##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-K


|                                            |  |                                                                                         
|------------------------------------------- |  | ----------------------------------------------------------------------------------------
|þ                                           |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended December 31, 2005

Encore Acquisition Company


(Exact name of registrant as specified in its charter)


|                                                                                               |  |                              |  |                                      
|---------------------------------------------------------------------------------------------- |  | ---------------------------- |  | -------------------------------------
|Delaware                                                                                       |  | 001-16295                    |  | 75-2759650                           
|(State or other jurisdiction
    of incorporation)                                             |  | (Commission
    File Number) |  | (IRS Employer
    Identification No.)
|                                                                                              
|777 Main Street,
    Suite 1400,
    Fort Worth, Texas(Address of principal executive offices) |  |                              |  | 76102(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. þ


12b-2


þ o o


12b-2). o þ


|                                                                                                                                                                                                                                |  |   |               | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------- | 
|Aggregate market value of the voting and non-voting common stock
    held by non-affiliates of the Registrant as of June 30,
    2005 (the last business day of Registrants most recently
    completed second fiscal quarter) |  | $ | 1,248,081,269 | 
|Number of shares of Common Stock, $0.01 par value,
    outstanding as of March 3, 2006                                                                                                                                          |  |   | 49,768,854    | 

DOCUMENTS INCORPORATED BY REFERENCE


10-K.










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##### 










ENCORE ACQUISITION COMPANY


2005 ANNUAL REPORT ON
FORM 10-K


TABLE OF CONTENTS


|                                                                     |  |                                                                                                                      |  |      |     |  |  | 
|-------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ---- | --- |  |  | 
|                                                                     |  |                                                                                                                      |  | Page |    
|                                                                     |  |                                                                                                                      |  |      |    
|PART I                                                              
|Items 1 and 2.                                                       |  | Business and Properties                                                                                              |  |      | 2   | 
|Item 1A.                                                             |  | Risk Factors                                                                                                         |  |      | 16  | 
|Item 1B.                                                             |  | Unresolved Staff Comments                                                                                            |  |      | 24  | 
|Item 3.                                                              |  | Legal Proceedings                                                                                                    |  |      | 24  | 
|Item 4.                                                              |  | Submission of Matters to a Vote of Security
    Holders                                                              |  |      | 24  | 
|                                                                    
|PART II                                                             
|Item 5.                                                              |  | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 25  | 
|Item 6.                                                              |  | Selected Financial Data                                                                                              |  |      | 26  | 
|Item 7.                                                              |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                            |  |      | 28  | 
|Item 7A.                                                             |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                       |  |      | 59  | 
|Item 8.                                                              |  | Financial Statements and Supplementary
    Data                                                                      |  |      | 64  | 
|Item 9.                                                              |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                             |  |      | 97  | 
|Item 9A.                                                             |  | Controls and Procedures                                                                                              |  |      | 97  | 
|Item 9B.                                                             |  | Other Information                                                                                                    |  |      | 99  | 
|                                                                    
|PART III                                                            
|Item 10.                                                             |  | Directors and Executive Officers of the
    Registrant                                                               |  |      | 99  | 
|Item 11.                                                             |  | Executive Compensation                                                                                               |  |      | 99  | 
|Item 12.                                                             |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                   |  |      | 99  | 
|Item 13.                                                             |  | Certain Relationships and Related
    Transactions                                                                   |  |      | 100 | 
|Item 14.                                                             |  | Principal Accountant Fees and Services                                                                               |  |      | 100 | 
|                                                                    
|PART IV                                                             
|Item 15.                                                             |  | Exhibits and Financial Statement
    Schedules                                                                       |  |      | 101 | 
|Form of Restricted Stock Award - Executive                          
|Form of Stock Option Agreement (Nonqualified)                       
|Form of Stock Option Agreement (Incentive)                          
|Table of 2006 Base Salaries for Executive Officers                  
|Severance Agreement                                                 
|Subsidiaries                                                        
|Consent of Ernst & Young LLP                                        
|Consent of Miller & 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)            



1



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##### Table of Contents



10-K





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 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 north Texas; and
|
| |  | 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.                      

Proved Reserves.


Most Valuable Asset.


Recent Acquisitions.


Mid-Continent and Permian Basin Acquisition. Nolley-McFarland,


Crusader Energy Corporation.


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##### Table of Contents





Drilling.


Oil and Natural Gas Reserve Replacement


|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |        |        | 
|------------------------------------- | --------------------------------- | ------------------------------- | --- | ------ | ---------- |  | --- | ------ | ------ |  | ------- | ------ | ------ |  | --- | ------ | ------ | 
|                                      |                                   | Year Ended December 31,         |     |        |           
|                                      |                                   |                                 |     |        | Three Year | 
|                                      |                                   | 2005                            |     |        | 2004       |  |     | 2003   |        |  | Average |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Acquisition Reserve Replacement Ratio |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Acquisitions of minerals-in-place |                                 |     | 14,796 |            |  |     | 22,239 |        |  |         | 6,257  |        |  |     | 14,431 |       
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 10,381 |            |  |     | 9,027  |        |  |         | 8,110  |        |  |     | 9,173  |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Acquisition reserve replacement ratio |                                   |                                 | 142 | %      |            |  | 246 | %      |        |  | 77      | %      |        |  | 157 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Development Reserve Replacement Ratio |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Extensions and discoveries        |                                 |     | 7,459  |            |  |     | 8,768  |        |  |         | 5,182  |        |  |     | 7,136  |       
|                                      | Improved recovery                 |                                 |     | 11,699 |            |  |     | 11,812 |        |  |         | 12,744 |        |  |     | 12,085 |       
|                                      | Revisions of estimates            |                                 |     | (928   | )          |  |     | (1,629 | )      |  |         | (3,493 | )      |  |     | (2,017 | )     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total development program       |     |        | 18,230     |  |     |        | 18,951 |  |         |        | 14,433 |  |     |        | 17,204 | 
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 10,381 |            |  |     | 9,027  |        |  |         | 8,110  |        |  |     | 9,173  |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Development reserve replacement ratio |                                   |                                 | 176 | %      |            |  | 210 | %      |        |  | 178     | %      |        |  | 188 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total Reserve Replacement Ratio |     |        |            |  |     |        |        |  |         |        |        |  |     |        |        | 
|Changes in Proved Reserves:           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Acquisitions of minerals-in-place |                                 |     | 14,796 |            |  |     | 22,239 |        |  |         | 6,257  |        |  |     | 14,431 |       
|                                      | Extensions and discoveries        |                                 |     | 7,459  |            |  |     | 8,768  |        |  |         | 5,182  |        |  |     | 7,136  |       
|                                      | Improved recovery                 |                                 |     | 11,699 |            |  |     | 11,812 |        |  |         | 12,744 |        |  |     | 12,085 |       
|                                      | Revisions of estimates            |                                 |     | (928   | )          |  |     | (1,629 | )      |  |         | (3,493 | )      |  |     | (2,017 | )     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|                                      |                                   | Total reserve additions         |     |        | 33,026     |  |     |        | 41,190 |  |         |        | 20,690 |  |     |        | 31,635 | 
|Divided by:                           |                                   |                                 |     |        |            |  |     |        |        |  |         |        |        |  |     |       
|                                      | Production                        |                                 |     | 10,381 |            |  |     | 9,027  |        |  |         | 8,110  |        |  |     | 9,173  |       
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       
|Total reserve replacement ratio       |                                   |                                 | 318 | %      |            |  | 456 | %      |        |  | 255     | %      |        |  | 345 | %     
|                                      |                                   |                                 |     |        |            |  |     |        |        |  |         |       



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##### Table of Contents





Business Strategies






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain an active drilling and workover 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 development
    and exploitation drilling, workovers, and recompletions. Our
    plan is to maintain an inventory of low-risk exploitation and
    development projects that provide us ongoing drilling activity.
    Each year, we budget a portion of internally generated cash flow
    for secondary and tertiary recovery projects whose results will
    not be seen until future years.                                                                                                                                                                                                                                                                                                
|
| |  | Maximize existing reserves and production through
    high-pressure air injection. In addition to conventional
    development programs, we utilize high-pressure air injection
    techniques on the CCA properties to enhance our growth.
    High-pressure air injection (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. We believe that the HPAI programs on our
    CCA properties will generate a higher rate of return than other
    tertiary processes and can be applied throughout our CCA
    properties.                                                                                                                                                                                                                              
|
| |  | 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. In certain properties in the Rockies, a similar tertiary
    recovery technique involving
    CO2
    has added approximately 1.5 million BOE of proved reserves.
    We believe that these other improved recovery techniques will
    continue to be a significant growth area for us.
|
| |  | 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 to complement our core
    properties, while providing upside potential. 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 in 2006 with the same disciplined commitment to
    acquire assets that fit our portfolio and create value for our
    shareholders.                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 are expected to set up multi-well
    exploitation projects if successful.
|
| |  | Operate in a cost effective, efficient, and safe manner.
    As of December 31, 2005, we operated properties
    representing approximately 85% 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.


Operations




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Production and Price History




|                          |                                                                              |                    |   |        |      |  |   |        |  |  |   |        | 
|------------------------- | ---------------------------------------------------------------------------- | ------------------ | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                          |                                                                              | As of December 31, |  
|                          |                                                                              |                    |  
|                          |                                                                              | 2005               |   |        | 2004 |  |   | 2003   | 
|                          |                                                                              |                    |   |        |      |  |   |        | 
|Production:               |                                                                              |                    |   |        |      |  |   |        |  |  |   |       
|                          | Oil (MBbls)                                                                  |                    |   | 6,871  |      |  |   | 6,679  |  |  |   | 6,601  | 
|                          | Natural gas (MMcf)                                                           |                    |   | 21,059 |      |  |   | 14,089 |  |  |   | 9,051  | 
|                          | Combined (MBOE)                                                              |                    |   | 10,381 |      |  |   | 9,027  |  |  |   | 8,110  | 
|Average Daily Production: |                                                                              |                    |   |        |      |  |   |        |  |  |   |       
|                          | Oil (Bbls/day)                                                               |                    |   | 18,826 |      |  |   | 18,249 |  |  |   | 18,085 | 
|                          | Natural gas (Mcf/day)                                                        |                    |   | 57,696 |      |  |   | 38,493 |  |  |   | 24,798 | 
|                          | Combined (BOE/day)                                                           |                    |   | 28,442 |      |  |   | 24,665 |  |  |   | 22,218 | 
|Average Prices:           |                                                                              |                    |   |        |      |  |   |        |  |  |   |       
|                          | Oil (per Bbl)                                                                |                    | $ | 44.82  |      |  | $ | 33.04  |  |  | $ | 26.72  | 
|                          | Natural gas (per Mcf)                                                        |                    |   | 7.09   |      |  |   | 5.53   |  |  |   | 4.83   | 
|                          | Combined (per BOE)                                                           |                    |   | 44.05  |      |  |   | 33.07  |  |  |   | 27.14  | 
|Average Costs per BOE:    |                                                                              |                    |   |        |      |  |   |        |  |  |   |       
|                          | Lease operations expense                                                     |                    | $ | 6.59   |      |  | $ | 5.22   |  |  | $ | 4.67   | 
|                          | Production, ad valorem, and severance taxes                                  |                    |   | 4.39   |      |  |   | 3.36   |  |  |   | 2.71   | 
|                          | Depletion, depreciation and amortization                                     |                    |   | 8.25   |      |  |   | 5.38   |  |  |   | 4.13   | 
|                          | Exploration                                                                  |                    |   | 1.39   |      |  |   | 0.43   |  |  |   |       | 
|                          | General and administrative (excluding non-cash stock based
    compensation) |                    |   | 1.42   |      |  |   | 1.22   |  |  |   | 1.07   | 
|                          | Other operating expense                                                      |                    |   | 0.91   |      |  |   | 0.56   |  |  |   | 0.43   | 

Producing Wells




|                      |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          |  |     |     |  |  |    |    |  
|--------------------- | ----- | --------- | ----- | ------- | ----------------- |  | --- | -------- | ------- |  | -------- | -- | - | ----- | ----- | ----- | -------- |  | --- | --- |  |  | -- | -- | -
|                      |       | Oil Wells |       |         | Natural Gas Wells | 
|                      |       |           |       |         |                   | 
|                      |       |           |       | Average |                   |  |     |          | Average | 
|                      |       | Gross     |       |         | Net               |  |     | Working  |         |  | Gross    |    |   | Net   |       |       | Working  | 
|                      |       | Wells(1)  |       |         | Wells             |  |     | Interest |         |  | Wells(1) |    |   | Wells |       |       | Interest | 
|                      |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 
|Cedar Creek Anticline |       |           | 756   |         |                   |  | 673 |          |         |  | 89       | %  |   |       | 18    |       |          |  | 6   |     |  |  | 31 | % 
|Permian Basin         |       |           | 1,811 |         |                   |  | 486 |          |         |  | 27       | %  |   |       | 483   |       |          |  | 223 |     |  |  | 46 | % 
|Rockies               |       |           | 605   |         |                   |  | 319 |          |         |  | 53       | %  |   |       | 15    |       |          |  | 14  |     |  |  | 91 | % 
|Mid-Continent         |       |           | 366   |         |                   |  | 174 |          |         |  | 48       | %  |   |       | 1,278 |       |          |  | 315 |     |  |  | 25 | % 
|                      |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 
|                      | Total |           |       | 3,538   |                   |  |     | 1,652    |         |  |          | 47 | % |       |       | 1,794 |          |  |     | 558 |  |  |    | 31 | %
|                      |       |           |       |         |                   |  |     |          |         |  |          |    |   |       |       |       |          | 






|    |                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our total wells include 2,449 operated wells and 2,883
    non-operated wells. At December 31, 2005, 26 of our
    wells have multiple completions.

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Acreage




|                           |             |         |           |         |         |  |         |         | 
|-------------------------- | ----------- | ------- | --------- | ------- | ------- |  | ------- | ------- | 
|                           |             | Gross   |           |         | Net     | 
|                           |             | Acreage |           |         | Acreage | 
|                           |             |         |           |         |         | 
|Cedar Creek Anticline:     |             |         |           |         |         |  |         |        
|                           | Developed   |         |           | 111,189 |         |  |         | 103,333 | 
|                           | Undeveloped |         |           | 83,242  |         |  |         | 61,204  | 
|                           |             |         |           |         |         | 
|                           |             |         | 194,431   |         |         |  | 164,537 |        
|                           |             |         |           |         |         | 
|West Texas and New Mexico: |             |         |           |         |         |  |         |        
|                           | Developed   |         |           | 63,772  |         |  |         | 38,856  | 
|                           | Undeveloped |         |           | 13,567  |         |  |         | 12,842  | 
|                           |             |         |           |         |         | 
|                           |             |         | 77,339    |         |         |  | 51,698  |        
|                           |             |         |           |         |         | 
|Rockies:                   |             |         |           |         |         |  |         |        
|                           | Developed   |         |           | 58,880  |         |  |         | 35,778  | 
|                           | Undeveloped |         |           | 407,181 |         |  |         | 340,332 | 
|                           |             |         |           |         |         | 
|                           |             |         | 466,061   |         |         |  | 376,110 |        
|                           |             |         |           |         |         | 
|Mid-Continent:             |             |         |           |         |         |  |         |        
|                           | Developed   |         |           | 379,148 |         |  |         | 96,895  | 
|                           | Undeveloped |         |           | 70,641  |         |  |         | 20,378  | 
|                           |             |         |           |         |         | 
|                           |             |         | 449,789   |         |         |  | 117,273 |        
|                           |             |         |           |         |         | 
|Total:                     |             |         |           |         |         |  |         |        
|                           | Developed   |         |           | 612,989 |         |  |         | 274,862 | 
|                           | Undeveloped |         |           | 574,631 |         |  |         | 434,756 | 
|                           |             |         |           |         |         | 
|                           |             |         | 1,187,620 |         |         |  | 709,618 |        
|                           |             |         |           |         |         | 

Drilling Results




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|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |     | 
|------------------ | ----- | ----------------------- | --- | --- | ---- |  | --- | ----- |  |  | --- | --- |  | ----- | --- | --- | --- |  | --- | --- |  |  | --- | --- | 
|                   |       | Year Ended December 31, |    
|                   |       |                         |    
|                   |       | 2005                    |     |     | 2004 |  |     | 2003  | 
|                   |       |                         |     |     |      |  |     |       | 
|                   |       | Gross                   |     |     | Net  |  |     | Gross |  |  | Net |     |  | Gross |     |     | Net | 
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|Development Wells: |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|Productive         |       |                         | 242 |     |      |  | 145 |       |  |  | 203 |     |  |       | 135 |     |     |  | 137 |     |  |  | 103 |    
|Dry holes          |       |                         | 4   |     |      |  | 2   |       |  |  | 1   |     |  |       | 1   |     |     |  | 1   |     |  |  | 1   |    
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   |       |                         | 246 |     |      |  | 147 |       |  |  | 204 |     |  |       | 136 |     |     |  | 138 |     |  |  | 104 |    
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|Exploratory Wells: |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|Productive         |       |                         | 34  |     |      |  | 22  |       |  |  | 32  |     |  |       | 30  |     |     |  |    |     |  |  |    |    
|Dry holes          |       |                         | 47  |     |      |  | 42  |       |  |  | 4   |     |  |       | 4   |     |     |  |    |     |  |  |    |    
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   |       |                         | 81  |     |      |  | 64  |       |  |  | 36  |     |  |       | 34  |     |     |  |    |     |  |  |    |    
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|All Wells Drilled: |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     |  |     |     |  |  |     |    
|Productive         |       |                         | 276 |     |      |  | 167 |       |  |  | 235 |     |  |       | 165 |     |     |  | 137 |     |  |  | 103 |    
|Dry holes          |       |                         | 51  |     |      |  | 44  |       |  |  | 5   |     |  |       | 5   |     |     |  | 1   |     |  |  | 1   |    
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 
|                   | Total |                         |     | 327 |      |  |     | 211   |  |  |     | 240 |  |       |     | 170 |     |  |     | 138 |  |  |     | 104 | 
|                   |       |                         |     |     |      |  |     |       |  |  |     |     |  |       |     |     |     | 

Present Activities








Delivery Commitments and Marketing






8



---



##### Table of Contents







Competition




Federal and State Regulations




Federal Regulation of Natural Gas.




Federal Regulation of Oil.


9



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##### Table of Contents



State Regulation.


Federal, State or Native American Leases. on-site


Environmental Regulations.


Operating Hazards and Insurance






Employees




Principal Executive Office




Available Information


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


10



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##### Table of Contents



www.sec.gov


www.encoreacq.com










Properties




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

PV-10


|                      |       |                     |       |                              |                   |  |          |                   |  |  |         |        |     |         |    |     |        |  |         |         |  |           |                |         |  |         |         |         |  |   |           |           |  |  |    |     |  
|--------------------- | ----- | ------------------- | ----- | ---------------------------- | ----------------- |  | -------- | ----------------- |  |  | ------- | ------ | --- | ------- | -- | --- | ------ |  | ------- | ------- |  | --------- | -------------- | ------- |  | ------- | ------- | ------- |  | - | --------- | --------- |  |  | -- | --- | -
|                      |       |                     |       | Proved Reserve Quantities at |                   |  | PV-10 at |                  
|                      |       | Net Production 2005 |       |                              | December 31, 2005 |  |          | December 31, 2005 | 
|                      |       |                     |       |                              |                   |  |          |                   | 
|                      |       |                     |       | Natural                      |                   |  |          |                   |  |  | Natural |        |     |         |    |    
|                      |       | Oil                 |       |                              | Gas               |  |          | Total             |  |  |         |        | Oil |         |    | Gas |        |  | Total   |         |  | Amount(1) |                |         | 
|                      |       | (MBbls)             |       |                              | (MMcf)            |  |          | (MBOE)            |  |  | Percent |        |     | (MBbls) |    |     | (MMcf) |  |         | MBOE    |  |           | (In thousands) |         |  | Percent |        
|                      |       |                     |       |                              |                   |  |          |                   |  |  |         |        |     |         |    |     |        |  |         |         |  |           |                |         |  |         |        
|Cedar Creek Anticline |       |                     | 4,868 |                              |                   |  | 1,237    |                   |  |  | 5,074   |        |     |         | 49 | %   |        |  | 113,701 |         |  |           | 16,870         |         |  |         | 116,513 |         |  | $ | 1,424,876 |           |  |  | 53 | %  
|Permian Basin         |       |                     | 1,138 |                              |                   |  | 6,261    |                   |  |  | 2,182   |        |     |         | 21 | %   |        |  | 21,958  |         |  |           | 85,921         |         |  |         | 36,278  |         |  |   | 573,476   |           |  |  | 22 | %  
|Mid-Continent         |       |                     | 179   |                              |                   |  | 13,127   |                   |  |  | 2,367   |        |     |         | 23 | %   |        |  | 3,938   |         |  |           | 177,698        |         |  |         | 33,554  |         |  |   | 536,668   |           |  |  | 20 | %  
|Rockies               |       |                     | 686   |                              |                   |  | 434      |                   |  |  | 758     |        |     |         | 7  | %   |        |  | 8,790   |         |  |           | 3,376          |         |  |         | 9,353   |         |  |   | 143,953   |           |  |  | 5  | %  
|                      |       |                     |       |                              |                   |  |          |                   |  |  |         |        |     |         |    |     |        |  |         |         |  |           |                |         |  |         |        
|                      | Total |                     |       | 6,871                        |                   |  |          | 21,059            |  |  |         | 10,381 |     |         |    | 100 | %      |  |         | 148,387 |  |           |                | 283,865 |  |         |         | 195,698 |  |   | $         | 2,678,973 |  |  |    | 100 | %
|                      |       |                     |       |                              |                   |  |          |                   |  |  |         |        |     |         |    |     |        |  |         |         |  |           |                |         |  |         |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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%. Giving effect to hedging transactions, our
    PV-10 value would have
    been decreased by $128.4 million at December 31, 2005.
    The Standardized Measure at December 31, 2005 is
    $1.9 billion. Standardized Measure differs from
    PV-10 by
    $760.5 million because Standardized Measure includes the
    effect of asset retirement obligations and future income taxes.



11



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##### Table of Contents












| |                                                                
| | ---------------------------------------------------------------
| | Cedar Creek Anticline Properties  Montana and
    North Dakota





12



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##### Table of Contents







| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | additional acquisition of interests;                                               
|
| |  | effective management of the existing wellbores;                                    
|
| |  | the addition of strategically positioned new horizontal and
    vertical wellbores;
|
| |  | the application of horizontal re-entry drilling in existing
    wellbores;         
|
| |  | waterflood enhancements; and                                                       
|
| |  | implementation of our high-pressure air injection program.                         







High-pressure air injection.








13



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##### Table of Contents





Net Profits Interests.




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









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



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







14



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









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



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







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





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



15



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##### Table of Contents



2




| |                      
| | ---------------------
| | Shallow Gas  Montana





Title to Properties








| |   |                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | royalties, overriding royalties, net profit interests, 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;                                  
|
| |  | 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.



16



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##### Table of Contents









| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the supply of domestic and foreign oil and natural gas;                                                                                         
|
| |  | the ability of members of the Organization of Petroleum
    Exporting Countries to agree upon and maintain oil prices and
    production levels;
|
| |  | political instability or armed conflict in oil or natural gas
    producing regions;                                                            
|
| |  | the level of consumer demand;                                                                                                                   
|
| |  | the proximity and capacity of oil and natural gas pipelines and
    other transportation facilities;                                            
|
| |  | refinery demands and customer preferences for different grades
    of crude oil;                                                                
|
| |  | weather conditions;                                                                                                                             
|
| |  | the price and availability of alternative fuels and
    technological advances affecting energy consumption;                                    
|
| |  | domestic and foreign governmental regulations and taxes;                                                                                        
|
| |  | domestic political developments; and                                                                                                            
|
| |  | worldwide economic conditions.                                                                                                                  







| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reserve estimates depend on many assumptions that may
    prove to be inaccurate. Any material inaccuracies in our reserve
    estimates or underlying assumptions could cause the quantities
    and net present value of our reserves to be overstated.





17



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##### Table of Contents







| |                                                                         
| | ------------------------------------------------------------------------
| | The results of high pressure air injection techniques are
    uncertain.





| |                                        
| | ---------------------------------------
| | We may be required to take write downs.





| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Our acquisition strategy subjects us to numerous risks
    that could adversely affect our results of operations.







| |   |                                               
| | - | ----------------------------------------------
| |  | recoverable reserves;                         
|
| |  | future oil and natural gas prices;            
|
| |  | operating costs; and                          
|
| |  | potential environmental and other liabilities.



18



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| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | 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 to our derivative instruments is unable to
    satisfy its obligations;                                                                                  
|
| |  | production is less than expected; or                                                                                                                                    
|
| |  | there is an adverse change in the expected differential between
    the underlying price in the derivative instrument and actual
    prices received for our production.





19



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Fluctuations
in the NYMEX price for oil or natural gas that do not coincide
with changes in our wellhead price may preclude the use of hedge
accounting and cause earnings volatility.


mark-to mark-to




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







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





| |                                                                
| | ---------------------------------------------------------------
| | Drilling oil and natural gas wells is a high-risk
    activity.





20



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##### Table of Contents





| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business involves many operating risks that can cause
    substantial losses; insurance may be unavailable or inadequate
    to protect us against these risks.





| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | fires;                                                                                                                                   
|
| |  | natural disasters;                                                                                                                       
|
| |  | explosions;                                                                                                                              
|
| |  | formations with abnormal pressures;                                                                                                      
|
| |  | blowouts;                                                                                                                                
|
| |  | collapses of wellbore, casing or other tubulars;                                                                                         
|
| |  | failure of oilfield drilling and service tools;                                                                                          
|
| |  | uncontrollable flows of oil, natural gas, formation water or
    drilling fluids;                                                        
|
| |  | pressure forcing oil or natural gas out of the wellbore at a
    dangerous velocity coupled with the potential for fire or
    explosion;
|
| |  | changes in below-ground pressure in a formation that causes
    surface collapse or cratering;                                           
|
| |  | pipeline ruptures or cement failures;                                                                                                    
|
| |  | environmental hazards, such as oil spills, natural gas leaks and
    discharges of toxic gases; and                                      
|
| |  | weather.                                                                                                                                 







| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | 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.



21



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##### Table of Contents







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







| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.



22



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

clean-up








| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have entered into, and may in the future enter into,
    long-term drilling and
    service contracts that may not be economical if oil and natural
    gas prices decline significantly.

long-term long-term long-term




| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could incur substantial additional indebtedness, which
    could negatively impact our financial condition, results of
    operations and business prospects and prevent us from fulfilling
    our obligations under our outstanding debt.

1 4 1 4


23



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##### Table of Contents









| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 the industry in which
    we operate.                                                              








|         |                          
|-------- | -------------------------
|Item 1B. | Unresolved Staff Comments








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings








|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



24



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##### Table of Contents






PART II







|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities



|                           |  |      |       |  |     |   |       | 
|-------------------------- |  | ---- | ----- |  | --- | - | ----- | 
|                           |  | High |       |  | Low |  
|                           |  |      |       |  |     |  
|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 | 
|2004                       |  |      |       |  |     |   |       | 
|Quarter ended December 31  |  | $    | 24.59 |  |     | $ | 20.37 | 
|Quarter ended September 30 |  |      | 23.17 |  |     |   | 16.99 | 
|Quarter ended June 30      |  |      | 21.00 |  |     |   | 16.54 | 
|Quarter ended March 31     |  |      | 19.23 |  |     |   | 15.77 | 



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     |       |              |       |        |                | $                |                    |                 |                    |                  |                   |   |  |  |  |  
|November(a) |       |              | 11,169 |        |                | $                | 33.56               |                 |                    |                  |                   |   |  |  |  |  
|December    |       |              |       |        |                | $                |                    |                 |                    |                  |                   |   |  |  |  |  
|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |  
|            | Total |              |        | 11,169 |                |                  | $                   | 33.56           |                    |                  |                    |  |  |  |   |  | 
|            |       |              |        |        |                |                  |                     |                 |                    |                  |                    |  






|    |                                                                                                                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | We do not have a formal common stock repurchase program. During
    the quarter ended December 31, 2005, 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




25



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data



|                                                         |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |         |  
|-------------------------------------------------------- | ---------------------------------------------------------------------------- | ----------------------- | ------- | -------- | ---- | - | ------- | -------- | - | - | ------- | -------- | - | ---- | ------- | -------- | - | - | ------- | ------- | -
|                                                         |                                                                              | Year Ended December 31, |        
|                                                         |                                                                              |                         |        
|                                                         |                                                                              | 2005                    |         |          | 2004 |   |         | 2003     |   |   | 2002    |          |   | 2001 |        
|                                                         |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Consolidated Statement of Operations Data:               |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|Revenues:(1)                                             |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Oil                                                                          |                         | $       | 307,959  |      |   | $       | 220,649  |   |   | $       | 176,351  |   |      | $       | 134,854  |   |   | $       | 105,768 |  
|                                                         | Natural gas                                                                  |                         |         | 149,365  |      |   |         | 77,884   |   |   |         | 43,745   |   |      |         | 25,838   |   |   |         | 30,149  |  
|                                                         |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Total revenues                                           |                                                                              | $                       | 457,324 |          |      | $ | 298,533 |          |   | $ | 220,096 |          |   | $    | 160,692 |          |   | $ | 135,917 |        
|                                                         |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Net income                                               |                                                                              | $                       | 103,425 | (4)      |      | $ | 82,147  |          |   | $ | 63,641  | (2)      |   | $    | 37,685  |          |   | $ | 16,179  | (3)    
|                                                         |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |        
|Net income per common share:(5)                          |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Basic                                                                        |                         | $       | 2.12     |      |   | $       | 1.74     |   |   | $       | 1.41     |   |      | $       | 0.84     |   |   | $       | 0.38    |  
|                                                         | Diluted                                                                      |                         |         | 2.09     |      |   |         | 1.72     |   |   |         | 1.40     |   |      |         | 0.83     |   |   |         | 0.38    |  
|Weighted average number of common shares outstanding:(5) |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Basic                                                                        |                         |         | 48,682   |      |   |         | 47,090   |   |   |         | 45,153   |   |      |         | 45,047   |   |   |         | 43,077  |  
|                                                         | Diluted                                                                      |                         |         | 49,522   |      |   |         | 47,738   |   |   |         | 45,500   |   |      |         | 45,242   |   |   |         | 43,085  |  
|Consolidated Statement of Cash Flows Data:               |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|Cash provided by (used in):                              |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Operating activities                                                         |                         | $       | 292,269  |      |   | $       | 171,821  |   |   | $       | 123,818  |   |      | $       | 91,509   |   |   | $       | 80,212  |  
|                                                         | Investing activities                                                         |                         |         | (573,560 | )    |   |         | (433,470 | ) |   |         | (153,747 | ) |      |         | (159,316 | ) |   |         | (89,583 | )
|                                                         | Financing activities                                                         |                         |         | 281,842  |      |   |         | 262,321  |   |   |         | 17,303   |   |      |         | 80,749   |   |   |         | 8,610   |  
|Production:                                              |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Oil (Bbls)                                                                   |                         |         | 6,871    |      |   |         | 6,679    |   |   |         | 6,601    |   |      |         | 6,037    |   |   |         | 4,935   |  
|                                                         | Natural gas (Mcf)                                                            |                         |         | 21,059   |      |   |         | 14,089   |   |   |         | 9,051    |   |      |         | 8,175    |   |   |         | 8,078   |  
|                                                         | Combined (BOE)                                                               |                         |         | 10,381   |      |   |         | 9,027    |   |   |         | 8,110    |   |      |         | 7,399    |   |   |         | 6,281   |  
|Average Sales Price:                                     |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Oil ($/Bbl)                                                                  |                         | $       | 44.82    |      |   | $       | 33.04    |   |   | $       | 26.72    |   |      | $       | 22.34    |   |   | $       | 21.43   |  
|                                                         | Natural gas ($/Mcf)                                                          |                         |         | 7.09     |      |   |         | 5.53     |   |   |         | 4.83     |   |      |         | 3.16     |   |   |         | 3.73    |  
|                                                         | Combined ($/BOE)                                                             |                         |         | 44.05    |      |   |         | 33.07    |   |   |         | 27.14    |   |      |         | 21.72    |   |   |         | 21.64   |  
|Cost per BOE:                                            |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Lease operations                                                             |                         | $       | 6.59     |      |   | $       | 5.22     |   |   | $       | 4.67     |   |      | $       | 4.15     |   |   | $       | 4.00    |  
|                                                         | Production, ad valorem, and severance taxes                                  |                         |         | 4.39     |      |   |         | 3.36     |   |   |         | 2.71     |   |      |         | 2.12     |   |   |         | 2.20    |  
|                                                         | Depletion, depreciation, and amortization                                    |                         |         | 8.25     |      |   |         | 5.38     |   |   |         | 4.13     |   |      |         | 4.67     |   |   |         | 5.05    |  
|                                                         | Exploration                                                                  |                         |         | 1.39     |      |   |         | 0.43     |   |   |         |         |   |      |         |         |   |   |         |        |  
|                                                         | General and administrative (excluding non-cash stock based
    compensation) |                         |         | 1.42     |      |   |         | 1.22     |   |   |         | 1.07     |   |      |         | 0.83     |   |   |         | 0.80    |  
|                                                         | Other operating expense                                                      |                         |         | 0.91     |      |   |         | 0.56     |   |   |         | 0.43     |   |      |         | 0.28     |   |   |         | 0.15    |  
|Reserves:                                                |                                                                              |                         |         |          |      |   |         |          |   |   |         |          |   |      |         |          |   |   |         |        
|                                                         | Oil (Bbls)                                                                   |                         |         | 148,387  |      |   |         | 134,048  |   |   |         | 117,732  |   |      |         | 111,674  |   |   |         | 91,369  |  
|                                                         | Natural gas (Mcf)                                                            |                         |         | 283,865  |      |   |         | 234,030  |   |   |         | 138,950  |   |      |         | 99,818   |   |   |         | 75,687  |  
|                                                         | Combined (BOE)                                                               |                         |         | 195,698  |      |   |         | 173,053  |   |   |         | 140,890  |   |      |         | 128,310  |   |   |         | 103,983 |  

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|                                 |                      |                    |   |           |      |  |   |           |   |  |      |         |   |      |   |         |  |  |   |         | 
|-------------------------------- | -------------------- | ------------------ | - | --------- | ---- |  | - | --------- | - |  | ---- | ------- | - | ---- | - | ------- |  |  | - | ------- | 
|                                 |                      | As of December 31, |  
|                                 |                      |                    |  
|                                 |                      | 2005               |   |           | 2004 |  |   | 2003      |   |  | 2002 |         |   | 2001 |  
|                                 |                      |                    |   |           |      |  |   |           |   |  |      |         |   |      |  
|Consolidated Balance Sheet Data: |                      |                    |   |           |      |  |   |           |   |  |      |         |   |      |   |         |  |  |   |        
|                                 | Working Capital      |                    | $ | (56,838   | )    |  | $ | (15,566   | ) |  | $    | (52     | ) |      | $ | 12,489  |  |  | $ | 1,107   | 
|                                 | Total assets         |                    |   | 1,705,705 |      |  |   | 1,123,400 |   |  |      | 672,138 |   |      |   | 549,896 |  |  |   | 402,000 | 
|                                 | Long-term debt       |                    |   | 673,189   |      |  |   | 379,000   |   |  |      | 179,000 |   |      |   | 166,000 |  |  |   | 79,107  | 
|                                 | Stockholders equity |                    |   | 546,781   |      |  |   | 473,575   |   |  |      | 358,975 |   |      |   | 296,266 |  |  |   | 269,302 | 






|    |                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For the years ended December 31, 2005, 2004, 2003, 2002,
    and 2001 we reduced revenue for the payments of the net profits
    interests by $21.2 million, $12.6 million,
    $5.8 million, $2.0 million, and $2.8 million,
    respectively.                                                                                                                        
|   
|(2) | Net income for the year ended December 31, 2003 includes
    $0.9 million income from the cumulative effect of
    accounting change, which affects its comparability with other
    periods presented.                                                                                                                                                                
|   
|(3) | Net income for the year ended December 31, 2001 includes
    $9.6 million of non-cash compensation expense,
    $4.3 million of bad debt expense, $1.6 million of
    impairment of oil and natural gas properties, and a
    $0.9 million charge for the cumulative effect of accounting
    change, which affects its comparability with other periods
    presented.
|   
|(4) | Net income for the year ended December 31, 2005 includes a
    $12.2 million charge for the early redemption of debt,
    which affects its comparability with other periods presented.                                                                                                                                                                                
|   
|(5) | 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 that occurred on
    July 12, 2005.                                                                                                                                              

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

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 elsewhere
in this Report. 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 the 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
beginning on page 58 and Item 1A. Risk
Factors beginning on page 16.


Introduction






| |   |                      
| | - | ---------------------
| |  | Overview of Business 
|
| |  | 2005 Highlights      
|
| |  | Results of Operations



| |   |                           
| | - | --------------------------
| |  | Comparison of 2005 to 2004
|
| |  | Comparison of 2004 to 2003



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

Overview of Business






| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Maintaining an active drilling and workover program;                                                     
|
| |  | Maximizing existing reserves and programs through high-pressure
    air injection;                       
|
| |  | Utilizing other improved recovery techniques to maximize
    existing reserves and production;           
|
| |  | Expanding our reserves, production, and drilling inventory
    through a disciplined acquisition program;
|
| |  | Exploring for reserves; and                                                                              
|
| |  | Operating in a cost effective, efficient, and safe manner.                                               

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##### Table of Contents











2005 Highlights






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Oil and natural gas reserves increased 13% to 195.7 MMBOE.
    During 2005, we added 33.0 MMBOE, replacing 318% of the
    10.4 MMBOE produced in 2005. See Business and
    Properties  General  Oil and Natural Gas
    Production and Reserves on page 3 for the calculation
    of our reserve replacement ratio. Oil reserves accounted for 76%
    of total proved reserves, and 71% of proved reserves are
    developed. The estimated pretax present value of our reserves
    increased by 65% to $2.7 billion (using a 10% discount rate
    and constant year end prices of $61.04 for oil and $9.44 for
    natural gas). The Standardized Measure at December 31, 2005
    is $1.9 billion. Standardized Measure differs from
    PV-10 by
    $760.5 million, because Standardized Measure includes the
    effect of asset retirement obligations and future income taxes.
|
| |  | During 2005, we had oil and natural gas revenues of
    $457.3 million. This represents a 53% increase over the
    $298.5 million of oil and natural gas revenues reported in
    2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | We reported net income of $103.4 million, or $2.09 per
    diluted share, in 2005. This represents an increase of
    $21.3 million, or $0.37 per diluted share, over net
    income reported in 2004. Net income for 2005 was reduced due to
    a one-time $19.5 million loss on early redemption of debt
    related to                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | redemption premiums and the expensing of unamortized debt
    issuance costs related to our
    83/8% senior
    subordinated notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Our realized average oil price for 2005, including the effects
    of hedging, increased $11.78 per Bbl to $44.82 per Bbl
    as compared to the 2004 average price of $33.04 per Bbl.
    Our realized average natural gas price for 2005, including the
    effects of hedging, increased $1.56 per Mcf to
    $7.09 per Mcf as compared to the 2004 average price of
    $5.53 per Mcf.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Production volumes for 2005 increased 15% to 10,381 MBOE
    (28,442 BOE per day), compared with 2004 production volumes of
    9,027 MBOE (24,665 BOE per day). The rise in production
    volumes was attributable to the continued success of our
    drilling program, uplift from our HPAI tertiary recovery project
    in the CCA, and acquisitions completed in 2004 and 2005. Oil
    represented 66% and 74% of our total production in 2005 and
    2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | On July 13, 2005, we issued $300.0 million of
    6% senior subordinated notes due 2015. We received net
    proceeds of approximately $294.5 million from the issuance
    and used approximately $165.9 million of the net proceeds
    to redeem all of the outstanding principal and related accrued
    interest of our
    83/8% senior
    subordinated notes. The remaining proceeds were used to reduce
    our indebtedness under our revolving credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | On November 23, 2005, we issued $150.0 million of
    71/4% senior
    subordinated notes due 2017. We received net proceeds of
    approximately $148.5 million and used substantially all of
    the proceeds to reduce our indebtedness under our revolving
    credit facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | We invested $571.3 million in oil and natural gas
    activities during 2005 (excluding development-related asset
    retirement obligations). We invested $325.6 million in
    development, exploitation, HPAI expansion, and exploration
    activities, which yielded 327 gross (210.6 net) wells,
    and $245.7 million in acquiring proved properties and
    undeveloped leases during 2005 (excluding asset retirement
    obligations). In October 2005, we completed the acquisition of
    Crusader Energy Corporation, a privately held, independent oil
    and natural gas company for a purchase price of approximately
    $109.7 million. In November 2005, we acquired oil and
    natural gas properties from Kerr-McGee Corporation for
    approximately $101.4 million. In September 2005, we
    acquired oil and natural gas properties in the Williston Basin
    for approximately $28.6 million.
|
| |  | During 2005, we improved our financial flexibility and liquidity
    by extending the maturity of our revolving credit facility to
    December 29, 2010 and increasing our borrowing base to
    $550.0 million. At December 31, 2005, we had
    $80.0 million outstanding under the revolving credit
    facility, $50.0 million in outstanding letters of credit,
    and available borrowing capacity of $420.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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Results of Operations




| |                           
| | --------------------------
| | Comparison of 2005 to 2004



Revenues and Production.


|                          |                      |                            |   |         |           |  |   |            |         |  |   |         |         |  |  |  |    |  
|------------------------- | -------------------- | -------------------------- | - | ------- | --------- |  | - | ---------- | ------- |  | - | ------- | ------- |  |  |  | -- | -
|                          |                      | Year Ended December 31,    |   |         |          
|                          |                      |                            |   |         | Increase/ | 
|                          |                      | 2005                       |   |         | 2004      |  |   | (Decrease) |        
|                          |                      |                            |   |         |           |  |   |            |        
|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 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 Revenues    |   | $       | 44.05     |  |   | $          | 33.07   |  |   | $       | 10.98   |  |  |  | 33 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|Total production volumes: |                      |                            |   |         |           |  |   |            |         |  |   |         |         |  |  | 
|                          |                      | Oil (Bbls)                 |   |         | 6,871     |  |   |            | 6,679   |  |   |         | 192     |  |  |  | 3  | %
|                          |                      | Natural gas (Mcf)          |   |         | 21,059    |  |   |            | 14,089  |  |   |         | 6,970   |  |  |  | 50 | %
|                          |                      | Combined (BOE)             |   |         | 10,381    |  |   |            | 9,027   |  |   |         | 1,354   |  |  |  | 15 | %
|Daily production volumes: |                      |                            |   |         |           |  |   |            |         |  |   |         |         |  |  | 
|                          |                      | Oil (Bbls/day)             |   |         | 18,826    |  |   |            | 18,249  |  |   |         | 577     |  |  |  | 3  | %
|                          |                      | Natural gas (Mcf/day)      |   |         | 57,696    |  |   |            | 38,493  |  |   |         | 19,203  |  |  |  | 50 | %
|                          |                      | Combined (BOE/day)         |   |         | 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    | %
|                             |                                          |              |       |       |      |  



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##### Table of Contents







Expenses.


|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |         |         |        |  |    |    |   | 
|------------------------ | ----------------------------------------- | ---------------------------------------------------------------------------- | ------- | ------- | --------- | - | ------- | ---------- | ------ | - | ------- | ------- | ------ |  | -- | -- | - | 
|                         |                                           | Year Ended December 31,                                                      |         |         |          
|                         |                                           |                                                                              |         |         | Increase/ |  
|                         |                                           | 2005                                                                         |         |         | 2004      |   |         | (Decrease) |       
|                         |                                           |                                                                              |         |         |           |   |         |            |       
|Expenses (in thousands): |                                           |                                                                              |         |         |           |   |         |            |        |   |         |         |        |  |    |   
|                         | Production                               |                                                                              |         |         |           |   |         |            |        |   |         |         |        |  |    |    |  
|                         |                                           | Lease operations                                                             |         | $       | 68,395    |   |         | $          | 47,142 |   |         | $       | 21,253 |  |    |    |   | 
|                         |                                           | Production, ad valorem, and severance taxes                                  |         |         | 45,601    |   |         |            | 30,313 |   |         |         | 15,288 |  |    |    |   | 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |         |        
|                         | Total production expenses                 |                                                                              |         | 113,996 |           |   |         | 77,455     |        |   |         | 36,541  |        |  |    | 47 | %
|                         | Other                                    |                                                                              |         |         |           |   |         |            |        |   |         |         |        |  |    |    |  
|                         |                                           | Depletion, depreciation, and amortization                                    |         |         | 85,627    |   |         |            | 48,522 |   |         |         | 37,105 |  |    |    |   | 
|                         |                                           | Exploration                                                                  |         |         | 14,402    |   |         |            | 3,907  |   |         |         | 10,495 |  |    |    |   | 
|                         |                                           | General and administrative (excluding non-cash stock based
    compensation) |         |         | 14,696    |   |         |            | 10,982 |   |         |         | 3,714  |  |    |    |   | 
|                         |                                           | Non-cash stock based compensation                                            |         |         | 3,962     |   |         |            | 1,770  |   |         |         | 2,192  |  |    |    |   | 
|                         |                                           | 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                                                             |       | $     | 6.59      |   |       | $          | 5.22 |   |       | $    | 1.37  |   |    |    |   | 
|                    |                                           | Production, ad valorem, and severance taxes                                  |       |       | 4.39      |   |       |            | 3.36 |   |       |      | 1.03  |   |    |    |   | 
|                    |                                           |                                                                              |       |       |           |   |       |            |      |   |       |     
|                    | Total production expenses                 |                                                                              |       | 10.98 |           |   |       | 8.58       |      |   |       | 2.40 |       |   |    | 28 | %
|                    | Other                                    |                                                                              |       |       |           |   |       |            |      |   |       |      |       |   |    |    |  
|                    |                                           | Depletion, depreciation, and amortization                                    |       |       | 8.25      |   |       |            | 5.38 |   |       |      | 2.87  |   |    |    |   | 
|                    |                                           | Exploration                                                                  |       |       | 1.39      |   |       |            | 0.43 |   |       |      | 0.96  |   |    |    |   | 
|                    |                                           | General and administrative (excluding non-cash stock based
    compensation) |       |       | 1.42      |   |       |            | 1.22 |   |       |      | 0.20  |   |    |    |   | 
|                    |                                           | Non-cash stock based compensation                                            |       |       | 0.38      |   |       |            | 0.20 |   |       |      | 0.18  |   |    |    |   | 
|                    |                                           | 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 (Lease operations and production, ad
valorem, and severance taxes).








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




Exploration expense.


|                      |                                |              |   |       |           |  |   |            |       |  |   |       |        | 
|--------------------- | ------------------------------ | ------------ | - | ----- | --------- |  | - | ---------- | ----- |  | - | ----- | ------ | 
|                      |                                | Year Ended   |   |       |          
|                      |                                | December 31, |   |       |          
|                      |                                |              |   |       | Increase/ | 
|                      |                                | 2005         |   |       | 2004      |  |   | (Decrease) |      
|                      |                                |              |   |       |           |  |   |            |      
|Exploration expenses: |                                |              |   |       |           |  |   |            |       |  |   |      
|                      | Dry hole                       |              | $ | 8,632 |           |  | $ | 2,050      |       |  | $ | 6,582 |       
|                      | Geological and geophysical     |              |   | 1,247 |           |  |   | 425        |       |  |   | 822   |       
|                      | Seismic                        |              |   | 1,849 |           |  |   | 553        |       |  |   | 1,296 |       
|                      | Delay rentals                  |              |   | 635   |           |  |   | 204        |       |  |   | 431   |       
|                      | Impairment of unproved acreage |              |   | 2,039 |           |  |   | 675        |       |  |   | 1,364 |       
|                      |                                |              |   |       |           |  |   |            |      
|                      |                                | Total        |   | $     | 14,402    |  |   | $          | 3,907 |  |   | $     | 10,495 | 
|                      |                                |              |   |       |           |  |   |            |      





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General and administrative (G&A) expense.




Non-cash stock based compensation expense.




|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       |  |        |        |  |  |         |         | 
|------------- | ----- | --------------- | ------ | ------- | ---- |  | ------ | ------- |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------- | ------- | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2006            |        |         | 2007 |  |        | 2008    |  |  | 2009   |        |  | 2010 |        |        | Total | 
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 52,694 |         |      |  | 52,693 |         |  |  |       |        |  |      |       |        |       |  |       |        |  |  | 105,387 |        
|2003          |       |                 | 19,569 |         |      |  | 19,522 |         |  |  | 19,522 |        |  |      |       |        |       |  |       |        |  |  | 58,613  |        
|2004          |       |                 | 28,462 |         |      |  | 33,362 |         |  |  | 4,899  |        |  |      | 4,898  |        |       |  |       |        |  |  | 71,621  |        
|2005          |       |                 | 5,511  |         |      |  | 5,511  |         |  |  | 42,367 |        |  |      | 36,793 |        |       |  | 36,793 |        |  |  | 126,975 |        
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 106,236 |      |  |        | 111,088 |  |  |        | 66,788 |  |      |        | 41,691 |       |  |        | 36,793 |  |  |         | 362,596 | 
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 



|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       |  |        |        |  |  |         |         | 
|------------- | ----- | --------------- | - | - | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------- | ------- | 
|              |       | Year of Vesting |  
|              |       |                 |  
|Year of Grant |       | 2006            |   |   | 2007 |  |        | 2008   |  |  | 2009   |        |  | 2010 |        |        | Total | 
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2004          |       |                 |  |   |      |  | 25,832 |        |  |  | 25,828 |        |  |      | 25,828 |        |       |  |       |        |  |  | 77,488  |        
|2005          |       |                 |  |   |      |  |       |        |  |  | 47,730 |        |  |      | 47,730 |        |       |  | 47,730 |        |  |  | 143,190 |        
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |   |  |      |  |        | 25,832 |  |  |        | 73,558 |  |      |        | 73,558 |       |  |        | 47,730 |  |  |         | 220,678 | 
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 

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|                        |       |              |       |       | 
|----------------------- | ----- | ------------ | ----- | ----- | 
|                        |       | Estimated    |      
|                        |       | Amortization |      
|Year Ended December 31, |       | Expense      |      
|                        |       |              |      
|2006                    |       | $            | 3,835 |      
|2007                    |       |              | 2,918 |      
|2008                    |       |              | 1,567 |      
|2009                    |       |              | 617   |      
|2010                    |       |              | 70    |      
|                        |       |              |      
|                        | Total |              | $     | 9,007 | 
|                        |       |              |      





Derivative fair value loss. mark-to fixed-to mark-to fixed-to


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

fixed-to


37



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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) | 
|                                             |       |              |       |        |           |   |        |            | 
|83/8 senior
    subordinated notes due 2012  |       | $            | 7,852 |        |           | $ | 12,563 |            |  | $ | (4,711 | )     
|61/4% senior
    subordinated notes due 2014 |       |              | 9,375 |        |           |   | 7,005  |            |  |   | 2,370  |       
|6% senior subordinated notes due 2015        |       |              | 8,437 |        |           |   |       |            |  |   | 8,437  |       
|71/4% senior
    subordinated notes due 2017 |       |              | 1,145 |        |           |   |       |            |  |   | 1,145  |       
|Revolving credit facility                    |       |              | 4,554 |        |           |   | 1,565  |            |  |   | 2,989  |       
|Letters of credit                            |       |              | 615   |        |           |   | 170    |            |  |   | 445    |       
|Interest rate hedges                         |       |              | 42    |        |           |   | 546    |            |  |   | (504   | )     
|Debt issuance costs amortization             |       |              | 979   |        |           |   | 969    |            |  |   | 10     |       
|Banking fees and other                       |       |              | 847   |        |           |   | 641    |            |  |   | 206    |       
|Debt discount amortization                   |       |              | 209   |        |           |   |       |            |  |   | 209    |       
|                                             |       |              |       |        |           |   |        |            | 
|                                             | Total |              | $     | 34,055 |           |   | $      | 23,459     |  |   | $      | 10,596 | 
|                                             |       |              |       |        |           |   |        |            | 



38



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Income taxes.






39



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| |                           
| | --------------------------
| | Comparison of 2004 to 2003



Revenues and Production.


|                          |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  |  |    |  
|------------------------- | -------------------- | -------------------------- | - | ------- | --------- |  | - | ---------- | ------- |  | - | ------- | ------ |  |  |  | -- | -
|                          |                      | Year Ended                 |   |         |           |  |  
|                          |                      | December 31,               |   |         |          
|                          |                      |                            |   |         | Increase/ | 
|                          |                      | 2004                       |   |         | 2003      |  |   | (Decrease) |        
|                          |                      |                            |   |         |           |  |   |            |        
|Revenues:                 |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  | 
|                          | Oil wellhead         |                            | $ | 255,394 |           |  | $ | 190,203    |         |  | $ | 65,191  |        |  |  |  |   
|                          | Oil hedges           |                            |   | (34,745 | )         |  |   | (13,852    | )       |  |   | (20,893 | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Oil Revenues         |   | $       | 220,649   |  |   | $          | 176,351 |  |   | $       | 44,298 |  |  |  | 25 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          | Natural gas wellhead |                            | $ | 81,112  |           |  | $ | 45,218     |         |  | $ | 35,894  |        |  |  |  |   
|                          | Natural gas hedges   |                            |   | (3,228  | )         |  |   | (1,473     | )       |  |   | (1,755  | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Natural Gas Revenues |   | $       | 77,884    |  |   | $          | 43,745  |  |   | $       | 34,139 |  |  |  | 78 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          | Combined wellhead    |                            | $ | 336,506 |           |  | $ | 235,421    |         |  | $ | 101,085 |        |  |  |  |   
|                          | Combined hedges      |                            |   | (37,973 | )         |  |   | (15,325    | )       |  |   | (22,648 | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Combined Revenues    |   | $       | 298,533   |  |   | $          | 220,096 |  |   | $       | 78,437 |  |  |  | 36 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|Revenues ($/Unit):        |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  | 
|                          | Oil wellhead         |                            | $ | 38.24   |           |  | $ | 28.82      |         |  | $ | 9.42    |        |  |  |  |   
|                          | Oil hedges           |                            |   | (5.20   | )         |  |   | (2.10      | )       |  |   | (3.10   | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Oil Revenues         |   | $       | 33.04     |  |   | $          | 26.72   |  |   | $       | 6.32   |  |  |  | 24 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          | Natural gas wellhead |                            | $ | 5.76    |           |  | $ | 5.00       |         |  | $ | 0.76    |        |  |  |  |   
|                          | Natural gas hedges   |                            |   | (0.23   | )         |  |   | (0.17      | )       |  |   | (0.06   | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Natural Gas Revenues |   | $       | 5.53      |  |   | $          | 4.83    |  |   | $       | 0.70   |  |  |  | 14 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          | Combined wellhead    |                            | $ | 37.28   |           |  | $ | 29.03      |         |  | $ | 8.25    |        |  |  |  |   
|                          | Combined hedges      |                            |   | (4.21   | )         |  |   | (1.89      | )       |  |   | (2.32   | )      |  |  |  |   
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|                          |                      | Total Combined Revenues    |   | $       | 33.07     |  |   | $          | 27.14   |  |   | $       | 5.93   |  |  |  | 22 | %
|                          |                      |                            |   |         |           |  |   |            |         |  |   |        
|Total production volumes: |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  | 
|                          |                      | Oil (Bbls)                 |   |         | 6,679     |  |   |            | 6,601   |  |   |         | 78     |  |  |  | 1  | %
|                          |                      | Natural gas (Mcf)          |   |         | 14,089    |  |   |            | 9,051   |  |   |         | 5,038  |  |  |  | 56 | %
|                          |                      | Combined (BOE)             |   |         | 9,027     |  |   |            | 8,110   |  |   |         | 917    |  |  |  | 11 | %
|Daily production volumes: |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  | 
|                          |                      | Oil (Bbls/day)             |   |         | 18,249    |  |   |            | 18,085  |  |   |         | 164    |  |  |  | 1  | %
|                          |                      | Natural gas (Mcf/day)      |   |         | 38,493    |  |   |            | 24,798  |  |   |         | 13,695 |  |  |  | 55 | %
|                          |                      | Combined (BOE/day)         |   |         | 24,665    |  |   |            | 22,218  |  |   |         | 2,447  |  |  |  | 11 | %
|Average NYMEX Prices:     |                      |                            |   |         |           |  |   |            |         |  |   |         |        |  |  | 
|                          |                      | Oil (per Bbl)              |   | $       | 41.26     |  |   | $          | 31.04   |  |   | $       | 10.22  |  |  |  | 33 | %
|                          |                      | Natural gas (per Mcf)      |   |         | 6.11      |  |   |            | 5.50    |  |   |         | 0.61   |  |  |  | 11 | %



40



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|                         |                                          |              |       |       |      |   |       |       |  
|------------------------ | ---------------------------------------- | ------------ | ----- | ----- | ---- | - | ----- | ----- | -
|                         |                                          | Year Ended   |      
|                         |                                          | December 31, |      
|                         |                                          |              |      
|                         |                                          | 2004         |       |       | 2003 |  
|                         |                                          |              |       |       |      |  
|Oil wellhead ($/Bbl)     |                                          | $            | 38.24 |       |      | $ | 28.82 |      
|Average NYMEX ($/Bbl)    |                                          | $            | 41.26 |       |      | $ | 31.04 |      
|                         | Differential to NYMEX                    |              | $     | (3.02 | )    |   | $     | (2.22 | )
|                         | Oil wellhead to NYMEX percentage         |              |       | 93    | %    |   |       | 93    | %
|                         |                                          |              |       |       |      |  
|Natural gas well ($/Mcf) |                                          | $            | 5.76  |       |      | $ | 5.00  |      
|Average NYMEX ($/Mcf)    |                                          | $            | 6.11  |       |      | $ | 5.50  |      
|                         | Differential to NYMEX                    |              | $     | (0.35 | )    |   | $     | (0.50 | )
|                         | Natural gas wellhead to NYMEX percentage |              |       | 94    | %    |   |       | 91    | %
|                         |                                          |              |       |       |      |  



41



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##### Table of Contents



Expenses.


|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |    |   | 
|------------------------ | ----------------------------------------- | ---------------------------------------------------------------------------- | ------- | ------- | --------- | - | ------- | ---------- | ------ | - | ------ | ------ | ------ |  | -- | -- | - | 
|                         |                                           | Year Ended                                                                   |         |         |           |   |        
|                         |                                           | December 31,                                                                 |         |         |          
|                         |                                           |                                                                              |         |         | Increase/ |  
|                         |                                           | 2004                                                                         |         |         | 2003      |   |         | (Decrease) |       
|                         |                                           |                                                                              |         |         |           |   |         |            |       
|Expenses (in thousands): |                                           |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |   
|                         | Production                               |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |    |  
|                         |                                           | Lease operations                                                             |         | $       | 47,142    |   |         | $          | 37,846 |   |        | $      | 9,296  |  |    |    |   | 
|                         |                                           | Production, ad valorem, and severance taxes                                  |         |         | 30,313    |   |         |            | 22,013 |   |        |        | 8,300  |  |    |    |   | 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|                         | Total production expenses                 |                                                                              |         | 77,455  |           |   |         | 59,859     |        |   |        | 17,596 |        |  |    | 29 | %
|                         | Other                                    |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |    |  
|                         |                                           | Depletion, depreciation, and amortization                                    |         |         | 48,522    |   |         |            | 33,530 |   |        |        | 14,992 |  |    |    |   | 
|                         |                                           | Exploration                                                                  |         |         | 3,907     |   |         |            |       |   |        |        | 3,907  |  |    |    |   | 
|                         |                                           | General and administrative (excluding non-cash stock based
    compensation) |         |         | 10,982    |   |         |            | 8,680  |   |        |        | 2,302  |  |    |    |   | 
|                         |                                           | Non-cash stock based compensation                                            |         |         | 1,770     |   |         |            | 614    |   |        |        | 1,156  |  |    |    |   | 
|                         |                                           | Derivative fair value (gain) loss                                            |         |         | 5,011     |   |         |            | (885   | ) |        |        | 5,896  |  |    |    |   | 
|                         |                                           | Other operating                                                              |         |         | 5,028     |   |         |            | 3,481  |   |        |        | 1,547  |  |    |    |   | 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|                         | Total operating                           |                                                                              |         | 152,675 |           |   |         | 105,279    |        |   |        | 47,396 |        |  |    | 45 | %
|                         | Interest                                  |                                                                              |         | 23,459  |           |   |         | 16,151     |        |   |        | 7,308  |        |  |    |    |  
|                         | Current and deferred income tax provision |                                                                              |         | 40,492  |           |   |         | 36,102     |        |   |        | 4,390  |        |  |    |    |  
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|Total expenses           |                                           | $                                                                            | 216,626 |         |           | $ | 157,532 |            |        | $ | 59,094 |        |        |  | 38 | % 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|Expenses (per BOE):      |                                           |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |   
|                         | Production                               |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |    |  
|                         |                                           | Lease operations                                                             |         | $       | 5.22      |   |         | $          | 4.67   |   |        | $      | 0.55   |  |    |    |   | 
|                         |                                           | Production, ad valorem, and severance taxes                                  |         |         | 3.36      |   |         |            | 2.71   |   |        |        | 0.65   |  |    |    |   | 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|                         | Total production expenses                 |                                                                              |         | 8.58    |           |   |         | 7.38       |        |   |        | 1.20   |        |  |    | 16 | %
|                         | Other                                    |                                                                              |         |         |           |   |         |            |        |   |        |        |        |  |    |    |  
|                         |                                           | Depletion, depreciation, and amortization                                    |         |         | 5.38      |   |         |            | 4.13   |   |        |        | 1.25   |  |    |    |   | 
|                         |                                           | Exploration                                                                  |         |         | 0.43      |   |         |            |       |   |        |        | 0.43   |  |    |    |   | 
|                         |                                           | General and administrative (excluding non-cash stock based
    compensation) |         |         | 1.22      |   |         |            | 1.07   |   |        |        | 0.15   |  |    |    |   | 
|                         |                                           | Non-cash stock based compensation                                            |         |         | 0.20      |   |         |            | 0.08   |   |        |        | 0.12   |  |    |    |   | 
|                         |                                           | Derivative fair value (gain) loss                                            |         |         | 0.56      |   |         |            | (0.11  | ) |        |        | 0.67   |  |    |    |   | 
|                         |                                           | Other operating                                                              |         |         | 0.56      |   |         |            | 0.43   |   |        |        | 0.13   |  |    |    |   | 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|                         | Total operating                           |                                                                              |         | 16.93   |           |   |         | 12.98      |        |   |        | 3.95   |        |  |    | 30 | %
|                         | Interest                                  |                                                                              |         | 2.60    |           |   |         | 1.99       |        |   |        | 0.61   |        |  |    |    |  
|                         | Current and deferred income tax provision |                                                                              |         | 4.49    |           |   |         | 4.45       |        |   |        | 0.04   |        |  |    |    |  
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       
|Total expenses           |                                           | $                                                                            | 24.02   |         |           | $ | 19.42   |            |        | $ | 4.60   |        |        |  | 24 | % 
|                         |                                           |                                                                              |         |         |           |   |         |            |        |   |        |       

Production expenses (Lease operations and production, ad
valorem, and severance taxes).


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


Exploration expense.


General and administrative (G&A) expense.


Non-cash stock based compensation expense.




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Derivative fair value (gain) loss. mark-to mark-to


|                                   |                                                  |                                         |   |       |           |  |   |            |      |   |   |       |       | 
|---------------------------------- | ------------------------------------------------ | --------------------------------------- | - | ----- | --------- |  | - | ---------- | ---- | - | - | ----- | ----- | 
|                                   |                                                  | Year Ended                              |   |       |          
|                                   |                                                  | December 31,                            |   |       |          
|                                   |                                                  |                                         |   |       | Increase/ | 
|                                   |                                                  | 2004                                    |   |       | 2003      |  |   | (Decrease) |     
|                                   |                                                  |                                         |   |       |           |  |   |            |     
|Designated cash flow hedges:       |                                                  |                                         |   |       |           |  |   |            |      |   |   |      
|                                   | Ineffectiveness  Commodity contracts            |                                         | $ | 5,018 |           |  | $ | 818        |      |   | $ | 4,200 |      
|Undesignated derivative contracts: |                                                  |                                         |   |       |           |  |   |            |      |   |   |      
|                                   | Mark-to-market (gain) loss  Interest rate swap  |                                         |   | 272   |           |  |   | (2,098     | )    |   |   | 2,370 |      
|                                   | Mark-to-market (gain) loss  Commodity contracts |                                         |   | (279  | )         |  |   | 395        |      |   |   | (674  | )    
|                                   |                                                  |                                         |   |       |           |  |   |            |     
|                                   |                                                  | Total derivative fair value (gain) loss |   | $     | 5,011     |  |   | $          | (885 | ) |   | $     | 5,896 | 
|                                   |                                                  |                                         |   |       |           |  |   |            |     

3 8


Other operating expense.


Interest expense. 1 4




|                                             |       |              |        |        |           |   |        |            |  |   |        |       | 
|-------------------------------------------- | ----- | ------------ | ------ | ------ | --------- | - | ------ | ---------- |  | - | ------ | ----- | 
|                                             |       | Year Ended   |        |        |          
|                                             |       | December 31, |        |        |          
|                                             |       |              |        |        | Increase/ |  
|                                             |       | 2004         |        |        | 2003      |   |        | (Decrease) | 
|                                             |       |              |        |        |           |   |        |            | 
|83/8% senior
    subordinated notes due 2012 |       | $            | 12,563 |        |           | $ | 12,563 |            |  | $ |       |      
|61/4% senior
    subordinated notes due 2014 |       |              | 7,005  |        |           |   |       |            |  |   | 7,005  |      
|Revolving credit facility                    |       |              | 1,565  |        |           |   | 453    |            |  |   | 1,112  |      
|Interest rate hedges                         |       |              | 546    |        |           |   | 1,910  |            |  |   | (1,364 | )    
|Debt issuance costs amortization             |       |              | 969    |        |           |   | 714    |            |  |   | 255    |      
|Banking fees and other                       |       |              | 811    |        |           |   | 511    |            |  |   | 300    |      
|                                             |       |              |        |        |           |   |        |            | 
|                                             | Total |              | $      | 23,459 |           |   | $      | 16,151     |  |   | $      | 7,308 | 
|                                             |       |              |        |        |           |   |        |            | 

Income tax expense.


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Capital Resources






| |   |                                     
| | - | ------------------------------------
| |  | Cash flows from operating activities
|
| |  | Cash flows from financing activities
|
| |  | Current capitalization              

Cash flows from operating activities.




Cash flows from financing activities.


3 8


1 4




1 4


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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 costs               
|
| |  | Other general property and equipment                                                         
|
| |  | Funding of necessary working capital                                                         
|
| |  | Payment of contractual obligations                                                           



|                               |                                            |       |   |         |         | 
|------------------------------ | ------------------------------------------ | ----- | - | ------- | ------- | 
|                               |                                            | 2006  |  
|                               |                                            |       |  
|Budgeted Capital Expenditures: |                                            |       |   |        
|                               | Development, exploitation, and exploration |       | $ | 270,000 |        
|                               | HPAI                                       |       |   | 32,000  |        
|                               | Leasehold acreage acquisition and other    |       |   | 18,000  |        
|                               |                                            |       |  
|                               |                                            | Total |   | $       | 320,000 | 
|                               |                                            |       |  



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Development, exploitation, and exploration of existing
properties.


|                             |       |                         |         |         |      |   |         |         |  |   |        |        | 
|---------------------------- | ----- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                             |       | Year Ended December 31, |        
|                             |       |                         |        
|                             |       | 2005                    |         |         | 2004 |   |         | 2003    | 
|                             |       |                         |         |         |      |   |         |         | 
|Development and exploitation |       | $                       | 236,467 |         |      | $ | 117,464 |         |  | $ | 86,078 |       
|HPAI                         |       |                         | 32,053  |         |      |   | 39,628  |         |  |   | 12,899 |       
|Exploration                  |       |                         | 57,046  |         |      |   | 30,546  |         |  |   |       |       
|                             |       |                         |         |         |      |   |         |         | 
|                             | Total |                         | $       | 325,566 |      |   | $       | 187,638 |  |   | $      | 98,977 | 
|                             |       |                         |         |         |      |   |         |         | 

Development and exploitation.




Exploration.




High-pressure air injection.






Acquisitions, Leasehold and Acreage Costs.


|                        |       |                         |         |         |      |   |         |         |  |   |        |        | 
|----------------------- | ----- | ----------------------- | ------- | ------- | ---- | - | ------- | ------- |  | - | ------ | ------ | 
|                        |       | Year Ended December 31, |        
|                        |       |                         |        
|                        |       | 2005                    |         |         | 2004 |   |         | 2003    | 
|                        |       |                         |         |         |      |   |         |         | 
|Acquisitions            |       | $                       | 224,469 |         |      | $ | 204,907 |         |  | $ | 54,484 |       
|Leasehold acreage costs |       |                         | 21,205  |         |      |   | 33,926  |         |  |   | 117    |       
|                        |       |                         |         |         |      |   |         |         | 
|                        | Total |                         | $       | 245,674 |      |   | $       | 238,833 |  |   | $      | 54,601 | 
|                        |       |                         |         |         |      |   |         |         | 

47



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2005 Acquisitions.


Levelland-Slaughter,






2004 Acquisitions.




Leasehold acreage costs.






Other General Property and Equipment.




Funding of necessary working capital.


48



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Contractual Obligations.


|                                        |       |                        |         |           |      |   |        |             |  |   |             |         |  |            |        |         |  |   |         |         | 
|--------------------------------------- | ----- | ---------------------- | ------- | --------- | ---- | - | ------ | ----------- |  | - | ----------- | ------- |  | ---------- | ------ | ------- |  | - | ------- | ------- | 
|                                        |       | Payments Due by Period |        
|                                        |       |                        |        
|Contractual Obligations and Commitments |       | Total                  |         |           | 2006 |   |        | 2007 - 2008 |  |   | 2009 - 2010 |         |  | Thereafter |       
|                                        |       |                        |         |           |      |   |        |             |  |   |             |         |  |            |       
|61/4% notes(a)                          |       | $                      | 229,675 |           |      | $ | 9,375  |             |  | $ | 18,750      |         |  | $          | 18,750 |         |  | $ | 182,800 |        
|6% notes(a)                             |       |                        | 480,000 |           |      |   | 18,000 |             |  |   | 36,000      |         |  |            | 36,000 |         |  |   | 390,000 |        
|71/4% notes(a)                          |       |                        | 280,500 |           |      |   | 10,875 |             |  |   | 21,750      |         |  |            | 21,750 |         |  |   | 226,125 |        
|Revolving credit facility(a)            |       |                        | 105,760 |           |      |   | 5,152  |             |  |   | 10,304      |         |  |            | 90,304 |         |  |   |        |        
|Derivative obligations(b)               |       |                        | 140,625 |           |      |   | 74,063 |             |  |   | 66,562      |         |  |            |       |         |  |   |        |        
|Development commitments(c)(f)           |       |                        | 41,706  |           |      |   | 41,106 |             |  |   | 600         |         |  |            |       |         |  |   |        |        
|Operating leases(d)                     |       |                        | 11,716  |           |      |   | 1,918  |             |  |   | 3,007       |         |  |            | 2,755  |         |  |   | 4,036   |        
|Asset retirement obligations(e)         |       |                        | 118,078 |           |      |   | 582    |             |  |   | 1,165       |         |  |            | 1,165  |         |  |   | 115,166 |        
|                                        |       |                        |         |           |      |   |        |             |  |   |             |         |  |            |       
|                                        | Total |                        | $       | 1,408,060 |      |   | $      | 161,071     |  |   | $           | 158,138 |  |            | $      | 170,724 |  |   | $       | 918,127 | 
|                                        |       |                        |         |           |      |   |        |             |  |   |             |         |  |            |       






|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | Amounts included in the table above include both principal and
    projected interest payments. See information presented in
    Note 8. Long-Term Debt to the accompanying
    consolidated financial statements for additional information
    regarding our long-term debt.                                                                                                                                                                                                                                                               
|   
|(b) |  | Derivative obligations represent liabilities for derivatives
    that were valued as of December 31, 2005. The ultimate
    settlement amounts of the remaining portions of our derivative
    obligations are unknown because they are subject to continuing
    market risk. See Item 7A. Quantitative and
    Qualitative Disclosures about Market Risk and
    Note 13. Financial Instruments to the
    accompanying consolidated financial statements for additional
    information regarding our derivative obligations.           
|   
|(c) |  | Development commitments represent authorized purchases,
    $40.4 million of which represents work in process and is
    accrued at December 31, 2005. At December 31, 2005, we
    had $237.3 million of authorized purchases not placed to
    vendors (authorized AFEs) which were not accrued at year-end,
    but are budgeted for and expected to be made during 2006 unless
    circumstances change. Development commitments in the above table
    also include future minimum payments for electricity and seismic
    data analysis.
|   
|(d) |  | Operating leases represent office space and equipment
    obligations that have remaining non-cancelable lease terms in
    excess of one year. See Note 4. Commitments and
    Contingencies to the accompanying consolidated financial
    statements 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. See                                                                                                                                                                                                                                                                                                                            

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|    |  |                                                                                                                                                                            
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  | Note 5. Asset Retirement Obligations to the
    accompanying consolidated financial statements for additional
    information regarding our asset retirement obligations.
|   
|(f) |  | Subsequent to December 31, 2005, we entered into drilling
    rig commitments that require total payments of approximately
    $116 million over a two year period.        

Other Contingencies and Commitments. unit-of






Letters of Credit. mark-to mark-to


Liquidity




Internally generated cash flows.


50



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Revolving credit facility.






|                                             |  |                     |                |  |                    |  |                    | 
|-------------------------------------------- |  | ------------------- | -------------- |  | ------------------ |  | ------------------ | 
|Ratio of Total Outstanding 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 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 as selected by Encore, subject to availability at each
    lender).



|    |  |                                                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) |  | The Base Rate is calculated as the highest of (1) the
    annual rate of interest announced by Bank of America, N.A. as
    its prime rate and (2) the federal funds
    effective rate plus 0.5%.





1 4 1 4


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1 4 1 4




Off-Balance Sheet Arrangements




Inflation and Changes in Prices




|                                  |  |         |       |  |             |   |      |          |  |   |       | 
|--------------------------------- |  | ------- | ----- |  | ----------- | - | ---- | -------- |  | - | ----- | 
|                                  |  | Oil     |       |  | Natural Gas |   |      | Combined | 
|                                  |  | ($/Bbl) |       |  | ($/Mcf)     |   |      | ($/BOE)  | 
|                                  |  |         |       |  |             |   |      |          | 
|Net Price Realization with Hedges |  |         |       |  |             |   |      |          |  |   |       | 
|Year ended December 31, 2005      |  | $       | 44.82 |  |             | $ | 7.09 |          |  | $ | 44.05 | 
|Year ended December 31, 2004      |  |         | 33.04 |  |             |   | 5.53 |          |  |   | 33.07 | 
|Year ended December 31, 2003      |  |         | 26.72 |  |             |   | 4.83 |          |  |   | 27.14 | 
|Average Wellhead Price            |  |         |       |  |             |   |      |          |  |   |       | 
|Year ended December 31, 2005      |  | $       | 51.06 |  |             | $ | 7.87 |          |  | $ | 49.76 | 
|Year ended December 31, 2004      |  |         | 38.24 |  |             |   | 5.76 |          |  |   | 37.28 | 
|Year ended December 31, 2003      |  |         | 28.82 |  |             |   | 5.00 |          |  |   | 29.03 | 



Critical Accounting Policies and Estimates




52



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##### Table of Contents



Oil and Natural Gas Properties


Successful efforts method.




unit-of


Unproved Properties.


Oil and Natural Gas Reserves.


53



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##### Table of Contents



Impairment.


Asset Retirement Obligations. Accounting for Asset Retirement Obligations.




Depletion, Depreciation, and Amortization
(DD&A).


Goodwill






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Net Profits Interests




Revenue Recognition




Income Taxes


Section 43 Credits.




| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. The project involves the application of one or more
    qualified tertiary recovery methods that is reasonably expected
    to result in more than an insignificant increase in the amount
    of oil that ultimately will be recovered;
|
| | 2. The project is located within the United States;                                                                                                                                                                                        
|
| | 3. The first injection of liquids, gases, or other matter
    for the project occurs after December 31, 1990; and                                                                                                                          

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| |                                                     
| | ----------------------------------------------------
| | 4. The project is certified by a petroleum engineer.





| |                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Tangible Property. Any amount paid for tangible
    property that is an integral part of a qualified enhanced oil
    recovery project, and with respect to which depreciation is
    allowable.   
|
| | 2. Intangible Drilling and Development Costs.
    Intangible drilling cost with respect to which the taxpayer may
    make an intangible drilling costs deduction election under Code
    Sec. 263(c).
|
| | 3. Qualified Tertiary Injectant Expenses. Any
    qualified tertiary injectant expenses for which a deduction is
    allowable under any Code section.                                                



Effective Tax Rate.


Hedging and Related Activities


over-the




marked-to


mark-to


56



---



##### Table of Contents







marked-to


New Accounting Standards


Statement of Financial Accounting Standards No. 123R,
Share-Based Payment.










57



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##### Table of Contents





FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations.


FASB Staff Position 19-1, Accounting for Suspended Well
Costs.


Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3.


Emerging Issues Task Force
(EITF) Issue 04-13
Accounting for Purchases and Sales of Inventory with the
Same Counterparty. work-in


Information Concerning Forward-Looking Statements




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| |   |                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 high-pressure air injection 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; lease operations expenses;
    production, ad valorem and severance taxes; DD&A expense;
    general and administrative expenses; other operating expenses;
    and taxes;                                                    
|
| |  | timing and amount of future production of oil and natural gas;                                                                                                                                                                                                   
|
| |  | availability of pipeline capacity;                                                                                                                                                                                                                               
|
| |  | expected hedging positions and payments related to hedging
    contracts (including the effectiveness thereof);                                                                                                                                                  
|
| |  | expectations regarding working capital, cash flow and
    anticipated liquidity;                                                                                                                                                                                 
|
| |  | projected borrowings under our revolving credit facility;                                                                                                                                                                                                        
|
| |  | our ability to continue to use hedge accounting; and                                                                                                                                                                                                             
|
| |  | marketing of oil and natural gas.                                                                                                                                                                                                                                








|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures About Market
    Risk

Hedging policy.


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Counterparties.


|                  |  |               |    |   |                |  |    |  
|----------------- |  | ------------- | -- | - | -------------- |  | -- | -
|                  |  | Percentage of |    |   | Percentage of  | 
|                  |  | Hedged Oil    |    |   | Hedged Natural | 
|                  |  | Production    |    |   | Gas Production | 
|Counterparty      |  | Committed     |    |   | Committed      | 
|                  |  |               |    |   |                | 
|BNP Paribas       |  |               |   |   |                |  | 45 | %
|Calyon            |  |               | 14 | % |                |  | 20 | %
|Deutsche Bank     |  |               | 37 | % |                |  | 3  | %
|J. Aron & Company |  |               | 3  | % |                |  | 23 | %
|Morgan Stanley    |  |               | 11 | % |                |  |   |  
|Wachovia          |  |               | 23 | % |                |  |   |  





Commodity price sensitivity.


mark-to mark-to


60



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| |                                              
| | ---------------------------------------------
| | Oil Derivative Contracts at December 31, 2005

|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ------------ | ------ |  | --------- | - | ----- | ---------- |  |  | --------- |  |  | ----------- | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily        |        |  | Floor     |   |       | Daily      |  |  | Cap       |  |  | Daily       |       |  | Swap      |  |       | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |       | Cap Volume |  |  | Price     |  |  | Swap Volume |       |  | Price     |  |       | Value          | 
|Period           |  | (Bbl)        |        |  | (per Bbl) |   |       | (Bbl)      |  |  | (per Bbl) |  |  | (Bbl)       |       |  | (per Bbl) |  |       | (In thousands) | 
|                 |  |              |        |  |           |   |       |            |  |  |           |  |  |             |       |  |           |  |       |                | 
|Jan. - June 2006 |  |              | 13,500 |  |           | $ | 44.07 |            |  |  | 1,000     |  |  | $           | 29.88 |  |           |  | 3,000 |                |  | $ | 37.27 |  |  | $ | (17,899 | )
|July - Dec. 2006 |  |              | 13,000 |  |           |   | 45.00 |            |  |  | 1,000     |  |  |             | 29.88 |  |           |  | 3,000 |                |  |   | 37.27 |  |  |   | (16,081 | )
|Jan. - Dec 2007  |  |              | 8,000  |  |           |   | 53.75 |            |  |  |          |  |  |             |      |  |           |  | 3,000 |                |  |   | 36.75 |  |  |   | (13,807 | )
|Jan. - June 2008 |  |              |       |  |           |   |      |            |  |  |          |  |  |             |      |  |           |  | 1,000 |                |  |   | 58.59 |  |  |   | (685    | )



| |                                                          
| | ---------------------------------------------------------
| | Natural Gas Derivative Contracts at December 31,
    2005

|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                |  |   |      |  |  |   |         |  
|---------------- |  | ------------ | ------ |  | --------- | - | ---- | ---------- |  |  | --------- |  |  | ----------- | ---- |  | --------- |  | ------ | -------------- |  | - | ---- |  |  | - | ------- | -
|                 |  | Daily        |        |  | Floor     |   |      | Daily      |  |  | Cap       |  |  | Daily       |      |  | Swap      |  |        | Fair Market    | 
|                 |  | Floor Volume |        |  | Price     |   |      | Cap Volume |  |  | Price     |  |  | Swap Volume |      |  | Price     |  |        | Value          | 
|Period           |  | (Mcf)        |        |  | (per Mcf) |   |      | (Mcf)      |  |  | (per Mcf) |  |  | (Mcf)       |      |  | (per Mcf) |  |        | (In thousands) | 
|                 |  |              |        |  |           |   |      |            |  |  |           |  |  |             |      |  |           |  |        |                | 
|Jan. - Dec. 2006 |  |              | 32,500 |  |           | $ | 6.17 |            |  |  | 5,000     |  |  | $           | 5.68 |  |           |  | 12,500 |                |  | $ | 5.02 |  |  | $ | (28,463 | )
|Jan. - Dec. 2007 |  |              | 22,500 |  |           |   | 6.96 |            |  |  |          |  |  |             |     |  |           |  | 10,000 |                |  |   | 4.99 |  |  |   | (12,278 | )

Interest rate sensitivity. 1 4 1 4




GLOSSARY OF OIL AND NATURAL GAS TERMS




Bbl.


Bcf.


Bbl/ D.


BOE.


BOE/ D.


Completion.


Delay Rentals.


Developed Acreage.


Development Well.


Exploratory Well.


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Gross Acres or Gross Wells.


High-pressure air injection (HPAI).


Horizontal Drilling.


Lease Operations Expense.


MBbl.


MBOE.


Mcf.


Mcf/ D.


Mcfe.


MMBOE.


MMBtu.


MMcf.


Net Acres or Net Wells.


Net Production.


NYMEX.


Oil.


Operating Income.


Operator.


Present Value of Future Net Revenues or Present Value or
PV-10.


Proved Developed Reserves.


Proved Reserves.


62



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Proved Undeveloped Reserves.


Reserve-To-Production Index or R/ P Index.


Royalty.


Standardized Measure. PV-10


Tertiary Recovery.


Unit.


Waterflood.


Working Interest.


63



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|        |                                            
|------- | -------------------------------------------
|Item 8. | Financial Statements and Supplementary Data

|                                                                                                              |  |  |    | 
|------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public
    Accounting Firm                                                   |  |  | 65 | 
|Consolidated Balance Sheets as of
    December 31, 2005 and 2004                                              |  |  | 66 | 
|Consolidated Statements of Operations for
    the Years Ended December 31, 2005, 2004, and 2003               |  |  | 67 | 
|Consolidated Statements of
    Stockholders Equity for the Years Ended December 31,
    2005, 2004, and 2003 |  |  | 68 | 
|Consolidated Statements of Cash Flows for
    the Years Ended December 31, 2005, 2004, and 2003               |  |  | 69 | 
|Notes to Consolidated Financial
    Statements                                                                |  |  | 70 | 
|Supplemental Information                                                                                      |  |  | 93 | 

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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,                               |          
|                                                                   |                                                                                                                                     |                                            |          
|                                                                   |                                                                                                                                     | 2005                                       |           |           | 2004      | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | (In thousands                              |          
|                                                                   |                                                                                                                                     | except share data)                         |          
|ASSETS                                                            
|Current assets:                                                    |                                                                                                                                     |                                            |           |           |           |  |         |          
|                                                                   | Cash and cash equivalents                                                                                                           |                                            | $         | 1,654     |           |  | $       | 1,103     |          
|                                                                   | Accounts receivable                                                                                                                 |                                            |           | 76,960    |           |  |         | 43,839    |          
|                                                                   | Inventory                                                                                                                           |                                            |           | 11,231    |           |  |         | 6,550     |          
|                                                                   | Derivatives                                                                                                                         |                                            |           | 8,826     |           |  |         | 2,665     |          
|                                                                   | Deferred taxes                                                                                                                      |                                            |           | 29,030    |           |  |         | 11,118    |          
|                                                                   | Other                                                                                                                               |                                            |           | 5,656     |           |  |         | 5,842     |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total current assets                       |           |           | 133,357   |  |         |           | 71,117    | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|Properties and equipment, at cost  successful efforts
    method: |                                                                                                                                     |                                            |           |           |           |  |         |          
|                                                                   | Proved properties                                                                                                                   |                                            |           | 1,691,175 |           |  |         | 1,134,220 |          
|                                                                   | Unproved properties                                                                                                                 |                                            |           | 37,646    |           |  |         | 29,740    |          
|                                                                   | Accumulated depletion, depreciation, and amortization                                                                               |                                            |           | (255,564  | )         |  |         | (171,691  | )        
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     |                                            | 1,473,257 |           |           |  | 992,269 |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   | Other property and equipment                                                                                                        |                                            |           | 15,894    |           |  |         | 10,425    |          
|                                                                   | Accumulated depreciation                                                                                                            |                                            |           | (5,366    | )         |  |         | (3,551    | )        
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     |                                            | 10,528    |           |           |  | 6,874   |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|Goodwill                                                           |                                                                                                                                     |                                            | 59,046    |           |           |  | 37,995  |          
|Derivatives                                                        |                                                                                                                                     |                                            | 17,316    |           |           |  | 1,150   |          
|Other                                                              |                                                                                                                                     |                                            | 12,201    |           |           |  | 13,995  |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total assets                               |           | $         | 1,705,705 |  |         | $         | 1,123,400 | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                  
|LIABILITIES AND STOCKHOLDERS EQUITY                              
|Current liabilities:                                               |                                                                                                                                     |                                            |           |           |           |  |         |          
|                                                                   | Accounts payable                                                                                                                    |                                            | $         | 27,281    |           |  | $       | 24,375    |          
|                                                                   | Accrued lease operations expense                                                                                                    |                                            |           | 6,633     |           |  |         | 3,408     |          
|                                                                   | Accrued development capital                                                                                                         |                                            |           | 38,899    |           |  |         | 14,643    |          
|                                                                   | Derivatives                                                                                                                         |                                            |           | 68,850    |           |  |         | 24,270    |          
|                                                                   | Production and severance taxes payable                                                                                              |                                            |           | 12,566    |           |  |         | 9,106     |          
|                                                                   | Deferred premiums on derivative contracts                                                                                           |                                            |           | 7,665     |           |  |         |          |          
|                                                                   | Other                                                                                                                               |                                            |           | 28,301    |           |  |         | 10,881    |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total current liabilities                  |           |           | 190,195   |  |         |           | 86,683    | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|Derivatives                                                        |                                                                                                                                     |                                            | 44,087    |           |           |  | 31,477  |          
|Future abandonment cost                                            |                                                                                                                                     |                                            | 14,430    |           |           |  | 6,601   |          
|Deferred taxes                                                     |                                                                                                                                     |                                            | 213,268   |           |           |  | 146,064 |          
|Long-term debt                                                     |                                                                                                                                     |                                            | 673,189   |           |           |  | 379,000 |          
|Deferred premiums on derivative contracts                          |                                                                                                                                     |                                            | 22,476    |           |           |  |        |          
|Other                                                              |                                                                                                                                     |                                            | 1,279     |           |           |  |        |          
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total liabilities                          |           |           | 1,158,924 |  |         |           | 649,825   | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|Commitments and contingencies                                      |                                                                                                                                     |                                            |          |           |           |  |        |          
|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, 49,368,120 and 48,982,197 issued and outstanding,
    respectively |                                            |           | 494       |           |  |         | 490       |          
|                                                                   | Additional paid-in capital                                                                                                          |                                            |           | 325,620   |           |  |         | 314,573   |          
|                                                                   | Treasury stock, at cost, of 11,169 and 0 shares,
    respectively                                                                   |                                            |           | (375      | )         |  |         |          |          
|                                                                   | Deferred compensation                                                                                                               |                                            |           | (9,007    | )         |  |         | (4,603    | )        
|                                                                   | Retained earnings                                                                                                                   |                                            |           | 302,875   |           |  |         | 199,512   |          
|                                                                   | Accumulated other comprehensive income                                                                                              |                                            |           | (72,826   | )         |  |         | (36,397   | )        
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total stockholders equity                 |           |           | 546,781   |  |         |           | 473,575   | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 
|                                                                   |                                                                                                                                     | Total liabilities and stockholders equity |           | $         | 1,705,705 |  |         | $         | 1,123,400 | 
|                                                                   |                                                                                                                                     |                                            |           |           |           | 



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                           |                                                                              |                                             |         |         |        |   |         |         |        |   |         |         |        | 
|-------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------- | ------- | ------- | ------ | - | ------- | ------- | ------ | - | ------- | ------- | ------ | 
|                                                                           |                                                                              | Year Ended December 31,                     |        
|                                                                           |                                                                              |                                             |        
|                                                                           |                                                                              | 2005                                        |         |         | 2004   |   |         | 2003    |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|                                                                           |                                                                              | (In thousands except per share data)        |        
|Revenues:                                                                  |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Oil                                                                          |                                             | $       | 307,959 |        |   | $       | 220,649 |        |   | $       | 176,351 |       
|                                                                           | Natural gas                                                                  |                                             |         | 149,365 |        |   |         | 77,884  |        |   |         | 43,745  |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total revenues                                                             |                                                                              |                                             | 457,324 |         |        |   | 298,533 |         |        |   | 220,096 |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Expenses:                                                                  |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Production                                                                  |                                             |         |         |        |   |         |         |        |   |         |         |       
|                                                                           |                                                                              | Lease operations                            |         |         | 68,395 |   |         |         | 47,142 |   |         |         | 37,846 | 
|                                                                           |                                                                              | Production, ad valorem, and severance taxes |         |         | 45,601 |   |         |         | 30,313 |   |         |         | 22,013 | 
|                                                                           | Depletion, depreciation, and amortization                                    |                                             |         | 85,627  |        |   |         | 48,522  |        |   |         | 33,530  |       
|                                                                           | Exploration                                                                  |                                             |         | 14,402  |        |   |         | 3,907   |        |   |         |        |       
|                                                                           | General and administrative (excluding non-cash stock based
    compensation) |                                             |         | 14,696  |        |   |         | 10,982  |        |   |         | 8,680   |       
|                                                                           | Non-cash stock based compensation                                            |                                             |         | 3,962   |        |   |         | 1,770   |        |   |         | 614     |       
|                                                                           | Derivative fair value (gain) loss                                            |                                             |         | 5,290   |        |   |         | 5,011   |        |   |         | (885    | )     
|                                                                           | Loss on early redemption of debt                                             |                                             |         | 19,477  |        |   |         |        |        |   |         |        |       
|                                                                           | Other operating                                                              |                                             |         | 9,485   |        |   |         | 5,028   |        |   |         | 3,481   |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total expenses                                                             |                                                                              |                                             | 266,935 |         |        |   | 152,675 |         |        |   | 105,279 |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Operating income                                                           |                                                                              |                                             | 190,389 |         |        |   | 145,858 |         |        |   | 114,817 |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Other income (expenses):                                                   |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           | Interest                                                                     |                                             |         | (34,055 | )      |   |         | (23,459 | )      |   |         | (16,151 | )     
|                                                                           | Other                                                                        |                                             |         | 1,039   |        |   |         | 240     |        |   |         | 214     |       
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Total other income (expenses)                                              |                                                                              |                                             | (33,016 | )       |        |   | (23,219 | )       |        |   | (15,937 | )      
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before income taxes and cumulative effect of accounting
    change  |                                                                              |                                             | 157,373 |         |        |   | 122,639 |         |        |   | 98,880  |        
|Current income tax benefit (provision)                                     |                                                                              |                                             | 2,084   |         |        |   | (1,913  | )       |        |   | (991    | )      
|Deferred income tax provision                                              |                                                                              |                                             | (56,032 | )       |        |   | (38,579 | )       |        |   | (35,111 | )      
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before cumulative effect of accounting change                       |                                                                              |                                             | 103,425 |         |        |   | 82,147  |         |        |   | 62,778  |        
|Cumulative effect of accounting change, net of income taxes                |                                                                              |                                             |        |         |        |   |        |         |        |   | 863     |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Net income                                                                 |                                                                              | $                                           | 103,425 |         |        | $ | 82,147  |         |        | $ | 63,641  |        
|                                                                           |                                                                              |                                             |         |         |        |   |         |         |       
|Income before cumulative effect of accounting change per common
    share: |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           |                                                                              | Basic                                       |         | $       | 2.12   |   |         | $       | 1.74   |   |         | $       | 1.39   | 
|                                                                           |                                                                              | Diluted                                     |         |         | 2.09   |   |         |         | 1.72   |   |         |         | 1.38   | 
|Net income per common share:                                               |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           |                                                                              | Basic                                       |         | $       | 2.12   |   |         | $       | 1.74   |   |         | $       | 1.41   | 
|                                                                           |                                                                              | Diluted                                     |         |         | 2.09   |   |         |         | 1.72   |   |         |         | 1.40   | 
|Weighted average common shares outstanding:                                |                                                                              |                                             |         |         |        |   |         |         |        |   |         |        
|                                                                           |                                                                              | Basic                                       |         |         | 48,682 |   |         |         | 47,090 |   |         |         | 45,153 | 
|                                                                           |                                                                              | Diluted                                     |         |         | 49,522 |   |         |         | 47,738 |   |         |         | 45,500 | 



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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 |         |             | Deferred     |   |          | Retained |  |       | Comprehensive |        |   | Stockholders |        
|                                    |                                                                         | Stock                            |         |     | Stock  |   |            | Capital |  |           | Stock    |       |  | Stock    |         |             | Compensation |   |          | Earnings |  |       | Income        |        |   | Equity        |        
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|                                    |                                                                         | (In thousands except share data) |        
|Balance at December 31, 2002        |                                                                         |                                  | 45,245  |     |        | $ | 452        |         |  | $         | 251,081  |       |  |          |        |             |              | $ |         |          |  | $     | (2,396        | )      |   | $             | 53,724  |         |  | $ | (6,595  | )       |   | $ | 296,266  |        
|Exercise of stock options           |                                                                         |                                  | 218     |     |        |   | 2          |         |  |           | 1,973    |       |  |          |        |             |              |   |         |          |  |       |              |        |   |               |        |         |  |   |        |         |   |   | 1,975    |        
|Issuance of common stock            |                                                                         |                                  | 13,590  |     |        |   | 136        |         |  |           | 175,338  |       |  |          |        |             |              |   |         |          |  |       |              |        |   |               |        |         |  |   |        |         |   |   | 175,474  |        
|Purchase of treasury stock          |                                                                         |                                  |        |     |        |   |           |         |  |           |         |       |  |          | (13,588 | )           |              |   | (175,560 | )        |  |       |              |        |   |               |        |         |  |   |        |         |   |   | (175,560 | )      
|Cancellation of treasury stock      |                                                                         |                                  | (13,590 | )   |        |   | (136       | )       |  |           | (175,424 | )     |  |          | 13,588  |             |              |   | 175,560  |          |  |       |              |        |   |               |        |         |  |   |        |         |   |   |         |        
|Deferred compensation:              |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|Issuance of restricted common stock |                                                                         |                                  | 67      |     |        |   | 1          |         |  |           | 926      |       |  |          |        |             |              |   |         |          |  |       | (927          | )      |   |               |        |         |  |   |        |         |   |   |         |        
|Amortization to expense             |                                                                         |                                  |        |     |        |   |           |         |  |           |         |       |  |          |        |             |              |   |         |          |  |       | 614           |        |   |               |        |         |  |   |        |         |   |   | 614      |        
|Other changes                       |                                                                         |                                  | (26     | )   |        |   |           |         |  |           | (181     | )     |  |          |        |             |              |   |         |          |  |       | 181           |        |   |               |        |         |  |   |        |         |   |   |         |        
|Components of comprehensive income: |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         | 63,641  |  |   |         |        |   |   |          | 63,641  |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $2,105)  |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         |        |  |   |         | (3,435  | ) |   |          | (3,435  | )
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Total comprehensive income          |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   | 60,206   |        
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Balance at December 31, 2003        |                                                                         |                                  | 45,504  |     |        |   | 455        |         |  |           | 253,713  |       |  |          |        |             |              |   |         |          |  |       | (2,528        | )      |   |               | 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   |        
|Deferred compensation:              |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|                                    | Issuance of restricted common stock                                     |                                  |         | 189 |        |   |            | 2       |  |           |          | 3,371 |  |          |         |            |              |   |          |         |  |       |               | (3,373 | ) |               |         |        |  |   |         |        |   |   |          |        |  
|                                    | Amortization to expense                                                 |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               | 1,770  |   |               |         |        |  |   |         |        |   |   |          | 1,770   |  
|                                    | Other changes                                                           |                                  |         | (14 | )      |   |            |        |  |           |          | 472   |  |          |         |            |              |   |          |         |  |       |               | (472   | ) |               |         |        |  |   |         |        |   |   |          |        |  
|Components of comprehensive income: |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         | 82,147  |  |   |         |        |   |   |          | 82,147  |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $15,757) |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         |        |  |   |         | (26,367 | ) |   |          | (26,367 | )
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Total comprehensive income          |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   | 55,780   |        
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Balance at December 31, 2004        |                                                                         |                                  | 48,982  |     |        |   | 490        |         |  |           | 314,573  |       |  |          |        |             |              |   |         |          |  |       | (4,603        | )      |   |               | 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     | )       |  |   |        |         |   |   |         |        
|Deferred compensation:              |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|                                    | Issuance of restricted common stock                                     |                                  |         | 286 |        |   |            | 3       |  |           |          | 7,645 |  |          |         |            |              |   |          |         |  |       |               | (7,648 | ) |               |         |        |  |   |         |        |   |   |          |        |  
|                                    | Amortization to expense                                                 |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               | 3,962  |   |               |         |        |  |   |         |        |   |   |          | 3,962   |  
|                                    | Other changes                                                           |                                  |         | (31 | )      |   |            |        |  |           |          | 718   |  |          |         |            |              |   |          |         |  |       |               | (718   | ) |               |         |        |  |   |         |        |   |   |          |        |  
|Components of comprehensive income: |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   |          |        
|                                    | Net income                                                              |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         | 103,425 |  |   |         |        |   |   |          | 103,425 |  
|                                    | Change in deferred hedge gain/loss (Net of income taxes of
    $21,701) |                                  |         |    |        |   |            |        |  |           |          |      |  |          |         |            |              |   |          |         |  |       |               |       |   |               |         |        |  |   |         | (36,429 | ) |   |          | (36,429 | )
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Total comprehensive income          |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |         |         |  |   |         |         |   |   | 66,996   |        
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        
|Balance at December 31, 2005        |                                                                         |                                  | 49,368  |     |        | $ | 494        |         |  | $         | 325,620  |       |  |          | (11     | )           |              | $ | (375     | )        |  | $     | (9,007        | )      |   | $             | 302,875 |         |  | $ | (72,826 | )       |   | $ | 546,781  |        
|                                    |                                                                         |                                  |         |     |        |   |            |         |  |           |          |       |  |          |         |             |              |   |          |          |  |       |               |        |   |               |        



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ENCORE ACQUISITION COMPANY





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |         |   |          |          |        |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------------------------- | -------- | -------- | ------- | - | -------- | -------- | ------- | - | -------- | -------- | ------ | -
|                                                                                      |                                                                  | Year Ended December 31,                        |         
|                                                                                      |                                                                  |                                                |         
|                                                                                      |                                                                  | 2005                                           |          |          | 2004    |   |          | 2003     |        
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|                                                                                      |                                                                  | (In thousands)                                 |         
|Operating activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |         |   |          |         
|Net income                                                                            |                                                                  | $                                              | 103,425  |          |         | $ | 82,147   |          |         | $ | 63,641   |         
|Adjustments to reconcile net income to net cash provided by
    operating activities: |                                                                  |                                                |          |          |         |   |          |          |         |   |          |         
|                                                                                      | Depletion, depreciation, and amortization                        |                                                |          | 85,627   |         |   |          | 48,522   |         |   |          | 33,530   |       
|                                                                                      | Dry hole expense                                                 |                                                |          | 8,667    |         |   |          | 2,086    |         |   |          |         |       
|                                                                                      | Deferred taxes                                                   |                                                |          | 56,032   |         |   |          | 38,579   |         |   |          | 35,111   |       
|                                                                                      | Non-cash stock based compensation                                |                                                |          | 3,962    |         |   |          | 1,770    |         |   |          | 614      |       
|                                                                                      | Cumulative effect of accounting change                           |                                                |          |         |         |   |          |         |         |   |          | (863     | )     
|                                                                                      | Loss on early redemption of debt                                 |                                                |          | 19,477   |         |   |          |         |         |   |          |         |       
|                                                                                      | Non-cash derivative fair value (gain) loss                       |                                                |          | 12,637   |         |   |          | 12,449   |         |   |          | (165     | )     
|                                                                                      | Other non-cash                                                   |                                                |          | 3,951    |         |   |          | 1,456    |         |   |          | 1,293    |       
|                                                                                      | Loss on disposition of assets                                    |                                                |          | 352      |         |   |          | 271      |         |   |          | 322      |       
|                                                                                      | Changes in operating assets and liabilities:                     |                                                |          |          |         |   |          |          |         |   |          |          |       
|                                                                                      |                                                                  | Accounts receivable                            |          |          | (30,192 | ) |          |          | (10,719 | ) |          |          | (5,602 | )
|                                                                                      |                                                                  | Other current assets                           |          |          | (6,096  | ) |          |          | (7,220  | ) |          |          | (8,592 | )
|                                                                                      |                                                                  | Other assets                                   |          |          | (4,798  | ) |          |          | (5,568  | ) |          |          | (2,024 | )
|                                                                                      |                                                                  | Accounts payable and other current liabilities |          |          | 39,225  |   |          |          | 8,048   |   |          |          | 6,553  |  
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Cash provided by operating activities                                                 |                                                                  |                                                | 292,269  |          |         |   | 171,821  |          |         |   | 123,818  |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Investing Activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |         |   |          |         
|                                                                                      | Proceeds from disposition of assets                              |                                                |          | 753      |         |   |          | 703      |         |   |          | 1,295    |       
|                                                                                      | Purchases of other property and equipment                        |                                                |          | (6,767   | )       |   |          | (7,594   | )       |   |          | (1,464   | )     
|                                                                                      | Acquisition of oil and natural gas properties                    |                                                |          | (154,615 | )       |   |          | (116,316 | )       |   |          | (54,601  | )     
|                                                                                      | 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                    |                                                |          | (321,836 | )       |   |          | (186,455 | )       |   |          | (98,977  | )     
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Cash used by investing activities                                                     |                                                                  |                                                | (573,560 | )        |         |   | (433,470 | )        |         |   | (153,747 | )       
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Financing Activities                                                                  |                                                                  |                                                |          |          |         |   |          |          |         |   |          |         
|                                                                                      | Proceeds from issuance of common stock                           |                                                |          |         |         |   |          | 53,900   |         |   |          | 176,127  |       
|                                                                                      | Purchase of treasury stock                                       |                                                |          | (570     | )       |   |          |         |         |   |          | (175,560 | )     
|                                                                                      | Offering costs paid                                              |                                                |          |         |         |   |          | (971     | )       |   |          | (653     | )     
|                                                                                      | Proceeds from issuance of
    61/4% notes                        |                                                |          |         |         |   |          | 150,000  |         |   |          |         |       
|                                                                                      | Proceeds from issuance of 6% notes                               |                                                |          | 294,480  |         |   |          |         |         |   |          |         |       
|                                                                                      | Proceeds from issuance of
    71/4% notes                        |                                                |          | 148,500  |         |   |          |         |         |   |          |         |       
|                                                                                      | Redemption of
    83/8% notes                                    |                                                |          | (165,852 | )       |   |          |         |         |   |          |         |       
|                                                                                      | Payments for debt issuance costs                                 |                                                |          | (534     | )       |   |          | (4,808   | )       |   |          | (125     | )     
|                                                                                      | Exercise of stock options                                        |                                                |          | 1,468    |         |   |          | 2,756    |         |   |          | 1,975    |       
|                                                                                      | Proceeds from long-term debt                                     |                                                |          | 555,000  |         |   |          | 328,500  |         |   |          | 112,500  |       
|                                                                                      | Payments on long-term debt                                       |                                                |          | (554,000 | )       |   |          | (278,500 | )       |   |          | (99,500  | )     
|                                                                                      | Cash overdrafts                                                  |                                                |          | 3,350    |         |   |          | 11,444   |         |   |          | 2,539    |       
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Cash provided by financing activities                                                 |                                                                  |                                                | 281,842  |          |         |   | 262,321  |          |         |   | 17,303   |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Increase (decrease) in cash and cash equivalents                                      |                                                                  |                                                | 551      |          |         |   | 672      |          |         |   | (12,626  | )       
|Cash and cash equivalents, beginning of period                                        |                                                                  |                                                | 1,103    |          |         |   | 431      |          |         |   | 13,057   |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        
|Cash and cash equivalents, end of period                                              |                                                                  | $                                              | 1,654    |          |         | $ | 1,103    |          |         | $ | 431      |         
|                                                                                      |                                                                  |                                                |          |          |         |   |          |          |        



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ENCORE ACQUISITION COMPANY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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







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



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





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





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



|                    |       |      |       |        |      |   |       |       | 
|------------------- | ----- | ---- | ----- | ------ | ---- | - | ----- | ----- | 
|                    |       | 2005 |       |        | 2004 |  
|                    |       |      |       |        |      |  
|Warehouse inventory |       | $    | 9,019 |        |      | $ | 6,321 |      
|Oil in pipelines    |       |      | 2,212 |        |      |   | 229   |      
|                    |       |      |       |        |      |  
|                    | Total |      | $     | 11,231 |      |   | $     | 6,550 | 
|                    |       |      |       |        |      |  



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



| |                               
| | ------------------------------
| | Oil and Natural Gas Properties



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




unit-of








| |                    
| | -------------------
| | Unproved Properties





| |                             
| | ----------------------------
| | Other Property and Equipment



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





| |           
| | ----------
| | Impairment





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

Accounting for Asset Retirement
Obligations.






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





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|             |                                                  |                         |   |         |      |  |   |        |  |  |   |        | 
|------------ | ------------------------------------------------ | ----------------------- | - | ------- | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                                  | Year Ended December 31, |  
|             |                                                  |                         |  
|             |                                                  | 2005                    |   |         | 2004 |  |   | 2003   | 
|             |                                                  |                         |   |         |      |  |   |        | 
|As Reported: |                                                  |                         |   |         |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         | $ | 2,483   |      |  | $ | 1,108  |  |  | $ | 381    | 
|             | Net income                                       |                         |   | 103,425 |      |  |   | 82,147 |  |  |   | 63,641 | 
|             | Basic net income per share                       |                         |   | 2.12    |      |  |   | 1.74   |  |  |   | 1.41   | 
|             | Diluted net income per share                     |                         |   | 2.09    |      |  |   | 1.72   |  |  |   | 1.40   | 
|Pro Forma:   |                                                  |                         |   |         |      |  |   |        |  |  |   |       
|             | Non-cash stock based compensation (net of taxes) |                         |   | 3,091   |      |  |   | 2,289  |  |  |   | 1,929  | 
|             | Net income                                       |                         |   | 102,817 |      |  |   | 80,966 |  |  |   | 62,093 | 
|             | Basic net income per share                       |                         |   | 2.11    |      |  |   | 1.72   |  |  |   | 1.38   | 
|             | Diluted net income per share                     |                         |   | 2.08    |      |  |   | 1.70   |  |  |   | 1.36   | 



|                        |  |                         |         |   |      |  |         |      |  |  |         |  
|----------------------- |  | ----------------------- | ------- | - | ---- |  | ------- | ---- |  |  | ------- | -
|                        |  | Year Ended December 31, |        
|                        |  |                         |        
|                        |  | 2005                    |         |   | 2004 |  |         | 2003 | 
|                        |  |                         |         |   |      |  |         |      | 
|Risk free interest rate |  |                         | 3.7     | % |      |  | 3.2     | %    |  |  | 3.0     | %
|Expected life           |  |                         | 6 years |   |      |  | 6 years |      |  |  | 4 years |  
|Expected volatility     |  |                         | 46.0    | % |      |  | 34.8    | %    |  |  | 36.5    | %
|Expected dividend yield |  |                         | 0.00    | % |      |  | 0.00    | %    |  |  | 0.00    | %



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







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





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



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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

over-the






mark-to mark-to




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



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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







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

Statement of Financial Accounting Standards No. 123R,
Share-Based Payment.












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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations.


Statement of Financial Accounting Standards No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and FASB Statement No. 3.


Emerging Issues Task Force
(EITF) Issue 04-13
Accounting for Purchases and Sales of Inventory with the
Same Counterparty. work-in




|   |             
|-- | ------------
|3. | Acquisitions



| |                  
| | -----------------
| | 2003 Acquisitions



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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

Cortez Acquisition.






|                                                                       |                                    |                                   |   |         |         |  
|---------------------------------------------------------------------- | ---------------------------------- | --------------------------------- | - | ------- | ------- | -
|Calculation of total purchase price:                                   |                                    |                                   |   |        
|                                                                       | Cash paid to Cortez 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   |        
|                                                                       | Current assets, excluding cash     |                                   |   | 5,946   |        
|                                                                       | Proved oil and gas properties      |                                   |   | 120,503 |        
|                                                                       | Unproved oil and gas properties    |                                   |   | 3,011   |        
|                                                                       | Goodwill                           |                                   |   | 37,908  |        
|                                                                       |                                    |                                   |  
|                                                                       |                                    | Total assets acquired             |   |         | 170,574 |  
|                                                                       |                                    |                                   |  
|                                                                       | Current liabilities                |                                   |   | (5,673  | )      
|                                                                       | Non-current liabilities            |                                   |   | (996    | )      
|                                                                       | Deferred income taxes              |                                   |   | (36,891 | )      
|                                                                       |                                    |                                   |  
|                                                                       |                                    | Total liabilities assumed         |   |         | (43,560 | )
|                                                                       |                                    |                                   |  
|                                                                       |                                    | Fair value of net assets acquired |   | $       | 127,014 |  
|                                                                       |                                    |                                   |  



Overton.


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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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

Williston Basin Acquisition.


Crusader Acquisition.






|                                                                       |                                       |                                   |   |         |         |  
|---------------------------------------------------------------------- | ------------------------------------- | --------------------------------- | - | ------- | ------- | -
|Calculation of total purchase price:                                   |                                       |                                   |   |        
|                                                                       | Cash paid to Crusaders former owners |                                   | $ | 79,142  |        
|                                                                       | Crusader debt repaid                  |                                   |   | 29,732  |        
|                                                                       | Transaction costs                     |                                   |   | 813     |        
|                                                                       |                                       |                                   |  
|                                                                       |                                       | Total purchase price              |   | $       | 109,687 |  
|                                                                       |                                       |                                   |  
|Allocation of purchase price to the fair value of assets
    acquired: |                                       |                                   |   |        
|                                                                       | Cash                                  |                                   | $ | 18,592  |        
|                                                                       | Current assets, excluding cash        |                                   |   | 3,131   |        
|                                                                       | Proved oil and gas properties         |                                   |   | 85,388  |        
|                                                                       | Unproved oil and gas properties       |                                   |   | 6,863   |        
|                                                                       | Goodwill                              |                                   |   | 21,138  |        
|                                                                       |                                       |                                   |  
|                                                                       |                                       | Total assets acquired             |   |         | 135,112 |  
|                                                                       |                                       |                                   |  
|                                                                       | Current liabilities                   |                                   |   | (8,688  | )      
|                                                                       | Non-current liabilities               |                                   |   | (1,190  | )      
|                                                                       | Deferred income taxes                 |                                   |   | (15,547 | )      
|                                                                       |                                       |                                   |  
|                                                                       |                                       | Total liabilities assumed         |   |         | (25,425 | )
|                                                                       |                                       |                                   |  
|                                                                       |                                       | Fair value of net assets acquired |   | $       | 109,687 |  
|                                                                       |                                       |                                   |  



78



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Kerr-McGee Acquisition.




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



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



|           |  |   |       | 
|---------- |  | - | ----- | 
|2006       |  | $ | 1,918 | 
|          
|2007       |  |   | 1,498 | 
|          
|2008       |  |   | 1,509 | 
|          
|2009       |  |   | 1,393 | 
|          
|2010       |  |   | 1,362 | 
|          
|Thereafter |  |   | 4,036 | 





|   |                             
|-- | ----------------------------
|5. | Asset Retirement Obligations







79



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                            |                                         |              |        |       |      |   |       |       |  
|------------------------------------------- | --------------------------------------- | ------------ | ------ | ----- | ---- | - | ----- | ----- | -
|                                            |                                         | December 31, |       
|                                            |                                         |              |       
|                                            |                                         | 2005         |        |       | 2004 |  
|                                            |                                         |              |        |       |      |  
|Future abandonment liability at January 1   |                                         | $            | 6,601  |       |      | $ | 5,341 |      
|                                           
|                                            | Acquisition of properties               |              |        | 2,221 |      |   |       | 1,165 |  
|                                           
|                                            | Wells drilled                           |              |        | 990   |      |   |       | 467   |  
|                                           
|                                            | Accretion expense                       |              |        | 515   |      |   |       | 317   |  
|                                           
|                                            | Plugging and abandonment costs incurred |              |        | (745  | )    |   |       | (280  | )
|                                           
|                                            | Revision of estimates                   |              |        | 4,848 |      |   |       | (409  | )
|                                            |                                         |              |        |       |      |  
|                                           
|Future abandonment liability at December 31 |                                         | $            | 14,430 |       |      | $ | 6,601 |      
|                                            |                                         |              |        |       |      |  





|   |                                         
|-- | ----------------------------------------
|6. | Capitalization of Exploratory Well Costs



|                                                                                                    |       |      |         |       |      |   |         |       |  |   |   |   | 
|--------------------------------------------------------------------------------------------------- | ----- | ---- | ------- | ----- | ---- | - | ------- | ----- |  | - | - | - | 
|                                                                                                    |       | 2005 |         |       | 2004 |   |         | 2003 
|                                                                                                    |       |      |         |       |      |   |         |      
|Beginning balance at January 1                                                                      |       | $    | 3,242   |       |      | $ |        |       |  | $ |  |  
|Additions to capitalized exploratory well costs pending the
    determination of proved reserves    |       |      | 48,208  |       |      |   | 27,723  |       |  |   |  |  
|Reclassification to proved property and equipment based on the
    determination of proved reserves |       |      | (42,644 | )     |      |   | (24,481 | )     |  |   |  |  
|Capitalized exploratory well costs charged to expense                                               |       |      | (2,246  | )     |      |   |        |       |  |   |  |  
|                                                                                                    |       |      |         |       |      |   |         |       | 
|                                                                                                    | Total |      | $       | 6,560 |      |   | $       | 3,242 |  |   | $ |  | 
|                                                                                                    |       |      |         |       |      |   |         |       | 



80



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                                         
|-- | ----------------------------------------
|7. | Accounts Payable and Accrued Liabilities



|                                     |       |      |        |        |      |   |       |        | 
|------------------------------------ | ----- | ---- | ------ | ------ | ---- | - | ----- | ------ | 
|                                     |       | 2005 |        |        | 2004 |  
|                                     |       |      |        |        |      |  
|Oil and natural gas revenues payable |       | $    | 4,544  |        |      | $ | 2,413 |       
|Net profits payable                  |       |      | 1,634  |        |      |   | 558   |       
|Interest                             |       |      | 12,531 |        |      |   | 2,630 |       
|Other                                |       |      | 9,592  |        |      |   | 5,280 |       
|                                     |       |      |        |        |      |  
|                                     | Total |      | $      | 28,301 |      |   | $     | 10,881 | 
|                                     |       |      |        |        |      |  



|   |               
|-- | --------------
|8. | Long-Term Debt



|                                                       |       |      |         |         |      |   |         |         | 
|------------------------------------------------------ | ----- | ---- | ------- | ------- | ---- | - | ------- | ------- | 
|                                                       |       | 2005 |         |         | 2004 |  
|                                                       |       |      |         |         |      |  
|Revolving credit facility                              |       | $    | 80,000  |         |      | $ | 79,000  |        
|83/8% Notes                                            |       |      |        |         |      |   | 150,000 |        
|61/4% Notes                                            |       |      | 150,000 |         |      |   | 150,000 |        
|6% Notes, net of unamortized discount of $5,317        |       |      | 294,683 |         |      |   |        |        
|71/4% Notes,
    net of unamortized discount of $1,494 |       |      | 148,506 |         |      |   |        |        
|                                                       |       |      |         |         |      |  
|                                                       | Total |      | $       | 673,189 |      |   | $       | 379,000 | 
|                                                       |       |      |         |         |      |  



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

83/8% Senior
Subordinated Notes. 3 8 3 8 3 8


61/4% Senior
Subordinated Notes. 1 4 1 4 1 4


6% Senior Subordinated Notes. 3 8


71/4% Senior
Subordinated Notes. 1 4 1 4 3 8 1 4


81



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


1 4








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







|                                             |  |                     |                |  |                    |  |                    | 
|-------------------------------------------- |  | ------------------- | -------------- |  | ------------------ |  | ------------------ | 
|Ratio of Total Outstanding 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 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 as selected by Encore, subject to availability at each
    lender).
|   
|(b) |  | The Base Rate is calculated as the highest of (1) the
    annual rate of interest announced by Bank of America, N.A. as
    its prime rate and (2) the federal funds effective
    rate plus 0.5%.                                                                                                                                        

82



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)










|                             |  |                |        | 
|---------------------------- |  | -------------- | ------ | 
|                             |  | Commitment     |       
|Borrowings to Borrowing Base |  | Fee Percentage |       
|                             |  |                |       
|<.40 to 1                    |  |                | 0.250% | 
|>.40 to 1< .90 to 1          |  |                | 0.375% | 
|>.90 to 1                    |  |                | 0.500% | 





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





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



|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |        |        |  |   |         |         | 
|------------------------- | ----- | ---------------------- | ------- | ------- | ---- | - | --------- | - | --------- | - | - | ---------- |  | - | ------ | ------ |  | - | ------- | ------- | 
|                          |       | Payments Due by Period |        
|                          |       |                        |        
|                          |       | Total                  |         |         | 2006 |   | 2007-2008 |   | 2009-2010 |   |   | Thereafter | 
|                          |       |                        |         |         |      |   |           |   |           |   |   |            | 
|61/4% Notes               |       | $                      | 150,000 |         |      | $ |          |   |           | $ |  |            |  | $ |       |        |  | $ | 150,000 |        
|6% Notes                  |       |                        | 300,000 |         |      |   |          |   |           |   |  |            |  |   |       |        |  |   | 300,000 |        
|71/4% Notes               |       |                        | 150,000 |         |      |   |          |   |           |   |  |            |  |   |       |        |  |   | 150,000 |        
|Revolving credit facility |       |                        | 80,000  |         |      |   |          |   |           |   |  |            |  |   | 80,000 |        |  |   |        |        
|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |       
|                          | Total |                        | $       | 680,000 |      |   | $         |  |           |   | $ |           |  |   | $      | 80,000 |  |   | $       | 600,000 | 
|                          |       |                        |         |         |      |   |           |   |           |   |   |            |  |   |       

83



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|   |      
|-- | -----
|9. | Taxes



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



|                  |                                                      |                         |        |        |      |   |        |        |  |   |        |        | 
|----------------- | ---------------------------------------------------- | ----------------------- | ------ | ------ | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                  |                                                      | Year Ended December 31, |       
|                  |                                                      |                         |       
|                  |                                                      | 2005                    |        |        | 2004 |   |        | 2003   | 
|                  |                                                      |                         |        |        |      |   |        |        | 
|Taxes related to: |                                                      |                         |        |        |      |   |        |        |  |   |        |       
|                  | Income before cumulative effect of accounting change |                         | $      | 53,948 |      |   | $      | 40,492 |  |   | $      | 36,102 | 
|                  | Cumulative effect of accounting change               |                         |        |       |      |   |        |       |  |   |        | 529    | 
|                  |                                                      |                         |        |        |      |   |        |        | 
|Total tax expense |                                                      | $                       | 53,948 |        |      | $ | 40,492 |        |  | $ | 36,631 |       
|                  |                                                      |                         |        |        |      |   |        |        | 



|                                |          |                         |        |        |        |   |        |        |        |   |        |        |        | 
|------------------------------- | -------- | ----------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                |          | Year Ended December 31, |       
|                                |          |                         |       
|                                |          | 2005                    |        |        | 2004   |   |        | ? 2003 |       
|                                |          |                         |        |        |        |   |        |        |       
|Federal:                        |          |                         |        |        |        |   |        |        |        |   |        |       
|                                | Current  |                         | $      | (2,084 | )      |   | $      | 1,788  |        |   | $      | 991    |       
|                                | Deferred |                         |        | 53,147 |        |   |        | 35,470 |        |   |        | 32,145 |       
|                                |          |                         |        |        |        |   |        |        |       
|                                |          | Total federal           |        |        | 51,063 |   |        |        | 37,258 |   |        |        | 33,136 | 
|                                |          |                         |        |        |        |   |        |        |       
|State (net of federal benefit): |          |                         |        |        |        |   |        |        |        |   |        |       
|                                | Current  |                         |        |       |        |   |        | 125    |        |   |        |       |       
|                                | Deferred |                         |        | 2,885  |        |   |        | 3,109  |        |   |        | 2,966  |       
|                                |          |                         |        |        |        |   |        |        |       
|                                |          | Total state             |        |        | 2,885  |   |        |        | 3,234  |   |        |        | 2,966  | 
|                                |          |                         |        |        |        |   |        |        |       
|Income tax provision            |          | $                       | 53,948 |        |        | $ | 40,492 |        |        | $ | 36,102 |       
|                                |          |                         |        |        |        |   |        |        |       



|                                           |                      |                         |         |        |      |   |         |        |  |   |        |        | 
|------------------------------------------ | -------------------- | ----------------------- | ------- | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | 
|                                           |                      | Year Ended December 31, |        
|                                           |                      |                         |        
|                                           |                      | 2005                    |         |        | 2004 |   |         | 2003   | 
|                                           |                      |                         |         |        |      |   |         |        | 
|Income before income taxes                 |                      | $                       | 157,373 |        |      | $ | 122,639 |        |  | $ | 98,880 |       
|                                           |                      |                         |         |        |      |   |         |        | 
|Tax at statutory rate                      |                      | $                       | 55,081  |        |      | $ | 42,923  |        |  | $ | 34,608 |       
|State income taxes, net of federal benefit |                      |                         | 2,885   |        |      |   | 3,234   |        |  |   | 2,966  |       
|Section 29 and 43 credits                  |                      |                         | (3,227  | )      |      |   | (3,816  | )      |  |   | (1,322 | )     
|Permanent differences and other            |                      |                         | (791    | )      |      |   | (1,849  | )      |  |   | (150   | )     
|                                           |                      |                         |         |        |      |   |         |        | 
|                                           | Income tax provision |                         | $       | 53,948 |      |   | $       | 40,492 |  |   | $      | 36,102 | 
|                                           |                      |                         |         |        |      |   |         |        | 

84



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |                                                     |                                                                         |                                     |          |          |        |   |          |          |        | 
|---------- | --------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------- | -------- | -------- | ------ | - | -------- | -------- | ------ | 
|           |                                                     | December 31,                                                            |                                    
|           |                                                     |                                                                         |                                    
|           |                                                     | 2005                                                                    |                                     |          | 2004     |       
|           |                                                     |                                                                         |                                     |          |          |       
|Current:   |                                                     |                                                                         |                                     |          |          |        |   |         
|Assets:    |                                                     |                                                                         |                                     |          |          |        |   |         
|           | Unrealized hedge loss in other comprehensive income |                                                                         | $                                   | 26,427   |          |        | $ | 10,550   |         
|           | Derivative fair value loss  hedges                 |                                                                         |                                     | 2,603    |          |        |   | 568      |         
|           |                                                     |                                                                         |                                     |          |          |       
|           |                                                     |                                                                         | Total current deferred tax assets   |          | $        | 29,030 |   |          | $        | 11,118 | 
|           |                                                     |                                                                         |                                     |          |          |       
|Long-term: |                                                     |                                                                         |                                     |          |          |        |   |         
|           | Assets:                                             |                                                                         |                                     |          |          |        |   |          |         
|           |                                                     | Alternative minimum tax                                                 |                                     | $        | 2,073    |        |   | $        | 2,017    |       
|           |                                                     | Unrealized hedge loss in other comprehensive income                     |                                     |          | 16,964   |        |   |          | 11,522   |       
|           |                                                     | Derivative fair value loss  hedges                                     |                                     |          | 1,424    |        |   |          | 215      |       
|           |                                                     | Section 43 credits                                                      |                                     |          | 13,227   |        |   |          | 6,350    |       
|           |                                                     | Other                                                                   |                                     |          | 3,004    |        |   |          | 1,289    |       
|           |                                                     |                                                                         |                                     |          |          |       
|           |                                                     |                                                                         | Total long-term deferred tax assets |          |          | 36,692 |   |          |          | 21,393 | 
|           |                                                     |                                                                         |                                     |          |          |       
|           | Liabilities:                                        |                                                                         |                                     |          |          |        |   |          |         
|           |                                                     | Book basis of oil and natural gas properties in excess of tax
    basis |                                     |          | (249,960 | )      |   |          | (167,457 | )     
|           |                                                     |                                                                         |                                     |          |          |       
|           | Net long-term deferred tax liability                |                                                                         | $                                   | (213,268 | )        |        | $ | (146,064 | )       
|           |                                                     |                                                                         |                                     |          |          |       





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



|                                    |       |                         |        |        |      |  |        |        |  |  |        |        | 
|----------------------------------- | ----- | ----------------------- | ------ | ------ | ---- |  | ------ | ------ |  |  | ------ | ------ | 
|                                    |       | Year Ended December 31, |       
|                                    |       |                         |       
|                                    |       | 2005                    |        |        | 2004 |  |        | 2003   | 
|                                    |       |                         |        |        |      |  |        |        | 
|Production and severance taxes      |       |                         | 41,195 |        |      |  | 27,491 |        |  |  | 19,999 |       
|Property and ad valorem taxes       |       |                         | 4,406  |        |      |  | 2,822  |        |  |  | 2,014  |       
|Franchise, payroll, and other taxes |       |                         | 1,246  |        |      |  | 868    |        |  |  | 677    |       
|                                    |       |                         |        |        |      |  |        |        | 
|                                    | Total |                         | $      | 46,847 |      |  | $      | 31,181 |  |  | $      | 22,690 | 
|                                    |       |                         |        |        |      |  |        |        | 



|    |                     
|--- | --------------------
|10. | Stockholders Equity



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



85



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








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

S-3 333-117036). 1 4




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







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





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





|    |                           
|--- | --------------------------
|11. | Earnings Per Share (EPS)



86



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                                                                   |                                                         |                         |         |         |      |   |        |        |  |   |        |        | 
|---------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------- | ------- | ------- | ---- | - | ------ | ------ |  | - | ------ | ------ | 
|                                                                                   |                                                         | Year Ended December 31, |        
|                                                                                   |                                                         |                         |        
|                                                                                   |                                                         | 2005                    |         |         | 2004 |   |        | 2003   | 
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Numerator:                                                                         |                                                         |                         |         |         |      |   |        |        |  |   |        |       
|Income before cumulative effect of accounting change                               |                                                         | $                       | 103,425 |         |      | $ | 82,147 |        |  | $ | 62,778 |       
|Cumulative effect of accounting change                                             |                                                         |                         |        |         |      |   |       |        |  |   | 863    |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|                                                                                   | Net income                                              |                         | $       | 103,425 |      |   | $      | 82,147 |  |   | $      | 63,641 | 
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Denominator:                                                                       |                                                         |                         |         |         |      |   |        |        |  |   |        |       
|Denominator for basic earnings per share  Weighted
    average shares outstanding |                                                         |                         | 48,682  |         |      |   | 47,090 |        |  |   | 45,153 |       
|                                                                                   | Effect of dilutive options and diluted restricted stock |                         |         | 840     |      |   |        | 648    |  |   |        | 347    | 
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Denominator for diluted earnings per share                                         |                                                         |                         | 49,522  |         |      |   | 47,738 |        |  |   | 45,500 |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Basic income per common share before accounting change                             |                                                         | $                       | 2.12    |         |      | $ | 1.74   |        |  | $ | 1.39   |       
|Cumulative effect of accounting change, net of tax                                 |                                                         |                         |        |         |      |   |       |        |  |   | 0.02   |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Basic income per common share after accounting change                              |                                                         | $                       | 2.12    |         |      | $ | 1.74   |        |  | $ | 1.41   |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Diluted income per common share before accounting change                           |                                                         | $                       | 2.09    |         |      | $ | 1.72   |        |  | $ | 1.38   |       
|Cumulative effect of accounting change, net of tax                                 |                                                         |                         |        |         |      |   |       |        |  |   | 0.02   |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 
|Diluted income per common share after accounting change                            |                                                         | $                       | 2.09    |         |      | $ | 1.72   |        |  | $ | 1.40   |       
|                                                                                   |                                                         |                         |         |         |      |   |        |        | 






|    |  |                                                                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | There were no antidilutive options or antidilutive restricted
    stock outstanding for the years ended December 31, 2005,
    2004, and 2003.



|    |                       
|--- | ----------------------
|12. | Employee Benefit Plans



| |            
| | -----------
| | 401(k) plan





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



87



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##### Table of Contents



ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |   |                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an employee may not be awarded more than 150,000 shares of
    common stock in any calendar year;                                                                                                                                      
|
| |  | a nonemployee director may not be awarded more than
    10,000 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.



|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              |  |           |          |   |   |      |       | 
|-------------------------------- | ---------- | ----------------------- | --------- | -------- | ----------------------- | - | ----- | ----------------------- | -------- |  | ------------ | -------- | - | --------- | ----- | ----- | ------------ |  | --------- | -------- | - | - | ---- | ----- | 
|                                 |            | Year Ended December 31, |           |          | Year Ended December 31, |   |       | Year Ended December 31, |         
|                                 |            | 2005                    |           |          | 2004                    |   |       | 2003                    |         
|                                 |            |                         |           |          |                         |   |       |                         |         
|                                 |            |                         |           | Weighted |                         |   |       |                         | Weighted |  |              |          |   | Weighted  |      
|                                 |            | Number of               |           |          | Average                 |   |       | Number of               |          |  | Average      |          |   | Number of |       |       | Average      | 
|                                 |            | Options                 |           |          | Strike Price            |   |       | Options                 |          |  | Strike Price |          |   | Options   |       |       | Strike Price | 
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Outstanding at beginning of year |            |                         | 1,520,586 |          |                         | $ | 12.00 |                         |          |  | 1,444,431    |          |   | $         | 9.91  |       |              |  | 1,767,767 |          |   | $ | 9.75 |      
|                                 | Granted(a) |                         |           | 115,255  |                         |   |       | 26.55                   |          |  |              | 389,784  |   |           |       | 17.42 |              |  |           | 74,688   |   |   |      | 12.97 | 
|                                 | Forfeited  |                         |           | (57,616  | )                       |   |       | 17.94                   |          |  |              | (9,764   | ) |           |       | 10.49 |              |  |           | (179,433 | ) |   |      | 10.74 | 
|                                 | Exercised  |                         |           | (137,413 | )                       |   |       | 9.07                    |          |  |              | (303,865 | ) |           |       | 9.07  |              |  |           | (218,591 | ) |   |      | 8.95  | 
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Outstanding at end of year       |            |                         | 1,440,812 |          |                         |   | 13.20 |                         |          |  | 1,520,586    |          |   |           | 12.00 |       |              |  | 1,444,431 |          |   |   | 9.91 |      
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 
|Exercisable at end of year       |            |                         | 1,089,677 |          |                         |   | 11.04 |                         |          |  | 948,771      |          |   |           | 9.77  |       |              |  | 872,415   |          |   |   | 9.30 |      
|                                 |            |                         |           |          |                         |   |       |                         |          |  |              |          |   |           |       |       |              | 






|    |                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | During 2005, 2004, and 2003, there were zero, 37,500, and 22,500
    stock options, respectively, granted to non-employee directors.
    The weighted average fair value of individual options granted in
    2005, 2004, and 2003 was $12.99, $6.87, and $4.25, respectively.



|              |  |                  |                  |           |             |          |           |         |          |         |        |  |           |             |       |  |  |  |           | 
|------------- |  | ---------------- | ---------------- | --------- | ----------- | -------- | --------- | ------- | -------- | ------- | ------ |  | --------- | ----------- | ----- |  |  |  | --------- | 
|              |  |                  |                  |           |             | 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          |  |                  | $ 8.40 to $ 9.33 |           |             |          | 542,474   |         |          |         | 5.5    |  |           | $           | 8.92  |  |  |  | 542,474   | 
|2002          |  |                  | $ 8.50 to $12.40 |           |             |          | 380,587   |         |          |         | 6.7    |  |           |             | 11.72 |  |  |  | 380,587   | 
|2003          |  |                  | $11.49 to $13.61 |           |             |          | 51,258    |         |          |         | 7.6    |  |           |             | 12.68 |  |  |  | 36,684    | 
|2004          |  |                  | $17.17 to $19.77 |           |             |          | 363,224   |         |          |         | 8.1    |  |           |             | 17.44 |  |  |  | 129,932   | 
|2005          |  |                  | $26.55           |           |             |          | 103,269   |         |          |         | 9.1    |  |           |             | 26.55 |  |  |  |          | 
|              |  |                  |                  |           |             |          |           |         |          |         |        |  |           |             |      
|              |  |                  |                  |           |             |          | 1,440,812 |         |          |         | 6.8    |  |           |             | 13.20 |  |  |  | 1,089,677 | 
|              |  |                  |                  |           |             |          |           |         |          |         |        |  |           |             |      

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       |  |        |        |  |  |         |         | 
|------------- | ----- | --------------- | ------ | ------- | ---- |  | ------ | ------- |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------- | ------- | 
|              |       | Year of Vesting |       
|              |       |                 |       
|Year of Grant |       | 2006            |        |         | 2007 |  |        | 2008    |  |  | 2009   |        |  | 2010 |        |        | Total | 
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 
|2002          |       |                 | 52,694 |         |      |  | 52,693 |         |  |  |       |        |  |      |       |        |       |  |       |        |  |  | 105,387 |        
|2003          |       |                 | 19,569 |         |      |  | 19,522 |         |  |  | 19,522 |        |  |      |       |        |       |  |       |        |  |  | 58,613  |        
|2004          |       |                 | 28,462 |         |      |  | 33,362 |         |  |  | 4,899  |        |  |      | 4,898  |        |       |  |       |        |  |  | 71,621  |        
|2005          |       |                 | 5,511  |         |      |  | 5,511  |         |  |  | 42,367 |        |  |      | 36,793 |        |       |  | 36,793 |        |  |  | 126,975 |        
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |        | 106,236 |      |  |        | 111,088 |  |  |        | 66,788 |  |      |        | 41,691 |       |  |        | 36,793 |  |  |         | 362,596 | 
|              |       |                 |        |         |      |  |        |         |  |  |        |        |  |      |        |        |       | 



|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       |  |        |        |  |  |         |         | 
|------------- | ----- | --------------- | - | - | ---- |  | ------ | ------ |  |  | ------ | ------ |  | ---- | ------ | ------ | ----- |  | ------ | ------ |  |  | ------- | ------- | 
|              |       | Year of Vesting |  
|              |       |                 |  
|Year of Grant |       | 2006            |   |   | 2007 |  |        | 2008   |  |  | 2009   |        |  | 2010 |        |        | Total | 
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|2004          |       |                 |  |   |      |  | 25,832 |        |  |  | 25,828 |        |  |      | 25,828 |        |       |  |       |        |  |  | 77,488  |        
|2005          |       |                 |  |   |      |  |       |        |  |  | 47,730 |        |  |      | 47,730 |        |       |  | 47,730 |        |  |  | 143,190 |        
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 
|              | Total |                 |   |  |      |  |        | 25,832 |  |  |        | 73,558 |  |      |        | 73,558 |       |  |        | 47,730 |  |  |         | 220,678 | 
|              |       |                 |   |   |      |  |        |        |  |  |        |        |  |      |        |        |       | 



|                        |       |              |       |       | 
|----------------------- | ----- | ------------ | ----- | ----- | 
|                        |       | Estimated    |      
|                        |       | Amortization |      
|Year Ended December 31, |       | Expense      |      
|                        |       |              |      
|2006                    |       | $            | 3,835 |      
|2007                    |       |              | 2,918 |      
|2008                    |       |              | 1,567 |      
|2009                    |       |              | 617   |      
|2010                    |       |              | 70    |      
|                        |       |              |      
|                        | Total |              | $     | 9,007 | 
|                        |       |              |      



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                      
|--- | ---------------------
|13. | Financial Instruments



|                                          |  |                   |          |   |                   |   |          |            |  |   |            |   |  |   |          |  
|----------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | ---------- |  | - | ---------- | - |  | - | -------- | -
|                                          |  | December 31, 2005 |          |   | December 31, 2004 |  
|                                          |  |                   |          |   |                   |  
|                                          |  | Book Value        |          |   | Fair Value        |   |          | Book Value |  |   | Fair Value |  
|                                          |  |                   |          |   |                   |   |          |            |  |   |            |  
|Cash and cash equivalents                 |  | $                 | 1,654    |   |                   | $ | 1,654    |            |  | $ | 1,103      |   |  | $ | 1,103    |  
|Accounts receivable, net                  |  |                   | 76,960   |   |                   |   | 76,960   |            |  |   | 43,839     |   |  |   | 43,839   |  
|Accounts payable                          |  |                   | (27,281  | ) |                   |   | (27,281  | )          |  |   | (24,375    | ) |  |   | (24,375  | )
|83/8% Notes                               |  |                   |         |   |                   |   |         |            |  |   | (150,000   | ) |  |   | (166,500 | )
|61/4% Notes                               |  |                   | (150,000 | ) |                   |   | (145,500 | )          |  |   | (150,000   | ) |  |   | (148,500 | )
|6% Notes                                  |  |                   | (294,683 | ) |                   |   | (279,000 | )          |  |   |           |   |  |   |         |  
|71/4% Notes                               |  |                   | (148,506 | ) |                   |   | (150,000 | )          |  |   |           |   |  |   |         |  
|Revolving credit facility                 |  |                   | (80,000  | ) |                   |   | (80,000  | )          |  |   | (79,000    | ) |  |   | (79,000  | )
|Commodity derivative contracts            |  |                   | (86,794  | ) |                   |   | (86,794  | )          |  |   | (52,394    | ) |  |   | (52,394  | )
|Deferred premiums on derivative contracts |  |                   | (30,141  | ) |                   |   | (30,141  | )          |  |   |           |   |  |   |         |  
|Interest rate swaps                       |  |                   |         |   |                   |   |         |            |  |   | 462        |   |  |   | 462      |  
|Plugging bond                             |  |                   | 690      |   |                   |   | 843      |            |  |   | 625        |   |  |   | 737      |  

marked-to




| |                      
| | ---------------------
| | Commodity Derivatives

mark-to




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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


mark-to






| |                                
| | -------------------------------
| | Oil Hedges at December 31, 2005

|                 |  |             |        |  |           |   |       |           |  |  |           |  |  |            |       |  |           |  |       |                |  |   |       |  |  |   |         |  
|---------------- |  | ----------- | ------ |  | --------- | - | ----- | --------- |  |  | --------- |  |  | ---------- | ----- |  | --------- |  | ----- | -------------- |  | - | ----- |  |  | - | ------- | -
|                 |  | Daily Floor |        |  | Floor     |   |       | Daily Cap |  |  | Cap       |  |  | Daily Swap |       |  | Swap      |  |       | Fair Market    | 
|                 |  | Volume      |        |  | Price     |   |       | Volume    |  |  | Price     |  |  | Volume     |       |  | Price     |  |       | Value          | 
|Period           |  | (Bbl)       |        |  | (per Bbl) |   |       | (Bbl)     |  |  | (per Bbl) |  |  | (Bbl)      |       |  | (per Bbl) |  |       | (In thousands) | 
|                 |  |             |        |  |           |   |       |           |  |  |           |  |  |            |       |  |           |  |       |                | 
|Jan.  June 2006 |  |             | 13,500 |  |           | $ | 44.07 |           |  |  | 1,000     |  |  | $          | 29.88 |  |           |  | 3,000 |                |  | $ | 37.27 |  |  | $ | (17,899 | )
|July  Dec. 2006 |  |             | 13,000 |  |           |   | 45.00 |           |  |  | 1,000     |  |  |            | 29.88 |  |           |  | 3,000 |                |  |   | 37.27 |  |  |   | (16,081 | )
|Jan.  Dec. 2007 |  |             | 8,000  |  |           |   | 53.75 |           |  |  |          |  |  |            |      |  |           |  | 3,000 |                |  |   | 36.75 |  |  |   | (13,807 | )
|Jan.  June 2008 |  |             |       |  |           |   |      |           |  |  |          |  |  |            |      |  |           |  | 1,000 |                |  |   | 58.59 |  |  |   | (685    | )



| |                                        
| | ---------------------------------------
| | Natural Gas Hedges at December 31, 2005

|                 |  |             |        |  |             |   |           |        |  |  |           |            |  |        |      |  |             |  |        |                |  |   |      |  |  |   |         |  
|---------------- |  | ----------- | ------ |  | ----------- | - | --------- | ------ |  |  | --------- | ---------- |  | ------ | ---- |  | ----------- |  | ------ | -------------- |  | - | ---- |  |  | - | ------- | -
|                 |  | Daily Floor |        |  |             |   | Daily Cap |        |  |  |           | Daily Swap |  |        |      |  | Fair Market | 
|                 |  | Volume      |        |  | Floor Price |   |           | Volume |  |  | Cap Price |            |  | Volume |      |  | Swap Price  |  |        | Value          | 
|Period           |  | (Mcf)       |        |  | (per Mcf)   |   |           | (Mcf)  |  |  | (per Mcf) |            |  | (Mcf)  |      |  | (per Mcf)   |  |        | (In thousands) | 
|                 |  |             |        |  |             |   |           |        |  |  |           |            |  |        |      |  |             |  |        |                | 
|Jan. - Dec. 2006 |  |             | 32,500 |  |             | $ | 6.17      |        |  |  | 5,000     |            |  | $      | 5.68 |  |             |  | 12,500 |                |  | $ | 5.08 |  |  | $ | (28,463 | )
|Jan. - Dec. 2007 |  |             | 22,500 |  |             |   | 6.96      |        |  |  |          |            |  |        |     |  |             |  | 10,000 |                |  |   | 4.99 |  |  |   | (12,278 | )









| |                          
| | -------------------------
| | Interest Rate Derivatives



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                  
| | -----------------
| | Counterparty Risk



|                  |  |               |    |   |                    |  |    |  
|----------------- |  | ------------- | -- | - | ------------------ |  | -- | -
|                  |  | Percentage of |    |   | Percentage of      | 
|                  |  | Hedged Oil    |    |   | Hedged Natural Gas | 
|                  |  | Production    |    |   | Production         | 
|Counterparty      |  | Committed     |    |   | Committed          | 
|                  |  |               |    |   |                    | 
|BNP Paribas       |  |               |   |   |                    |  | 45 | %
|Calyon            |  |               | 14 | % |                    |  | 20 | %
|Deutsche Bank     |  |               | 37 | % |                    |  | 3  | %
|J. Aron & Company |  |               | 3  | % |                    |  | 23 | %
|Morgan Stanley    |  |               | 11 | % |                    |  |   |  
|Wachovia          |  |               | 23 | % |                    |  |   |  







|    |                           
|--- | --------------------------
|14. | Related Party Transactions





|    |                                                                                              
|--- | ---------------------------------------------------------------------------------------------
|15. | Capitalized Costs and Costs Incurred Relating to Oil and
    Natural Gas Producing Activities



|                                                                   |                                                       |              |           |           |      |   |         |           |  
|------------------------------------------------------------------ | ----------------------------------------------------- | ------------ | --------- | --------- | ---- | - | ------- | --------- | -
|                                                                   |                                                       | December 31, |          
|                                                                   |                                                       |              |          
|                                                                   |                                                       | 2005         |           |           | 2004 |  
|                                                                   |                                                       |              |           |           |      |  
|Properties and equipment, at cost  successful efforts
    method: |                                                       |              |           |           |      |   |         |          
|                                                                   | Proved properties                                     |              | $         | 1,691,175 |      |   | $       | 1,134,220 |  
|                                                                   | Unproved properties                                   |              |           | 37,646    |      |   |         | 29,740    |  
|                                                                   | Accumulated depletion, depreciation, and amortization |              |           | (255,564  | )    |   |         | (171,691  | )
|                                                                   |                                                       |              |           |           |      |  
|                                                                   |                                                       | $            | 1,473,257 |           |      | $ | 992,269 |          
|                                                                   |                                                       |              |           |           |      |  

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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                   |                                 |                         |         |         |         |  |         |         |         |  |        |        |         | 
|------------------ | ------------------------------- | ----------------------- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------ | ------ | ------- | 
|                   |                                 | Year Ended December 31, |        
|                   |                                 |                         |        
|                   |                                 | 2005                    |         |         | 2004    |  |         | 2003    |        
|                   |                                 |                         |         |         |         |  |         |         |        
|                   |                                 | (In thousands)          |        
|Acquisitions       |                                 |                         |         |         |         |  |         |         |         |  |        |       
|                   | Proved properties               |                         | $       | 224,469 |         |  | $       | 204,907 |         |  | $      | 54,484 |        
|                   | Unproved properties             |                         |         | 21,205  |         |  |         | 33,926  |         |  |        | 117    |        
|                   | Asset retirement obligations(1) |                         |         | 2,221   |         |  |         | 1,165   |         |  |        | 337    |        
|                   |                                 |                         |         |         |         |  |         |         |        
|Total acquisitions |                                 |                         | 247,895 |         |         |  | 239,998 |         |         |  | 54,938 |       
|                   |                                 |                         |         |         |         |  |         |         |        
|Development        |                                 |                         |         |         |         |  |         |         |         |  |        |       
|                   | Drilling and exploitation       |                         |         | 268,520 |         |  |         | 157,092 |         |  |        | 98,977 |        
|                   | Asset retirement obligations(1) |                         |         | 954     |         |  |         | 467     |         |  |        | 83     |        
|                   |                                 |                         |         |         |         |  |         |         |        
|Total development  |                                 |                         | 269,474 |         |         |  | 157,559 |         |         |  | 99,060 |       
|                   |                                 |                         |         |         |         |  |         |         |        
|Exploration        |                                 |                         |         |         |         |  |         |         |         |  |        |       
|                   | Drilling and exploitation       |                         |         | 53,316  |         |  |         | 29,363  |         |  |        |       |        
|                   | Geological and seismic          |                         |         | 3,095   |         |  |         | 979     |         |  |        |       |        
|                   | Delay rentals                   |                         |         | 635     |         |  |         | 204     |         |  |        |       |        
|                   |                                 |                         |         |         |         |  |         |         |        
|Total exploration  |                                 |                         | 57,046  |         |         |  | 30,546  |         |         |  |       |       
|                   |                                 |                         |         |         |         |  |         |         |        
|                   |                                 | Total costs incurred    |         | $       | 574,415 |  |         | $       | 428,103 |  |        | $      | 153,998 | 
|                   |                                 |                         |         |         |         |  |         |         |        






|    |                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company adopted SFAS 143 on January 1, 2003 which
    requires us to capitalize additional asset cost equal to the
    amount of our discounted asset retirement obligation assumed in
    a property purchase or incurred in the drilling of new wells.




SUPPLEMENTAL INFORMATION (unaudited)




|    |                                                       
|--- | ------------------------------------------------------
|16. | Oil & Natural Gas Producing Activities
    (unaudited)





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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                      |  |      |       |  |      |   |       |      |  |   |       | 
|--------------------- |  | ---- | ----- |  | ---- | - | ----- | ---- |  | - | ----- | 
|                      |  | 2005 |       |  | 2004 |   |       | 2003 | 
|                      |  |      |       |  |      |   |       |      | 
|Oil (per Bbl)         |  | $    | 61.04 |  |      | $ | 43.46 |      |  | $ | 32.55 | 
|Natural gas (per Mcf) |  |      | 9.44  |  |      |   | 6.19  |      |  |   | 5.83  | 



10-K.




|                  |                           |        |  |         |             |  |  |                |  |  |  |         | 
|----------------- | ------------------------- | ------ |  | ------- | ----------- |  |  | -------------- |  |  |  | ------- | 
|                  |                           | Oil    |  |         | Natural Gas |  |  | Oil Equivalent | 
|                  |                           | (MBbl) |  |         | (MMcf)      |  |  | (MBOE)         | 
|                  |                           |        |  |         |             |  |  |                | 
|December 31, 2005 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 148,387 |             |  |  | 283,865        |  |  |  | 195,698 | 
|                  | Proved developed reserves |        |  | 101,505 |             |  |  | 229,950        |  |  |  | 139,830 | 
|December 31, 2004 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 134,048 |             |  |  | 234,030        |  |  |  | 173,053 | 
|                  | Proved developed reserves |        |  | 97,114  |             |  |  | 156,919        |  |  |  | 123,267 | 
|December 31, 2003 |                           |        |  |         |             |  |  |                |  |  |  |        
|                  | Proved reserves           |        |  | 117,732 |             |  |  | 138,950        |  |  |  | 140,890 | 
|                  | Proved developed reserves |        |  | 92,377  |             |  |  | 104,767        |  |  |  | 109,838 | 



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                  |  |        |         |   |             |  |         |                |  |  |         |  
|--------------------------------- |  | ------ | ------- | - | ----------- |  | ------- | -------------- |  |  | ------- | -
|                                  |  | Oil    |         |   | Natural Gas |  |         | Oil Equivalent | 
|                                  |  | (MBbl) |         |   | (MMcf)      |  |         | (MBOE)         | 
|                                  |  |        |         |   |             |  |         |                | 
|Balance, December 31, 2002        |  |        | 111,674 |   |             |  | 99,818  |                |  |  | 128,310 |  
|Acquisitions of minerals-in-place |  |        | 13      |   |             |  | 37,464  |                |  |  | 6,257   |  
|Extensions and discoveries        |  |        | 3,957   |   |             |  | 7,354   |                |  |  | 5,182   |  
|Improved recovery                 |  |        | 12,773  |   |             |  | (178    | )              |  |  | 12,744  |  
|Revisions of estimates            |  |        | (4,084  | ) |             |  | 3,543   |                |  |  | (3,493  | )
|Production                        |  |        | (6,601  | ) |             |  | (9,051  | )              |  |  | (8,110  | )
|                                  |  |        |         |   |             |  |         |                | 
|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 |  
|                                  |  |        |         |   |             |  |         |                | 



|                                                                       |  |              |            |   |      |   |            |      |  |   |            |  
|---------------------------------------------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                       |  | December 31, |           
|                                                                       |  |              |           
|                                                                       |  | 2005         |            |   | 2004 |   |            | 2003 | 
|                                                                       |  |              |            |   |      |   |            |      | 
|Net future cash flows                                                  |  | $            | 10,414,091 |   |      | $ | 6,651,858  |      |  | $ | 4,245,574  |  
|Future production costs                                                |  |              | (3,690,974 | ) |      |   | (2,389,359 | )    |  |   | (1,683,810 | )
|Future development costs                                               |  |              | (250,554   | ) |      |   | (194,746   | )    |  |   | (75,811    | )
|Future abandonment costs                                               |  |              | (121,553   | ) |      |   | (49,859    | )    |  |   | (43,641    | )
|Future income tax expense                                              |  |              | (1,934,504 | ) |      |   | (1,221,933 | )    |  |   | (716,869   | )
|                                                                       |  |              |            |   |      |   |            |      | 
|Future net cash flows                                                  |  |              | 4,416,506  |   |      |   | 2,795,961  |      |  |   | 1,725,443  |  
|10% annual discount                                                    |  |              | (2,498,035 | ) |      |   | (1,630,342 | )    |  |   | (988,504   | )
|                                                                       |  |              |            |   |      |   |            |      | 
|Standardized measure of discounted estimated future net cash
    flows |  | $            | 1,918,471  |   |      | $ | 1,165,619  |      |  | $ | 736,939    |  
|                                                                       |  |              |            |   |      |   |            |      | 

95



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ENCORE ACQUISITION COMPANY


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                        |                                                |                         |           |          |      |   |           |          |   |   |         |          |  
|--------------------------------------- | ---------------------------------------------- | ----------------------- | --------- | -------- | ---- | - | --------- | -------- | - | - | ------- | -------- | -
|                                        |                                                | Year Ended December 31, |          
|                                        |                                                |                         |          
|                                        |                                                | 2005                    |           |          | 2004 |   |           | 2003     |  
|                                        |                                                |                         |           |          |      |   |           |          |  
|Standardized measure, beginning of year |                                                | $                       | 1,165,619 |          |      | $ | 736,939   |          |   | $ | 624,718 |         
|                                        | Net change in sales price and production costs |                         |           | 531,793  |      |   |           | 430,310  |   |   |         | 81,964   |  
|                                        | Acquisitions of mineral-in-place               |                         |           | 256,257  |      |   |           | 242,855  |   |   |         | 91,654   |  
|                                        | Extensions, discoveries, and improved recovery |                         |           | 229,929  |      |   |           | 150,112  |   |   |         | 103,780  |  
|                                        | Revisions of quantity estimates                |                         |           | (15,455  | )    |   |           | (15,217  | ) |   |         | (25,650  | )
|                                        | Sales, net of production costs                 |                         |           | (357,028 | )    |   |           | (222,995 | ) |   |         | (151,955 | )
|                                        | Development costs incurred during the year     |                         |           | 268,520  |      |   |           | 157,092  |   |   |         | 98,977   |  
|                                        | Accretion of discount                          |                         |           | 116,562  |      |   |           | 73,694   |   |   |         | 86,511   |  
|                                        | Change in estimated future development costs   |                         |           | (199,158 | )    |   |           | (276,027 | ) |   |         | (116,859 | )
|                                        | Net change in income taxes                     |                         |           | (247,937 | )    |   |           | (145,042 | ) |   |         | (52,992  | )
|                                        | Change in timing and other                     |                         |           | 169,369  |      |   |           | 33,898   |   |   |         | (3,209   | )
|                                        |                                                |                         |           |          |      |   |           |          |  
|Standardized measure, end of year       |                                                | $                       | 1,918,471 |          |      | $ | 1,165,619 |          |   | $ | 736,939 |         
|                                        |                                                |                         |           |          |      |   |           |          |  



|    |                                              
|--- | ---------------------------------------------
|17. | Selected Quarterly Financial Data (unaudited)



|                                |  |                                       |        |  |        |   |        |       |  |   |         |  |  |   |         | 
|------------------------------- |  | ------------------------------------- | ------ |  | ------ | - | ------ | ----- |  | - | ------- |  |  | - | ------- | 
|                                |  | Quarter                               |       
|                                |  |                                       |       
|                                |  | First                                 |        |  | Second |   |        | Third |  |   | Fourth  | 
|                                |  |                                       |        |  |        |   |        |       |  |   |         | 
|                                |  | (In thousands, except per share data) |       
|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    | 
|2004                            |  |                                       |        |  |        |   |        |       |  |   |         |  |  |   |         | 
|Revenues                        |  | $                                     | 59,291 |  |        | $ | 70,122 |       |  | $ | 79,252  |  |  | $ | 89,868  | 
|Operating income                |  |                                       | 30,249 |  |        |   | 34,201 |       |  |   | 38,010  |  |  |   | 43,398  | 
|Net income                      |  |                                       | 16,902 |  |        |   | 17,991 |       |  |   | 21,014  |  |  |   | 26,240  | 
|Basic income per common share   |  |                                       | 0.37   |  |        |   | 0.40   |       |  |   | 0.43    |  |  |   | 0.54    | 
|Diluted income per common share |  |                                       | 0.37   |  |        |   | 0.39   |       |  |   | 0.43    |  |  |   | 0.53    | 

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|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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, 10-K,


97



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






Internal Control  Integrated Framework








.






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







98



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Changes in Internal Control over Financial Reporting









|         |                  
|-------- | -----------------
|Item 9B. | Other Information






PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant










|         |                       
|-------- | ----------------------
|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 Securities |           |  | Weighted-Average  |                      |       | for Future Issuance  | 
|                                                           |  | to be Issued upon    |           |  | Exercise Price of |                      |       | Under Equity         | 
|                                                           |  | Exercise of          |           |  | Outstanding       |                      |       | Compensation Plans   | 
|                                                           |  | Outstanding Options, |           |  | Options,          |                      |       | (Excluding           | 
|                                                           |  | Warrants and         |           |  | Warrants and      |                      |       | Securities Reflected | 
|                                                           |  | Rights(2)            |           |  | Rights            |                      |       | in Column (a))       | 
|                                                           |  |                      |           |  |                   |                      |       |                      | 
|Equity compensation plans approved by security holders(1)  |  |                      | 1,440,812 |  |                   | $                    | 13.20 |                      |  |  | 1,656,960 | 
|Equity compensation plans not approved by security holders |  |                      |          |  |                   |                      |      |                      |  |  |          | 
|Total                                                      |  |                      | 1,440,812 |  |                   | $                    | 13.20 |                      |  |  | 1,656,960 | 






|    |                                                                                  
|--- | ---------------------------------------------------------------------------------
|(1) | The 2000 Incentive Stock Plan is the Companys only equity
    compensation plan.
|   
|(2) | Excludes 583,287 shares of restricted stock.                                     

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|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accountant Fees And Services



100



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PART IV







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules





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

|                                                                                                          |  |  |    | 
|--------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Report of Independent Registered Public Accounting Firm                                                   |  |  | 63 | 
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                              |  |  | 64 | 
|Consolidated Statements of Operations for the Years Ended
    December 31, 2005, 2004
    and 2003        |  |  | 65 | 
|Consolidated Statements of Stockholders Equity for the
    Years Ended December 31, 2005, 2004, and 2003 |  |  | 66 | 
|Consolidated Statements of Cash Flows for the Years Ended
    December 31, 2005, 2004
    and 2003        |  |  | 67 | 
|Notes to Consolidated Financial Statements                                                                |  |  | 68 | 



| |                                  
| | ---------------------------------
| | 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.

Exhibits




101



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INDEX TO EXHIBITS


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 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 (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).                                                                                                                                                                                    
|       
|        | 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.                                                                                                                                                                                                                                                                                                                                             
|       
|        | 10 | .4+*        |  | Form of Stock Option Agreement (Nonqualified).                                                                                                                                                                                                                                                                                                                                          
|       
|        | 10 | .5+*        |  | Form of Stock Option Agreement (Incentive).                                                                                                                                                                                                                                                                                                                                             
|       
|        | 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).                                                                                                                                                                   

102



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|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- | -- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|       
|        | 10 | .7+*        |  | Table of 2006 Base Salaries for Executive Officers of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 10 | .8          |  | 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 | .9          |  | 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 | .10         |  | 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 | .11         |  | 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 | .12         |  | 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 | .13         |  | 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).                                                                                                                                                                                                         
|       
|        | 10 | .14+*       |  | Severance Agreement, dated November 28, 2005, between the
    Company and Roy W. Jageman.                                                                                                                                                                                                                                                                                                                                                                                                        
|       
|        | 21 | .1*         |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       
|        | 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



103



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SIGNATURES






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



| |    |                   
| | -- | ------------------
| | By | /s/ Jon S. Brumley

| |                                      
| | -------------------------------------
| |                                      
| | Jon S. Brumley                       
| | Chief Executive Officer and President

attorneys-in attorneys-in attorneys-in




|                                                 |  |                                                                                                                         |  |  |  | 
|------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Signature                                        |  | Title or Capacity                                                                                                       |  | 
|                                                 |  |                                                                                                                         |  | 
|                                                
|/s/ I. Jon BrumleyI. Jon Brumley                 |  | Chairman of the Board and Director                                                                                      |  | 
|                                                
|/s/ Jon S. BrumleyJon S. Brumley                 |  | Chief Executive Officer, President and Director
    (Principal Executive Officer)                                       |  | 
|                                                
|/s/ Louie B.
    Nivens, Jr.Louie B. Nivens, Jr. |  | Chief Financial Officer, Treasurer, Senior Vice President
    and Corporate Secretary
    (Principal Financial Officer) |  | 
|                                                
|/s/ Robert C. ReevesRobert C. Reeves             |  | Senior Vice President, Chief Accounting Officer, Controller, and
    Assistant Corporate Secretary                      |  | 
|                                                
|/s/ Martin C. BowenMartin C. Bowen               |  | Director                                                                                                                |  | 
|                                                
|/s/ Ted
    Collins, Jr.Ted Collins, Jr.         |  | Director                                                                                                                |  | 

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|                                             |  |                   |  |  |  | 
|-------------------------------------------- |  | ----------------- |  |  |  | 
|Signature                                    |  | Title or Capacity |  | 
|                                             |  |                   |  | 
|                                            
|/s/ Ted A. GardnerTed A. Gardner             |  | Director          |  | 
|                                            
|/s/ John V. GenovaJohn V. Genova             |  | Director          |  | 
|                                            
|/s/ James A.
    Winne IIIJames A. Winne III |  | Director          |  | 

105