replacement ratio       |                                                |                           | 179 | %          |        |  | 318  | %      |        |         | 456 | %      |        |  | 308 | %     
|                                      |                                       |                                                |                           |     |            |        |  |      |        |        |         |    





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ENCORE ACQUISITION COMPANY




Recent Developments




| |                                           
| | ------------------------------------------
| | Agreement to Acquire Big Horn Basin Assets





| |                                            
| | -------------------------------------------
| | Agreement to Acquire Williston Basin Assets





| |                                               
| | ----------------------------------------------
| | Intention to Form a Master Limited Partnership

S-1




| |                                              
| | ---------------------------------------------
| | Potential Divestiture of Mid-Continent Assets



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ENCORE ACQUISITION COMPANY




Business Strategies






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain an active development program. Our technological
    expertise, combined with our proficient field operations and
    reservoir engineering, has allowed us to increase production and
    reserves on our properties through infill, offset, and re-entry
    drilling, workovers, and recompletions. Our plan is to maintain
    an inventory of exploitation and development projects that
    provide a good source of future production. We also budget a
    portion of internally generated cash flow to secondary and
    tertiary recovery projects that are longer- term in nature, the
    benefit from which is not seen until some point in the future.                                                                                                                                                                                                                                                                                                                        
|
| |  | Maximize existing reserves and production through HPAI.
    In addition to conventional development programs, we utilize
    HPAI techniques on the CCA properties to enhance our growth.
    HPAI involves using compressors to inject air into producing oil
    and natural gas formations in order to displace remaining
    resident hydrocarbons and force them under pressure to a common
    lifting point for production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Utilize other improved recovery techniques to maximize
    existing reserves and production. In addition to our HPAI
    programs, we use secondary and other tertiary recovery
    techniques to increase production and proved reserves on
    existing properties. Throughout our CCA properties and Permian
    Basin properties, we have successfully used waterflood
    enhancement programs to increase production. Waterflood
    enhancement is a secondary recovery operation in which water is
    injected into the producing formation in order to maintain
    reservoir pressure and force oil toward and into the producing
    wells. On certain non-operated properties in the Rockies, a
    similar tertiary recovery technique that uses carbon dioxide
    instead of water is being used successfully. We believe that
    these other improved recovery projects, including carbon dioxide
    injection, will continue to be a source of reserve and
    production growth.
|
| |  | Expand our reserves, production, and drilling inventory
    through a disciplined acquisition program. Using our
    experience, we have developed and refined an acquisition program
    designed to increase our reserves and complement our core
    properties. We have a staff of engineering and geoscience
    professionals who manage our core properties and use their
    experience and expertise to target and evaluate attractive
    acquisition opportunities. Following an acquisition, our
    technical professionals seek to enhance the value of the new
    assets through a proven development and exploitation program. We
    will continue to evaluate acquisition opportunities with the
    same disciplined commitment to acquire assets that fit our
    portfolio and create value for our shareholders.                                                                                                                                                              
|
| |  | Explore for reserves. With the current commodity price
    environment, we believe exploration programs can provide a rate
    of return comparable to property acquisitions in certain areas.
    We seek to acquire undeveloped acreage and/or enter into
    drilling arrangements to explore in areas that complement our
    portfolio of properties. In keeping with our exploitation focus,
    the exploration projects expand existing fields or could set up
    multi-well exploitation projects if successful.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Operate in a cost effective, efficient, and safe manner.
    As of December 31, 2006, we operated properties
    representing approximately 84 percent of our proved
    reserves, which allows us to control capital allocation, operate
    in a safe manner, and control timing of investments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Challenges to Implementing Our Strategy.


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ENCORE ACQUISITION COMPANY




Operations




Production and Price History




|                          |                                             |                         |   |        |      |  |   |        |  |  |   |        | 
|------------------------- | ------------------------------------------- | ----------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                          |                                             | Year Ended December 31, |  
|                          |                                             |                         |  
|                          |                                             | 2006                    |   |        | 2005 |  |   | 2004   | 
|                          |                                             |                         |   |        |      |  |   |        | 
|Production:               |                                             |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (MBbls)                                 |                         |   | 7,335  |      |  |   | 6,871  |  |  |   | 6,679  | 
|                          | Natural gas (MMcf)                          |                         |   | 23,456 |      |  |   | 21,059 |  |  |   | 14,089 | 
|                          | Combined (MBOE)                             |                         |   | 11,244 |      |  |   | 10,381 |  |  |   | 9,027  | 
|Average Daily Production: |                                             |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (Bbls/D)                                |                         |   | 20,096 |      |  |   | 18,826 |  |  |   | 18,249 | 
|                          | Natural gas (Mcf/D)                         |                         |   | 64,262 |      |  |   | 57,696 |  |  |   | 38,493 | 
|                          | Combined (BOE/D)                            |                         |   | 30,807 |      |  |   | 28,442 |  |  |   | 24,665 | 
|Average Prices:           |                                             |                         |   |        |      |  |   |        |  |  |   |       
|                          | Oil (per Bbl)                               |                         | $ | 47.30  |      |  | $ | 44.82  |  |  | $ | 33.04  | 
|                          | Natural gas (per Mcf)                       |                         |   | 6.24   |      |  |   | 7.09   |  |  |   | 5.53   | 
|                          | Combined (per BOE)                          |                         |   | 43.87  |      |  |   | 44.05  |  |  |   | 33.07  | 
|Average Costs per BOE:    |                                             |                         |   |        |      |  |   |        |  |  |   |       
|                          | Lease operations expense                    |                         | $ | 8.73   |      |  | $ | 6.72   |  |  | $ | 5.30   | 
|                          | Production, ad valorem, and severance taxes |                         |   | 4.43   |      |  |   | 4.39   |  |  |   | 3.36   | 
|                          | Depletion, depreciation, and amortization   |                         |   | 10.09  |      |  |   | 8.25   |  |  |   | 5.38   | 
|                          | Exploration                                 |                         |   | 2.71   |      |  |   | 1.39   |  |  |   | 0.44   | 
|                          | Derivative fair value (gain) loss           |                         |   | (2.17  | )    |  |   | 0.51   |  |  |   | 0.56   | 
|                          | General and administrative                  |                         |   | 2.06   |      |  |   | 1.67   |  |  |   | 1.33   | 
|                          | Other operating expense                     |                         |   | 0.89   |      |  |   | 0.91   |  |  |   | 0.56   | 
|                          | Oil marketing, net                          |                         |   | 0.09   |      |  |   |       |  |  |   |       | 

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ENCORE ACQUISITION COMPANY


Producing Wells




|              |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          |  |     |     |  |  |    |    |  
|------------- | ----- | --------- | ----- | ------- | ----------------- |  | --- | -------- | ------- |  | -------- | -- | - | ----- | ----- | ----- | -------- |  | --- | --- |  |  | -- | -- | -
|              |       | Oil Wells |       |         | Natural Gas Wells | 
|              |       |           |       |         |                   | 
|              |       |           |       | Average |                   |  |     |          | Average | 
|              |       | Gross     |       |         | Net               |  |     | Working  |         |  | Gross    |    |   | Net   |       |       | Working  | 
|              |       | Wells(a)  |       |         | Wells             |  |     | Interest |         |  | Wells(a) |    |   | Wells |       |       | Interest | 
|              |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 
|CCA           |       |           | 759   |         |                   |  | 675 |          |         |  | 89       | %  |   |       | 18    |       |          |  | 5   |     |  |  | 31 | % 
|Permian Basin |       |           | 1,991 |         |                   |  | 780 |          |         |  | 39       | %  |   |       | 523   |       |          |  | 240 |     |  |  | 46 | % 
|Rockies       |       |           | 607   |         |                   |  | 315 |          |         |  | 52       | %  |   |       | 19    |       |          |  | 16  |     |  |  | 82 | % 
|Mid-Continent |       |           | 388   |         |                   |  | 177 |          |         |  | 46       | %  |   |       | 1,470 |       |          |  | 357 |     |  |  | 24 | % 
|              |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 
|              | Total |           |       | 3,745   |                   |  |     | 1,947    |         |  |          | 52 | % |       |       | 2,030 |          |  |     | 618 |  |  |    | 30 | %
|              |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 






|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Our total wells include 2,587 operated wells and 3,188
    non-operated wells. At December 31, 2006, 61 of our
    wells have multiple completions.

Acreage




|               |             |         |           |         |         |  |         |         | 
|-------------- | ----------- | ------- | --------- | ------- | ------- |  | ------- | ------- | 
|               |             | Gross   |           |         | Net     | 
|               |             | Acreage |           |         | Acreage | 
|               |             |         |           |         |         | 
|CCA:           |             |         |           |         |         |  |         |        
|               | Developed   |         |           | 110,083 |         |  |         | 104,135 | 
|               | Undeveloped |         |           | 62,465  |         |  |         | 50,956  | 
|               |             |         |           |         |         | 
|               |             |         | 172,548   |         |         |  | 155,091 |        
|               |             |         |           |         |         | 
|Permian:       |             |         |           |         |         |  |         |        
|               | Developed   |         |           | 66,132  |         |  |         | 40,350  | 
|               | Undeveloped |         |           | 15,007  |         |  |         | 13,795  | 
|               |             |         |           |         |         | 
|               |             |         | 81,139    |         |         |  | 54,145  |        
|               |             |         |           |         |         | 
|Rockies:       |             |         |           |         |         |  |         |        
|               | Developed   |         |           | 64,848  |         |  |         | 39,626  | 
|               | Undeveloped |         |           | 491,613 |         |  |         | 384,899 | 
|               |             |         |           |         |         | 
|               |             |         | 556,461   |         |         |  | 424,525 |        
|               |             |         |           |         |         | 
|Mid-Continent: |             |         |           |         |         |  |         |        
|               | Developed   |         |           | 390,869 |         |  |         | 101,023 | 
|               | Undeveloped |         |           | 169,867 |         |  |         | 79,902  | 
|               |             |         |           |         |         | 
|               |             |         | 560,736   |         |         |  | 180,925 |        
|               |             |         |           |         |         | 
|Total:         |             |         |           |         |         |  |         |        
|               | Developed   |         |           | 631,932 |         |  |         | 285,134 | 
|               | Undeveloped |         |           | 738,952 |         |  |         | 529,552 | 
|               |             |         |           |         |         | 
|               |             |         | 1,370,884 |         |         |  | 814,686 |        
|               |             |         |           |         |         | 

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ENCORE ACQUISITION COMPANY


Drilling Results




|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |     | 
|------------------ | ---------- | ----------------------- | --- | --- | ---- |  | --- | ----- |  |  | --- | --- |  | ----- | --- | --- | --- |  | --- | --- |  |  | --- | --- | 
|                   |            | Year Ended December 31, |    
|                   |            |                         |    
|                   |            | 2006                    |     |     | 2005 |  |     | 2004  | 
|                   |            |                         |     |     |      |  |     |       | 
|                   |            | Gross                   |     |     | Net  |  |     | Gross |  |  | Net |     |  | Gross |     |     | Net | 
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|Development Wells: |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|                   | Productive |                         |     | 182 |      |  |     | 72    |  |  |     | 242 |  |       |     | 145 |     |  |     | 203 |  |  |     | 135 | 
|                   | Dry holes  |                         |     | 4   |      |  |     | 3     |  |  |     | 4   |  |       |     | 2   |     |  |     | 1   |  |  |     | 1   | 
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   |            |                         | 186 |     |      |  | 75  |       |  |  | 246 |     |  |       | 147 |     |     |  | 204 |     |  |  | 136 |    
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|Exploratory Wells: |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|                   | Productive |                         |     | 71  |      |  |     | 19    |  |  |     | 34  |  |       |     | 22  |     |  |     | 32  |  |  |     | 30  | 
|                   | Dry holes  |                         |     | 14  |      |  |     | 8     |  |  |     | 47  |  |       |     | 42  |     |  |     | 4   |  |  |     | 4   | 
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   |            |                         | 85  |     |      |  | 27  |       |  |  | 81  |     |  |       | 64  |     |     |  | 36  |     |  |  | 34  |    
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|Total:             |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|                   | Productive |                         |     | 253 |      |  |     | 91    |  |  |     | 276 |  |       |     | 167 |     |  |     | 235 |  |  |     | 165 | 
|                   | Dry holes  |                         |     | 18  |      |  |     | 11    |  |  |     | 51  |  |       |     | 44  |     |  |     | 5   |  |  |     | 5   | 
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   |            |                         | 271 |     |      |  | 102 |       |  |  | 327 |     |  |       | 211 |     |     |  | 240 |     |  |  | 170 |    
|                   |            |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 

Present Activities




Delivery Commitments and Marketing








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ENCORE ACQUISITION COMPANY






Competition








Environmental Matters and Regulation


General.




| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require the acquisition of various permits before drilling
    commences;                                                                                                                                               
|
| |  | require the installation of expensive pollution control
    equipment;                                                                                                                                                  
|
| |  | enjoin some or all of the operations of facilities deemed in
    non-compliance with permits;                                                                                                                           
|
| |  | restrict the types, quantities and concentration of various
    substances that can be released into the environment in
    connection with oil and natural gas drilling, production, and
    transportation activities;
|
| |  | restrict the way in which wastes are handled and disposed;                                                                                                                                                              
|
| |  | limit or prohibit drilling activities on certain lands lying
    within wilderness, wetlands, areas inhabited by threatened of
    endangered species, and other protected areas;                                       

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ENCORE ACQUISITION COMPANY




| |   |                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | require remedial measures to mitigate pollution from former and
    ongoing operations, such as requirements to close pits and plug
    abandoned wells;                      
|
| |  | impose substantial liabilities for pollution resulting from
    operations; and                                                                                               
|
| |  | require preparation of a Resource Management Plan, Environmental
    Assessment and/or an Environmental Impact Statement for
    operations affecting federal lands or leases.





Waste Handling.


Site Remediation.




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ENCORE ACQUISITION COMPANY




Water Discharges.




Air Emissions.






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ENCORE ACQUISITION COMPANY




Activities on Federal Lands.


Occupational Safety and Health Act (the OSH Act)
and Other Laws and Regulation. right-to




Other Regulation of the Oil and Natural Gas Industry






Drilling and Production.


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ENCORE ACQUISITION COMPANY






| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | the location of wells;                                                         
|
| |  | the method of drilling and casing wells;                                       
|
| |  | the surface use and restoration of properties upon which wells
    are drilled;
|
| |  | the plugging and abandoning of wells; and                                      
|
| |  | notice to surface owners and other third parties.                              



Natural Gas Regulation.




State Regulation.




Federal, State, or Native American Leases. on-site


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ENCORE ACQUISITION COMPANY


Operating Hazards and Insurance






Employees




Principal Executive Office


877-9955.


Available Information


www.encoreacq.com 10-K, 10-Q, 8-K, 1-800-SEC-0330. www.sec.gov


www.encoreacq.com






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ENCORE ACQUISITION COMPANY




Properties




| |                                  
| | ---------------------------------
| | Nature of Our Ownership Interests

PV-10


|              |       |                     |       |                           |                      |  |        |                      |  |  |         |        |         |     |     |        |     |  |         |         |  |                |           |         |  |         |         |         |  |   |           |           |  |  |     |      | 
|------------- | ----- | ------------------- | ----- | ------------------------- | -------------------- |  | ------ | -------------------- |  |  | ------- | ------ | ------- | --- | --- | ------ | --- |  | ------- | ------- |  | -------------- | --------- | ------- |  | ------- | ------- | ------- |  | - | --------- | --------- |  |  | --- | ---- | 
|              |       |                     |       | Proved Reserve Quantities |                      |  | PV-10  |                     
|              |       | 2006 Net Production |       |                           | at December 31, 2006 |  |        | at December 31, 2006 | 
|              |       |                     |       |                           |                      |  |        |                      | 
|              |       |                     |       | Natural                   |                      |  |        |                      |  |  | Natural |        |         |     |     |       
|              |       | Oil                 |       |                           | Gas                  |  |        | Total                |  |  | Percent |        |         | Oil |     |        | Gas |  |         | Total   |  |                | Amount(a) |         |  | Percent |        
|              |       |                     |       |                           |                      |  |        |                      |  |  |         |        |         |     |     |        |     |  |         |         |  |                |           |         |  |         |        
|              |       | (MBbls)             |       |                           | (MMcf)               |  |        | (MBOE)               |  |  |         |        | (MBbls) |     |     | (MMcf) |     |  | (MBOE)  |         |  | (in thousands) |           |         | 
|CCA           |       |                     | 4,851 |                           |                      |  | 1,330  |                      |  |  | 5,073   |        |         |     | 45% |        |     |  | 117,868 |         |  |                | 15,750    |         |  |         | 120,493 |         |  | $ | 1,113,352 |           |  |  | 57% |     
|Permian Basin |       |                     | 1,277 |                           |                      |  | 5,841  |                      |  |  | 2,250   |        |         |     | 20% |        |     |  | 23,105  |         |  |                | 106,693   |         |  |         | 40,887  |         |  |   | 302,669   |           |  |  | 15% |     
|Rockies       |       |                     | 732   |                           |                      |  | 360    |                      |  |  | 792     |        |         |     | 7%  |        |     |  | 8,716   |         |  |                | 2,895     |         |  |         | 9,198   |         |  |   | 426,160   |           |  |  | 22% |     
|Mid-Continent |       |                     | 475   |                           |                      |  | 15,925 |                      |  |  | 3,129   |        |         |     | 28% |        |     |  | 3,745   |         |  |                | 181,426   |         |  |         | 33,983  |         |  |   | 119,035   |           |  |  | 6%  |     
|              |       |                     |       |                           |                      |  |        |                      |  |  |         |        |         |     |     |        |     |  |         |         |  |                |           |         |  |         |        
|              | Total |                     |       | 7,335                     |                      |  |        | 23,456               |  |  |         | 11,244 |         |     |     | 100%   |     |  |         | 153,434 |  |                |           | 306,764 |  |         |         | 204,561 |  |   | $         | 1,961,216 |  |  |     | 100% | 
|              |       |                     |       |                           |                      |  |        |                      |  |  |         |        |         |     |     |        |     |  |         |         |  |                |           |         |  |         |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Calculated as the pretax present value of estimated future
    revenues to be generated from the production of proved reserves,
    net of estimated production and future development costs, using
    prices and costs as of the date of estimation without future
    escalation, without giving effect to hedging activities and
    non-property related expenses such as general and administrative
    expenses, debt service, and depletion, depreciation, and
    amortization; and discounted using an annual discount rate of
    10 percent. Giving effect to hedging transactions, our
    PV-10 value would have
    been decreased by $21.7 million at December 31, 2006.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Standardized Measure at December 31, 2006 is
    $1.5 billion. Standardized Measure differs from
    PV-10 by
    $499.4 million because Standardized Measure includes the
    effect of future income taxes. Since we are taxed at the
    corporate level, future income taxes are determined on a
    combined property basis and cannot be accurately subdivided
    among our core areas. Therefore, we feel
    PV-10 provides the best
    method for assessing relative value of each of our areas.



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ENCORE ACQUISITION COMPANY


EIA-23.







| |                                          
| | -----------------------------------------
| | CCA Properties  Montana and North Dakota









| |   |                                                
| | - | -----------------------------------------------
| |  | acquisition of additional interests;           
|
| |  | effective management of the existing wellbores;

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ENCORE ACQUISITION COMPANY




| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | the addition of strategically positioned new horizontal and
    vertical wellbores;
|
| |  | re-entry horizontal drilling using existing wellbores;                             
|
| |  | waterflood enhancements; and                                                       
|
| |  | implementation of our HPAI program.                                                









HPAI.






Net Profits Interests (NPI).


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ENCORE ACQUISITION COMPANY






| |                                                         
| | --------------------------------------------------------
| | Permian Basin Properties  West Texas and New
    Mexico





| |           
| | ----------
| | West Texas















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ENCORE ACQUISITION COMPANY




| |           
| | ----------
| | New Mexico





| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Entering into joint ventures;                                                    
|
| |  | Agreements with major oil and gas companies;                                     
|
| |  | Drill to earn agreements;                                                        
|
| |  | Farm-outs of close-in exploitation opportunities; and                            
|
| |  | Establish built-in partnerships with other independent
    exploration companies.







| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Mid-Continent Properties  Oklahoma, Arkansas,
    East Texas, North Texas, Kansas, and North Louisiana



| |                                            
| | -------------------------------------------
| | Oklahoma, Arkansas, North Texas, and Kansas











| |                                                
| | -----------------------------------------------
| | North Louisiana Salt Basin and East Texas Basin





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ENCORE ACQUISITION COMPANY








| |                                                                
| | ---------------------------------------------------------------
| | Rocky Mountain Properties  North Dakota,
    Montana, and Utah



| |                                           
| | ------------------------------------------
| | Williston Basin  North Dakota and Montana





| |                     
| | --------------------
| | Bell Creek  Montana





| |                     
| | --------------------
| | Paradox Basin  Utah



Title to Properties








| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | royalties, overriding royalties, NPIs, and other burdens under
    oil and natural gas leases;                                                                                                                                                 
|
| |  | contractual obligations, including, in some cases, development
    obligations arising under operating agreements, farmout
    agreements, production sales contracts, and other agreements
    that may affect the properties or their titles;
|
| |  | liens that arise in the normal course of operations, such as
    those for unpaid taxes, statutory liens securing unpaid
    suppliers and contractors, and contractual liens under operating
    agreements;                                  

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ENCORE ACQUISITION COMPANY




| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | pooling, unitization and communitization agreements,
    declarations, and orders; and          
|
| |  | easements, restrictions,
    rights-of-way, and
    other matters that commonly affect property.








ITEM 1A.     RISK FACTORS


You should read carefully the following factors and all other
information contained in this Report. If any of the risks and
uncertainties described below or elsewhere in this Report
actually occur, our business, financial condition, or results of
operations could be materially adversely affected. In that case,
the trading price of our common stock could decline, and an
investor may lose all or part of his investment.




| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Oil and natural gas prices are volatile and sustained
    periods of low prices could materially and adversely affect our
    financial condition, results of operations, and cash
    flows.





| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | domestic and foreign supply of and demand for oil and natural
    gas;                                                                                      
|
| |  | weather conditions;                                                                                                                                         
|
| |  | overall domestic and global economic conditions;                                                                                                            
|
| |  | political and economic conditions in oil and natural gas
    producing countries, including those in the Middle East and
    South America;                 
|
| |  | actions of the Organization of Petroleum Exporting Countries and
    other state-controlled oil companies relating to oil price and
    production controls;
|
| |  | impact of the U.S. dollar exchange rates on oil and natural
    gas prices;                                                                                 
|
| |  | technological advances affecting energy consumption;                                                                                                        
|
| |  | armed conflict in oil and natural gas producing countries;                                                                                                  
|
| |  | domestic and foreign governmental regulations and taxation;                                                                                                 
|
| |  | the impact of energy conservation efforts;                                                                                                                  
|
| |  | the proximity, capacity, cost and availability of oil and
    natural gas pipelines and other transportation
    facilities; and                            
|
| |  | the price and availability of alternative fuels.                                                                                                            

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| |   |                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | negatively impact the value of our reserves, because declines in
    oil and natural gas prices would reduce the amount of oil and
    natural gas that we can produce economically;
|
| |  | reduce the amount of cash flow available for capital
    expenditures and repayment of indebtedness;                                                                                
|
| |  | limit our ability to borrow money or raise additional
    capital; and                                                                                                              
|
| |  | impair our ability to pay distributions.                                                                                                                                            





| |                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our estimated proved reserves are based on many
    assumptions that may prove to be inaccurate. Any material
    inaccuracies in these reserve estimates or underlying
    assumptions will materially affect the quantities and present
    value of our reserves.





| |   |                                   
| | - | ----------------------------------
| |  | future oil and natural gas prices;
|
| |  | production levels;                
|
| |  | capital expenditures;             
|
| |  | operating and development costs;  
|
| |  | the effects of regulation; and    
|
| |  | availability of funds.            







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ENCORE ACQUISITION COMPANY






| |   |                                                             
| | - | ------------------------------------------------------------
| |  | the actual prices we receive for oil and natural gas;       
|
| |  | our actual operating costs in producing oil and natural gas;
|
| |  | the amount and timing of actual production;                 
|
| |  | the amount and timing of our capital expenditures;          
|
| |  | supply of and demand for oil and natural gas; and           
|
| |  | changes in governmental regulations or taxation.            





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | The failure to replace our reserves could adversely affect
    our financial condition.







| |                                              
| | ---------------------------------------------
| | The results of HPAI techniques are uncertain.





| |                                                                
| | ---------------------------------------------------------------
| | We may be required to write down our asset carrying
    values.





| |   |                                                                                     
| | - | ------------------------------------------------------------------------------------
| |  | oil and natural gas prices decrease;                                                
|
| |  | we make substantial downward adjustments to our estimated proved
    reserves;      
|
| |  | our operating expenses or development costs increase
    substantially; or          
|
| |  | we experience poor performance from our development and
    exploitation activities.



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ENCORE ACQUISITION COMPANY






| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | If we do not make acquisitions on economically acceptable
    terms, our future growth may be limited.





| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | unable to identify attractive acquisition candidates or
    negotiate acceptable purchase contracts with them;
|
| |  | unable to obtain financing for these acquisitions on
    economically acceptable terms;                       
|
| |  | outbid by competitors; or                                                                                     
|
| |  | unable to obtain necessary regulatory approvals.                                                              





| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | expected revenues;                                                         
|
| |  | the level of recoverable reserves and production;                          
|
| |  | future oil and natural gas prices;                                         
|
| |  | operating costs; and                                                       
|
| |  | the nature and amount of potential environmental and other
    liabilities.





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ENCORE ACQUISITION COMPANY




| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | The failure to properly manage growth through acquisitions
    could adversely affect our results of operations.





| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | diversion of management attention from existing operations;                                                                                                                       
|
| |  | unexpected losses of key employees, customers, and suppliers of
    the acquired business;                                                                                        
|
| |  | conforming the financial, technological, and management
    standards, processes, procedures, and controls of the acquired
    business with those of our existing operations; and
|
| |  | increasing the scope, geographic diversity, and complexity of
    our operations.                                                                                                 





| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | A substantial portion of our producing properties is
    located in one geographic area.





| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Derivative instruments expose us to risks of financial
    loss in a variety of circumstances.





| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a counterparty may not perform its obligation under the
    applicable derivative instrument; and                                                                                                                                                                                                                          
|
| |  | there may be a change in the expected differential between the
    underlying commodity price in the derivative instrument and the
    actual price received resulting in either a drop in the price we
    receive for production that is not offset by an increase in cash
    inflows from the derivative or vice versa.



mark-to


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ENCORE ACQUISITION COMPANY




| |                                                                                 
| | --------------------------------------------------------------------------------
| | We have limited control over the activities on properties
    we do not operate.





| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Drilling for and producing oil and natural gas are costly
    and high-risk activities with many uncertainties that could
    adversely affect our financial condition or results of
    operations.





| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | high costs, shortages or delivery delays of drilling rigs,
    equipment, labor, or other services;                
|
| |  | unexpected operational events and drilling conditions;                                                             
|
| |  | reductions in oil and natural gas prices;                                                                          
|
| |  | limitations in the market for oil and natural gas;                                                                 
|
| |  | adverse weather conditions;                                                                                        
|
| |  | facility or equipment malfunctions;                                                                                
|
| |  | equipment failures or accidents;                                                                                   
|
| |  | title problems;                                                                                                    
|
| |  | pipe or cement failures;                                                                                           
|
| |  | casing collapses;                                                                                                  
|
| |  | compliance with environmental and other governmental
    requirements;                                             
|
| |  | environmental hazards, such as natural gas leaks, oil spills,
    pipeline ruptures, and discharges of toxic gases;
|
| |  | lost or damaged oilfield drilling and service tools;                                                               
|
| |  | unusual or unexpected geological formations;                                                                       
|
| |  | loss of drilling fluid circulation;                                                                                
|
| |  | pressure or irregularities in formations;                                                                          
|
| |  | fires;                                                                                                             
|
| |  | natural disasters;                                                                                                 
|
| |  | blowouts, surface craterings and explosions; and                                                                   
|
| |  | uncontrollable flows of oil, natural gas or well fluids.                                                           



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ENCORE ACQUISITION COMPANY




| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our operations are subject to operational hazards and
    unforeseen interruptions for which we may not be adequately
    insured.







| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Terrorist activities and the potential for military and
    other actions could adversely affect our business.





| |                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our development, exploitation, and exploration operations
    require substantial capital, and we may be unable to obtain
    needed financing on satisfactory terms.





| |                                                                   
| | ------------------------------------------------------------------
| | The loss of key personnel could adversely affect our
    business.





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ENCORE ACQUISITION COMPANY






| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business depends on gathering and transportation
    facilities owned by others. Any limitation in the availability
    of those facilities could interfere with our ability to market
    our oil and natural gas production and could harm our
    business.





| |                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition in the oil and natural gas industry is
    intense, and many of our competitors have greater financial,
    technological, and other resources than we do.





| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | acquiring desirable producing properties or new leases for
    future exploration;        
|
| |  | marketing our oil and natural gas production;                                             
|
| |  | integrating new technologies; and                                                         
|
| |  | acquiring the equipment and expertise necessary to develop and
    operate our properties.





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We are subject to complex federal, state, and local laws
    and regulations that could adversely affect our business.



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ENCORE ACQUISITION COMPANY








| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have significant indebtedness and may incur significant
    additional indebtedness, which could negatively impact our
    financial condition, results of operations, and business
    prospects.









| |   |                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may have difficulties borrowing money in the future for
    acquisitions, to meet our operating expenses, or for other
    purposes;                                                                         
|
| |  | the amount of our interest expense may increase because certain
    of our borrowings are at variable rates of interest, which, if
    interest rates increase, could result in higher interest expense;        
|
| |  | we will need to use a portion of the money we earn to pay
    principal and interest on our debt, which will reduce the amount
    of money we have to finance our operations and other business
    activities;
|
| |  | we may be more vulnerable to economic downturns and adverse
    developments in our industry; and                                                                                                               
|
| |  | our debt level could limit our flexibility in planning for, or
    reacting to, changes in our business and industry.                                                                                           

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ENCORE ACQUISITION COMPANY









|         |                          
|-------- | -------------------------
|ITEM 1B. | UNRESOLVED STAFF COMMENTS








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS








|        |                                                    
|------- | ---------------------------------------------------
|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



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ENCORE ACQUISITION COMPANY





PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
    STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
    SECURITIES



|                           |  |      |       |  |     |   |       | 
|-------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                           |  | High |       |  | Low |  
|                           |  |      |       |  |     |  
|2006                       |  |      |       |  |     |   |       | 
|Quarter ended December 31  |  | $    | 27.62 |  |     | $ | 22.45 | 
|Quarter ended September 30 |  |      | 30.97 |  |     |   | 22.63 | 
|Quarter ended June 30      |  |      | 32.59 |  |     |   | 22.75 | 
|Quarter ended March 31     |  |      | 36.84 |  |     |   | 28.16 | 
|2005                       |  |      |       |  |     |   |       | 
|Quarter ended December 31  |  | $    | 39.37 |  |     | $ | 29.69 | 
|Quarter ended September 30 |  |      | 39.48 |  |     |   | 28.63 | 
|Quarter ended June 30      |  |      | 29.63 |  |     |   | 22.12 | 
|Quarter ended March 31     |  |      | 30.48 |  |     |   | 21.44 | 



Issuer Purchases of Equity Securities




|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |   |  |  |    |    | 
|----------- | ----- | ------------ | ------ | ------ | -------------- | ---------------- | ------------------- | --------------- | ------------------ | ---------------- | ------------------ | - |  |  | -- | -- | 
|            |       |              |        |        |                | Total Number of  |                     |                 | Maximum Number     |                 
|            |       |              |        |        |                | Shares Purchased |                     |                 | of Shares That May |                 
|            |       | Total Number |        |        |                |                  | as Part of Publicly |                 |                    | Yet Be Purchased |                   
|            |       | of Shares    |        |        | Average Price  |                  |                     | Announced Plans |                    |                  | Under the Plans or |  
|Month       |       | Purchased    |        |        | Paid per Share |                  |                     | or Programs     |                    |                  | Programs           |  
|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |  
|October     |       |              |       |        |                | $                |                    |                 |                    |                  |                   |   |  |  | NA |   
|November(a) |       |              | 17,809 |        |                | $                | 25.69               |                 |                    |                  |                   |   |  |  | NA |   
|December    |       |              |       |        |                | $                |                    |                 |                    |                  |                   |   |  |  | NA |   
|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |  
|            | Total |              |        | 17,809 |                |                  | $                   | 25.69           |                    |                  |                    |  |  |  |    | NA | 
|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |  






|    |                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | We do not have a formal common stock repurchase program. During
    the fourth quarter of 2006, certain employees surrendered shares
    of common stock to pay income tax withholding obligations in
    conjunction with vesting of restricted shares under our 2000
    Incentive Stock Plan.

Dividends




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ENCORE ACQUISITION COMPANY


Stock Performance Graph




Comparison of Total Return Since January 1, 2002 Among
Encore


Acquisition Company, the Standard & Poors 500
Index, and the


Independent Oil and Gas Index





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ENCORE ACQUISITION COMPANY





ITEM 6.  SELECTED FINANCIAL DATA




|                                            |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |         |          |  
|------------------------------------------- | -------------------------------------------------------- | -------------------------------------------------- | - | ------- | -------- | - | - | ------- | -------- | - | ---- | ------- | -------- | ---- | - | ------- | -------- | - | - | ------- | -------- | -
|                                            |                                                          | Year Ended December 31,(h)                         |  
|                                            |                                                          |                                                    |  
|                                            |                                                          | 2006                                               |   |         | 2005     |   |   | 2004    |          |   | 2003 |         |          | 2002 |  
|                                            |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |  
|                                            |                                                          | (In thousands, except per share and per unit data) |  
|Consolidated Statements of Operations Data: |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |        
|                                            | Revenues(a):                                             |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |         |         
|                                            |                                                          | Oil                                                |   | $       | 346,974  |   |   | $       | 307,959  |   |      | $       | 220,649  |      |   | $       | 176,351  |   |   | $       | 134,854  |  
|                                            |                                                          | Natural gas                                        |   |         | 146,325  |   |   |         | 149,365  |   |      |         | 77,884   |      |   |         | 43,745   |   |   |         | 25,838   |  
|                                            |                                                          | Oil marketing(e)                                   |   |         | 147,563  |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |  
|                                            |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |  
|                                            | Total revenues                                           |                                                    | $ | 640,862 |          |   | $ | 457,324 |          |   | $    | 298,533 |          |      | $ | 220,096 |          |   | $ | 160,692 |         
|                                            |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |  
|                                            | Net income                                               |                                                    | $ | 92,398  |          |   | $ | 103,425 | (b)      |   | $    | 82,147  |          |      | $ | 63,641  | (c)      |   | $ | 37,685  |         
|                                            |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |  
|                                            | Net income per common share(d):                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |         |         
|                                            |                                                          | Basic                                              |   | $       | 1.78     |   |   | $       | 2.12     |   |      | $       | 1.74     |      |   | $       | 1.41     |   |   | $       | 0.84     |  
|                                            |                                                          | Diluted                                            |   |         | 1.75     |   |   |         | 2.09     |   |      |         | 1.72     |      |   |         | 1.40     |   |   |         | 0.83     |  
|                                            | Weighted average number of common shares outstanding(d): |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |         |         
|                                            |                                                          | Basic                                              |   |         | 51,865   |   |   |         | 48,682   |   |      |         | 47,090   |      |   |         | 45,153   |   |   |         | 45,047   |  
|                                            |                                                          | Diluted                                            |   |         | 52,736   |   |   |         | 49,522   |   |      |         | 47,738   |      |   |         | 45,500   |   |   |         | 45,242   |  
|Consolidated Statements of Cash Flows Data: |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |        
|                                            | Cash provided by (used in):                              |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |         |         
|                                            |                                                          | Operating activities                               |   | $       | 297,333  |   |   | $       | 292,269  |   |      | $       | 171,821  |      |   | $       | 123,818  |   |   | $       | 91,509   |  
|                                            |                                                          | Investing activities                               |   |         | (397,430 | ) |   |         | (573,560 | ) |      |         | (433,470 | )    |   |         | (153,747 | ) |   |         | (159,316 | )
|                                            |                                                          | Financing activities                               |   |         | 99,206   |   |   |         | 281,842  |   |      |         | 262,321  |      |   |         | 17,303   |   |   |         | 80,749   |  
|Production:                                 |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |        
|                                            | Oil (Bbls)                                               |                                                    |   | 7,335   |          |   |   | 6,871   |          |   |      | 6,679   |          |      |   | 6,601   |          |   |   | 6,037   |         
|                                            | Natural gas (Mcf)                                        |                                                    |   | 23,456  |          |   |   | 21,059  |          |   |      | 14,089  |          |      |   | 9,051   |          |   |   | 8,175   |         
|                                            | Combined (BOE)                                           |                                                    |   | 11,244  |          |   |   | 10,381  |          |   |      | 9,027   |          |      |   | 8,110   |          |   |   | 7,399   |         
|Average Sales Price:                        |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |        
|                                            | Oil ($/Bbl)                                              |                                                    | $ | 47.30   |          |   | $ | 44.82   |          |   | $    | 33.04   |          |      | $ | 26.72   |          |   | $ | 22.34   |         
|                                            | Natural gas ($/Mcf)                                      |                                                    |   | 6.24    |          |   |   | 7.09    |          |   |      | 5.53    |          |      |   | 4.83    |          |   |   | 3.16    |         
|                                            | Combined ($/BOE)                                         |                                                    |   | 43.87   |          |   |   | 44.05   |          |   |      | 33.07   |          |      |   | 27.14   |          |   |   | 21.72   |         
|Average Costs per BOE:                      |                                                          |                                                    |   |         |          |   |   |         |          |   |      |         |          |      |   |         |          |   |   |        
|                                            | Lease operations(f)                                      |                                                    | $ | 8.73    |          |   | $ | 6.72    |          |   | $    | 5.30    |          |      | $ | 4.70    |          |   | $ | 4.15    |         
|                                            | Production, ad valorem, and severance taxes              |                                                    |   | 4.43    |          |   |   | 4.39    |          |   |      | 3.36    |          |      |   | 2.71    |          |   |   | 2.12    |         
|                                            | Depletion, depreciation, and amortization                |                                                    |   | 10.09   |          |   |   | 8.25    |          |   |      | 5.38    |          |      |   | 4.13    |          |   |   | 4.67    |         
|                                            | Exploration(f)                                           |                                                    |   | 2.71    |          |   |   | 1.39    |          |   |      | 0.44    |          |      |   |        |          |   |   |        |         
|                                            | General and administrative(f)                            |                                                    |   | 2.06    |          |   |   | 1.67    |          |   |      | 1.33    |          |      |   | 1.12    |          |   |   | 0.83    |         
|                                            | Derivative fair value (gain) loss(g)                     |                                                    |   | (2.17   | )        |   |   | 0.51    |          |   |      | 0.56    |          |      |   | (0.11   | )        |   |   | (0.12   | )       
|                                            | Other operating expense                                  |                                                    |   | 0.89    |          |   |   | 0.91    |          |   |      | 0.56    |          |      |   | 0.43    |          |   |   | 0.28    |         
|                                            | Oil marketing, net(e)                                    |                                                    |   | 0.09    |          |   |   |        |          |   |      |        |          |      |   |        |          |   |   |        |         

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ENCORE ACQUISITION COMPANY


|          |                   |                                                    |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |  |  |         | 
|--------- | ----------------- | -------------------------------------------------- |  | ------- | ---- |  |  | ------- |  |  | ---- | ------- |  | ---- |  | ------- |  |  |  | ------- | 
|          |                   | Year Ended December 31,(h)                         | 
|          |                   |                                                    | 
|          |                   | 2006                                               |  |         | 2005 |  |  | 2004    |  |  | 2003 |         |  | 2002 | 
|          |                   |                                                    |  |         |      |  |  |         |  |  |      |         |  |      | 
|          |                   | (In thousands, except per share and per unit data) | 
|Reserves: |                   |                                                    |  |         |      |  |  |         |  |  |      |         |  |      |  |         |  |  |  |        
|          | Oil (Bbls)        |                                                    |  | 153,434 |      |  |  | 148,387 |  |  |      | 134,048 |  |      |  | 117,732 |  |  |  | 111,674 | 
|          | Natural gas (Mcf) |                                                    |  | 306,764 |      |  |  | 283,865 |  |  |      | 234,030 |  |      |  | 138,950 |  |  |  | 99,818  | 
|          | Combined (BOE)    |                                                    |  | 204,561 |      |  |  | 195,698 |  |  |      | 173,053 |  |      |  | 140,890 |  |  |  | 128,310 | 

|                                  |                      |                    |   |           |      |  |   |           |   |  |      |           |   |      |   |         |   |  |   |         | 
|--------------------------------- | -------------------- | ------------------ | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - | ---- | - | ------- | - |  | - | ------- | 
|                                  |                      | As of December 31, |  
|                                  |                      |                    |  
|                                  |                      | 2006               |   |           | 2005 |  |   | 2004      |   |  | 2003 |           |   | 2002 |  
|                                  |                      |                    |   |           |      |  |   |           |   |  |      |           |   |      |  
|                                  |                      | (In thousands)     |  
|Consolidated Balance Sheets Data: |                      |                    |   |           |      |  |   |           |   |  |      |           |   |      |   |         |   |  |   |        
|                                  | Working capital      |                    | $ | (40,745   | )    |  | $ | (56,838   | ) |  | $    | (15,566   | ) |      | $ | (52     | ) |  | $ | 12,489  | 
|                                  | Total assets         |                    |   | 2,006,900 |      |  |   | 1,705,705 |   |  |      | 1,123,400 |   |      |   | 672,138 |   |  |   | 549,896 | 
|                                  | Total debt           |                    |   | 661,696   |      |  |   | 673,189   |   |  |      | 379,000   |   |      |   | 179,000 |   |  |   | 166,000 | 
|                                  | Stockholders equity |                    |   | 816,865   |      |  |   | 546,781   |   |  |      | 473,575   |   |      |   | 358,975 |   |  |   | 296,266 | 






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | For the years ended December 31, 2006, 2005, 2004, 2003,
    and 2002 we reduced revenue for NPI payments by
    $23.4 million, $21.2 million, $12.6 million,
    $5.8 million, and $2.0 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(b) |  | Net income for the year ended December 31, 2005 includes an
    after-tax loss on early redemption of debt of
    $12.2 million, which affects its comparability with other
    periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(c) |  | Net income for the year ended December 31, 2003 includes
    $0.9 million income from the cumulative effect of
    accounting change, net of tax, which affects its comparability
    with other periods presented.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(d) |  | Net income per common share and the weighted-average number of
    common shares outstanding have been revised for years prior to
    2005 for the effects of the 3-for-2 stock split in July 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(e) |  | In 2006, we began purchasing third-party oil Bbls from a
    counterparty other than to whom the Bbls were sold for
    aggregation and sale with our own equity production.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(f) |  | On January 1, 2006, we adopted the provisions of
    SFAS No. 123R, Share-Based Payment
    (SFAS 123R). Due to the adoption of
    SFAS 123R, non-cash stock-based compensation expense in all
    prior periods presented has been reclassified to allocate the
    amount to the same respective income statement lines as the
    employees salary, cash bonus, and benefits. This resulted
    in increases in LOE of $1.3 million, $0.7 million, and
    $0.2 million during 2005, 2004, and 2003, respectively,
    increases in general and administrative (G&A)
    expense of $2.6 million, $1.1 million, and
    $0.4 million during 2005, 2004, and 2003, respectively, and
    increases in exploration expense of $41 thousand and $29
    thousand during 2005 and 2004, respectively.
|   
|(g) |  | During July 2006, we elected to discontinue hedge accounting
    prospectively for all commodity derivatives which were
    previously accounted for as hedges. From that point forward, all
    mark-to-market gains or
    losses on these derivative instruments are recorded in
    Derivative fair value (gain) loss while in
    periods prior to that point, only the ineffective portions of
    hedges were recorded in Derivative fair value
    (gain) loss.                                                                                                                                                                                                                                                                                                                                 
|   
|(h) |  | We acquired Crusader Energy Corporation (Crusader)
    in October 2005 and Cortez Oil & Gas, Inc.
    (Cortez) in April 2004. The operating results or
    these entities are included in our Consolidated Statements of
    Operations from the date of acquisition forward.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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ENCORE ACQUISITION COMPANY







|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATION

The following discussion and analysis of our consolidated
financial position and results of operations should be read in
conjunction with our financial statements and notes and the
supplemental oil and natural gas disclosures included in
Item 8. Financial Statements and Supplementary
Data. The following discussion and analysis contains
forward-looking statements, including, without limitation,
statements relating to our plans, strategies, objectives,
expectations, intentions, and resources. The words
anticipate, estimate,
expect, project, intend,
plan, believe, should, and
similar expressions identify forward-looking statements. Actual
results could differ materially from those stated in the
forward-looking statements. We do not undertake to update,
revise, or correct any of the forward-looking information unless
required to do so under federal securities laws. Readers are
cautioned that such forward-looking statements should be read in
conjunction with our disclosures under the headings:
Information Concerning Forward-Looking Statements
below and Item 1A. Risk Factors.


Introduction






| |   |                      
| | - | ---------------------
| |  | Overview of Business 
|
| |  | 2006 Highlights      
|
| |  | 2007 Outlook         
|
| |  | Results of Operations



| |   |                           
| | - | --------------------------
| |  | Comparison of 2006 to 2005
|
| |  | Comparison of 2005 to 2004



| |   |                                                  
| | - | -------------------------------------------------
| |  | Capital Resources                                
|
| |  | Capital Commitments                              
|
| |  | Liquidity                                        
|
| |  | Off-Balance Sheet Arrangements                   
|
| |  | Inflation and Changes in Prices                  
|
| |  | Critical Accounting Policies and Estimates       
|
| |  | New Accounting Pronouncements                    
|
| |  | Information Concerning Forward-Looking Statements

Overview of Business






| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Maintaining an active development program;                                                               
|
| |  | Maximizing existing reserves and production through HPAI;                                                
|
| |  | Utilizing other improved recovery techniques to maximize
    existing reserves and production;           
|
| |  | Expanding our reserves, production, and drilling inventory
    through a disciplined acquisition program;

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| |   |                                                           
| | - | ----------------------------------------------------------
| |  | Exploring for reserves; and                               
|
| |  | Operating in a cost effective, efficient, and safe manner.









2006 Highlights






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Oil and natural gas reserves increased five percent to
    205 MMBOE. During 2006, we added 20.1 MMBOE, replacing
    179 percent of the 11.2 MMBOE produced in 2006. Please
    read Items 1 and 2. Business and
    Properties  General  Oil and Natural Gas
    Production and Reserves for the calculation of our reserve
    replacement ratios. At December 31, 2006, oil reserves
    accounted for 75 percent of total proved reserves, and
    65 percent of proved reserves are developed. However,
    primarily as a result of a decline in natural gas prices, the
    estimated pretax present value of our reserves decreased by
    27 percent to $2.0 billion (using a 10 percent
    discount rate and constant year end prices of $61.06 for oil and
    $5.48 for natural gas). The Standardized Measure at
    December 31, 2006 was $1.5 billion. Standardized
    Measure differs from
    PV-10 by
    $499.4 million, because Standardized Measure includes the
    effect of future income taxes.
|
| |  | During 2006, we had oil and natural gas revenues of
    $493.3 million. This represents an eight percent increase
    over the $457.3 million of oil and natural gas revenues
    reported in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our realized average oil price for 2006, including the effects
    of hedging, increased $2.48 per Bbl to $47.30 per Bbl
    as compared to $44.82 per Bbl in 2005. Average oil
    differentials more than doubled in 2006 to $11.80 per Bbl
    as compared to $5.50 per Bbl in 2005, which somewhat offset
    higher production volumes and higher wellhead prices. Our
    realized average natural gas price for 2006, including the
    effects of hedging, decreased $0.85 per Mcf to
    $6.24 per Mcf as compared to $7.09 per Mcf in 2005.
|
| |  | Production volumes for 2006 increased eight percent to
    30,807 BOE/ D (11.2 MMBOE), compared with 2005
    production volumes of 28,442 BOE/ D (10.4 MMBOE). The rise
    in production volumes was attributable to our drilling program,
    HPAI uplift, and acquisitions completed in the second half of
    2005. Oil represented 65 percent and 66 percent of our
    total production volumes in 2006 and 2005, respectively.                                                                                                               
|
| |  | During 2006, we generated cash flows from operating activities
    of $297.3 million. This represents a five percent increase
    over the $292.3 million of cash flows from operating
    activities we reported for 2005.                                                                                                                                                                                                                                                                                                                          
|
| |  | On April 4, 2006, we closed a public offering of
    4.0 million shares of common stock at a price of
    $32.00 per share. The net proceeds of the offering, after
    deducting underwriting discounts and commissions and the
    expenses of the offering, were $127.1 million. We used the
    net proceeds to reduce the amounts outstanding under our
    revolving credit facility, invest in oil and natural gas
    activities, and to pay general corporate expenses.                                                                     
|
| |  | We reported net income of $92.4 million, or $1.75 per
    diluted share, in 2006, as compared to $103.4 million, or
    $2.09 per diluted share, for 2005. In addition to the
    increase in the effective tax rate that decreased net income by
    $4.7 million, the decrease in net income was primarily due
    to the following pretax items:                                                                                                                                                                                                  



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our natural gas wellhead price was $1.28 per Mcf less in
    2006 than 2005 which negatively impacted revenues and margins;                                                                                             
|
| |  | Increased service costs, expensing of stock options, high
    operating costs in the Mid-Continent area, and expensing of HPAI
    costs for LOE in 2006 resulted in an increase of
    $28.5 million, or $2.01 per BOE;
|
| |  | DD&A per BOE increased to $10.09 per BOE as compared to
    $8.25 per BOE in 2005 as a result of higher than historical
    finding and development costs, which added $27.8 million to
    total DD&A;                 
|
| |  | Exploration expense was $16.1 million higher due to a
    larger exploration program in 2006 than 2005; and                                                                                                             
|
| |  | Interest expense increased by $11.1 million in 2006 as
    compared to 2005 as a result of higher average debt levels due
    to financing acquisitions and our capital program.                                        



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | Partially offsetting the above items, the change in net income
    was positively impacted by the following pretax items:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Derivative fair value gain increased $29.8 million,
    primarily as a result of our discontinuance of hedge accounting
    in July 2006; and
|
| |  | The recognition of a $19.5 million loss on the early
    redemption of debt in 2005.                                                         



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | Diluted earnings per share were lower as a result of the above
    items and the aforementioned public offering of common stock in
    April.



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We entered into a joint development agreement with ExxonMobil to
    develop seven natural gas fields in West Texas. Under the terms
    of the agreement, we have the opportunity to develop

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ENCORE ACQUISITION COMPANY




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | approximately 100,000 gross acres and will earn
    30 percent of ExxonMobils working interest in each
    well drilled. We will operate each well during the drilling and
    completion phase, after which ExxonMobil will assume operational
    control of the well. In 2006, we drilled 24 wells, 12 of
    which were commitment wells, with an investment of
    $29.5 million under the joint development agreement. At
    December 31, 2006, we had advanced $22.4 million to
    ExxonMobil for its portion of drilling these commitment wells.
|
| |  | We invested $377.6 million in oil and natural gas
    activities during 2006 (excluding asset retirement obligations
    of $0.9 million). Of this amount, we invested
    $348.7 million in development, exploitation, HPAI
    expansion, and exploration activities, which yielded
    253 gross (91.6 net) productive wells, and
    $28.9 million on acquisitions primarily of undeveloped
    leases. We operated between 9 and 12 rigs during 2006, including
    4 rigs related to our west Texas joint development
    agreement.                 

2007 Outlook






S-1


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ENCORE ACQUISITION COMPANY






| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Invest an amount equal to or less than our cash flows from
    operations;                       
|
| |  | Evaluate the potential divestiture of certain Oklahoma natural
    gas properties; and           
|
| |  | Raise capital through an initial public offering of limited
    partnership interests in the MLP.





|                                  |       |   |         |         | 
|--------------------------------- | ----- | - | ------- | ------- | 
|Development and exploitation      |       | $ | 202,000 |        
|Exploration                       |       |   | 71,000  |        
|Acquisitions of leasehold acreage |       |   | 11,000  |        
|Other                             |       |   | 1,000   |        
|                                  |       |   |        
|                                  | Total |   | $       | 285,000 | 
|                                  |       |   |        



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ENCORE ACQUISITION COMPANY


Results of Operations


Comparison of 2006 to 2005




Revenues and production.


|                          |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |     |     |   
|------------------------- | --------------------- | ------------------------------------------- | - | ------- | --------- |  | - | ---------- | ------- |  | - | ------- | ------- | - |  | --- | --- | --
|                          |                       | Year Ended December 31,                     |   |         |          
|                          |                       |                                             |   |         | Increase/ | 
|                          |                       | 2006                                        |   |         | 2005      |  |   | (Decrease) |        
|                          |                       |                                             |   |         |           |  |   |            |        
|                          |                       | (In thousands, except per unit and          |  
|                          |                       | per day amounts)                            |  
|Revenues:                 |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |    
|                          | Oil wellhead          |                                             | $ | 399,180 |           |  | $ | 350,837    |         |  | $ | 48,343  |         |   |  |     |    
|                          | Oil hedges            |                                             |   | (52,206 | )         |  |   | (42,878    | )       |  |   | (9,328  | )       |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total oil revenues                          |   | $       | 346,974   |  |   | $          | 307,959 |  |   | $       | 39,015  |   |  |     | 13% |   
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          | Natural gas wellhead  |                                             | $ | 154,458 |           |  | $ | 165,794    |         |  | $ | (11,336 | )       |   |  |     |    
|                          | Natural gas hedges    |                                             |   | (8,133  | )         |  |   | (16,429    | )       |  |   | 8,296   |         |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total natural gas revenues                  |   | $       | 146,325   |  |   | $          | 149,365 |  |   | $       | (3,040  | ) |  |     | (2  | )%
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          | Combined wellhead     |                                             | $ | 553,638 |           |  | $ | 516,631    |         |  | $ | 37,007  |         |   |  |     |    
|                          | Combined hedges       |                                             |   | (60,339 | )         |  |   | (59,307    | )       |  |   | (1,032  | )       |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total combined oil and natural gas revenues |   |         | 493,299   |  |   |            | 457,324 |  |   |         | 35,975  |   |  |     | 8%  |   
|                          |                       | Oil marketing revenues                      |   |         | 147,563   |  |   |            |        |  |   |         | 147,563 |   |  |     |     |   
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total revenues                              |   | $       | 640,862   |  |   | $          | 457,324 |  |   | $       | 183,538 |   |  |     |     |   
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|Revenues ($/Unit):        |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |    
|                          | Oil wellhead          |                                             | $ | 54.42   |           |  | $ | 51.06      |         |  | $ | 3.36    |         |   |  |     |    
|                          | Oil hedges            |                                             |   | (7.12   | )         |  |   | (6.24      | )       |  |   | (0.88   | )       |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total oil revenues                          |   | $       | 47.30     |  |   | $          | 44.82   |  |   | $       | 2.48    |   |  |     | 6%  |   
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          | Natural gas wellhead  |                                             | $ | 6.59    |           |  | $ | 7.87       |         |  | $ | (1.28   | )       |   |  |     |    
|                          | Natural gas hedges    |                                             |   | (0.35   | )         |  |   | (0.78      | )       |  |   | 0.43    |         |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total natural gas revenues                  |   | $       | 6.24      |  |   | $          | 7.09    |  |   | $       | (0.85   | ) |  |     | (12 | )%
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          | Combined wellhead     |                                             | $ | 49.24   |           |  | $ | 49.76      |         |  | $ | (0.52   | )       |   |  |     |    
|                          | Combined hedges       |                                             |   | (5.37   | )         |  |   | (5.71      | )       |  |   | 0.34    |         |   |  |     |    
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|                          |                       | Total combined oil and natural gas revenues |   | $       | 43.87     |  |   | $          | 44.05   |  |   | $       | (0.18   | ) |  |     | 0%  |   
|                          |                       |                                             |   |         |           |  |   |            |         |  |   |        
|Total production volumes: |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |    
|                          | Oil (Bbls)            |                                             |   | 7,335   |           |  |   | 6,871      |         |  |   | 464     |         |   |  | 7%  |    
|                          | Natural gas (Mcf)     |                                             |   | 23,456  |           |  |   | 21,059     |         |  |   | 2,397   |         |   |  | 11% |    
|                          | Combined (BOE)        |                                             |   | 11,244  |           |  |   | 10,381     |         |  |   | 863     |         |   |  | 8%  |    
|Daily production volumes: |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |    
|                          | Oil (Bbl/ D)          |                                             |   | 20,096  |           |  |   | 18,826     |         |  |   | 1,270   |         |   |  | 7%  |    
|                          | Natural gas (Mcf/ D)  |                                             |   | 64,262  |           |  |   | 57,696     |         |  |   | 6,566   |         |   |  | 11% |    
|                          | Combined (BOE/ D)     |                                             |   | 30,807  |           |  |   | 28,442     |         |  |   | 2,365   |         |   |  | 8%  |    
|Average NYMEX prices:     |                       |                                             |   |         |           |  |   |            |         |  |   |         |         |   |  |    
|                          | Oil (per Bbl)         |                                             | $ | 66.22   |           |  | $ | 56.56      |         |  | $ | 9.66    |         |   |  | 17% |    
|                          | Natural gas (per Mcf) |                                             | $ | 6.99    |           |  | $ | 8.96       |         |  | $ | (1.97   | )       |   |  | (22 | )% 

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ENCORE ACQUISITION COMPANY










|                             |                                          |              |       |        |      |   |       |       |  
|---------------------------- | ---------------------------------------- | ------------ | ----- | ------ | ---- | - | ----- | ----- | -
|                             |                                          | Year Ended   |      
|                             |                                          | December 31, |      
|                             |                                          |              |      
|                             |                                          | 2006         |       |        | 2005 |  
|                             |                                          |              |       |        |      |  
|Oil wellhead ($/Bbl)         |                                          | $            | 54.42 |        |      | $ | 51.06 |      
|Average NYMEX ($/Bbl)        |                                          | $            | 66.22 |        |      | $ | 56.56 |      
|                             | Differential to NYMEX                    |              | $     | (11.80 | )    |   | $     | (5.50 | )
|                             | Oil wellhead to NYMEX percentage         |              |       | 82     | %    |   |       | 90    | %
|Natural gas wellhead ($/Mcf) |                                          | $            | 6.59  |        |      | $ | 7.87  |      
|Average NYMEX ($/Mcf)        |                                          | $            | 6.99  |        |      | $ | 8.96  |      
|                             | Differential to NYMEX                    |              | $     | (0.40  | )    |   | $     | (1.09 | )
|                             | Natural gas wellhead to NYMEX percentage |              |       | 94     | %    |   |       | 88    | %



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ENCORE ACQUISITION COMPANY






Marketing activities.




|                               |                            |   |          |        |  
|------------------------------ | -------------------------- | - | -------- | ------ | -
|Oil marketing revenues         |                            | $ | 147,563  |       
|Oil marketing expenses         |                            |   | (148,571 | )     
|                               |                            |   |         
|                               | Oil marketing, net         |   | $        | (1,008 | )
|                               |                            |   |         
|Oil marketing revenues per BOE |                            | $ | 13.12    |       
|Oil marketing expenses per BOE |                            |   | (13.21   | )     
|                               |                            |   |         
|                               | Oil marketing, net per BOE |   | $        | (0.09  | )
|                               |                            |   |         

Expenses.


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|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |     |  | 
|------------------------ | ----------------------------------------- | ------------------------------------------- | ------- | ------- | --------- | - | ------- | ---------- | ------ | - | ------- | ------- | ------- | - | --- | --- |  | 
|                         |                                           | Year Ended December 31,                     |         |         |          
|                         |                                           |                                             |         |         | Increase/ |  
|                         |                                           | 2006                                        |         |         | 2005      |   |         | (Decrease) |       
|                         |                                           |                                             |         |         |           |   |         |            |       
|Expenses (in thousands): |                                           |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |    
|                         | Production:                               |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |     | 
|                         |                                           | Lease operations                            |         | $       | 98,194    |   |         | $          | 69,744 |   |         | $       | 28,450  |   |     |     |  | 
|                         |                                           | Production, ad valorem, and severance taxes |         |         | 49,780    |   |         |            | 45,601 |   |         |         | 4,179   |   |     |     |  | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total production expenses                 |                                             |         | 147,974 |           |   |         | 115,345    |        |   |         | 32,629  |         |   |     | 28% | 
|                         | Other:                                    |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |     | 
|                         |                                           | Depletion, depreciation, and amortization   |         |         | 113,463   |   |         |            | 85,627 |   |         |         | 27,836  |   |     |     |  | 
|                         |                                           | Exploration                                 |         |         | 30,519    |   |         |            | 14,443 |   |         |         | 16,076  |   |     |     |  | 
|                         |                                           | General and administrative                  |         |         | 23,194    |   |         |            | 17,268 |   |         |         | 5,926   |   |     |     |  | 
|                         |                                           | Oil marketing                               |         |         | 148,571   |   |         |            |       |   |         |         | 148,571 |   |     |     |  | 
|                         |                                           | Derivative fair value (gain) loss           |         |         | (24,388   | ) |         |            | 5,290  |   |         |         | (29,678 | ) |     |     |  | 
|                         |                                           | Loss on early redemption of debt            |         |         |          |   |         |            | 19,477 |   |         |         | (19,477 | ) |     |     |  | 
|                         |                                           | Other operating                             |         |         | 10,023    |   |         |            | 9,485  |   |         |         | 538     |   |     |     |  | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total operating                           |                                             |         | 449,356 |           |   |         | 266,935    |        |   |         | 182,421 |         |   |     | 68% | 
|                         | Interest                                  |                                             |         | 45,131  |           |   |         | 34,055     |        |   |         | 11,076  |         |   |     |     | 
|                         | Current and deferred income tax provision |                                             |         | 55,406  |           |   |         | 53,948     |        |   |         | 1,458   |         |   |     |     | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|Total expenses           |                                           | $                                           | 549,893 |         |           | $ | 354,938 |            |        | $ | 194,955 |         |         |   | 55% |    
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|Expenses (per BOE):      |                                           |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |    
|                         | Production:                               |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |     | 
|                         |                                           | Lease operations                            |         | $       | 8.73      |   |         | $          | 6.72   |   |         | $       | 2.01    |   |     |     |  | 
|                         |                                           | Production, ad valorem, and severance taxes |         |         | 4.43      |   |         |            | 4.39   |   |         |         | 0.04    |   |     |     |  | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total production expenses                 |                                             |         | 13.16   |           |   |         | 11.11      |        |   |         | 2.05    |         |   |     | 18% | 
|                         | Other:                                    |                                             |         |         |           |   |         |            |        |   |         |         |         |   |     |     | 
|                         |                                           | Depletion, depreciation, and amortization   |         |         | 10.09     |   |         |            | 8.25   |   |         |         | 1.84    |   |     |     |  | 
|                         |                                           | Exploration                                 |         |         | 2.71      |   |         |            | 1.39   |   |         |         | 1.32    |   |     |     |  | 
|                         |                                           | General and administrative                  |         |         | 2.06      |   |         |            | 1.67   |   |         |         | 0.39    |   |     |     |  | 
|                         |                                           | Derivative fair value (gain) loss           |         |         | (2.17     | ) |         |            | 0.51   |   |         |         | (2.68   | ) |     |     |  | 
|                         |                                           | Loss on early redemption of debt            |         |         |          |   |         |            | 1.88   |   |         |         | (1.88   | ) |     |     |  | 
|                         |                                           | Other operating                             |         |         | 0.89      |   |         |            | 0.91   |   |         |         | (0.02   | ) |     |     |  | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total operating                           |                                             |         | 26.74   |           |   |         | 25.72      |        |   |         | 1.02    |         |   |     | 4%  | 
|                         | Interest                                  |                                             |         | 4.01    |           |   |         | 3.28       |        |   |         | 0.73    |         |   |     |     | 
|                         | Current and deferred income tax provision |                                             |         | 4.93    |           |   |         | 5.20       |        |   |         | (0.27   | )       |   |     |     | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|Total expenses           |                                           | $                                           | 35.68   |         |           | $ | 34.20   |            |        | $ | 1.48    |         |         |   | 4%  |    
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        

Production expenses.


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ENCORE ACQUISITION COMPANY






| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increases in prices paid to oilfield service companies and
    suppliers due to a current higher price environment;                                 
|
| |  | increased operational activity to maximize production;                                                                                              
|
| |  | the operation of higher operating cost wells (which have offered
    acceptable rates of return due to increases in oil and natural
    gas prices);
|
| |  | higher than expected operating costs in the Anadarko Basin and
    Arkoma Basin of Oklahoma and the North Louisiana Salt Basin;                     
|
| |  | higher salary levels for engineers and other technical
    professionals;                                                                           
|
| |  | expensing HPAI costs associated with the Little Beaver
    Phase 2 program; and                                                                     
|
| |  | increased stock-based compensation expense attributable to
    equity instruments granted to employees under the Plan.                              





Depletion, depreciation, and amortization
(DD&A) expense.


Exploration expense.


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|                               |       |                |        |        |           |   |       |            |  |   |        |        | 
|------------------------------ | ----- | -------------- | ------ | ------ | --------- | - | ----- | ---------- |  | - | ------ | ------ | 
|                               |       | Year Ended     |        |        |          
|                               |       | December 31,   |        |        |          
|                               |       |                |        |        | Increase/ |  
|                               |       | 2006           |        |        | 2005      |   |       | (Decrease) | 
|                               |       |                |        |        |           |   |       |            | 
|                               |       | (In thousands) |       
|Dry holes                      |       | $              | 17,257 |        |           | $ | 8,632 |            |  | $ | 8,625  |       
|Geological and seismic         |       |                | 1,720  |        |           |   | 3,137 |            |  |   | (1,417 | )     
|Delay rentals                  |       |                | 670    |        |           |   | 635   |            |  |   | 35     |       
|Impairment of unproved acreage |       |                | 10,872 |        |           |   | 2,039 |            |  |   | 8,833  |       
|                               |       |                |        |        |           |   |       |            | 
|                               | Total |                | $      | 30,519 |           |   | $     | 14,443     |  |   | $      | 16,076 | 
|                               |       |                |        |        |           |   |       |            | 



G&A expense.






Derivative fair value (gain) loss. mark-to


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|                                   |                                                  |                     |                                         |       |           |         |   |            |        |       |   |        |         |         |  
|---------------------------------- | ------------------------------------------------ | ------------------- | --------------------------------------- | ----- | --------- | ------- | - | ---------- | ------ | ----- | - | ------ | ------- | ------- | -
|                                   |                                                  | Year Ended          |                                         |       |          
|                                   |                                                  | December 31,        |                                         |       |          
|                                   |                                                  |                     |                                         |       | Increase/ |        
|                                   |                                                  | 2006                |                                         |       | 2005      |         |   | (Decrease) |       
|                                   |                                                  |                     |                                         |       |           |         |   |            |       
|                                   |                                                  | (In thousands)      |                                        
|Designated cash flow hedges:       |                                                  |                     |                                         |       |           |         |   |            |        |       |   |       
|                                   | Ineffectiveness  Derivative commodity contracts |                     | $                                       | 1,748 |           |         | $ | 8,371      |        |       | $ | (6,623 | )      
|Undesignated derivative contracts: |                                                  |                     |                                         |       |           |         |   |            |        |       |   |       
|                                   | Mark-to-market loss (gain):                      |                     |                                         |       |           |         |   |            |        |       |   |        |        
|                                   |                                                  | Interest rate swap  |                                         |       |          |         |   |            | 462    |       |   |        | (462    | )      
|                                   |                                                  | Commodity contracts |                                         |       | (17,279   | )       |   |            | (2,050 | )     |   |        | (15,229 | )      
|                                   | Settlements:                                     |                     |                                         |       |           |         |   |            |        |       |   |        |        
|                                   |                                                  | Interest rate swap  |                                         |       |          |         |   |            | (312   | )     |   |        | 312     |        
|                                   |                                                  | Commodity contracts |                                         |       | (8,857    | )       |   |            | (1,181 | )     |   |        | (7,676  | )      
|                                   |                                                  |                     |                                         |       |           |         |   |            |       
|                                   |                                                  |                     | Total derivative fair value (gain) loss |       | $         | (24,388 | ) |            | $      | 5,290 |   |        | $       | (29,678 | )
|                                   |                                                  |                     |                                         |       |           |         |   |            |       

Loss on early redemption of debt. 3 8 3 8 3 8


Interest expense. 1 4 1 4 1 4 1 4 3 8




|                          |       |                |        |        |           |   |       |            |  |   |        |        | 
|------------------------- | ----- | -------------- | ------ | ------ | --------- | - | ----- | ---------- |  | - | ------ | ------ | 
|                          |       | Year Ended     |        |        |          
|                          |       | December 31,   |        |        |          
|                          |       |                |        |        | Increase/ |  
|                          |       | 2006           |        |        | 2005      |   |       | (Decrease) | 
|                          |       |                |        |        |           |   |       |            | 
|                          |       | (In thousands) |       
|83/8% Notes               |       | $              |       |        |           | $ | 7,852 |            |  | $ | (7,852 | )     
|61/4% Notes               |       |                | 9,684  |        |           |   | 9,375 |            |  |   | 309    |       
|6% Notes                  |       |                | 18,418 |        |           |   | 8,437 |            |  |   | 9,981  |       
|71/4% Notes               |       |                | 10,984 |        |           |   | 1,145 |            |  |   | 9,839  |       
|Revolving credit facility |       |                | 3,609  |        |           |   | 4,554 |            |  |   | (945   | )     
|Other                     |       |                | 2,436  |        |           |   | 2,692 |            |  |   | (256   | )     
|                          |       |                |        |        |           |   |       |            | 
|                          | Total |                | $      | 45,131 |           |   | $     | 34,055     |  |   | $      | 11,076 | 
|                          |       |                |        |        |           |   |       |            | 

Income taxes.


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ENCORE ACQUISITION COMPANY




Comparison of 2005 to 2004




Revenues and production.


|                   |                      |                                             |   |         |           |  |   |            |         |  |   |         |         |  |  |  |    |  
|------------------ | -------------------- | ------------------------------------------- | - | ------- | --------- |  | - | ---------- | ------- |  | - | ------- | ------- |  |  |  | -- | -
|                   |                      | Year Ended                                  |   |         |           |  |  
|                   |                      | December 31,                                |   |         |          
|                   |                      |                                             |   |         | Increase/ | 
|                   |                      | 2005                                        |   |         | 2004      |  |   | (Decrease) |        
|                   |                      |                                             |   |         |           |  |   |            |        
|                   |                      | (In thousands, except per unit and          |   |         |          
|                   |                      | per day amounts)                            |   |         |          
|Revenues:          |                      |                                             |   |         |           |  |   |            |         |  |   |         |         |  |  | 
|                   | Oil wellhead         |                                             | $ | 350,837 |           |  | $ | 255,394    |         |  | $ | 95,443  |         |  |  |  |   
|                   | Oil hedges           |                                             |   | (42,878 | )         |  |   | (34,745    | )       |  |   | (8,133  | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total oil revenues                          |   | $       | 307,959   |  |   | $          | 220,649 |  |   | $       | 87,310  |  |  |  | 40 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   | Natural gas wellhead |                                             | $ | 165,794 |           |  | $ | 81,112     |         |  | $ | 84,682  |         |  |  |  |   
|                   | Natural gas hedges   |                                             |   | (16,429 | )         |  |   | (3,228     | )       |  |   | (13,201 | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total natural gas revenues                  |   | $       | 149,365   |  |   | $          | 77,884  |  |   | $       | 71,481  |  |  |  | 92 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   | Combined wellhead    |                                             | $ | 516,631 |           |  | $ | 336,506    |         |  | $ | 180,125 |         |  |  |  |   
|                   | Combined hedges      |                                             |   | (59,307 | )         |  |   | (37,973    | )       |  |   | (21,334 | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total combined oil and natural gas revenues |   | $       | 457,324   |  |   | $          | 298,533 |  |   | $       | 158,791 |  |  |  | 53 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|Revenues ($/Unit): |                      |                                             |   |         |           |  |   |            |         |  |   |         |         |  |  | 
|                   | Oil wellhead         |                                             | $ | 51.06   |           |  | $ | 38.24      |         |  | $ | 12.82   |         |  |  |  |   
|                   | Oil hedges           |                                             |   | (6.24   | )         |  |   | (5.20      | )       |  |   | (1.04   | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total oil revenues                          |   | $       | 44.82     |  |   | $          | 33.04   |  |   | $       | 11.78   |  |  |  | 36 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   | Natural gas wellhead |                                             | $ | 7.87    |           |  | $ | 5.76       |         |  | $ | 2.11    |         |  |  |  |   
|                   | Natural gas hedges   |                                             |   | (0.78   | )         |  |   | (0.23      | )       |  |   | (0.55   | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total natural gas revenues                  |   | $       | 7.09      |  |   | $          | 5.53    |  |   | $       | 1.56    |  |  |  | 28 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   | Combined wellhead    |                                             | $ | 49.76   |           |  | $ | 37.28      |         |  | $ | 12.48   |         |  |  |  |   
|                   | Combined hedges      |                                             |   | (5.71   | )         |  |   | (4.21      | )       |  |   | (1.50   | )       |  |  |  |   
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        
|                   |                      | Total combined oil and natural gas revenues |   | $       | 44.05     |  |   | $          | 33.07   |  |   | $       | 10.98   |  |  |  | 33 | %
|                   |                      |                                             |   |         |           |  |   |            |         |  |   |        

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|                          |                       |                                    |   |        |           |  |   |            |  |  |   |        |  |  |  |    |  
|------------------------- | --------------------- | ---------------------------------- | - | ------ | --------- |  | - | ---------- |  |  | - | ------ |  |  |  | -- | -
|                          |                       | Year Ended                         |   |        |           |  |  
|                          |                       | December 31,                       |   |        |          
|                          |                       |                                    |   |        | Increase/ | 
|                          |                       | 2005                               |   |        | 2004      |  |   | (Decrease) | 
|                          |                       |                                    |   |        |           |  |   |            | 
|                          |                       | (In thousands, except per unit and |   |        |          
|                          |                       | per day amounts)                   |   |        |          
|Total production volumes: |                       |                                    |   |        |           |  |   |            |  |  |   |        |  |  |  |   
|                          | Oil (Bbls)            |                                    |   | 6,871  |           |  |   | 6,679      |  |  |   | 192    |  |  |  | 3  | %
|                          | Natural gas (Mcf)     |                                    |   | 21,059 |           |  |   | 14,089     |  |  |   | 6,970  |  |  |  | 49 | %
|                          | Combined (BOE)        |                                    |   | 10,381 |           |  |   | 9,027      |  |  |   | 1,354  |  |  |  | 15 | %
|Daily production volumes: |                       |                                    |   |        |           |  |   |            |  |  |   |        |  |  |  |   
|                          | Oil (Bbl/ D)          |                                    |   | 18,826 |           |  |   | 18,249     |  |  |   | 577    |  |  |  | 3  | %
|                          | Natural gas (Mcf/ D)  |                                    |   | 57,696 |           |  |   | 38,493     |  |  |   | 19,203 |  |  |  | 50 | %
|                          | Combined (BOE/ D)     |                                    |   | 28,442 |           |  |   | 24,665     |  |  |   | 3,777  |  |  |  | 15 | %
|Average NYMEX prices:     |                       |                                    |   |        |           |  |   |            |  |  |   |        |  |  |  |   
|                          | Oil (per Bbl)         |                                    | $ | 56.56  |           |  | $ | 41.26      |  |  | $ | 15.30  |  |  |  | 37 | %
|                          | Natural gas (per Mcf) |                                    | $ | 8.96   |           |  | $ | 6.11       |  |  | $ | 2.85   |  |  |  | 47 | %







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|                             |                                          |              |       |       |      |   |       |       |  
|---------------------------- | ---------------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | -
|                             |                                          | Year Ended   |      
|                             |                                          | December 31, |      
|                             |                                          |              |      
|                             |                                          | 2005         |       |       | 2004 |  
|                             |                                          |              |       |       |      |  
|Oil wellhead ($/Bbl)         |                                          | $            | 51.06 |       |      | $ | 38.24 |      
|Average NYMEX ($/Bbl)        |                                          | $            | 56.56 |       |      | $ | 41.26 |      
|                             | Differential to NYMEX                    |              | $     | (5.50 | )    |   | $     | (3.02 | )
|                             | Oil wellhead to NYMEX percentage         |              |       | 90    | %    |   |       | 93    | %
|Natural gas wellhead ($/Mcf) |                                          | $            | 7.87  |       |      | $ | 5.76  |      
|Average NYMEX ($/Mcf)        |                                          | $            | 8.96  |       |      | $ | 6.11  |      
|                             | Differential to NYMEX                    |              | $     | (1.09 | )    |   | $     | (0.35 | )
|                             | Natural gas wellhead to NYMEX percentage |              |       | 88    | %    |   |       | 94    | %



Expenses.


|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |         |        |  |    |    |   | 
|------------------------ | ----------------------------------------- | ------------------------------------------- | ------- | ------- | --------- | - | ------- | ---------- | ------ | - | ------- | ------- | ------ |  | -- | -- | - | 
|                         |                                           | Year Ended                                  |         |         |           |   |        
|                         |                                           | December 31,                                |         |         |          
|                         |                                           |                                             |         |         | Increase/ |  
|                         |                                           | 2005                                        |         |         | 2004      |   |         | (Decrease) |       
|                         |                                           |                                             |         |         |           |   |         |            |       
|Expenses (in thousands): |                                           |                                             |         |         |           |   |         |            |        |   |         |         |        |  |    |   
|                         | Production:                               |                                             |         |         |           |   |         |            |        |   |         |         |        |  |    |    |  
|                         |                                           | Lease operations                            |         | $       | 69,744    |   |         | $          | 47,807 |   |         | $       | 21,937 |  |    |    |   | 
|                         |                                           | Production, ad valorem, and severance taxes |         |         | 45,601    |   |         |            | 30,313 |   |         |         | 15,288 |  |    |    |   | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total production expenses                 |                                             |         | 115,345 |           |   |         | 78,120     |        |   |         | 37,225  |        |  |    | 48 | %
|                         | Other:                                    |                                             |         |         |           |   |         |            |        |   |         |         |        |  |    |    |  
|                         |                                           | Depletion, depreciation, and amortization   |         |         | 85,627    |   |         |            | 48,522 |   |         |         | 37,105 |  |    |    |   | 
|                         |                                           | Exploration                                 |         |         | 14,443    |   |         |            | 3,935  |   |         |         | 10,508 |  |    |    |   | 
|                         |                                           | General and administrative                  |         |         | 17,268    |   |         |            | 12,059 |   |         |         | 5,209  |  |    |    |   | 
|                         |                                           | Derivative fair value loss                  |         |         | 5,290     |   |         |            | 5,011  |   |         |         | 279    |  |    |    |   | 
|                         |                                           | Loss on early redemption of debt            |         |         | 19,477    |   |         |            |       |   |         |         | 19,477 |  |    |    |   | 
|                         |                                           | Other operating                             |         |         | 9,485     |   |         |            | 5,028  |   |         |         | 4,457  |  |    |    |   | 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|                         | Total operating                           |                                             |         | 266,935 |           |   |         | 152,675    |        |   |         | 114,260 |        |  |    | 75 | %
|                         | Interest                                  |                                             |         | 34,055  |           |   |         | 23,459     |        |   |         | 10,596  |        |  |    |    |  
|                         | Current and deferred income tax provision |                                             |         | 53,948  |           |   |         | 40,492     |        |   |         | 13,456  |        |  |    |    |  
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        
|Total expenses           |                                           | $                                           | 354,938 |         |           | $ | 216,626 |            |        | $ | 138,312 |         |        |  | 64 | % 
|                         |                                           |                                             |         |         |           |   |         |            |        |   |         |        

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|                    |                                           |                                             |       |       |           |   |       |            |      |   |       |      |       |   |    |    |   | 
|------------------- | ----------------------------------------- | ------------------------------------------- | ----- | ----- | --------- | - | ----- | ---------- | ---- | - | ----- | ---- | ----- | - | -- | -- | - | 
|                    |                                           | Year Ended                                  |       |       |           |   |      
|                    |                                           | December 31,                                |       |       |          
|                    |                                           |                                             |       |       | Increase/ |  
|                    |                                           | 2005                                        |       |       | 2004      |   |       | (Decrease) |     
|                    |                                           |                                             |       |       |           |   |       |            |     
|Expenses (per BOE): |                                           |                                             |       |       |           |   |       |            |      |   |       |      |       |   |    |   
|                    | Production:                               |                                             |       |       |           |   |       |            |      |   |       |      |       |   |    |    |  
|                    |                                           | Lease operations                            |       | $     | 6.72      |   |       | $          | 5.30 |   |       | $    | 1.42  |   |    |    |   | 
|                    |                                           | Production, ad valorem, and severance taxes |       |       | 4.39      |   |       |            | 3.36 |   |       |      | 1.03  |   |    |    |   | 
|                    |                                           |                                             |       |       |           |   |       |            |      |   |       |     
|                    | Total production expenses                 |                                             |       | 11.11 |           |   |       | 8.66       |      |   |       | 2.45 |       |   |    | 28 | %
|                    | Other:                                    |                                             |       |       |           |   |       |            |      |   |       |      |       |   |    |    |  
|                    |                                           | Depletion, depreciation, and amortization   |       |       | 8.25      |   |       |            | 5.38 |   |       |      | 2.87  |   |    |    |   | 
|                    |                                           | Exploration                                 |       |       | 1.39      |   |       |            | 0.44 |   |       |      | 0.95  |   |    |    |   | 
|                    |                                           | General and administrative                  |       |       | 1.67      |   |       |            | 1.33 |   |       |      | 0.34  |   |    |    |   | 
|                    |                                           | Derivative fair value loss                  |       |       | 0.51      |   |       |            | 0.56 |   |       |      | (0.05 | ) |    |    |   | 
|                    |                                           | Loss on early redemption of debt            |       |       | 1.88      |   |       |            |     |   |       |      | 1.88  |   |    |    |   | 
|                    |                                           | Other operating                             |       |       | 0.91      |   |       |            | 0.56 |   |       |      | 0.35  |   |    |    |   | 
|                    |                                           |                                             |       |       |           |   |       |            |      |   |       |     
|                    | Total operating                           |                                             |       | 25.72 |           |   |       | 16.93      |      |   |       | 8.79 |       |   |    | 52 | %
|                    | Interest                                  |                                             |       | 3.28  |           |   |       | 2.60       |      |   |       | 0.68 |       |   |    |    |  
|                    | Current and deferred income tax provision |                                             |       | 5.20  |           |   |       | 4.49       |      |   |       | 0.71 |       |   |    |    |  
|                    |                                           |                                             |       |       |           |   |       |            |      |   |       |     
|Total expenses      |                                           | $                                           | 34.20 |       |           | $ | 24.02 |            |      | $ | 10.18 |      |       |   | 42 | % 
|                    |                                           |                                             |       |       |           |   |       |            |      |   |       |     

Production expenses.






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DD&A expense.


Exploration expense.


|                               |       |                |       |        |           |   |       |            |  |   |       |        | 
|------------------------------ | ----- | -------------- | ----- | ------ | --------- | - | ----- | ---------- |  | - | ----- | ------ | 
|                               |       | Year Ended     |       |        |          
|                               |       | December 31,   |       |        |          
|                               |       |                |       |        | Increase/ |  
|                               |       | 2005           |       |        | 2004      |   |       | (Decrease) | 
|                               |       |                |       |        |           |   |       |            | 
|                               |       | (In thousands) |      
|Dry holes                      |       | $              | 8,632 |        |           | $ | 2,050 |            |  | $ | 6,582 |       
|Geological and seismic         |       |                | 3,137 |        |           |   | 1,006 |            |  |   | 2,131 |       
|Delay rentals                  |       |                | 635   |        |           |   | 204   |            |  |   | 431   |       
|Impairment of unproved acreage |       |                | 2,039 |        |           |   | 675   |            |  |   | 1,364 |       
|                               |       |                |       |        |           |   |       |            | 
|                               | Total |                | $     | 14,443 |           |   | $     | 3,935      |  |   | $     | 10,508 | 
|                               |       |                |       |        |           |   |       |            | 

G&A expense.




Derivative fair value loss. mark-to fixed-to


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ENCORE ACQUISITION COMPANY


mark-to fixed-to


|                                   |                                           |                                  |   |        |           |  |   |            |       |  |   |        |     | 
|---------------------------------- | ----------------------------------------- | -------------------------------- | - | ------ | --------- |  | - | ---------- | ----- |  | - | ------ | --- | 
|                                   |                                           | Year Ended                       |   |        |          
|                                   |                                           | December 31,                     |   |        |          
|                                   |                                           |                                  |   |        | Increase/ | 
|                                   |                                           | 2005                             |   |        | 2004      |  |   | (Decrease) |      
|                                   |                                           |                                  |   |        |           |  |   |            |      
|                                   |                                           | (In thousands)                   |  
|Designated cash flow hedges:       |                                           |                                  |   |        |           |  |   |            |       |  |   |       
|                                   | Ineffectiveness  Commodity contracts     |                                  | $ | 8,371  |           |  | $ | 5,018      |       |  | $ | 3,353  |    
|Undesignated derivative contracts: |                                           |                                  |   |        |           |  |   |            |       |  |   |       
|                                   | Mark-to-market loss  Interest rate swap  |                                  |   | 150    |           |  |   | 272        |       |  |   | (122   | )  
|                                   | Mark-to-market gain  Commodity contracts |                                  |   | (3,231 | )         |  |   | (279       | )     |  |   | (2,952 | )  
|                                   |                                           |                                  |   |        |           |  |   |            |      
|                                   |                                           | Total derivative fair value loss |   | $      | 5,290     |  |   | $          | 5,011 |  |   | $      | 279 | 
|                                   |                                           |                                  |   |        |           |  |   |            |      

fixed-to


Loss on early redemption of debt. 3 8 3 8


Other operating expense.


Interest expense. 1 4 1 4 3 8




|                          |       |                |       |        |           |   |        |            |  |   |        |        | 
|------------------------- | ----- | -------------- | ----- | ------ | --------- | - | ------ | ---------- |  | - | ------ | ------ | 
|                          |       | Year Ended     |       |        |          
|                          |       | December 31,   |       |        |          
|                          |       |                |       |        | Increase/ |  
|                          |       | 2005           |       |        | 2004      |   |        | (Decrease) | 
|                          |       |                |       |        |           |   |        |            | 
|                          |       | (In thousands) |      
|83/8% Notes               |       | $              | 7,852 |        |           | $ | 12,563 |            |  | $ | (4,711 | )     
|61/4% Notes               |       |                | 9,375 |        |           |   | 7,005  |            |  |   | 2,370  |       
|6% Notes                  |       |                | 8,437 |        |           |   |       |            |  |   | 8,437  |       
|71/4% Notes               |       |                | 1,145 |        |           |   |       |            |  |   | 1,145  |       
|Revolving credit facility |       |                | 4,554 |        |           |   | 1,565  |            |  |   | 2,989  |       
|Other                     |       |                | 2,692 |        |           |   | 2,326  |            |  |   | 366    |       
|                          |       |                |       |        |           |   |        |            | 
|                          | Total |                | $     | 34,055 |           |   | $      | 23,459     |  |   | $      | 10,596 | 
|                          |       |                |       |        |           |   |        |            | 

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Income taxes.




| |                  
| | -----------------
| | Capital Resources





| |   |                                          
| | - | -----------------------------------------
| |  | Cash flows from operating activities;    
|
| |  | Cash flows from financing activities; and
|
| |  | Current capitalization.                  

Cash flows from operating activities.




Cash flows from investing activities.




Cash flows from financing activities.






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1 4 3 8


1 4


Current capitalization.




| |                    
| | -------------------
| | Capital Commitments





| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | Development, exploitation, and exploration of our existing oil
    and natural gas properties;
|
| |  | Acquisitions of oil and natural gas properties and leasehold
    acreage;                     
|
| |  | Other general property and equipment;                                                         
|
| |  | Funding of necessary working capital; and                                                     
|
| |  | Payment of contractual obligations.                                                           

Development, exploitation, and exploration of existing
properties.


|                             |       |                         |         |         |      |   |         |         |  |   |         |         | 
|---------------------------- | ----- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                             |       | Year Ended December 31, |        
|                             |       |                         |        
|                             |       | 2006                    |         |         | 2005 |   |         | 2004    | 
|                             |       |                         |         |         |      |   |         |         | 
|                             |       | (In thousands)          |        
|Development and exploitation |       | $                       | 228,014 |         |      | $ | 236,467 |         |  | $ | 117,464 |        
|Exploration                  |       |                         | 95,205  |         |      |   | 57,046  |         |  |   | 30,546  |        
|HPAI                         |       |                         | 25,470  |         |      |   | 32,053  |         |  |   | 39,628  |        
|                             |       |                         |         |         |      |   |         |         | 
|                             | Total |                         | $       | 348,689 |      |   | $       | 325,566 |  |   | $       | 187,638 | 
|                             |       |                         |         |         |      |   |         |         | 

Development and exploitation.


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Exploration.


HPAI programs.


Acquisitions of proved property and leasehold acreage.


|                                  |       |                         |        |        |      |   |         |         |  |   |         |         | 
|--------------------------------- | ----- | ----------------------- | ------ | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                  |       | Year Ended December 31, |       
|                                  |       |                         |       
|                                  |       | 2006                    |        |        | 2005 |   |         | 2004    | 
|                                  |       |                         |        |        |      |   |         |         | 
|                                  |       | (In thousands)          |       
|Acquisitions of proved property   |       | $                       | 4,486  |        |      | $ | 224,469 |         |  | $ | 204,907 |        
|Acquisitions of leasehold acreage |       |                         | 24,462 |        |      |   | 21,205  |         |  |   | 33,926  |        
|                                  |       |                         |        |        |      |   |         |         | 
|                                  | Total |                         | $      | 28,948 |      |   | $       | 245,674 |  |   | $       | 238,833 | 
|                                  |       |                         |        |        |      |   |         |         | 

2006 Acquisitions.


2005 Acquisitions.


2004 Acquisitions.


Leasehold acreage costs.


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Other general property and equipment.


Funding of necessary working capital.






Contractual obligations.


|                                        |       |                        |         |           |      |   |         |           |  |   |           |         |  |            |        |         |  |   |         |         | 
|--------------------------------------- | ----- | ---------------------- | ------- | --------- | ---- | - | ------- | --------- |  | - | --------- | ------- |  | ---------- | ------ | ------- |  | - | ------- | ------- | 
|                                        |       | Payments Due by Period |        
|                                        |       |                        |        
|Contractual Obligations and Commitments |       | Total                  |         |           | 2007 |   |         | 2008-2009 |  |   | 2010-2011 |         |  | Thereafter |       
|                                        |       |                        |         |           |      |   |         |           |  |   |           |         |  |            |       
|                                        |       | (In thousands)         |        
|61/4% Notes(a)                          |       | $                      | 220,313 |           |      | $ | 9,375   |           |  | $ | 18,750    |         |  | $          | 18,750 |         |  | $ | 173,438 |        
|6% Notes(a)                             |       |                        | 462,000 |           |      |   | 18,000  |           |  |   | 36,000    |         |  |            | 36,000 |         |  |   | 372,000 |        
|71/4% Notes(a)                          |       |                        | 269,625 |           |      |   | 10,875  |           |  |   | 21,750    |         |  |            | 21,750 |         |  |   | 215,250 |        
|Revolving credit facility(a)            |       |                        | 80,212  |           |      |   | 3,053   |           |  |   | 6,106     |         |  |            | 71,053 |         |  |   |        |        
|Derivative obligations(b)               |       |                        | 77,524  |           |      |   | 53,804  |           |  |   | 22,880    |         |  |            | 840    |         |  |   |        |        
|Development commitments(c)              |       |                        | 199,092 |           |      |   | 135,779 |           |  |   | 62,942    |         |  |            | 371    |         |  |   |        |        
|Operating leases(d)                     |       |                        | 14,218  |           |      |   | 1,818   |           |  |   | 4,304     |         |  |            | 4,199  |         |  |   | 3,897   |        
|Asset retirement obligations(e)         |       |                        | 134,103 |           |      |   | 636     |           |  |   | 1,273     |         |  |            | 1,273  |         |  |   | 130,921 |        
|                                        |       |                        |         |           |      |   |         |           |  |   |           |         |  |            |       
|                                        | Total |                        | $       | 1,457,087 |      |   | $       | 233,340   |  |   | $         | 174,005 |  |            | $      | 154,236 |  |   | $       | 895,506 | 
|                                        |       |                        |         |           |      |   |         |           |  |   |           |         |  |            |       






|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Amounts included in the table above include both principal and
    projected interest payments. Please read Note 8 of Notes to
    Consolidated Financial Statements included in Item 8.
    Financial Statements and Supplementary Data for additional
    information regarding our long-term debt.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Derivative obligations represent net liabilities for derivatives
    that were valued as of December 31, 2006. With the
    exception of $54.7 million of deferred premiums on
    derivative contracts, the ultimate settlement amounts of the
    remaining portions of our derivative obligations are unknown
    because they are subject to continuing market risk. Please read
    Item 7A. Quantitative and Qualitative Disclosures
    about Market Risk and Note 13 of Notes to
    Consolidated Financial Statements included in Item 8.
    Financial Statements and Supplementary Data for additional
    information regarding our derivative obligations.                                          
|   
|(c) | Development commitments include authorized purchases for work in
    process of $46.7 million which is accrued at
    December 31, 2006, future minimum payments for electricity,
    seismic data analysis, and drilling rig operations of
    $140.4 million, and $12.0 million for minimum capital
    obligations associated with the remaining commitment wells to be
    drilled under the ExxonMobil joint development agreement. Also
    at December 31, 2006, we had $132.3 million of
    authorized purchases not placed to vendors (authorized AFEs),
    which were not accrued and are excluded from the above table but
    are budgeted for and expected to be made unless circumstances
    change.
|   
|(d) | Operating leases represent office space and equipment
    obligations that have non-cancelable lease terms in excess of
    one year. Please read Note 4 of Notes to Consolidated
    Financial Statements included in Item 8. Financial
    Statements and Supplementary Data for additional
    information regarding our operating leases.                                                                                                                                                                                                                                                                                                                                                                      
|   
|(e) | Asset retirement obligations represent the undiscounted future
    plugging and abandonment expenses on oil and natural gas
    properties and related facilities disposal at the completion of
    field life. Please read Note 5 of Notes to Consolidated
    Financial Statements included in Item 8. Financial
    Statements and Supplementary Data for additional
    information regarding our AROs.                                                                                                                                                                                                                                                                                                        

Other contingencies and commitments. unit-of






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Letters of credit.


mark-to mark-to


Liquidity




Internally generated cash flows.


Revolving credit facility.






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|                                              |  |                     |               |   |                    |  |                   |  
|--------------------------------------------- |  | ------------------- | ------------- | - | ------------------ |  | ----------------- | -
|Ratio of Total Outstandings to Borrowing Base |  | Eurodollar Loans(a) |               |   | Base Rate Loans(b) | 
|                                              |  |                     |               |   |                    | 
|Less than .40 to 1                            |  |                     | LIBOR + 1.000 | % |                    |  | Base Rate + 0.000 | %
|From .40 to 1 but less than .75 to 1          |  |                     | LIBOR + 1.250 | % |                    |  | Base Rate + 0.000 | %
|From .75 to 1 but less than .90 to 1          |  |                     | LIBOR + 1.500 | % |                    |  | Base Rate + 0.250 | %
|.90 to 1 or greater                           |  |                     | LIBOR + 1.750 | % |                    |  | Base Rate + 0.500 | %






|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The LIBOR rate is equal to the rate determined by Bank of
    America, N.A. to be the average British Bankers Association
    Interest Settlement Rate for deposits in dollars for a similar
    interest period (either one, two, three, or six months, or such
    other period that is twelve months or less as selected by us and
    consented to by each lender).



|    |  |                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | The Base Rate is calculated as the higher of (i) the annual
    rate of interest announced by Bank of America, N.A. as its
    prime rate and (ii) the federal funds effective
    rate plus 0.5 percent.











Indentures governing our senior subordinated
notes. 1 4 1 4




| |   |                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------
| |  | incur additional indebtedness;                                                                                        
|
| |  | pay dividends on our capital stock or redeem, repurchase or
    retire our capital stock or subordinated indebtedness;
|
| |  | make investments;                                                                                                     

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | incur liens;                                                                                                                                   
|
| |  | create any consensual limitation on the ability of our
    restricted subsidiaries to pay dividends, make loans or transfer
    property to us;
|
| |  | engage in transactions with our affiliates;                                                                                                    
|
| |  | sell assets, including capital stock of our subsidiaries; and                                                                                  
|
| |  | consolidate, merge or transfer assets.                                                                                                         







| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements





| |                                
| | -------------------------------
| | Inflation and Changes in Prices



|                                   |                     |                         |   |       |      |  |   |       |  |  |   |       | 
|---------------------------------- | ------------------- | ----------------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                   |                     | Year Ended December 31, |  
|                                   |                     |                         |  
|                                   |                     | 2006                    |   |       | 2005 |  |   | 2004  | 
|                                   |                     |                         |   |       |      |  |   |       | 
|Net Price Realization with Hedges: |                     |                         |   |       |      |  |   |       |  |  |   |      
|                                   | Oil ($/Bbl)         |                         | $ | 47.30 |      |  | $ | 44.82 |  |  | $ | 33.04 | 
|                                   | Natural gas ($/Mcf) |                         |   | 6.24  |      |  |   | 7.09  |  |  |   | 5.53  | 
|                                   | Combined ($/BOE)    |                         |   | 43.87 |      |  |   | 44.05 |  |  |   | 33.07 | 
|Average Wellhead Price:            |                     |                         |   |       |      |  |   |       |  |  |   |      
|                                   | Oil ($/Bbl)         |                         | $ | 54.42 |      |  | $ | 51.06 |  |  | $ | 38.24 | 
|                                   | Natural gas ($/Mcf) |                         |   | 6.59  |      |  |   | 7.87  |  |  |   | 5.76  | 
|                                   | Combined ($/BOE)    |                         |   | 49.24 |      |  |   | 49.76 |  |  |   | 37.28 | 



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| |                                           
| | ------------------------------------------
| | Critical Accounting Policies and Estimates



Oil and Natural Gas Properties


Successful efforts method.








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unit-of-production










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Oil and natural gas reserves.


Asset retirement obligations.




Goodwill






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Net Profits Interests




Revenue Recognition




Income Taxes


Effective tax rate.




| |                               
| | ------------------------------
| | Hedging and Related Activities

mark-to


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mark-to




| |                              
| | -----------------------------
| | New Accounting Pronouncements



| |                                                        
| | -------------------------------------------------------
| | SFAS No. 157, Fair Value Measurement
    (SFAS 157)

In September 2006, the FASB issued SFAS 157.




| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | FASB Interpretation No. 48, Accounting for
    Uncertainty in Income Taxes
    (FIN 48)

In June 2006, the FASB issued FIN 48. Accounting for
Income Taxes.


Information Concerning Forward-Looking Statements






| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | expected capital expenditures and the focus of our capital
    program;                                                                                                                                                                                          
|
| |  | areas of future growth;                                                                                                                                                                                                                                          
|
| |  | our drilling program;                                                                                                                                                                                                                                            
|
| |  | future horizontal development, secondary development, and
    tertiary recovery potential;                                                                                                                                                                       
|
| |  | the implementation of our HPAI program, the ability to expand
    the program to other parts of the CCA and the effects thereof;                                                                                                                                 
|
| |  | the completion of current HPAI projects and the effects thereof;                                                                                                                                                                                                 
|
| |  | anticipated prices for oil and natural gas and expectations
    regarding differentials between wellhead prices received and
    benchmark prices (including, without limitation, the effects of
    increased Canadian oil production and refinery turnarounds);
|
| |  | projected revenues, lifting costs, LOE; production taxes,
    DD&A expense, G&A expenses, other operating expenses,
    and taxes;                                                                                                                               
|
| |  | timing and amount of future production of oil and natural gas;                                                                                                                                                                                                   
|
| |  | the benefits to be derived from acquisitions and divestitures;                                                                                                                                                                                                   

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| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | availability of pipeline capacity;                                                                                      
|
| |  | expected hedging positions and payments related to hedging
    contracts;                                               
|
| |  | expectations regarding working capital, cash flow, and
    anticipated liquidity;                                       
|
| |  | projected borrowings under our revolving credit facility and
    expectations regarding a new revolving credit facility;
|
| |  | plans regarding an MLP;                                                                                                 
|
| |  | expected reductions in our debt levels and the steps taken to
    reduce our debt; and                                  
|
| |  | marketing of oil and natural gas.                                                                                       








|         |                                                               
|-------- | --------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK

Derivative policy.


Counterparties.


|                  |  |                      |      |   |                      |  |      |  
|----------------- |  | -------------------- | ---- | - | -------------------- |  | ---- | -
|                  |  | Percentage of        |      |   | Percentage of        | 
|                  |  | Hedged Oil           |      |   | Hedged Natural Gas   | 
|Counterparty      |  | Production Committed |      |   | Production Committed | 
|                  |  |                      |      |   |                      | 
|BNP Paribas       |  |                      | 7.6  | % |                      |  | 66.6 | %
|Calyon            |  |                      | 17.0 | % |                      |  | 14.3 | %
|Deutsche Bank     |  |                      | 34.9 | % |                      |  |     |  
|J. Aron & Company |  |                      | 3.8  | % |                      |  | 19.0 | %
|Wachovia          |  |                      | 22.6 | % |                      |  |     |  





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Commodity price sensitivity.


mark-to




| |                           
| | --------------------------
| | Oil Derivative Instruments

|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ------ | ------ |  | --------- | - | ----- | ----------- |  |  | ----------- | - |  | ------ | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily  |        |  | Average   |   |       | Daily       |  |  | Average     |   |  | Daily  |       |  | Average   |  |       |               
|                 |  | Floor  |        |  | Floor     |   |       | Short Floor |  |  | Short Floor |   |  | Swap   |       |  | Swap      |  |       | Fair Market    | 
|Period           |  | Volume |        |  | Price     |   |       | Volume      |  |  | Price       |   |  | Volume |       |  | Price     |  |       | Value          | 
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 
|                 |  | (Bbl)  |        |  | (Per Bbl) |   |       | (Bbl)       |  |  | (Per Bbl)   |   |  | (Bbl)  |       |  | (Per Bbl) |  |       | (In thousands) | 
|Jan.  Dec. 2007 |  |        | 8,000  |  |           | $ | 53.75 |             |  |  |            |   |  | $      |      |  |           |  | 3,000 |                |  | $ | 36.75 |  |  | $ | (26,347 | )
|Jan.  June 2008 |  |        | 12,000 |  |           |   | 64.17 |             |  |  | (4,000      | ) |  |        | 50.00 |  |           |  | 1,000 |                |  |   | 58.59 |  |  |   | 9,536   |  
|July  Dec. 2008 |  |        | 8,000  |  |           |   | 66.25 |             |  |  | (4,000      | ) |  |        | 50.00 |  |           |  |      |                |  |   |      |  |  |   | 8,471   |  
|Jan.  Dec. 2009 |  |        | 5,000  |  |           |   | 70.00 |             |  |  | (5,000      | ) |  |        | 50.00 |  |           |  |      |                |  |   |      |  |  |   | 11,972  |  
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                |  |   |       |  |  | $ | 3,632   |  
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 



| |                                   
| | ----------------------------------
| | Natural Gas Derivative Instruments

|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  |  |   |      |  |  |   |       | 
|---------------- |  | ------ | ------ |  | --------- | - | ---- | ----------- |  |  | ----------- |  | ------ | - | - | --------- |  |  | -------------- |  |  | - | ---- |  |  | - | ----- | 
|                 |  | Daily  |        |  | Average   |   |      | Daily       |  |  | Average     |  | Daily  |   |   | Average   |  |  |               
|                 |  | Floor  |        |  | Floor     |   |      | Short Floor |  |  | Short Floor |  | Swap   |   |   | Swap      |  |  | Fair Market    | 
|Period           |  | Volume |        |  | Price     |   |      | Volume      |  |  | Price       |  | Volume |   |   | Price     |  |  | Value          | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                | 
|                 |  | (Mcf)  |        |  | (Per Mcf) |   |      | (Mcf)       |  |  | (Per Mcf)   |  | (Mcf)  |   |   | (Per Mcf) |  |  | (In thousands) | 
|Jan.  Dec. 2007 |  |        | 32,500 |  |           | $ | 6.74 |             |  |  |            |  |        | $ |  |           |  |  | 10,000         |  |  | $ | 4.99 |  |  | $ | 7,567 | 
|Jan.  Dec. 2008 |  |        | 10,000 |  |           |   | 6.25 |             |  |  |            |  |        |   |  |           |  |  |               |  |  |   |     |  |  |   | 2,400 | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  |  |   |      |  |  | $ | 9,967 | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  | 

Interest rate sensitivity.


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1 4 1 4




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|        |                                            
|------- | -------------------------------------------
|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements


|                                                                                                              |  |      |     | 
|------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                              |  | Page |    
|                                                                                                              |  |      |    
|Report of Independent Registered Public
    Accounting Firm                                                   |  |      | 69  | 
|Consolidated Balance Sheets as of
    December 31, 2006 and 2005                                              |  |      | 70  | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2006, 2005, and 2004               |  |      | 71  | 
|Consolidated Statements of
    Stockholders Equity for the Years Ended December 31,
    2006, 2005, and 2004 |  |      | 72  | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2006, 2005, and 2004               |  |      | 73  | 
|Notes to Consolidated Financial
    Statements                                                                |  |      | 74  | 
|Supplementary Information                                                                                     |  |      | 101 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














Internal Control 
Integrated Framework




| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





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ENCORE ACQUISITION COMPANY





CONSOLIDATED BALANCE SHEETS


|                                                                   |                                                                                                                                     |                                            |                                      |           |           |  |           |           |           |  | 
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | --------- | --------- |  | --------- | --------- | --------- |  | 
|                                                                   |                                                                                                                                     | December 31,                               |                                     
|                                                                   |                                                                                                                                     |                                            |                                     
|                                                                   |                                                                                                                                     | 2006                                       |                                      |           | 2005      | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | (In thousands, except                      |                                     
|                                                                   |                                                                                                                                     | share and per share                        |                                     
|                                                                   |                                                                                                                                     | amounts)                                   |                                     
|ASSETS                                                             |                                                                                                                                     |                                            |                                      |           |           |  |           |          
|Current assets:                                                    |                                                                                                                                     |                                            |                                      |           |           |  |           |          
|                                                                   | Cash and cash equivalents                                                                                                           |                                            | $                                    | 763       |           |  | $         | 1,654     |          
|                                                                   | Accounts receivable                                                                                                                 |                                            |                                      | 81,470    |           |  |           | 76,960    |          
|                                                                   | Inventory                                                                                                                           |                                            |                                      | 18,170    |           |  |           | 11,231    |          
|                                                                   | Derivatives                                                                                                                         |                                            |                                      | 17,349    |           |  |           | 8,826     |          
|                                                                   | Deferred taxes                                                                                                                      |                                            |                                      | 24,978    |           |  |           | 29,030    |          
|                                                                   | Prepaid expenses                                                                                                                    |                                            |                                      | 2,988     |           |  |           | 5,656     |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total current assets                       |                                      |           | 145,718   |  |           |           | 133,357   | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|Properties and equipment, at cost  successful efforts
    method: |                                                                                                                                     |                                            |                                      |           |           |  |           |          
|                                                                   | Proved properties                                                                                                                   |                                            |                                      | 2,033,914 |           |  |           | 1,691,175 |          
|                                                                   | Unproved properties                                                                                                                 |                                            |                                      | 47,548    |           |  |           | 37,646    |          
|                                                                   | Accumulated depletion, depreciation, and amortization                                                                               |                                            |                                      | (364,780  | )         |  |           | (255,564  | )        
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     |                                            | 1,716,682                            |           |           |  | 1,473,257 |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   | Other property and equipment                                                                                                        |                                            |                                      | 18,231    |           |  |           | 15,894    |          
|                                                                   | Accumulated depreciation                                                                                                            |                                            |                                      | (7,791    | )         |  |           | (5,366    | )        
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     |                                            | 10,440                               |           |           |  | 10,528    |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|Goodwill                                                           |                                                                                                                                     |                                            | 60,606                               |           |           |  | 59,046    |          
|Derivatives                                                        |                                                                                                                                     |                                            | 40,715                               |           |           |  | 17,316    |          
|Other                                                              |                                                                                                                                     |                                            | 32,739                               |           |           |  | 12,201    |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total assets                               |                                      | $         | 2,006,900 |  |           | $         | 1,705,705 | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     |                                            | LIABILITIES AND STOCKHOLDERS EQUITY |           |           |  |           |           |           |  | 
|Current liabilities:                                               |                                                                                                                                     |                                            |                                      |           |           |  |           |          
|                                                                   | Accounts payable                                                                                                                    |                                            | $                                    | 18,204    |           |  | $         | 27,281    |          
|                                                                   | Accrued lease operations expense                                                                                                    |                                            |                                      | 8,582     |           |  |           | 6,633     |          
|                                                                   | Accrued development capital                                                                                                         |                                            |                                      | 44,492    |           |  |           | 38,899    |          
|                                                                   | Interest payable                                                                                                                    |                                            |                                      | 11,273    |           |  |           | 12,531    |          
|                                                                   | Production, ad valorem, and severance taxes payable                                                                                 |                                            |                                      | 10,915    |           |  |           | 12,566    |          
|                                                                   | Accrued oil purchases                                                                                                               |                                            |                                      | 11,191    |           |  |           |          |          
|                                                                   | Derivatives                                                                                                                         |                                            |                                      | 60,448    |           |  |           | 76,515    |          
|                                                                   | Other                                                                                                                               |                                            |                                      | 21,358    |           |  |           | 15,770    |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total current liabilities                  |                                      |           | 186,463   |  |           |           | 190,195   | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|Derivatives                                                        |                                                                                                                                     |                                            | 38,688                               |           |           |  | 66,563    |          
|Future abandonment cost                                            |                                                                                                                                     |                                            | 19,205                               |           |           |  | 14,430    |          
|Deferred taxes                                                     |                                                                                                                                     |                                            | 282,825                              |           |           |  | 213,268   |          
|Long-term debt                                                     |                                                                                                                                     |                                            | 661,696                              |           |           |  | 673,189   |          
|Other                                                              |                                                                                                                                     |                                            | 1,158                                |           |           |  | 1,279     |          
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total liabilities                          |                                      |           | 1,190,035 |  |           |           | 1,158,924 | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|Commitments and contingencies (see Note 4)                         |                                                                                                                                     |                                            |                                     |           |           |  |          |          
|Stockholders equity:                                              |                                                                                                                                     |                                            |                                      |           |           |  |           |          
|                                                                   | Preferred stock, $.01 par value, 5,000,000 shares
    authorized, none issued and outstanding                                       |                                            |                                      |          |           |  |           |          |          
|                                                                   | Common stock, $.01 par value, 144,000,000 shares
    authorized, 53,046,675 and 48,784,846 issued and outstanding,
    respectively |                                            |                                      | 531       |           |  |           | 488       |          
|                                                                   | Additional paid-in capital                                                                                                          |                                            |                                      | 457,201   |           |  |           | 316,619   |          
|                                                                   | Treasury stock, at cost, of 17,809 and 11,169 shares,
    respectively                                                              |                                            |                                      | (457      | )         |  |           | (375      | )        
|                                                                   | Retained earnings                                                                                                                   |                                            |                                      | 394,917   |           |  |           | 302,875   |          
|                                                                   | Accumulated other comprehensive loss                                                                                                |                                            |                                      | (35,327   | )         |  |           | (72,826   | )        
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total stockholders equity                 |                                      |           | 816,865   |  |           |           | 546,781   | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 
|                                                                   |                                                                                                                                     | Total liabilities and stockholders equity |                                      | $         | 2,006,900 |  |           | $         | 1,705,705 | 
|                                                                   |                                                                                                                                     |                                            |                                      |           |           | 



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                            |                                           |                                             |         |         |        |   |         |         |        |   |         |         |        | 
|------------------------------------------- | ----------------------------------------- | ------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                            |                                           | Year Ended December 31,                     |        
|                                            |                                           |                                             |        
|                                            |                                           | 2006                                        |         |         | 2005   |   |         | 2004    |       
|                                            |                                           |                                             |         |         |        |   |         |         |       
|                                            |                                           | (In thousands, except per share             |        
|                                            |                                           | amounts)                                    |        
|Revenues:                                   |                                           |                                             |         |         |        |   |         |         |        |   |         |        
|                                            | Oil                                       |                                             | $       | 346,974 |        |   | $       | 307,959 |        |   | $       | 220,649 |       
|                                            | Natural gas                               |                                             |         | 146,325 |        |   |         | 149,365 |        |   |         | 77,884  |       
|                                            | Oil marketing                             |                                             |         | 147,563 |        |   |         |        |        |   |         |        |       
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Total revenues                              |                                           |                                             | 640,862 |         |        |   | 457,324 |         |        |   | 298,533 |        
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Expenses:                                   |                                           |                                             |         |         |        |   |         |         |        |   |         |        
|                                            | Production:                               |                                             |         |         |        |   |         |         |        |   |         |         |       
|                                            |                                           | Lease operations                            |         |         | 98,194 |   |         |         | 69,744 |   |         |         | 47,807 | 
|                                            |                                           | Production, ad valorem, and severance taxes |         |         | 49,780 |   |         |         | 45,601 |   |         |         | 30,313 | 
|                                            | Depletion, depreciation, and amortization |                                             |         | 113,463 |        |   |         | 85,627  |        |   |         | 48,522  |       
|                                            | Exploration                               |                                             |         | 30,519  |        |   |         | 14,443  |        |   |         | 3,935   |       
|                                            | General and administrative                |                                             |         | 23,194  |        |   |         | 17,268  |        |   |         | 12,059  |       
|                                            | Oil marketing                             |                                             |         | 148,571 |        |   |         |        |        |   |         |        |       
|                                            | Derivative fair value (gain) loss         |                                             |         | (24,388 | )      |   |         | 5,290   |        |   |         | 5,011   |       
|                                            | Loss on early redemption of debt          |                                             |         |        |        |   |         | 19,477  |        |   |         |        |       
|                                            | Other operating                           |                                             |         | 10,023  |        |   |         | 9,485   |        |   |         | 5,028   |       
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Total expenses                              |                                           |                                             | 449,356 |         |        |   | 266,935 |         |        |   | 152,675 |        
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Operating income                            |                                           |                                             | 191,506 |         |        |   | 190,389 |         |        |   | 145,858 |        
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Other income (expenses):                    |                                           |                                             |         |         |        |   |         |         |        |   |         |        
|                                            | Interest                                  |                                             |         | (45,131 | )      |   |         | (34,055 | )      |   |         | (23,459 | )     
|                                            | Other                                     |                                             |         | 1,429   |        |   |         | 1,039   |        |   |         | 240     |       
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Total other income (expenses)               |                                           |                                             | (43,702 | )       |        |   | (33,016 | )       |        |   | (23,219 | )      
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Income before income taxes                  |                                           |                                             | 147,804 |         |        |   | 157,373 |         |        |   | 122,639 |        
|Income tax provision                        |                                           |                                             | (55,406 | )       |        |   | (53,948 | )       |        |   | (40,492 | )      
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Net income                                  |                                           | $                                           | 92,398  |         |        | $ | 103,425 |         |        | $ | 82,147  |        
|                                            |                                           |                                             |         |         |        |   |         |         |       
|Net income per common share:                |                                           |                                             |         |         |        |   |         |         |        |   |         |        
|                                            |                                           | Basic                                       |         | $       | 1.78   |   |         | $       | 2.12   |   |         | $       | 1.74   | 
|                                            |                                           | Diluted                                     |         |         | 1.75   |   |         |         | 2.09   |   |         |         | 1.72   | 
|Weighted average common shares outstanding: |                                           |                                             |         |         |        |   |         |         |        |   |         |        
|                                            |                                           | Basic                                       |         |         | 51,865 |   |         |         | 48,682 |   |         |         | 47,090 | 
|                                            |                                           | Diluted                                     |         |         | 52,736 |   |         |         | 49,522 |   |         |         | 47,738 | 



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         |         |         |  
|---------------------------- | --------------------------------------------------------- | --------------------------------------------------------- | ------ | ----- | ------ | - | ---------- | ------- | - | --------- | -------- | ------- | - | ----------- | --- | --- | -------- | - | ---- | ------------- | - | - | ------------- | ---- | ------- | - | ------- | - | ------- | - | ------- | ------- | ------- | -
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   | Accumulated |     |     |         
|                             |                                                           | Shares of                                                 |        |       |        |   | Additional |         |   | Shares of |          |         |   |             |     |     | Other    |   |      | Total         |  
|                             |                                                           | Common                                                    |        |       | Common |   |            | Paid-In |   |           | Treasury |         |   | Treasury    |     |     | Retained |   |      | Comprehensive |   |   | Stockholders |     
|                             |                                                           | Stock                                                     |        |       | Stock  |   |            | Capital |   |           | Stock    |         |   | Stock       |     |     | Earnings |   |      | Loss          |   |   | Equity        |     
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|                             |                                                           | (In thousands)                                            |       
|Balance at December 31, 2003 |                                                           |                                                           | 45,351 |       |        | $ | 454        |         |   | $         | 251,186  |         |   |             |    |     |          | $ |     |               |   | $ | 117,365       |      |         | $ | (10,030 | ) |         | $ | 358,975 |        
|                             | Exercise of stock options                                 |                                                           |        | 303   |        |   |            | 3       |   |           |          | 4,118   |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 4,121   |        
|                             | Issuance of common stock                                  |                                                           |        | 3,000 |        |   |            | 30      |   |           |          | 52,899  |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 52,929  |        
|                             | Non-cash stock-based compensation                         |                                                           |        |      |        |   |            |        |   |           |          | 1,770   |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 1,770   |        
|                             | Components of comprehensive income:                       |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         |         |        
|                             |                                                           | Net income                                                |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      | 82,147  |   |         |   |        |   |         |         | 82,147  |  
|                             |                                                           | Change in deferred hedge gain/loss, net of tax of $15,757 |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      |        |   |         |   | (26,367 | ) |         |         | (26,367 | )
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|                             | Total comprehensive income                                |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         | 55,780  |        
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|Balance at December 31, 2004 |                                                           |                                                           | 48,654 |       |        |   | 487        |         |   |           | 309,973  |         |   |             |    |     |          |   |     |               |   |   | 199,512       |      |         |   | (36,397 | ) |         |   | 473,575 |        
|                             | Exercise of stock options and vesting of restricted stock |                                                           |        | 138   |        |   |            | 1       |   |           |          | 2,817   |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 2,818   |        
|                             | Purchase of treasury stock                                |                                                           |        |      |        |   |            |        |   |           |          |        |   |             |     | (18 | )        |   |      | (570          | ) |   |               |     |         |   |         |  |         |   |         | (570    | )      
|                             | Cancellation of treasury stock                            |                                                           |        | (7    | )      |   |            |        |   |           |          | (133    | ) |             |     | 7   |          |   |      | 195           |   |   |               | (62  | )       |   |         |  |         |   |         |        |        
|                             | Non-cash stock-based compensation                         |                                                           |        |      |        |   |            |        |   |           |          | 3,962   |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 3,962   |        
|                             | Components of comprehensive income:                       |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         |         |        
|                             |                                                           | Net income                                                |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      | 103,425 |   |         |   |        |   |         |         | 103,425 |  
|                             |                                                           | Change in deferred hedge gain/loss, net of tax of $21,701 |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      |        |   |         |   | (36,429 | ) |         |         | (36,429 | )
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|                             | Total comprehensive income                                |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         | 66,996  |        
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|Balance at December 31, 2005 |                                                           |                                                           | 48,785 |       |        |   | 488        |         |   |           | 316,619  |         |   |             | (11 | )   |          |   | (375 | )             |   |   | 302,875       |      |         |   | (72,826 | ) |         |   | 546,781 |        
|                             | Exercise of stock options and vesting of restricted stock |                                                           |        | 280   |        |   |            | 3       |   |           |          | 3,641   |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 3,644   |        
|                             | Purchase of treasury stock                                |                                                           |        |      |        |   |            |        |   |           |          |        |   |             |     | (25 | )        |   |      | (633          | ) |   |               |     |         |   |         |  |         |   |         | (633    | )      
|                             | Cancellation of treasury stock                            |                                                           |        | (18   | )      |   |            |        |   |           |          | (195    | ) |             |     | 18  |          |   |      | 551           |   |   |               | (356 | )       |   |         |  |         |   |         |        |        
|                             | Issuance of common stock                                  |                                                           |        | 4,000 |        |   |            | 40      |   |           |          | 127,061 |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 127,101 |        
|                             | Non-cash stock-based compensation                         |                                                           |        |      |        |   |            |        |   |           |          | 10,075  |   |             |     |    |          |   |      |              |   |   |               |     |         |   |         |  |         |   |         | 10,075  |        
|                             | Components of comprehensive income:                       |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         |         |        
|                             |                                                           | Net income                                                |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      | 92,398  |   |         |   |        |   |         |         | 92,398  |  
|                             |                                                           | Change in deferred hedge gain/loss, net of tax of $22,365 |        |       |       |   |            |         |  |           |          |         |  |             |     |     |         |   |      |               |  |   |               |      |        |   |         |   | 37,499  |   |         |         | 37,499  |  
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|                             | Total comprehensive income                                |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |      |         |   |         |   |         |   |         | 129,897 |        
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     
|Balance at December 31, 2006 |                                                           |                                                           | 53,047 |       |        | $ | 531        |         |   | $         | 457,201  |         |   |             | (18 | )   |          | $ | (457 | )             |   | $ | 394,917       |      |         | $ | (35,327 | ) |         | $ | 816,865 |        
|                             |                                                           |                                                           |        |       |        |   |            |         |   |           |          |         |   |             |     |     |          |   |      |               |   |   |               |     



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |        |         |          |          |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------- | -------- | ------- | ------ | -------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | -
|                                                 |                                                                                       | Year Ended December 31,                      |                          
|                                                 |                                                                                       |                                              |                          
|                                                 |                                                                                       | 2006                                         |                           |          | 2005    |        |          | 2004     |       
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|                                                 |                                                                                       | (In thousands)                               |                          
|Cash flows from operating activities:            |                                                                                       |                                              |                           |          |         |        |          |          |        |         |          |         
|                                                 | Net income                                                                            |                                              | $                         | 92,398   |         |        | $        | 103,425  |        |         | $        | 82,147   |       
|                                                 | Adjustments to reconcile net income to net cash provided by
    operating activities: |                                              |                           |          |         |        |          |          |        |         |          |          |       
|                                                 |                                                                                       | Depletion, depreciation, and amortization    |                           |          | 113,463 |        |          |          | 85,627 |         |          |          | 48,522 |        
|                                                 |                                                                                       | Non-cash exploration expense                 |                           |          | 28,128  |        |          |          | 10,706 |         |          |          | 2,761  |        
|                                                 |                                                                                       | Deferred taxes                               |                           |          | 51,220  |        |          |          | 56,032 |         |          |          | 38,579 |        
|                                                 |                                                                                       | Non-cash stock-based compensation expense    |                           |          | 8,980   |        |          |          | 3,962  |         |          |          | 1,770  |        
|                                                 |                                                                                       | Non-cash derivative fair value               |                           |          | (10,434 | )      |          |          | 12,637 |         |          |          | 12,449 |        
|                                                 |                                                                                       | Loss on early redemption of debt             |                           |          |        |        |          |          | 19,477 |         |          |          |       |        
|                                                 |                                                                                       | Other non-cash expense                       |                           |          | 7,577   |        |          |          | 1,912  |         |          |          | 781    |        
|                                                 |                                                                                       | (Gain) loss on disposition of assets         |                           |          | (297    | )      |          |          | 352    |         |          |          | 271    |        
|                                                 |                                                                                       | Changes in operating assets and liabilities: |                           |          |         |        |          |          |        |         |          |          |        |        
|                                                 |                                                                                       |                                              | Accounts receivable       |          |         | (305   | )        |          |        | (30,192 | )        |          |        | (10,719 | )
|                                                 |                                                                                       |                                              | Other current assets      |          |         | (4,945 | )        |          |        | (6,096  | )        |          |        | (7,220  | )
|                                                 |                                                                                       |                                              | Other assets              |          |         | (365   | )        |          |        | (4,798  | )        |          |        | (5,568  | )
|                                                 |                                                                                       |                                              | Accounts payable          |          |         | 1,833  |          |          |        | (444    | )        |          |        | (1,128  | )
|                                                 |                                                                                       |                                              | Other current liabilities |          |         | 10,080 |          |          |        | 39,669  |          |          |        | 9,176   |  
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Net cash provided by operating activities        |                                                                                       |                                              | 297,333                   |          |         |        | 292,269  |          |        |         | 171,821  |         
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Cash flows from investing activities:            |                                                                                       |                                              |                           |          |         |        |          |          |        |         |          |         
|                                                 | Proceeds from disposition of assets                                                   |                                              |                           | 1,522    |         |        |          | 753      |        |         |          | 703      |       
|                                                 | Purchases of other property and equipment                                             |                                              |                           | (4,290   | )       |        |          | (6,767   | )      |         |          | (7,594   | )     
|                                                 | Acquisition of oil and natural gas properties                                         |                                              |                           | (30,119  | )       |        |          | (154,615 | )      |         |          | (116,316 | )     
|                                                 | Acquisition of Cortez Oil & Gas, Inc., net of cash
    acquired                       |                                              |                           |         |         |        |          |         |        |         |          | (123,808 | )     
|                                                 | Acquisition of Crusader Energy Corp., net of cash acquired                            |                                              |                           |         |         |        |          | (91,095  | )      |         |          |         |       
|                                                 | Development of oil and natural gas properties                                         |                                              |                           | (340,582 | )       |        |          | (321,836 | )      |         |          | (186,455 | )     
|                                                 | Advances to working interest partners                                                 |                                              |                           | (22,425  | )       |        |          |         |        |         |          |         |       
|                                                 | Other                                                                                 |                                              |                           | (1,536   | )       |        |          |         |        |         |          |         |       
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Net cash used in investing activities            |                                                                                       |                                              | (397,430                  | )        |         |        | (573,560 | )        |        |         | (433,470 | )       
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Cash flows from financing activities:            |                                                                                       |                                              |                           |          |         |        |          |          |        |         |          |         
|                                                 | Proceeds from issuance of common stock                                                |                                              |                           | 128,000  |         |        |          |         |        |         |          | 53,900   |       
|                                                 | Offering costs paid                                                                   |                                              |                           | (899     | )       |        |          |         |        |         |          | (971     | )     
|                                                 | Purchase of treasury stock                                                            |                                              |                           | (633     | )       |        |          | (570     | )      |         |          |         |       
|                                                 | Payment of debt issuance costs                                                        |                                              |                           | (147     | )       |        |          | (534     | )      |         |          | (4,808   | )     
|                                                 | Exercise of stock options                                                             |                                              |                           | 3,644    |         |        |          | 1,468    |        |         |          | 2,756    |       
|                                                 | Proceeds from long-term debt                                                          |                                              |                           | 282,000  |         |        |          | 997,980  |        |         |          | 478,500  |       
|                                                 | Payments on long-term debt                                                            |                                              |                           | (294,000 | )       |        |          | (719,852 | )      |         |          | (278,500 | )     
|                                                 | Payments of deferred commodity premiums                                               |                                              |                           | (7,848   | )       |        |          |         |        |         |          |         |       
|                                                 | Change in cash overdrafts                                                             |                                              |                           | (10,911  | )       |        |          | 3,350    |        |         |          | 11,444   |       
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Net cash provided by financing activities        |                                                                                       |                                              | 99,206                    |          |         |        | 281,842  |          |        |         | 262,321  |         
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Increase (decrease) in cash and cash equivalents |                                                                                       |                                              | (891                      | )        |         |        | 551      |          |        |         | 672      |         
|Cash and cash equivalents, beginning of period   |                                                                                       |                                              | 1,654                     |          |         |        | 1,103    |          |        |         | 431      |         
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       
|Cash and cash equivalents, end of period         |                                                                                       | $                                            | 763                       |          |         | $      | 1,654    |          |        | $       | 1,103    |         
|                                                 |                                                                                       |                                              |                           |          |         |        |          |          |       



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ENCORE ACQUISITION COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|        |                                                   
|------- | --------------------------------------------------
|Note 1. | Formation of the Company and Basis of Presentation





|        |                                           
|------- | ------------------------------------------
|Note 2. | Summary of Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |            
| | -----------
| | Inventories



|                    |       |                |        |        |      |   |       |        | 
|------------------- | ----- | -------------- | ------ | ------ | ---- | - | ----- | ------ | 
|                    |       | December 31,   |       
|                    |       |                |       
|                    |       | 2006           |        |        | 2005 |  
|                    |       |                |        |        |      |  
|                    |       | (In thousands) |       
|Warehouse inventory |       | $              | 11,784 |        |      | $ | 9,019 |       
|Oil in pipelines    |       |                | 6,386  |        |      |   | 2,212 |       
|                    |       |                |        |        |      |  
|                    | Total |                | $      | 18,170 |      |   | $     | 11,231 | 
|                    |       |                |        |        |      |  



| |                         
| | ------------------------
| | Properties and Equipment

Oil and Natural Gas Properties.


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




unit-of










75



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Other Property and Equipment.




| |         
| | --------
| | Goodwill





| |                             
| | ----------------------------
| | Asset Retirement Obligations

Accounting for Asset Retirement




| |                         
| | ------------------------
| | Stock-based Compensation

Share-Based
Payment Accounting for
Stock-Based Compensation Accounting for Stock Issued to
Employees




76



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|             |                                               |                       |   |         |      |  |   |        | 
|------------ | --------------------------------------------- | --------------------- | - | ------- | ---- |  | - | ------ | 
|             |                                               | Year Ended            |  
|             |                                               | December 31,          |  
|             |                                               |                       |  
|             |                                               | 2005                  |   |         | 2004 | 
|             |                                               |                       |   |         |      | 
|             |                                               | (In thousands, except |  
|             |                                               | per share amounts)    |  
|As Reported: |                                               |                       |   |         |      |  |   |       
|             | Non-cash stock-based compensation, net of tax |                       | $ | 2,483   |      |  | $ | 1,108  | 
|             | Net income                                    |                       |   | 103,425 |      |  |   | 82,147 | 
|             | Basic net income per share                    |                       |   | 2.12    |      |  |   | 1.74   | 
|             | Diluted net income per share                  |                       |   | 2.09    |      |  |   | 1.72   | 
|Pro Forma:   |                                               |                       |   |         |      |  |   |       
|             | Non-cash stock-based compensation, net of tax |                       |   | 3,091   |      |  |   | 2,289  | 
|             | Net income                                    |                       |   | 102,817 |      |  |   | 80,966 | 
|             | Basic net income per share                    |                       |   | 2.11    |      |  |   | 1.72   | 
|             | Diluted net income per share                  |                       |   | 2.08    |      |  |   | 1.70   | 



| |                  
| | -----------------
| | Segment Reporting





| |                
| | ---------------
| | Major Customers



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |             
| | ------------
| | Income Taxes





| |                    
| | -------------------
| | Revenue Recognition





| |                                                                   
| | ------------------------------------------------------------------
| | Oil Marketing Revenues and Expenses and Buy/ Sell
    Transactions



04-13, 04-13).


04-13


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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |               
| | --------------
| | Shipping Costs





| |                               
| | ------------------------------
| | Hedging and Related Activities

over-the


mark-to






mark-to mark-to




| |                     
| | --------------------
| | Comprehensive Income





| |                 
| | ----------------
| | Use of Estimates



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                         
| | ------------------------
| | New Accounting Standards



| |                                                        
| | -------------------------------------------------------
| | SFAS No. 157, Fair Value Measurement
    (SFAS 157)





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | FASB Interpretation No. 48, Accounting for
    Uncertainty in Income Taxes (FIN 48)

In June 2006, the FASB issued FIN 48. Accounting for
Income Taxes.


Note 3.     Acquisitions




| |                  
| | -----------------
| | 2005 Acquisitions

Williston Basin Acquisition.


Crusader Acquisition.




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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                       |                                         |                                   |   |         |         |  
|---------------------------------------------------------------------- | --------------------------------------- | --------------------------------- | - | ------- | ------- | -
|Calculation of total purchase price:                                   |                                         |                                   |   |        
|                                                                       | Cash paid to Crusaders former owners   |                                   | $ | 79,142  |        
|                                                                       | Crusader debt repaid                    |                                   |   | 29,732  |        
|                                                                       | Transaction costs                       |                                   |   | 707     |        
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total purchase price              |   | $       | 109,581 |  
|                                                                       |                                         |                                   |  
|Allocation of purchase price to the fair value of assets
    acquired: |                                         |                                   |   |        
|                                                                       | Cash                                    |                                   | $ | 18,592  |        
|                                                                       | Other current assets                    |                                   |   | 3,362   |        
|                                                                       | Deferred taxes                          |                                   |   | 1,997   |        
|                                                                       | Proved oil and natural gas properties   |                                   |   | 85,388  |        
|                                                                       | Unproved oil and natural gas properties |                                   |   | 6,863   |        
|                                                                       | Goodwill                                |                                   |   | 22,698  |        
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total assets acquired             |   |         | 138,900 |  
|                                                                       |                                         |                                   |  
|                                                                       | Current liabilities                     |                                   |   | (10,267 | )      
|                                                                       | Non-current liabilities                 |                                   |   | (1,190  | )      
|                                                                       | Deferred taxes                          |                                   |   | (17,862 | )      
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total liabilities assumed         |   |         | (29,319 | )
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Fair value of net assets acquired |   | $       | 109,581 |  
|                                                                       |                                         |                                   |  



Kerr-McGee Acquisition.




| |                  
| | -----------------
| | 2004 Acquisitions

Cortez Acquisition.




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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                       |                                         |                                   |   |         |         |  
|---------------------------------------------------------------------- | --------------------------------------- | --------------------------------- | - | ------- | ------- | -
|Calculation of total purchase price:                                   |                                         |                                   |   |        
|                                                                       | Cash paid to Cortezs former owners     |                                   | $ | 85,805  |        
|                                                                       | Cortez debt repaid                      |                                   |   | 39,449  |        
|                                                                       | Transaction costs                       |                                   |   | 1,760   |        
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total purchase price              |   | $       | 127,014 |  
|                                                                       |                                         |                                   |  
|Allocation of purchase price to the fair value of assets
    acquired: |                                         |                                   |   |        
|                                                                       | Cash                                    |                                   | $ | 3,206   |        
|                                                                       | Other current assets                    |                                   |   | 5,946   |        
|                                                                       | Proved oil and natural gas properties   |                                   |   | 120,503 |        
|                                                                       | Unproved oil and natural gas properties |                                   |   | 3,011   |        
|                                                                       | Goodwill                                |                                   |   | 37,908  |        
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total assets acquired             |   |         | 170,574 |  
|                                                                       |                                         |                                   |  
|                                                                       | Current liabilities                     |                                   |   | (5,673  | )      
|                                                                       | Non-current liabilities                 |                                   |   | (996    | )      
|                                                                       | Deferred taxes                          |                                   |   | (36,891 | )      
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Total liabilities assumed         |   |         | (43,560 | )
|                                                                       |                                         |                                   |  
|                                                                       |                                         | Fair value of net assets acquired |   | $       | 127,014 |  
|                                                                       |                                         |                                   |  



Overton.




|        |                              
|------- | -----------------------------
|Note 4. | Commitments and Contingencies



| |           
| | ----------
| | Litigation



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |       
| | ------
| | Leases



|           |  |   |        | 
|---------- |  | - | ------ | 
|2007       |  | $ | 1,818  | 
|2008       |  |   | 2,210  | 
|2009       |  |   | 2,094  | 
|2010       |  |   | 2,105  | 
|2011       |  |   | 2,094  | 
|Thereafter |  |   | 3,897  | 
|           |  |   |       
|           |  | $ | 14,218 | 
|           |  |   |       





| |           
| | ----------
| | ExxonMobil









83



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|        |     
|------- | ----
|Note 5. | AROs



|                                            |                                         |                |        |        |      |   |        |       |  
|------------------------------------------- | --------------------------------------- | -------------- | ------ | ------ | ---- | - | ------ | ----- | -
|                                            |                                         | Year Ended     |       
|                                            |                                         | December 31,   |       
|                                            |                                         |                |       
|                                            |                                         | 2006           |        |        | 2005 |  
|                                            |                                         |                |        |        |      |  
|                                            |                                         | (In thousands) |       
|Future abandonment liability at January 1   |                                         | $              | 14,430 |        |      | $ | 6,601  |      
|                                            | Acquisition of properties               |                |        | 785    |      |   |        | 2,221 |  
|                                            | Wells drilled                           |                |        | 147    |      |   |        | 954   |  
|                                            | Accretion expense                       |                |        | 743    |      |   |        | 515   |  
|                                            | Plugging and abandonment costs incurred |                |        | (1,466 | )    |   |        | (745  | )
|                                            | Revision of estimates                   |                |        | 5,202  |      |   |        | 4,884 |  
|                                            |                                         |                |        |        |      |  
|Future abandonment liability at December 31 |                                         | $              | 19,841 |        |      | $ | 14,430 |      
|                                            |                                         |                |        |        |      |  



Note 6.     Capitalization of
Exploratory Well Costs


19-1 19-1) 19-1 19-1,


|                                                                                                    |       |                         |        |        |      |   |        |       |  |   |       |       | 
|--------------------------------------------------------------------------------------------------- | ----- | ----------------------- | ------ | ------ | ---- | - | ------ | ----- |  | - | ----- | ----- | 
|                                                                                                    |       | Year Ended December 31, |       
|                                                                                                    |       |                         |       
|                                                                                                    |       | 2006                    |        |        | 2005 |   |        | 2004  | 
|                                                                                                    |       |                         |        |        |      |   |        |       | 
|                                                                                                    |       | (In thousands)          |       
|Beginning balance at January 1                                                                      |       | $                       | 6,560  |        |      | $ | 3,242  |       |  | $ |      |      
|Additions to capitalized exploratory well costs pending the
    determination of proved reserves    |       |                         | 13,048 |        |      |   | 6,560  |       |  |   | 3,242 |      
|Reclassification to proved property and equipment based on the
    determination of proved reserves |       |                         | (1,457 | )      |      |   | (996   | )     |  |   |      |      
|Capitalized exploratory well costs charged to expense                                               |       |                         | (5,103 | )      |      |   | (2,246 | )     |  |   |      |      
|                                                                                                    |       |                         |        |        |      |   |        |       | 
|                                                                                                    | Total |                         | $      | 13,048 |      |   | $      | 6,560 |  |   | $     | 3,242 | 
|                                                                                                    |       |                         |        |        |      |   |        |       | 

84



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Note 7.     Accounts Payable
and Other Current Liabilities




|                                     |       |                |       |        |      |   |       |        | 
|------------------------------------ | ----- | -------------- | ----- | ------ | ---- | - | ----- | ------ | 
|                                     |       | December 31,   |      
|                                     |       |                |      
|                                     |       | 2006           |       |        | 2005 |  
|                                     |       |                |       |        |      |  
|                                     |       | (In thousands) |      
|Oil and natural gas revenues payable |       | $              | 8,612 |        |      | $ | 4,544 |       
|Net profits payable                  |       |                | 1,178 |        |      |   | 1,634 |       
|Acquired gas imbalances              |       |                | 3,173 |        |      |   | 408   |       
|Accrued bonus                        |       |                | 5,665 |        |      |   | 5,299 |       
|Other                                |       |                | 2,730 |        |      |   | 3,885 |       
|                                     |       |                |       |        |      |  
|                                     | Total |                | $     | 21,358 |      |   | $     | 15,770 | 
|                                     |       |                |       |        |      |  

Note 8.     Long-Term Debt




|                                                                                |       |                |         |         |      |   |         |         | 
|------------------------------------------------------------------------------- | ----- | -------------- | ------- | ------- | ---- | - | ------- | ------- | 
|                                                                                |       | December 31,   |        
|                                                                                |       |                |        
|                                                                                |       | 2006           |         |         | 2005 |  
|                                                                                |       |                |         |         |      |  
|                                                                                |       | (In thousands) |        
|Revolving credit facility                                                       |       | $              | 68,000  |         |      | $ | 80,000  |        
|61/4% Notes                                                                     |       |                | 150,000 |         |      |   | 150,000 |        
|6% Notes, net of unamortized discount of $4,892 and $5,317,
    respectively    |       |                | 295,108 |         |      |   | 294,683 |        
|71/4% Notes,
    net of unamortized discount of $1,412 and $1,494, respectively |       |                | 148,588 |         |      |   | 148,506 |        
|                                                                                |       |                |         |         |      |  
|                                                                                | Total |                | $       | 661,696 |      |   | $       | 673,189 | 
|                                                                                |       |                |         |         |      |  



| |                          
| | -------------------------
| | Senior Subordinated Notes

61/4% Notes. 1 4 1 4


6% Notes. 3 8


71/4% Notes. 1 4 1 4 1 4


85



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












| |                          
| | -------------------------
| | Revolving Credit Facility

five-year






|                                              |  |                     |                |  |                    |  |                    | 
|--------------------------------------------- |  | ------------------- | -------------- |  | ------------------ |  | ------------------ | 
|Ratio of Total Outstandings to Borrowing Base |  | Eurodollar Loans(a) |                |  | Base Rate Loans(b) | 
|                                              |  |                     |                |  |                    | 
|Less than .40 to 1                            |  |                     | LIBOR + 1.000% |  |                    |  | Base Rate + 0.000% | 
|From .40 to 1 but less than .75 to 1          |  |                     | LIBOR + 1.250% |  |                    |  | Base Rate + 0.000% | 
|From .75 to 1 but less than .90 to 1          |  |                     | LIBOR + 1.500% |  |                    |  | Base Rate + 0.250% | 
|.90 to 1 or greater                           |  |                     | LIBOR + 1.750% |  |                    |  | Base Rate + 0.500% | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The London Interbank Offered Rate (LIBOR) is equal
    to the rate determined by Bank of America, N.A. to be the
    average British Bankers Association Interest Settlement Rate for
    deposits in dollars for a similar interest period (either one,
    two, three, or six months, or such other period that is twelve
    months of less as selected by Encore and consented to by each
    lender).
|   
|(b) | The Base Rate is calculated as the higher of (i) the annual
    rate of interest announced by Bank of America, N.A. as its
    prime rate and (ii) the federal funds effective
    rate plus 0.5 percent.                                                                                                                                                                                                 

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                                              |  |                |        | 
|--------------------------------------------- |  | -------------- | ------ | 
|                                              |  | Commitment     |       
|Ratio of Total Outstandings to Borrowing Base |  | Fee Percentage |       
|                                              |  |                |       
|Less than .40 to 1                            |  |                | 0.250% | 
|From .40 to 1 but less than .90 to 1          |  |                | 0.375% | 
|.90 to 1 or greater                           |  |                | 0.500% | 







| |                  
| | -----------------
| | Letters of Credit



87



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Long-Term Debt Maturities



|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |        |        |  |   |         |         | 
|------------------------- | ----- | ---------------------- | ------- | ------- | ---- | - | --------- | - | --------- | - | - | ---------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                          |       | Payments Due by Period |        
|                          |       |                        |        
|                          |       | Total                  |         |         | 2007 |   | 2008-2009 |   | 2010-2011 |   |   | Thereafter | 
|                          |       |                        |         |         |      |   |           |   |           |   |   |            | 
|                          |       | (In thousands)         |        
|61/4% Notes               |       | $                      | 150,000 |         |      | $ |          |   |           | $ |  |            |  | $ |       |        |  | $ | 150,000 |        
|6% Notes                  |       |                        | 300,000 |         |      |   |          |   |           |   |  |            |  |   |       |        |  |   | 300,000 |        
|71/4% Notes               |       |                        | 150,000 |         |      |   |          |   |           |   |  |            |  |   |       |        |  |   | 150,000 |        
|Revolving credit facility |       |                        | 68,000  |         |      |   |          |   |           |   |  |            |  |   | 68,000 |        |  |   |        |        
|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |       
|                          | Total |                        | $       | 668,000 |      |   | $         |  |           |   | $ |           |  |   | $      | 68,000 |  |   | $       | 600,000 | 
|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |       





Note 9.     Taxes




| |             
| | ------------
| | Income Taxes



|                                |          |                         |                         |        |        |        |   |        |        |        |   |        |        |        | 
|------------------------------- | -------- | ----------------------- | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                |          | Year Ended December 31, |                        
|                                |          |                         |                        
|                                |          | 2006                    |                         |        | 2005   |        |   | 2004   |       
|                                |          |                         |                         |        |        |        |   |        |       
|                                |          | (In thousands)          |                        
|Federal:                        |          |                         |                         |        |        |        |   |        |        |        |   |       
|                                | Current  |                         | $                       | 3,785  |        |        | $ | (2,084 | )      |        | $ | 1,788  |       
|                                | Deferred |                         |                         | 48,327 |        |        |   | 53,147 |        |        |   | 35,470 |       
|                                |          |                         |                         |        |        |        |   |        |       
|                                |          | Total federal           |                         |        | 52,112 |        |   |        | 51,063 |        |   |        | 37,258 |       
|                                |          |                         |                         |        |        |        |   |        |       
|State (net of federal benefit): |          |                         |                         |        |        |        |   |        |        |        |   |       
|                                | Current  |                         |                         | 401    |        |        |   |       |        |        |   | 125    |       
|                                | Deferred |                         |                         | 2,893  |        |        |   | 2,885  |        |        |   | 3,109  |       
|                                |          |                         |                         |        |        |        |   |        |       
|                                |          | Total state             |                         |        | 3,294  |        |   |        | 2,885  |        |   |        | 3,234  |       
|                                |          |                         |                         |        |        |        |   |        |       
|                                |          |                         | Income tax provision(a) |        | $      | 55,406 |   |        | $      | 53,948 |   |        | $      | 40,492 | 
|                                |          |                         |                         |        |        |        |   |        |       






|    |                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | These amounts do not include the Companys excess tax
    benefit related to stock option exercises and vesting of
    restricted stock, which was recorded directly to additional
    paid-in capital, of $1.3 million, $1.4 million, and $1.3 million
    during 2006, 2005, and 2004, respectively.

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                           |                      |                         |         |        |      |   |         |        |  |   |         |        | 
|------------------------------------------ | -------------------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                           |                      | Year Ended December 31, |        
|                                           |                      |                         |        
|                                           |                      | 2006                    |         |        | 2005 |   |         | 2004   | 
|                                           |                      |                         |         |        |      |   |         |        | 
|                                           |                      | (In thousands)          |        
|Income before income taxes                 |                      | $                       | 147,804 |        |      | $ | 157,373 |        |  | $ | 122,639 |       
|                                           |                      |                         |         |        |      |   |         |        | 
|Tax at statutory rate                      |                      | $                       | 51,731  |        |      | $ | 55,081  |        |  | $ | 42,923  |       
|State income taxes, net of federal benefit |                      |                         | 3,294   |        |      |   | 2,885   |        |  |   | 3,234   |       
|Section 43 credits                         |                      |                         |        |        |      |   | (3,227  | )      |  |   | (3,816  | )     
|Permanent and other                        |                      |                         | 381     |        |      |   | (791    | )      |  |   | (1,849  | )     
|                                           |                      |                         |         |        |      |   |         |        | 
|                                           | Income tax provision |                         | $       | 55,406 |      |   | $       | 53,948 |  |   | $       | 40,492 | 
|                                           |                      |                         |         |        |      |   |         |        | 







|         |         |                                                     |                                   |   |        |        |  |   |        |        | 
|-------- | ------- | --------------------------------------------------- | --------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|         |         | December 31,                                        |                                  
|         |         |                                                     |                                  
|         |         | 2006                                                |                                   |   | 2005   |       
|         |         |                                                     |                                   |   |        |       
|         |         | (In thousands)                                      |                                  
|Current: |         |                                                     |                                   |   |        |        |  |  
|         | Assets: |                                                     |                                   |   |        |        |  |   |       
|         |         | Unrealized hedge loss in other comprehensive income |                                   | $ | 20,049 |        |  | $ | 26,427 |       
|         |         | Derivative fair value loss                          |                                   |   | 4,062  |        |  |   | 2,603  |       
|         |         | Other                                               |                                   |   | 867    |        |  |   |       |       
|         |         |                                                     |                                   |   |        |       
|         |         |                                                     | Total current deferred tax assets |   | $      | 24,978 |  |   | $      | 29,030 | 
|         |         |                                                     |                                   |   |        |       

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|           |                                      |                                                                         |                                     |          |          |        |   |          |          |        | 
|---------- | ------------------------------------ | ----------------------------------------------------------------------- | ----------------------------------- | -------- | -------- | ------ | - | -------- | -------- | ------ | 
|           |                                      | December 31,                                                            |                                    
|           |                                      |                                                                         |                                    
|           |                                      | 2006                                                                    |                                     |          | 2005     |       
|           |                                      |                                                                         |                                     |          |          |       
|           |                                      | (In thousands)                                                          |                                    
|Long-term: |                                      |                                                                         |                                     |          |          |        |   |         
|           | Assets:                              |                                                                         |                                     |          |          |        |   |          |         
|           |                                      | Alternative minimum tax carryforward                                    |                                     | $        | 2,394    |        |   | $        | 2,073    |       
|           |                                      | Unrealized hedge loss in other comprehensive income                     |                                     |          | 1,069    |        |   |          | 16,964   |       
|           |                                      | Derivative fair value loss                                              |                                     |          | 2,606    |        |   |          | 1,424    |       
|           |                                      | Section 43 credits                                                      |                                     |          | 13,227   |        |   |          | 13,227   |       
|           |                                      | Other                                                                   |                                     |          | 5,615    |        |   |          | 3,004    |       
|           |                                      |                                                                         |                                     |          |          |       
|           |                                      |                                                                         | Total long-term deferred tax assets |          |          | 24,911 |   |          |          | 36,692 | 
|           |                                      |                                                                         |                                     |          |          |       
|           | Liabilities:                         |                                                                         |                                     |          |          |        |   |          |         
|           |                                      | Book basis of oil and natural gas properties in excess of tax
    basis |                                     |          | (307,736 | )      |   |          | (249,960 | )     
|           |                                      |                                                                         |                                     |          |          |       
|           | Net long-term deferred tax liability |                                                                         | $                                   | (282,825 | )        |        | $ | (213,268 | )       
|           |                                      |                                                                         |                                     |          |          |       



| |                              
| | -----------------------------
| | Taxes Other than Income Taxes



|                                    |       |                         |        |        |      |   |        |        |  |   |        |        | 
|----------------------------------- | ----- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                    |       | Year Ended December 31, |       
|                                    |       |                         |       
|                                    |       | 2006                    |        |        | 2005 |   |        | 2004   | 
|                                    |       |                         |        |        |      |   |        |        | 
|                                    |       | (In thousands)          |       
|Production and severance taxes      |       | $                       | 43,458 |        |      | $ | 41,195 |        |  | $ | 27,491 |       
|Property and ad valorem taxes       |       |                         | 6,322  |        |      |   | 4,406  |        |  |   | 2,822  |       
|Franchise, payroll, and other taxes |       |                         | 1,745  |        |      |   | 1,246  |        |  |   | 868    |       
|                                    |       |                         |        |        |      |   |        |        | 
|                                    | Total |                         | $      | 51,525 |      |   | $      | 46,847 |  |   | $      | 31,181 | 
|                                    |       |                         |        |        |      |   |        |        | 

Note 10.     Stockholders
Equity




| |                                 
| | --------------------------------
| | Public Offerings of Common Stock







| |                                             
| | --------------------------------------------
| | Shelf Registration Statement on
    Form S-3

S-3


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


1 4




| |            
| | -----------
| | Stock Split





| |                              
| | -----------------------------
| | Common Stock Option Exercises





| |                
| | ---------------
| | Preferred Stock



Note 11.     Earnings Per Share
(EPS)


Earnings Per
Share




|                             |                             |                                                            |   |        |        |  |   |         |        |  |   |        |        | 
|---------------------------- | --------------------------- | ---------------------------------------------------------- | - | ------ | ------ |  | - | ------- | ------ |  | - | ------ | ------ | 
|                             |                             | Year Ended December 31,                                    |  
|                             |                             |                                                            |  
|                             |                             | 2006                                                       |   |        | 2005   |  |   | 2004    |       
|                             |                             |                                                            |   |        |        |  |   |         |       
|                             |                             | (In thousands, except per share data)                      |  
|Numerator:                   |                             |                                                            |   |        |        |  |   |         |        |  |   |       
|                             | Net income                  |                                                            | $ | 92,398 |        |  | $ | 103,425 |        |  | $ | 82,147 |       
|                             |                             |                                                            |   |        |        |  |   |         |       
|Denominator:                 |                             |                                                            |   |        |        |  |   |         |        |  |   |       
|                             | Denominator for basic EPS:  |                                                            |   |        |        |  |   |         |        |  |   |        |       
|                             |                             | Weighted average shares outstanding                        |   |        | 51,865 |  |   |         | 48,682 |  |   |        | 47,090 | 
|                             |                             | Effect of dilutive options and diluted restricted stock(a) |   |        | 871    |  |   |         | 840    |  |   |        | 648    | 
|                             |                             |                                                            |   |        |        |  |   |         |       
|                             | Denominator for diluted EPS |                                                            |   | 52,736 |        |  |   | 49,522  |        |  |   | 47,738 |       
|                             |                             |                                                            |   |        |        |  |   |         |       
|Net income per common share: |                             |                                                            |   |        |        |  |   |         |        |  |   |       
|                             | Basic                       |                                                            | $ | 1.78   |        |  | $ | 2.12    |        |  | $ | 1.74   |       
|                             | Diluted                     |                                                            | $ | 1.75   |        |  | $ | 2.09    |        |  | $ | 1.72   |       






|    |                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Options to purchase 190,406 shares of common stock
    were outstanding but not included in the above calculation of
    2006 EPS because their effect would be antidilutive. There were
    no antidilutive options or shares of restricted stock for 2005
    or 2004.

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 12.     Employee Benefit
Plans




| |            
| | -----------
| | 401(k) Plan





| |                      
| | ---------------------
| | Incentive Stock Plans







| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an employee may not be granted awards covering or relating to
    more than 225,000 shares of common stock in any calendar
    year;                                                                                                   
|
| |  | a non-employee director may not be granted awards covering or
    relating to more than 15,000 shares of common stock in any
    calendar year; and                                                                                    
|
| |  | an employee may not receive awards consisting of cash (including
    cash awards that are granted as performance awards) in respect
    of any calendar year having a value determined on the grant date
    in excess of $1.0 million.



Adoption of SFAS 123R.




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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




10-K


|                                   |  |                   |         |   |             |   |         | 
|---------------------------------- |  | ----------------- | ------- | - | ----------- | - | ------- | 
|                                   |  | December 31, 2005 |        
|                                   |  |                   |        
|                                   |  | As Originally     |         |   |            
|                                   |  | Reported          |         |   | As Restated |  
|                                   |  |                   |         |   |             |  
|                                   |  | (In thousands)    |        
|Shares of common stock outstanding |  |                   | 49,368  |   |             |   | 48,785  | 
|Common stock                       |  | $                 | 494     |   |             | $ | 488     | 
|Additional paid-in capital         |  | $                 | 325,620 |   |             | $ | 316,619 | 
|Deferred compensation              |  | $                 | (9,007  | ) |             | $ |        | 
|Total stockholders equity         |  | $                 | 546,781 |   |             | $ | 546,781 | 





Stock Options.


|                         |  |              |      |   |      |  |      |      |  |  |      |  
|------------------------ |  | ------------ | ---- | - | ---- |  | ---- | ---- |  |  | ---- | -
|                         |  | Year Ended   |     
|                         |  | December 31, |     
|                         |  |              |     
|                         |  | 2006         |      |   | 2005 |  |      | 2004 | 
|                         |  |              |      |   |      |  |      |      | 
|Expected volatility      |  |              | 42.8 | % |      |  | 46.0 | %    |  |  | 34.8 | %
|Expected dividend yield  |  |              | 0.0  | % |      |  | 0.0  | %    |  |  | 0.0  | %
|Expected term (in years) |  |              | 6.0  |   |      |  | 6.0  |      |  |  | 6.0  |  
|Risk-free interest rate  |  |              | 4.6  | % |      |  | 3.7  | %    |  |  | 3.2  | %

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |            |                         |           |          |              |   |           |             |  |           |           |  |  |           |          |  |              |  |           |           |   |   |              |       |  |  |           |          |   |   |       |       | 
|-------------------------------- | ---------- | ----------------------- | --------- | -------- | ------------ | - | --------- | ----------- |  | --------- | --------- |  |  | --------- | -------- |  | ------------ |  | --------- | --------- | - | - | ------------ | ----- |  |  | --------- | -------- | - | - | ----- | ----- | 
|                                 |            | Year Ended December 31, |          
|                                 |            |                         |          
|                                 |            | 2006                    |           |          | 2005         |   |           | 2004        | 
|                                 |            |                         |           |          |              |   |           |             | 
|                                 |            |                         |           | Weighted |              |   |           |             |  |           |          
|                                 |            |                         |           | Average  |              |   |           |             |  |           |          
|                                 |            |                         |           | Weighted |              |   | Remaining |             |  | Aggregate |           |  |  |           | Weighted |  |              |  |           | Weighted  |  
|                                 |            | Number of               |           |          | Average      |   |           | Contractual |  |           | Intrinsic |  |  | Number of |          |  | Average      |  |           | Number of |   |   | Average      |      
|                                 |            | Options                 |           |          | Strike Price |   |           | Term        |  |           | Value     |  |  | Options   |          |  | Strike Price |  |           | Options   |   |   | Strike Price |      
|                                 |            |                         |           |          |              |   |           |             |  |           |           |  |  |           |          |  |              |  |           |           |   |   |              |      
|                                 |            | (In thousands)          |          
|Outstanding at beginning of year |            |                         | 1,440,812 |          |              | $ | 13.20     |             |  |           |           |  |  |           |          |  |              |  | 1,520,586 |           |   | $ | 12.00        |       |  |  | 1,444,431 |          |   | $ | 9.91  |      
|                                 | Granted(a) |                         |           | 122,890  |              |   |           | 31.10       |  |           |           |  |  |           |          |  |              |  |           | 115,255   |   |   |              | 26.55 |  |  |           | 389,784  |   |   |       | 17.42 | 
|                                 | Forfeited  |                         |           | (48,410  | )            |   |           | 24.65       |  |           |           |  |  |           |          |  |              |  |           | (57,616   | ) |   |              | 17.94 |  |  |           | (9,764   | ) |   |       | 10.49 | 
|                                 | Exercised  |                         |           | (178,174 | )            |   |           | 13.14       |  |           |           |  |  |           |          |  |              |  |           | (137,413  | ) |   |              | 9.07  |  |  |           | (303,865 | ) |   |       | 9.07  | 
|                                 |            |                         |           |          |              |   |           |             |  |           |           |  |  |           |          |  |              |  |           |           |   |   |              |      
|Outstanding at end of year       |            |                         | 1,337,118 |          |              |   | 14.44     |             |  |           | 6.0       |  |  | $         | 14,353   |  |              |  | 1,440,812 |           |   |   | 13.20        |       |  |  | 1,520,586 |          |   |   | 12.00 |      
|                                 |            |                         |           |          |              |   |           |             |  |           |           |  |  |           |          |  |              |  |           |           |   |   |              |      
|Exercisable at end of year       |            |                         | 1,076,815 |          |              |   | 11.90     |             |  |           | 5.5       |  |  |           | 13,662   |  |              |  | 1,089,677 |           |   |   | 11.04        |       |  |  | 948,771   |          |   |   | 9.77  |      
|                                 |            |                         |           |          |              |   |           |             |  |           |           |  |  |           |          |  |              |  |           |           |   |   |              |      






|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(a) | During 2004, there were 37,500 stock options granted to
    non-employee directors.





|              |  |                  |                  |           |             |  |           |         |          |         |        |  |           |             |       |  |  |  |           | 
|------------- |  | ---------------- | ---------------- | --------- | ----------- |  | --------- | ------- | -------- | ------- | ------ |  | --------- | ----------- | ----- |  |  |  | --------- | 
|              |  |                  |                  | Weighted  |             |  |           |         | Weighted |         |        | 
|              |  |                  |                  | Number of |             |  | Average   |         |          | Average |        |  | Number of |            
|              |  | Range of Strike  |                  |           | Options     |  |           | Life    |          |         | Strike |  |           | Options     |      
|Year of Grant |  | Prices Per Share |                  |           | Outstanding |  |           | (Years) |          |         | Price  |  |           | Exercisable |      
|              |  |                  |                  |           |             |  |           |         |          |         |        |  |           |             |      
|2001          |  |                  | $8.33 to $9.33   |           |             |  | 482,325   |         |          |         | 4.5    |  |           | $           | 8.92  |  |  |  | 482,325   | 
|2002          |  |                  | $8.50 to $12.40  |           |             |  | 332,903   |         |          |         | 5.7    |  |           |             | 11.65 |  |  |  | 332,903   | 
|2003          |  |                  | $11.49 to $13.61 |           |             |  | 41,289    |         |          |         | 6.6    |  |           |             | 12.46 |  |  |  | 41,289    | 
|2004          |  |                  | $17.17 to $19.77 |           |             |  | 290,195   |         |          |         | 7.1    |  |           |             | 17.51 |  |  |  | 191,807   | 
|2005          |  |                  | $26.55           |           |             |  | 84,931    |         |          |         | 8.1    |  |           |             | 26.55 |  |  |  | 28,491    | 
|2006          |  |                  | $31.10           |           |             |  | 105,475   |         |          |         | 9.1    |  |           |             | 31.10 |  |  |  |          | 
|              |  |                  |                  |           |             |  |           |         |          |         |        |  |           |             |      
|              |  |                  |                  |           |             |  | 1,337,118 |         |          |         | 6.0    |  |           |             | 14.44 |  |  |  | 1,076,815 | 
|              |  |                  |                  |           |             |  |           |         |          |         |        |  |           |             |      



Restricted Stock.


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |           |           |         |          |            |   |       |       | 
|-------------------------------- | --------- | --------- | ------- | -------- | ---------- | - | ----- | ----- | 
|                                 |           |           |         | Weighted |           
|                                 |           |           |         | Average  |           
|                                 |           | Number of |         |          | Grant Date |  
|                                 |           | Shares    |         |          | Fair Value |  
|                                 |           |           |         |          |            |  
|Outstanding at January 1, 2006   |           |           | 583,274 |          |            | $ | 20.53 |      
|                                 | Granted   |           |         | 428,609  |            |   |       | 31.17 | 
|                                 | Vested    |           |         | (101,377 | )          |   |       | 15.49 | 
|                                 | Forfeited |           |         | (81,887  | )          |   |       | 25.37 | 
|                                 |           |           |         |          |            |  
|Outstanding at December 31, 2006 |           |           | 828,619 |          |            |   | 26.17 |      
|                                 |           |           |         |          |            |  



|              |  |                 |         |  |      |  |         |      |  |  |         |  |  |       |         |  |  |  |         | 
|------------- |  | --------------- | ------- |  | ---- |  | ------- | ---- |  |  | ------- |  |  | ----- | ------- |  |  |  | ------- | 
|              |  | Year of Vesting |        
|              |  |                 |        
|Year of Grant |  | 2007            |         |  | 2008 |  |         | 2009 |  |  | 2010    |  |  | Total |        
|              |  |                 |         |  |      |  |         |      |  |  |         |  |  |       |        
|2002          |  |                 | 48,275  |  |      |  |        |      |  |  |        |  |  |       |        |  |  |  | 48,275  | 
|2003          |  |                 | 19,080  |  |      |  | 19,080  |      |  |  |        |  |  |       |        |  |  |  | 38,160  | 
|2004          |  |                 | 55,039  |  |      |  | 26,582  |      |  |  | 26,582  |  |  |       |        |  |  |  | 108,203 | 
|2005          |  |                 | 5,508   |  |      |  | 82,206  |      |  |  | 76,698  |  |  |       | 76,698  |  |  |  | 241,110 | 
|2006          |  |                 | 34,935  |  |      |  | 34,935  |      |  |  | 153,338 |  |  |       | 34,935  |  |  |  | 258,143 | 
|              |  |                 |         |  |      |  |         |      |  |  |         |  |  |       |        
|Total         |  |                 | 162,837 |  |      |  | 162,803 |      |  |  | 256,618 |  |  |       | 111,633 |  |  |  | 693,891 | 
|              |  |                 |         |  |      |  |         |      |  |  |         |  |  |       |        



|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |       |        |        |  |  |         |         | 
|------------- | ----- | --------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ----- | ------ | ------ |  |  | ------- | ------- | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2007            |        |        | 2008 |  |        | 2009   |  |  | 2010   |        |  | Total |       
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |       |       
|2006          |       |                 | 33,682 |        |      |  | 33,682 |        |  |  | 33,682 |        |  |       | 33,682 |        |  |  | 134,728 |        
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |       |       
|              | Total |                 |        | 33,682 |      |  |        | 33,682 |  |  |        | 33,682 |  |       |        | 33,682 |  |  |         | 134,728 | 
|              |       |                 |        |        |      |  |        |        |  |  |        |        |  |       |       





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Note 13.     Financial
Instruments




|                                          |  |                |          |   |            |   |          |            |  |   |            |   |  |   |          |  
|----------------------------------------- |  | -------------- | -------- | - | ---------- | - | -------- | ---------- |  | - | ---------- | - |  | - | -------- | -
|                                          |  | December 31,   |         
|                                          |  |                |         
|                                          |  | 2006           |          |   | 2005       |  
|                                          |  |                |          |   |            |  
|                                          |  | Book Value     |          |   | Fair Value |   |          | Book Value |  |   | Fair Value |  
|                                          |  |                |          |   |            |   |          |            |  |   |            |  
|                                          |  | (In thousands) |         
|Cash and cash equivalents                 |  | $              | 763      |   |            | $ | 763      |            |  | $ | 1,654      |   |  | $ | 1,654    |  
|Accounts receivable                       |  |                | 81,470   |   |            |   | 81,470   |            |  |   | 76,960     |   |  |   | 76,960   |  
|Plugging bond                             |  |                | 732      |   |            |   | 838      |            |  |   | 690        |   |  |   | 843      |  
|Bell Creek escrow                         |  |                | 4,887    |   |            |   | 4,902    |            |  |   | 3,982      |   |  |   | 3,986    |  
|Accounts payable                          |  |                | (18,204  | ) |            |   | (18,204  | )          |  |   | (27,281    | ) |  |   | (27,281  | )
|61/4% Notes                               |  |                | (150,000 | ) |            |   | (140,625 | )          |  |   | (150,000   | ) |  |   | (145,500 | )
|6% Notes                                  |  |                | (295,108 | ) |            |   | (275,250 | )          |  |   | (294,683   | ) |  |   | (279,000 | )
|71/4% Notes                               |  |                | (148,588 | ) |            |   | (145,500 | )          |  |   | (148,506   | ) |  |   | (150,000 | )
|Revolving credit facility                 |  |                | (68,000  | ) |            |   | (68,000  | )          |  |   | (80,000    | ) |  |   | (80,000  | )
|Commodity derivative contracts            |  |                | 13,599   |   |            |   | 13,599   |            |  |   | (86,794    | ) |  |   | (86,794  | )
|Deferred premiums on derivative contracts |  |                | (54,671  | ) |            |   | (54,671  | )          |  |   | (30,141    | ) |  |   | (30,141  | )

marked-to




| |                                 
| | --------------------------------
| | Derivative Financial Instruments





Commodity Contracts 
Mark-to-Market
Accounting: Previously designated as hedges.


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


mark-to mark-to






| |                           
| | --------------------------
| | Oil Derivative Instruments

|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ------ | ------ |  | --------- | - | ----- | ----------- |  |  | ----------- | - |  | ------ | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily  |        |  | Average   |   |       | Daily       |  |  | Average     |   |  | Daily  |       |  | Average   |  |       |               
|                 |  | Floor  |        |  | Floor     |   |       | Short Floor |  |  | Short Floor |   |  | Swap   |       |  | Swap      |  |       | Fair           | 
|Period           |  | Volume |        |  | Price     |   |       | Volume      |  |  | Price       |   |  | Volume |       |  | Price     |  |       | Market Value   | 
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 
|                 |  | (Bbl)  |        |  | (Per Bbl) |   |       | (Bbl)       |  |  | (Per Bbl)   |   |  | (Bbl)  |       |  | (Per Bbl) |  |       | (In thousands) | 
|Jan.  Dec. 2007 |  |        | 8,000  |  |           | $ | 53.75 |             |  |  |            |   |  | $      |      |  |           |  | 3,000 |                |  | $ | 36.75 |  |  | $ | (26,347 | )
|Jan.  June 2008 |  |        | 12,000 |  |           |   | 64.17 |             |  |  | (4,000      | ) |  |        | 50.00 |  |           |  | 1,000 |                |  |   | 58.59 |  |  |   | 9,536   |  
|July  Dec. 2008 |  |        | 8,000  |  |           |   | 66.25 |             |  |  | (4,000      | ) |  |        | 50.00 |  |           |  |      |                |  |   |      |  |  |   | 8,471   |  
|Jan.  Dec. 2009 |  |        | 5,000  |  |           |   | 70.00 |             |  |  | (5,000      | ) |  |        | 50.00 |  |           |  |      |                |  |   |      |  |  |   | 11,972  |  
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                |  |   |       |  |  | $ | 3,632   |  
|                 |  |        |        |  |           |   |       |             |  |  |             |   |  |        |       |  |           |  |       |                | 



| |                                   
| | ----------------------------------
| | Natural Gas Derivative Instruments

|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  |  |   |      |  |  |   |       | 
|---------------- |  | ------ | ------ |  | --------- | - | ---- | ----------- |  |  | ----------- |  | ------ | - | - | --------- |  |  | -------------- |  |  | - | ---- |  |  | - | ----- | 
|                 |  | Daily  |        |  | Average   |   |      | Daily       |  |  | Average     |  | Daily  |   |   | Average   |  |  |               
|                 |  | Floor  |        |  | Floor     |   |      | Short Floor |  |  | Short Floor |  | Swap   |   |   | Swap      |  |  | Fair           | 
|Period           |  | Volume |        |  | Price     |   |      | Volume      |  |  | Price       |  | Volume |   |   | Price     |  |  | Market Value   | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                | 
|                 |  | (Mcf)  |        |  | (Per Mcf) |   |      | (Mcf)       |  |  | (Per Mcf)   |  | (Mcf)  |   |   | (Per Mcf) |  |  | (In thousands) | 
|Jan.  Dec. 2007 |  |        | 32,500 |  |           | $ | 6.74 |             |  |  |            |  |        | $ |  |           |  |  | 10,000         |  |  | $ | 4.99 |  |  | $ | 7,567 | 
|Jan.  Dec. 2008 |  |        | 10,000 |  |           |   | 6.25 |             |  |  |            |  |        |   |  |           |  |  |               |  |  |   |     |  |  |   | 2,400 | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  |  |   |      |  |  | $ | 9,967 | 
|                 |  |        |        |  |           |   |      |             |  |  |             |  |        |   |   |           |  |  |                |  | 

Commodity Contracts 
Mark-to-Market
Accounting: Floor Spreads. marked-to




| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | When the NYMEX oil price is greater than $70 per Bbl, the
    Company pays the net purchased floor premium cost per Bbl.

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | When the NYMEX oil price is greater than $50 per Bbl but
    less than $70 per Bbl, the Company receives settlements of
    $70 per Bbl less the NYMEX oil price and pays the net
    purchased floor premium cost per Bbl.
|
| |  | When the NYMEX oil price is below $50 per Bbl, the Company
    receives $20 per Bbl less the net purchased floor premium
    cost per Bbl.                                                                                 

Commodity Contracts  Current Period Impact.


|                                   |                                                  |                         |                                         |       |         |         |   |       |        |       |   |       |        |       | 
|---------------------------------- | ------------------------------------------------ | ----------------------- | --------------------------------------- | ----- | ------- | ------- | - | ----- | ------ | ----- | - | ----- | ------ | ----- | 
|                                   |                                                  | Year Ended December 31, |                                        
|                                   |                                                  |                         |                                        
|                                   |                                                  | 2006                    |                                         |       | 2005    |         |   | 2004  |       
|                                   |                                                  |                         |                                         |       |         |         |   |       |       
|                                   |                                                  | (In thousands)          |                                        
|Designated cash flow hedges:       |                                                  |                         |                                         |       |         |         |   |       |        |       |   |      
|                                   | Ineffectiveness  Derivative commodity contracts |                         | $                                       | 1,748 |         |         | $ | 8,371 |        |       | $ | 5,018 |       
|Undesignated derivative contracts: |                                                  |                         |                                         |       |         |         |   |       |        |       |   |      
|                                   | Mark-to-market loss (gain):                      |                         |                                         |       |         |         |   |       |        |       |   |       |       
|                                   |                                                  | Interest rate swap      |                                         |       |        |         |   |       | 462    |       |   |       | 1,958  |      
|                                   |                                                  | Commodity contracts     |                                         |       | (17,279 | )       |   |       | (2,050 | )     |   |       | 646    |      
|                                   | Settlements:                                     |                         |                                         |       |         |         |   |       |        |       |   |       |       
|                                   |                                                  | Interest rate swap      |                                         |       |        |         |   |       | (312   | )     |   |       | (1,686 | )    
|                                   |                                                  | Commodity contracts     |                                         |       | (8,857  | )       |   |       | (1,181 | )     |   |       | (925   | )    
|                                   |                                                  |                         |                                         |       |         |         |   |       |       
|                                   |                                                  |                         | Total derivative fair value loss (gain) |       | $       | (24,388 | ) |       | $      | 5,290 |   |       | $      | 5,011 | 
|                                   |                                                  |                         |                                         |       |         |         |   |       |       

Commodity Contracts  Future Period Impact.


|                                                   |                                      |                |         |         |      |   |         |         |  
|-------------------------------------------------- | ------------------------------------ | -------------- | ------- | ------- | ---- | - | ------- | ------- | -
|                                                   |                                      | December 31,   |        
|                                                   |                                      |                |        
|                                                   |                                      | 2006           |         |         | 2005 |  
|                                                   |                                      |                |         |         |      |  
|                                                   |                                      | (In thousands) |        
|Deferred loss on commodity derivatives, net of tax |                                      | $              | (35,327 | )       |      | $ | (72,918 | )      
|Deferred gain on interest rate swap, net of tax    |                                      |                |        |         |      |   | 92      |        
|                                                   |                                      |                |         |         |      |  
|                                                   | Accumulated other comprehensive loss |                | $       | (35,327 | )    |   | $       | (72,826 | )
|                                                   |                                      |                |         |         |      |  



Counterparty Risk.


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                  |  |                      |       |  |                      |  |       | 
|----------------- |  | -------------------- | ----- |  | -------------------- |  | ----- | 
|                  |  | Percentage of        |       |  | Percentage of        | 
|                  |  | Hedged Oil           |       |  | Hedged Natural Gas   | 
|Counterparty      |  | Production Committed |       |  | Production Committed | 
|                  |  |                      |       |  |                      | 
|BNP Paribas       |  |                      | 7.6%  |  |                      |  | 66.6% | 
|Calyon            |  |                      | 17.0% |  |                      |  | 14.3% | 
|Deutsche Bank     |  |                      | 34.9% |  |                      |  |      | 
|J. Aron & Company |  |                      | 3.8%  |  |                      |  | 19.0% | 
|Wachovia          |  |                      | 22.6% |  |                      |  |      | 





Note 14.     Related Party
Transactions






Note 15.     Subsequent
Events




| |             
| | ------------
| | Acquisitions



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










| |                                   
| | ----------------------------------
| | Master Limited Partnership (MLP)

S-1




| |                          
| | -------------------------
| | Revolving Credit Facility



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ENCORE ACQUISITION COMPANY





SUPPLEMENTARY INFORMATION


Capitalized Costs and Costs Incurred Relating to Oil and
Natural Gas Producing Activities




|                                                                   |                                                       |                |           |           |      |   |           |           |  
|------------------------------------------------------------------ | ----------------------------------------------------- | -------------- | --------- | --------- | ---- | - | --------- | --------- | -
|                                                                   |                                                       | December 31,   |          
|                                                                   |                                                       |                |          
|                                                                   |                                                       | 2006           |           |           | 2005 |  
|                                                                   |                                                       |                |           |           |      |  
|                                                                   |                                                       | (In thousands) |          
|Properties and equipment, at cost  successful efforts
    method: |                                                       |                |           |           |      |   |           |          
|                                                                   | Proved properties                                     |                | $         | 2,033,914 |      |   | $         | 1,691,175 |  
|                                                                   | Unproved properties                                   |                |           | 47,548    |      |   |           | 37,646    |  
|                                                                   | Accumulated depletion, depreciation, and amortization |                |           | (364,780  | )    |   |           | (255,564  | )
|                                                                   |                                                       |                |           |           |      |  
|                                                                   |                                                       | $              | 1,716,682 |           |      | $ | 1,473,257 |          
|                                                                   |                                                       |                |           |           |      |  



|                  |                              |                         |         |         |         |  |         |         |         |  |         |         |         | 
|----------------- | ---------------------------- | ----------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | ------- | ------- | 
|                  |                              | Year Ended December 31, |        
|                  |                              |                         |        
|                  |                              | 2006                    |         |         | 2005    |  |         | 2004    |        
|                  |                              |                         |         |         |         |  |         |         |        
|                  |                              | (In thousands)          |        
|Acquisitions:     |                              |                         |         |         |         |  |         |         |         |  |         |        
|                  | Proved properties            |                         | $       | 4,486   |         |  | $       | 224,469 |         |  | $       | 204,907 |        
|                  | Unproved properties          |                         |         | 24,462  |         |  |         | 21,205  |         |  |         | 33,926  |        
|                  | Asset retirement obligations |                         |         | 785     |         |  |         | 2,221   |         |  |         | 1,165   |        
|                  |                              |                         |         |         |         |  |         |         |        
|                  |                              | Total acquisitions      |         |         | 29,733  |  |         |         | 247,895 |  |         |         | 239,998 | 
|                  |                              |                         |         |         |         |  |         |         |        
|Development:      |                              |                         |         |         |         |  |         |         |         |  |         |        
|                  | Drilling and exploitation    |                         |         | 253,484 |         |  |         | 268,520 |         |  |         | 157,092 |        
|                  | Asset retirement obligations |                         |         | 147     |         |  |         | 954     |         |  |         | 467     |        
|                  |                              |                         |         |         |         |  |         |         |        
|Total development |                              |                         | 253,631 |         |         |  | 269,474 |         |         |  | 157,559 |        
|                  |                              |                         |         |         |         |  |         |         |        
|Exploration:      |                              |                         |         |         |         |  |         |         |         |  |         |        
|                  | Drilling and exploitation    |                         |         | 92,839  |         |  |         | 53,316  |         |  |         | 29,363  |        
|                  | Geological and seismic       |                         |         | 1,720   |         |  |         | 3,095   |         |  |         | 979     |        
|                  | Delay rentals                |                         |         | 646     |         |  |         | 635     |         |  |         | 204     |        
|                  |                              |                         |         |         |         |  |         |         |        
|Total exploration |                              |                         | 95,205  |         |         |  | 57,046  |         |         |  | 30,546  |        
|                  |                              |                         |         |         |         |  |         |         |        
|                  |                              | Total costs incurred    |         | $       | 378,569 |  |         | $       | 574,415 |  |         | $       | 428,103 | 
|                  |                              |                         |         |         |         |  |         |         |        

Oil & Natural Gas Producing
Activities  Unaudited






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ENCORE ACQUISITION COMPANY


SUPPLEMENTARY INFORMATION  (Continued)




|                      |  |              |       |  |      |   |       |      |  |   |       | 
|--------------------- |  | ------------ | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                      |  | December 31, |      
|                      |  |              |      
|                      |  | 2006         |       |  | 2005 |   |       | 2004 | 
|                      |  |              |       |  |      |   |       |      | 
|Oil (per Bbl)         |  | $            | 61.06 |  |      | $ | 61.04 |      |  | $ | 43.46 | 
|Natural gas (per Mcf) |  |              | 5.48  |  |      |   | 9.44  |      |  |   | 6.19  | 







|                           |                    |              |  |         |      |  |  |         |  |  |  |         | 
|-------------------------- | ------------------ | ------------ |  | ------- | ---- |  |  | ------- |  |  |  | ------- | 
|                           |                    | December 31, | 
|                           |                    |              | 
|                           |                    | 2006         |  |         | 2005 |  |  | 2004    | 
|                           |                    |              |  |         |      |  |  |         | 
|Proved reserves:           |                    |              |  |         |      |  |  |         |  |  |  |        
|                           | Oil (MBbl)         |              |  | 153,434 |      |  |  | 148,387 |  |  |  | 134,048 | 
|                           | Natural gas (MMcf) |              |  | 306,764 |      |  |  | 283,865 |  |  |  | 234,030 | 
|                           | Combined (MBOE)    |              |  | 204,561 |      |  |  | 195,698 |  |  |  | 173,053 | 
|Proved developed reserves: |                    |              |  |         |      |  |  |         |  |  |  |        
|                           | Oil (MBbl)         |              |  | 94,246  |      |  |  | 101,505 |  |  |  | 97,114  | 
|                           | Natural gas (MMcf) |              |  | 235,049 |      |  |  | 229,950 |  |  |  | 156,919 | 
|                           | Combined (MBOE)    |              |  | 133,421 |      |  |  | 139,830 |  |  |  | 123,267 | 



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ENCORE ACQUISITION COMPANY


SUPPLEMENTARY INFORMATION  (Continued)




|                           |                                   |        |         |         |        |  |         |            |   |  |         |         |  
|-------------------------- | --------------------------------- | ------ | ------- | ------- | ------ |  | ------- | ---------- | - |  | ------- | ------- | -
|                           |                                   |        |         | Natural |        |  | Oil     |           
|                           |                                   | Oil    |         |         | Gas    |  |         | Equivalent |  
|                           |                                   |        |         |         |        |  |         |            |  
|                           |                                   | (MBbl) |         |         | (MMcf) |  |         | (MBOE)     |  
|Balance, December 31, 2003 |                                   |        | 117,732 |         |        |  | 138,950 |            |   |  | 140,890 |        
|                           | Acquisitions of minerals-in-place |        |         | 7,853   |        |  |         | 86,314     |   |  |         | 22,239  |  
|                           | Extensions and discoveries        |        |         | 4,226   |        |  |         | 27,248     |   |  |         | 8,768   |  
|                           | Improved recovery                 |        |         | 11,826  |        |  |         | (80        | ) |  |         | 11,812  |  
|                           | Revisions of estimates            |        |         | (910    | )      |  |         | (4,313     | ) |  |         | (1,629  | )
|                           | Production                        |        |         | (6,679  | )      |  |         | (14,089    | ) |  |         | (9,027  | )
|                           |                                   |        |         |         |        |  |         |            |  
|Balance, December 31, 2004 |                                   |        | 134,048 |         |        |  | 234,030 |            |   |  | 173,053 |        
|                           | Acquisitions of minerals-in-place |        |         | 8,333   |        |  |         | 38,781     |   |  |         | 14,796  |  
|                           | Extensions and discoveries        |        |         | 2,780   |        |  |         | 28,073     |   |  |         | 7,459   |  
|                           | Improved recovery                 |        |         | 11,510  |        |  |         | 1,132      |   |  |         | 11,699  |  
|                           | Revisions of estimates            |        |         | (1,413  | )      |  |         | 2,908      |   |  |         | (928    | )
|                           | Production                        |        |         | (6,871  | )      |  |         | (21,059    | ) |  |         | (10,381 | )
|                           |                                   |        |         |         |        |  |         |            |  
|Balance, December 31, 2005 |                                   |        | 148,387 |         |        |  | 283,865 |            |   |  | 195,698 |        
|                           | Acquisitions of minerals-in-place |        |         | 25      |        |  |         | 235        |   |  |         | 64      |  
|                           | Extensions and discoveries        |        |         | 3,269   |        |  |         | 78,861     |   |  |         | 16,412  |  
|                           | Improved recovery                 |        |         | 10,935  |        |  |         | 941        |   |  |         | 11,092  |  
|                           | Revisions of estimates            |        |         | (1,847  | )      |  |         | (33,682    | ) |  |         | (7,461  | )
|                           | Production                        |        |         | (7,335  | )      |  |         | (23,456    | ) |  |         | (11,244 | )
|                           |                                   |        |         |         |        |  |         |            |  
|Balance, December 31, 2006 |                                   |        | 153,434 |         |        |  | 306,764 |            |   |  | 204,561 |        
|                           |                                   |        |         |         |        |  |         |            |  



|                                                                       |  |                |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------- |  | -------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                       |  | December 31,   |           
|                                                                       |  |                |           
|                                                                       |  | 2006           |            |   | 2005 |   |            | 2004 | 
|                                                                       |  |                |            |   |      |   |            |      | 
|                                                                       |  | (In thousands) |           
|Net future cash inflows                                                |  | $              | 9,291,007  |   |      | $ | 10,414,091 |      |  | $ | 6,651,858  |  
|Future production costs                                                |  |                | (3,668,897 | ) |      |   | (3,690,974 | )    |  |   | (2,389,359 | )
|Future development costs                                               |  |                | (371,396   | ) |      |   | (250,554   | )    |  |   | (194,746   | )
|Future abandonment costs                                               |  |                | (134,103   | ) |      |   | (121,553   | )    |  |   | (49,859    | )
|Future income tax expense                                              |  |                | (1,499,290 | ) |      |   | (1,934,504 | )    |  |   | (1,221,933 | )
|                                                                       |  |                |            |   |      |   |            |      | 
|Future net cash flows                                                  |  |                | 3,617,321  |   |      |   | 4,416,506  |      |  |   | 2,795,961  |  
|10% annual discount                                                    |  |                | (2,155,514 | ) |      |   | (2,498,035 | )    |  |   | (1,630,342 | )
|                                                                       |  |                |            |   |      |   |            |      | 
|Standardized measure of discounted estimated future net cash
    flows |  | $              | 1,461,807  |   |      | $ | 1,918,471  |      |  | $ | 1,165,619  |  
|                                                                       |  |                |            |   |      |   |            |      | 

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ENCORE ACQUISITION COMPANY


SUPPLEMENTARY INFORMATION  (Continued)




|                                        |                                                |                         |           |          |      |   |           |          |   |   |           |          |  
|--------------------------------------- | ---------------------------------------------- | ----------------------- | --------- | -------- | ---- | - | --------- | -------- | - | - | --------- | -------- | -
|                                        |                                                | Year Ended December 31, |          
|                                        |                                                |                         |          
|                                        |                                                | 2006                    |           |          | 2005 |   |           | 2004     |  
|                                        |                                                |                         |           |          |      |   |           |          |  
|                                        |                                                | (In thousands)          |          
|Standardized measure, beginning of year |                                                | $                       | 1,918,471 |          |      | $ | 1,165,619 |          |   | $ | 736,939   |         
|                                        | Net change in sales price and production costs |                         |           | (634,033 | )    |   |           | 531,793  |   |   |           | 430,310  |  
|                                        | Acquisitions of mineral-in-place               |                         |           | 539      |      |   |           | 256,257  |   |   |           | 242,855  |  
|                                        | Extensions, discoveries, and improved recovery |                         |           | 141,211  |      |   |           | 229,929  |   |   |           | 150,112  |  
|                                        | Revisions of quantity estimates                |                         |           | (62,615  | )    |   |           | (15,455  | ) |   |           | (15,217  | )
|                                        | Sales, net of production costs                 |                         |           | (340,036 | )    |   |           | (357,028 | ) |   |           | (222,995 | )
|                                        | Development costs incurred during the year     |                         |           | 253,484  |      |   |           | 268,520  |   |   |           | 157,092  |  
|                                        | Accretion of discount                          |                         |           | 191,847  |      |   |           | 116,562  |   |   |           | 73,694   |  
|                                        | Change in estimated future development costs   |                         |           | (185,212 | )    |   |           | (199,158 | ) |   |           | (276,027 | )
|                                        | Net change in income taxes                     |                         |           | 248,491  |      |   |           | (247,937 | ) |   |           | (145,042 | )
|                                        | Change in timing and other                     |                         |           | (70,340  | )    |   |           | 169,369  |   |   |           | 33,898   |  
|                                        |                                                |                         |           |          |      |   |           |          |  
|Standardized measure, end of year       |                                                | $                       | 1,461,807 |          |      | $ | 1,918,471 |          |   | $ | 1,165,619 |         
|                                        |                                                |                         |           |          |      |   |           |          |  

Selected Quarterly Financial Data




|                                |                                        |                                       |         |         |        |   |         |         |  |   |         |         |  |   |         |         | 
|------------------------------- | -------------------------------------- | ------------------------------------- | ------- | ------- | ------ | - | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                |                                        | Quarter                               |        
|                                |                                        |                                       |        
|                                |                                        | First                                 |         |         | Second |   |         | Third   |  |   | Fourth  |        
|                                |                                        |                                       |         |         |        |   |         |         |  |   |         |        
|                                |                                        | (In thousands, except per share data) |        
|2006                            |                                        |                                       |         |         |        |   |         |         |  |   |         |         |  |   |         |        
|Revenues, as reported           |                                        | $                                     | 116,216 |         |        | $ | 133,471 |         |  | $ | 177,697 |         |  | $ | 157,710 |        
|                                | Plus: change in marketing presentation |                                       |         | 31,746  |        |   |         | 24,022  |  |   |         |        |  |   |         |        | 
|                                |                                        |                                       |         |         |        |   |         |         |  |   |         |        
|                                | Revenues, as restated                  |                                       | $       | 147,962 |        |   | $       | 157,493 |  |   | $       | 177,697 |  |   | $       | 157,710 | 
|                                |                                        |                                       |         |         |        |   |         |         |  |   |         |        
|Operating income                |                                        | $                                     | 40,846  |         |        | $ | 47,594  |         |  | $ | 78,002  |         |  | $ | 25,064  |        
|Net income                      |                                        | $                                     | 17,936  |         |        | $ | 22,235  |         |  | $ | 42,135  |         |  | $ | 10,092  |        
|Basic income per common share   |                                        | $                                     | 0.37    |         |        | $ | 0.42    |         |  | $ | 0.80    |         |  | $ | 0.19    |        
|Diluted income per common share |                                        | $                                     | 0.36    |         |        | $ | 0.42    |         |  | $ | 0.78    |         |  | $ | 0.19    |        
|2005                            |                                        |                                       |         |         |        |   |         |         |  |   |         |         |  |   |         |        
|Revenues                        |                                        | $                                     | 91,581  |         |        | $ | 99,717  |         |  | $ | 127,572 |         |  | $ | 138,454 |        
|Operating income                |                                        | $                                     | 39,917  |         |        | $ | 43,401  |         |  | $ | 38,911  |         |  | $ | 68,160  |        
|Net income                      |                                        | $                                     | 21,784  |         |        | $ | 23,668  |         |  | $ | 20,854  |         |  | $ | 37,119  |        
|Basic income per common share   |                                        | $                                     | 0.45    |         |        | $ | 0.49    |         |  | $ | 0.43    |         |  | $ | 0.76    |        
|Diluted income per common share |                                        | $                                     | 0.44    |         |        | $ | 0.48    |         |  | $ | 0.42    |         |  | $ | 0.75    |        



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ENCORE ACQUISITION COMPANY







|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE






ITEM 9A.     CONTROLS AND
PROCEDURES


Evaluation of Disclosure Controls and Procedures


13a-15(e)


Managements Report on Internal Control Over Financial
Reporting






10-K,


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ENCORE ACQUISITION COMPANY


Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting















.






| |                          
| | -------------------------
| | /s/ Ernst & Young
    LLP





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ENCORE ACQUISITION COMPANY


Changes in Internal Control over Financial Reporting









|         |                  
|-------- | -----------------
|ITEM 9B. | OTHER INFORMATION






PART III







|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
    GOVERNANCE



www.encoreacq.com







|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS





|                                                           |  |                      |           |  |                      |                      |                     |                      |  |  |           | 
|---------------------------------------------------------- |  | -------------------- | --------- |  | -------------------- | -------------------- | ------------------- | -------------------- |  |  | --------- | 
|                                                           |  | (a)                  |           |  | (b)                  |                      |                     | (c)                  | 
|                                                           |  |                      |           |  |                      |                      |                     |                      | 
|                                                           |  |                      |           |  |                      | Number of Securities |                    
|                                                           |  |                      |           |  |                      | Remaining Available  |                    
|                                                           |  | Number of            |           |  |                      |                      | for Future Issuance |                     
|                                                           |  | Securities to Be     |           |  |                      |                      | Under Equity        |                     
|                                                           |  | Issued upon Exercise |           |  | Weighted-Average     |                      |                     | Compensation Plans   | 
|                                                           |  | of Outstanding       |           |  | Exercise Price of    |                      |                     | (Excluding           | 
|                                                           |  | Options, Warrants    |           |  | Outstanding Options, |                      |                     | Securities Reflected | 
|                                                           |  | and Rights(2)        |           |  | Warrants and Rights  |                      |                     | in Column(a))        | 
|                                                           |  |                      |           |  |                      |                      |                     |                      | 
|Equity compensation plans approved by security holders(1)  |  |                      | 1,337,118 |  |                      | $                    | 14.44               |                      |  |  | 1,307,467 | 
|Equity compensation plans not approved by security holders |  |                      |          |  |                      |                      |                    |                      |  |  |          | 
|                                                           |  |                      |           |  |                      |                      |                     |                      | 
|Total                                                      |  |                      | 1,337,118 |  |                      | $                    | 14.44               |                      |  |  | 1,307,467 | 
|                                                           |  |                      |           |  |                      |                      |                     |                      | 






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | The 2000 Incentive Stock Plan is the Companys only equity
    compensation plan.
|   
|(2) | Excludes 828,919 shares of restricted stock.                                     

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ENCORE ACQUISITION COMPANY







|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
    DIRECTOR INDEPENDENCE






ITEM 14.     PRINCIPAL ACCOUNTING
FEES AND SERVICES







PART IV





ITEM 15.     EXHIBITS, FINANCIAL
STATEMENT SCHEDULES






| |                         
| | ------------------------
| | 1. Financial Statements:

|                                                                                                          |  |      |    | 
|--------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                          |  | Page |   
|                                                                                                          |  |      |   
|Report of Independent Registered Public Accounting Firm                                                   |  |      | 69 | 
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                              |  |      | 70 | 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2006, 2005, and 2004           |  |      | 71 | 
|Consolidated Statements of Stockholders Equity for the
    Years Ended December 31, 2006, 2005, and 2004 |  |      | 72 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2006, 2005, and 2004           |  |      | 73 | 
|Notes to Consolidated Financial Statements                                                                |  |      | 74 | 



| |                                  
| | ---------------------------------
| | 2. Financial Statement Schedules:



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All financial statement schedules have been omitted because they
    are not applicable or the required information is presented in
    the financial statements or the notes to the consolidated
    financial statements.





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ENCORE ACQUISITION COMPANY


INDEX TO EXHIBITS


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 2  | .1          |  | Purchase and Sale Agreement dated January 16, 2007 among
    Clear Fork Pipeline Company, Howell Petroleum Corporation,
    Kerr-McGee Oil & Gas Onshore LP, and the Company
    (incorporated by reference to Exhibit 2.1 of the
    Companys Current Report on Form 8-K, filed with the
    SEC on January 17, 2007).                                                                           
|       
|        | 2  | .2          |  | Purchase and Sale Agreement dated January 23, 2007 among
    Howell Petroleum Corporation and Kerr-McGee Oil & Gas
    Onshore LP, as Sellers, and the Company, as Purchaser
    (incorporated by reference to Exhibit 2.1 of the
    Companys Current Report on Form 8-K, filed with the
    SEC on January 26, 2007).                                                                           
|        | 3  | .1          |  | Second Amended and Restated Certificate of Incorporation of the
    Company (incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the fiscal quarter ended
    September 30, 2001, filed with the SEC on November 7,
    2001).                                                                                                                                        
|        | 3  | .1.2        |  | Certificate of Amendment to Second Amended and Restated
    Certificate of Incorporation of the Company (incorporated by
    reference to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended March 31, 2005,
    filed with the SEC on May 5, 2005).                                                                                                                     
|       
|        | 3  | .2          |  | Second Amended and Restated Bylaws of the Company (incorporated
    by reference to the Companys Quarterly Report on
    Form 10-Q for the fiscal quarter ended September 30,
    2001, filed with the SEC on November 7, 2001).                                                                                                                                                                  
|       
|        | 4  | .1          |  | Specimen certificate of the Company (incorporated by referenced
    to Exhibit 4.1 to Registration Statement on Form S-1,
    Registration No. 333-47540, filed with the SEC on
    December 15, 2000).                                                                                                                                                                                            
|       
|        | 4  | .2.1        |  | Indenture, dated as of April 2, 2004, among the Company,
    the subsidiary guarantors party thereto and Wells Fargo Bank,
    National Association, with respect to the 6.25% Senior
    Subordinated Notes due 2014 (incorporated by reference to
    Exhibit 4.1 of the Companys Registration Statement on
    Form S-4 (Registration No. 333-117025) filed with the
    SEC on June 30, 2004).
|       
|        | 4  | .2.2        |  | Form of 6.25% Senior Subordinated Note to Cede &
    Co. or its registered assigns (included as Exhibit A to
    Exhibit 4.2.1 above).                                                                                                                                                                                                                                                             
|       
|        | 4  | .3.1        |  | Indenture, dated as of July 13, 2005, among the Company,
    the subsidiary guarantors party thereto and Wells Fargo Bank,
    National Association, with respect to the 6% Senior
    Subordinated Notes due 2015 (incorporated by reference to
    Exhibit 4.1 to the Companys Current Report on
    Form 8-K, filed with the SEC on July 14, 2005).                                            
|       
|        | 4  | .3.2        |  | Form of 6% Senior Subordinated Note due 2015 (included as
    Exhibit A to Exhibit 4.3.1 above).                                                                                                                                                                                                                                                                                                   
|       
|        | 4  | .4.1        |  | Indenture, dated as of November 16, 2005, among the
    Company, the subsidiary guarantors party thereto and Wells Fargo
    Bank, National Association with respect to Subordinated Debt
    Securities (incorporated by reference to Exhibit 4.1 to the
    Companys Current Report on Form 8-K, filed with the
    SEC on November 23, 2005).                                                  
|       
|        | 4  | .4.2        |  | First Supplemental Indenture, dated as of November 16,
    2005, among the Company, the subsidiary guarantors party thereto
    and Wells Fargo Bank, National Association, with respect to the
    71/4% Senior
    Subordinated Notes due 2017 (incorporated by reference to
    Exhibit 4.2 to the Companys Current Report on
    Form 8-K, filed with the SEC on November 23, 2005).          
|       
|        | 4  | .4.3        |  | Form of
    71/4% Senior
    Subordinated Note due 2017 (included as Exhibit A to
    Exhibit 4.4.2 above).                                                                                                                                                                                                                                                                                        
|       
|        | 10 | .1+         |  | 2000 Incentive Stock Plan (incorporated by reference to
    Exhibit 4.1 to the Companys Registration Statement on
    Form S-8 (File No. 333-120422), filed with the SEC on
    November 12, 2004).                                                                                                                                                                                               

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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 10 | .2+         |  | Employee Severance Protection Plan (incorporated by reference to
    Exhibit 10.1 to the Companys Quarterly Report on
    Form 10-Q for the quarterly period ended March 31,
    2003, filed with the SEC on May 8, 2003).                                                                                                                                                                                                                                                                      
|       
|        | 10 | .3+         |  | Form of Restricted Stock Award  Executive
    (incorporated by reference to Exhibit 10.3 to the
    Companys Annual Report on Form 10-K for the year
    ended December 31, 2005).                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .4+         |  | Form of Stock Option Agreement (Nonqualified) (incorporated by
    reference to Exhibit 10.4 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2005).                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .5+         |  | Form of Stock Option Agreement (Incentive) (incorporated by
    reference to Exhibit 10.5 to the Companys Annual
    Report on Form 10-K for the year ended December 31,
    2005).                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .6+         |  | Form of Indemnification Agreement for directors and executive
    officers (incorporated by reference to Exhibit 10.6 of the
    Companys 2004 Annual Report on Form 10-K for the year
    ended December 31, 2004).                                                                                                                                                                                                                                                                            
|       
|        | 10 | .7          |  | Description of Compensation Payable to Non-Management Directors
    (incorporated by reference to Exhibit 10.1 of the
    Companys Form 8-K filed with the SEC on
    February 22, 2006).                                                                                                                                                                                                                                                                                                       
|       
|        | 10 | .8          |  | Amended and Restated Credit Agreement, dated August 19,
    2004, among the Company, Encore Operating, L.P., Bank of
    America, N.A., as Administrative Agent, Fotis Capital Corp. and
    Wachovia Bank, N.A., as Co-Syndication Agents, BNP Paribas and
    Citibank, N.A., as Co-Documentary Agents and the financial
    institutions party thereto (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K, filed with the SEC on August 25, 2004).
|       
|        | 10 | .9          |  | First Amendment to Credit Agreement, dated April 29, 2005
    (incorporated by reference to Exhibit 10.1 of the
    Companys Current Report on Form 8-K, filed with the
    SEC on May 4, 2005).                                                                                                                                                                                                                                                                                                
|       
|        | 10 | .10         |  | Second Amendment to Credit Agreement, dated November 14,
    2005 (incorporated by reference to Exhibit 10.1 of the
    Companys Current Report on Form 8-K, filed with the
    SEC on November 18, 2005).                                                                                                                                                                                                                                                                                      
|       
|        | 10 | .11         |  | Third Amendment to Credit Agreement, dated December 29,
    2005 (incorporated by reference to Exhibit 10.1 of the
    Companys Current Report on Form 8-K, filed with the
    SEC on January 5, 2006).                                                                                                                                                                                                                                                                                         
|       
|        | 10 | .12         |  | Registration Rights Agreement, dated August 18, 1998, by
    and among the Company and the other parties thereto
    (incorporated by reference to Exhibit 4.2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-47540), filed with the SEC on October 6, 2000).                                                                                                                                                                                                         
|       
|        | 12 | .1*         |  | Statement showing computation of ratios of earnings to fixed
    charges.                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 21 | .1*         |  | Subsidiaries of the Company as of February 1, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       
|        | 23 | .1*         |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       
|        | 23 | .2*         |  | Consent of Miller and Lents, Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       
|        | 24 | .1*         |  | Power of Attorney (included on the signature page of this
    report).                                                                                                                                                                                                                                                                                                                                                                                                                           
|       
|        | 31 | .1*         |  | Rule 13a-14(a)/15d-14(a) Certification (Principal Executive
    Officer).                                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 31 | .2*         |  | Rule 13a-14(a)/15d-14(a) Certification (Principal Financial
    Officer).                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 32 | .1*         |  | Section 1350 Certification (Principal Executive Officer).                                                                                                                                                                                                                                                                                                                                                                                                                                        
|        | 32 | .2*         |  | Section 1350 Certification (Principal Financial Officer).                                                                                                                                                                                                                                                                                                                                                                                                                                        






|  |               
|- | --------------
|* | Filed herewith



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ENCORE ACQUISITION COMPANY


SIGNATURES






| |                           
| | --------------------------
| | Encore Acquisition Company

|                        |  |                                                                         
|----------------------- |  | ------------------------------------------------------------------------
|Date: February 28, 2007 |  | By: /s/ Jon S.
    BrumleyJon
    S. Brumley
    Chief Executive Officer

attorneys-in attorneys-in attorneys-in




|                                             |  |                                                                                                                                  |  |                   |  | 
|-------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | 
|Signature                                    |  | Title or Capacity                                                                                                                |  | Date             
|                                             |  |                                                                                                                                  |  |                  
|                                            
|/s/ I. Jon BrumleyI.
    Jon Brumley         |  | Chairman of the Board and Director                                                                                               |  | February 28, 2007
|                                            
|/s/ Jon S. BrumleyJon
    S. Brumley         |  | Chief Executive Officer, President, and Director
    (Principal Executive Officer)                                               |  | February 28, 2007
|                                            
|/s/ Robert C. ReevesRobert
    C. Reeves     |  | Senior Vice President, Chief Financial Officer, and Treasurer
    (Principal Financial Officer and Principal Accounting Officer) |  | February 28, 2007
|                                            
|/s/ John A. BaileyJohn
    A. Bailey         |  | Director                                                                                                                         |  | February 28, 2007
|                                            
|/s/ Martin C. BowenMartin
    C. Bowen       |  | Director                                                                                                                         |  | February 28, 2007
|                                            
|/s/ Ted
    Collins, Jr.Ted
    Collins, Jr. |  | Director                                                                                                                         |  | February 28, 2007
|                                            
|/s/ Ted A. GardnerTed
    A. Gardner         |  | Director                                                                                                                         |  | February 28, 2007

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|                                                 |  |                   |  |                   |  | 
|------------------------------------------------ |  | ----------------- |  | ----------------- |  | 
|Signature                                        |  | Title or Capacity |  | Date             
|                                                 |  |                   |  |                  
|                                                
|/s/ John V. GenovaJohn
    V. Genova             |  | Director          |  | February 28, 2007
|                                                
|/s/ James A.
    Winne IIIJames
    A. Winne III |  | Director          |  | February 28, 2007

112