UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549


Form 10-Q





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the Quarterly Period Ended September 30, 2008




OR





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




for
the transition period from _______________ to _______________




Commission
File Number: 000-51719









LINN
ENERGY, LLC


(Exact name of registrant as
specified in its charter)


Delaware
            65-1177591(State
      or other jurisdiction of incorporation or organization)
            (IRS
      Employer
              Identification
      No.)600
      Travis, Suite 5100
              Houston,
      Texas
            77002(Address
      of principal executive offices)
            (Zip
      Code)(281) 840-4000
              (Registrant’s
      telephone number, including area
code)




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past
90 days.    Yes  x    No   ̈





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





Large
      accelerated filer  x     Accelerated
      filer    ̈     Non-accelerated
      filer   ̈     Smaller
      reporting company   ̈


(Do not check if a smaller reporting company)





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





As of
October 31, 2008, there were 115,154,653 units outstanding.











TABLE OF CONTENTS





PageGlossary of Terms
            iiPart I - Financial InformationItem 1.
            Financial StatementsCondensed Consolidated Balance Sheets as of September 30,
      2008 and December 31, 2007
            1Condensed Consolidated Statements of Operations for the
      three and nine months ended September 30, 2008 and
      2007
            2Condensed Consolidated Statements of Unitholders’ Capital
      for the nine months ended September 30, 2008
            3Condensed Consolidated Statements of Cash Flows for the
      nine months ended September 30, 2008 and 2007
            4Notes to Condensed Consolidated Financial
      Statements
            5Item 2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            24Item 3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            43Item 4.
            Controls and Procedures
            44Part II - Other InformationItem 1.
            Legal Proceedings
            45Item 1A.
            Risk Factors
            45Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            45Item 3.
            Defaults Upon Senior Securities
            45Item 4.
            Submission of Matters to a Vote of Security
      Holders
            45Item 5.
            Other Information
            45Item 6.
            Exhibits
            46Signature
            47











i
 Table of Contents





GLOSSARY OF TERMS




As
commonly used in the oil and gas industry and as used in this Quarterly Report
on Form 10-Q, the following terms have the following meanings:




Bbl.One stock
tank barrel or 42 United States gallons liquid volume.




Bcfe.  One billion
cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of
oil, condensate or natural gas liquids.




MBbls.  One
thousand barrels of oil or other liquid hydrocarbons.




MBbls/d.MBbls per
day.




Mcf.  One thousand
cubic feet.




Mcfe.  One thousand
cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.




Mid-Continent
I.  February 2007 acquisition of oil and gas properties in the
Texas Panhandle from Cavallo Energy LP, acting through its general partner,
Stallion Energy LLC, for a contract price of $415.0 million.




Mid-Continent
II.  June 2007 acquisition of oil and gas properties in the
Texas Panhandle for a contract price of $90.5 million.




Mid-Continent
III.  August 2007 acquisition of oil and gas properties in
Oklahoma, Kansas and the Texas Panhandle from Dominion Resources, Inc. for a
contract price of $2.05 billion.




Mid-Continent
IV.  January 2008 acquisition of oil and gas properties in
Oklahoma from Lamamco Drilling Company for a contract price of $552.2
million.




MMBtu.  One million
British thermal units.




MMcf.  One million
cubic feet.




MMcf/d.MMcf per
day.




MMcfe.  One million
cubic feet equivalent, determined using a ratio of six Mcf of gas to one Bbl of
oil, condensate or natural gas liquids.




MMcfe/d.MMcfe per
day.




MMMBtu.  One
billion British thermal units.




NYMEX.  The New
York Mercantile Exchange.




Tcfe.  One trillion
cubic feet equivalent, determined using the ratio of six Mcf of gas to one Bbl
of oil, condensate or natural gas liquids.












ii
 Table of Contents
 PART I – FINANCIAL INFORMATION
  Item 1. Financial Statements
 LINN ENERGY, LLC
 CONDENSED
CONSOLIDATED BALANCE SHEETS


September 30,
            
            December 31,2008
            
            2007(Unaudited)(in
      thousands,
              except
      unit amounts)AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            47,269
            
            
            $
            1,441Accounts
      receivable – trade, net
            
            
            260,071
            
            
            
            149,850Derivative
      instruments
            
            
            61,201
            
            
            
            26,100Other
      current assets, net
            
            
            17,491
            
            
            
            5,768Total
      current assets
            
            
            386,032
            
            
            
            183,159Noncurrent
      assets:Oil
      and gas properties and equipment (successful efforts
    method)
            
            
            3,822,413
            
            
            
            3,618,741Less
      accumulated depreciation, depletion and amortization
            
            
            (205,520
            )
            
            
            (127,265
            )3,616,893
            
            
            
            3,491,476Other
      property and equipment
            
            
            21,974
            
            
            
            37,407Less
      accumulated depreciation
            
            
            (3,564
            )
            
            
            (5,383
            )18,410
            
            
            
            32,024Derivative
      instruments
            
            
            2,027
            
            
            
            —Goodwill
            
            
            —
            
            
            
            64,419Other
      noncurrent assets, net
            
            
            14,119
            
            
            
            36,625Noncurrent
      assets held for sale
            
            
            58,432
            
            
            
            —74,578
            
            
            
            101,044Total
      assets
            
            $
            4,095,913
            
            
            $
            3,807,703Liabilities
      and Unitholders’ CapitalCurrent
      liabilities:Accounts
      payable and accrued expenses
            
            $
            188,911
            
            
            $
            223,636Derivative
      instruments
            
            
            20,707
            
            
            
            6,148Other
      current liabilities
            
            
            8,508
            
            
            
            12,943Total
      current liabilities
            
            
            218,126
            
            
            
            242,727Noncurrent
      liabilities:Credit
      facility
            
            
            1,521,393
            
            
            
            1,443,000Senior
      notes, net
            
            
            250,086
            
            
            
            —Derivative
      instruments
            
            
            122,079
            
            
            
            63,813Other
      noncurrent liabilities
            
            
            29,931
            
            
            
            31,522Total
      noncurrent liabilities
            
            
            1,923,489
            
            
            
            1,538,335Unitholders’
      capital:115,158,483
      units and 113,815,914 units issued and outstanding at September 30,
      2008 and December 31, 2007, respectively
            
            
            2,191,207
            
            
            
            2,374,660Accumulated
      loss
            
            
            (236,909
            )
            
            
            (348,019
            )1,954,298
            
            
            
            2,026,641Total
      liabilities and unitholders’ capital
            
            $
            4,095,913
            
            
            $
            3,807,703




The accompanying notes are an integral
part of these condensed consolidated financial statements.


1
 Table of Contents
 LINN
ENERGY, LLC
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  (Unaudited)


Three
      Months Ended
                September 30,
            
            Nine
      Months Ended
                September 30,2008
            
            2007
            
            2008
            
            2007(in
      thousands, except per unit amounts)Revenues
      and other:Oil,
      gas and natural gas liquid sales
            
            $
            240,634
            
            
            $
            61,318
            
            
            $
            672,092
            
            
            $
            117,380Gain
      (loss) on oil and gas derivatives
            
            
            845,818
            
            
            
            (65,440
            )
            
            
            (293,780
            )
            
            
            (143,588
            )Natural
      gas marketing revenues
            
            
            4,647
            
            
            
            2,995
            
            
            
            11,056
            
            
            
            7,656Other
      revenues
            
            
            561
            
            
            
            924
            
            
            
            1,682
            
            
            
            2,0561,091,660
            
            
            
            (203
            )
            
            
            391,050
            
            
            
            (16,496
            )Expenses:Operating
      expenses
            
            
            56,970
            
            
            
            22,306
            
            
            
            139,732
            
            
            
            39,915Natural
      gas marketing expenses
            
            
            4,061
            
            
            
            2,451
            
            
            
            9,738
            
            
            
            6,426General
      and administrative expenses
            
            
            18,695
            
            
            
            12,657
            
            
            
            56,093
            
            
            
            34,850Data
      license expenses
            
            
            ―
            
            
            
            ―
            
            
            
            2,475
            
            
            
            ―Bad
      debt expenses
            
            
            1,436
            
            
            
            ―
            
            
            
            1,436
            
            
            
            ―Depreciation,
      depletion and amortization
            
            
            51,727
            
            
            
            16,825
            
            
            
            146,210
            
            
            
            29,295132,889
            
            
            
            54,239
            
            
            
            355,684
            
            
            
            110,486Other
      income and (expenses):Interest
      expense, net of amounts capitalized
            
            
            (22,574
            )
            
            
            (10,839
            )
            
            
            (71,199
            )
            
            
            (19,429
            )Loss
      on interest rate swaps
            
            
            (9,694
            )
            
            
            (3,151
            )
            
            
            (17,483
            )
            
            
            (2,954
            )Other,
      net
            
            
            (3,558
            )
            
            
            (2,422
            )
            
            
            (8,034
            )
            
            
            (2,944
            )(35,826
            )
            
            
            (16,412
            )
            
            
            (96,716
            )
            
            
            (25,327
            )Income
      (loss) from continuing operations beforeincome
      taxes
            
            
            922,945
            
            
            
            (70,854
            )
            
            
            (61,350
            )
            
            
            (152,309
            )Income
      tax provision
            
            
            (1,002
            )
            
            
            (977
            )
            
            
            (1,047
            )
            
            
            (5,007
            )Income
      (loss) from continuing operations
            
            
            921,943
            
            
            
            (71,831
            )
            
            
            (62,397
            )
            
            
            (157,316
            )Discontinued
      operations:Gain
      on sale of assets, net of taxes
            
            
            162,442
            
            
            
            ―
            
            
            
            161,120
            
            
            
            ―Income
      (loss) from discontinued operations,net
      of taxes
            
            
            (1,774
            )
            
            
            (4,391
            )
            
            
            12,387
            
            
            
            (3,879
            )Net
      income (loss) from discontinued operations
            
            
            160,668
            
            
            
            (4,391
            )
            
            
            173,507
            
            
            
            (3,879
            )Net
      income (loss)
            
            $
            1,082,611
            
            
            $
            (76,222
            )
            
            $
            111,110
            
            
            $
            (161,195
            )Net
      income (loss) per unit – continuing operations:Units
      – basic
            
            $
            8.06
            
            
            $
            (0.89
            )
            
            $
            (0.55
            )
            
            $
            (2.54
            )Units
      – diluted
            
            $
            8.05
            
            
            $
            (0.89
            )
            
            $
            (0.55
            )
            
            $
            (2.54
            )Net
      income (loss) per unit – discontinued operations:Units
      – basic
            
            $
            1.41
            
            
            $
            (0.05
            )
            
            $
            1.52
            
            
            $
            (0.06
            )Units
      – diluted
            
            $
            1.41
            
            
            $
            (0.05
            )
            
            $
            1.52
            
            
            $
            (0.06
            )Net
      income (loss) per unit:Units
      – basic
            
            $
            9.47
            
            
            $
            (0.94
            )
            
            $
            0.97
            
            
            $
            (2.60
            )Units
      – diluted
            
            $
            9.46
            
            
            $
            (0.94
            )
            
            $
            0.97
            
            
            $
            (2.60
            )Weighted
      average units outstanding:Units
      – basic
            
            
            114,321
            
            
            
            69,207
            
            
            
            114,111
            
            
            
            58,072Units
      – diluted
            
            
            114,476
            
            
            
            69,207
            
            
            
            114,111
            
            
            
            58,072Class
      D – basic
            
            
            ―
            
            
            
            11,792
            
            
            
            ―
            
            
            
            3,974Class
      D – diluted
            
            
            ―
            
            
            
            11,792
            
            
            
            ―
            
            
            
            3,974Distributions
      declared per unit
            
            $
            0.63
            
            
            $
            0.57
            
            
            $
            1.89
            
            
            $
            1.61




The accompanying notes are an integral
part of these condensed consolidated financial statements.


2
 Table of Contents
 LINN
ENERGY, LLC
 CONDENSED CONSOLIDATED STATEMENTS OF UNITHOLDERS’
CAPITAL
  (Unaudited)





Nine
      Months Ended September 30, 2008Units
            
            Unitholders’
                Capital
            
            Accumulated
                Income
      (Loss)
            
            Treasury
                Units
                (at
      Cost)
            
            Total
      Unitholders’
                Capital(in
      thousands)Balance
      as of December 31, 2007
            
            
            113,816
            
            
            $
            2,374,660
            
            
            $
            (348,019
            )
            
            $
            ―
            
            
            $
            2,026,641Issuance
      of units
            
            
            1,437
            
            
            
            23,483
            
            
            
            ―
            
            
            
            ―
            
            
            
            23,483Purchase
      of units
            
            
            (95
            )
            
            
            ―
            
            
            
            ―
            
            
            
            (1,981
            )
            
            
            (1,981
            )Cancellation
      of units
            
            
            ―
            
            
            
            (1,981
            )
            
            
            ―
            
            
            
            1,981
            
            
            
            ―Distributions
      to unitholders
            
            
            
            
            
            
            (217,331
            )
            
            
            ―
            
            
            
            ―
            
            
            
            (217,331
            )Unit-based
      compensation expenses
            
            
            
            
            
            
            12,376
            
            
            
            ―
            
            
            
            ―
            
            
            
            12,376Net
      income
            
            
            
            
            
            
            ―
            
            
            
            111,110
            
            
            
            ―
            
            
            
            111,110Balance
      as of September 30, 2008
            
            
            115,158
            
            
            $
            2,191,207
            
            
            $
            (236,909
            )
            
            $
            ―
            
            
            $
            1,954,298




The accompanying notes are an integral
part of these condensed consolidated financial statements.





3
 Table of Contents
 LINN
ENERGY, LLC
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  (Unaudited)




Nine
      Months Ended September 30,2008
            
            2007(in
      thousands)Cash
      flow from operating activities:Net
      income (loss)
            
            $
            111,110
            
            
            $
            (161,195
            )Adjustments
      to reconcile net income (loss) to net cash provided by (used in)operating
      activities:Depreciation,
      depletion and amortization
            
            
            152,599
            
            
            
            49,109Unit-based
      compensation and unit warrant expenses
            
            
            12,376
            
            
            
            10,890Bad
      debt expenses
            
            
            1,436
            
            
            
            ―Amortization
      and write-off of deferred financing fees and other
            
            
            12,271
            
            
            
            4,108Gain
      on sale of assets
            
            
            (161,120
            )
            
            
            (867
            )Deferred
      income tax
            
            
            ―
            
            
            
            3,359Mark-to-market
      on derivatives:Total
      losses
            
            
            311,263
            
            
            
            146,542Cash
      settlements
            
            
            (72,416
            )
            
            
            24,896Cash
      settlements on canceled derivatives
            
            
            (81,358
            )
            
            
            ―Premiums
      paid for derivatives
            
            
            (129,520
            )
            
            
            (257,092
            )Changes
      in assets and liabilities:Increase
      in accounts receivable
            
            
            (99,448
            )
            
            
            (47,163
            )(Increase)
      decrease in other assets
            
            
            (3,821
            )
            
            
            10,614Increase
      (decrease) in accounts payable and accrued expenses
            
            
            (14,473
            )
            
            
            24,205Increase
      in other liabilities
            
            
            3,889
            
            
            
            4,626Net
      cash provided by (used in) operating activities
            
            
            42,788
            
            
            
            (187,968
            )Cash
      flow from investing activities:Acquisition
      of oil and gas properties
            
            
            (575,622
            )
            
            
            (2,572,614
            )Additions
      to oil and gas properties
            
            
            (249,833
            )
            
            
            (54,170
            )Purchases
      of other property and equipment
            
            
            (2,783
            )
            
            
            (12,494
            )Proceeds
      from sales of oil and gas properties and other property and
      equipment
            
            
            744,133
            
            
            
            2,974Net
      cash used in investing activities
            
            
            (84,105
            )
            
            
            (2,636,304
            )Cash
      flow from financing activities:Proceeds
      from sale and issuance of units
            
            
            ―
            
            
            
            2,120,000Purchase
      of units
            
            
            (1,981
            )
            
            
            (7,399
            )Proceeds
      from issuance of debt
            
            
            1,422,000
            
            
            
            1,140,000Principal
      payments on debt
            
            
            (1,095,116
            )
            
            
            (265,947
            )Distributions
      to unitholders
            
            
            (217,331
            )
            
            
            (90,165
            )Financing
      fees and other, net
            
            
            (20,427
            )
            
            
            (45,224
            )Net
      cash provided by financing activities
            
            
            87,145
            
            
            
            2,851,265Net
      increase in cash and cash equivalents
            
            
            45,828
            
            
            
            26,993Cash
      and cash equivalents:Beginning
            
            
            1,441
            
            
            
            6,595Ending
            
            $
            47,269
            
            
            $
            33,588




The
accompanying notes are an integral part of these condensed consolidated
financial statements.


4
 Table of Contents
 LINN ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  (Unaudited)




(1)
            Basis
      of Presentation




Linn
Energy, LLC (“Linn Energy” or the “Company”) is an independent oil and gas
company focused on the development and acquisition of long life properties which
complement its asset profile in producing basins within the United
States.




The
condensed consolidated financial statements at September 30, 2008, and for
the three and nine months ended September 30, 2008 and 2007, are unaudited,
but in the opinion of management include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of the results
for the interim periods.  Certain information and note disclosures
normally included in annual financial statements prepared in accordance with
United States generally accepted accounting principles (“GAAP”) have been
condensed or omitted under Securities and Exchange Commission (“SEC”) rules and
regulations, and as such this report should be read in conjunction with the
financial statements and notes in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2007.  The results reported in
these unaudited condensed consolidated financial statements should not
necessarily be taken as indicative of results that may be expected for the
entire year.




Certain
amounts in the condensed consolidated financial statements and notes thereto
have been reclassified to conform to the 2008 financial statement
presentation.  Such reclassifications include those related to the
presentation of discontinued operations (see Note 2) on the condensed
consolidated statements of operations.




The
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries.  All significant intercompany
transactions and balances have been eliminated upon consolidation.




Management
of the Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and revenues and expenses and the disclosure
of contingent assets and liabilities to prepare these condensed consolidated
financial statements in conformity with GAAP.  Actual results could
differ from those estimates.




The
Company’s Appalachian Basin and Mid Atlantic Well Service (“Mid Atlantic”)
operations have been classified as discontinued operations on the condensed
consolidated statement of operations for all periods
presented.  Unless otherwise indicated, information about the
statement of operations that is presented in the notes to condensed consolidated
financial statements relates only to Linn Energy’s continuing
operations.




(2)
            Assets
      Held for Sale and Discontinued
Operations




On
July 1, 2008, the Company completed the sale of its interests in oil and
gas properties located in the Appalachian Basin to XTO Energy, Inc. (“XTO”) for
a contract price of $600.0 million.  Net proceeds were $568.1 million
and the carrying value of net assets sold was $405.3 million, resulting in a
gain on the sale of $162.8 million, which is recorded in “discontinued
operations: gain on sale of assets, net of taxes” on the condensed consolidated
statements of operations.  The gain is subject to normal post-closing
adjustments.  The Company used the net proceeds from the sale to repay
loans outstanding under its term loan agreement and reduce indebtedness under
its credit facility (see Note 8).




In
addition, in March 2008, the Company exited the drilling and service business in
the Appalachian Basin provided by its wholly owned subsidiary Mid Atlantic Well
Service (“Mid Atlantic”).  At September 30, 2008, substantially
all of the property and equipment previously held by Mid Atlantic totaling $9.2
million had been sold.  During the three and nine months ended
September 30, 2008, the Company recorded a loss on the sale of the Mid
Atlantic assets of $0.3 million and $1.6 million, respectively, which is
recorded in “discontinued operations: gain on sale of assets, net of taxes” on
the condensed consolidated statements of operations.


5
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


The
following summarizes the Appalachian Basin and Mid Atlantic amounts included in
income from discontinued operations on the condensed consolidated statements of
operations.




Three
      Months Ended
                September 30,
            
            Nine
      Months Ended
                September 30,2008
            
            2007
            
            2008
            
            2007(in
      thousands)Total
      revenues and other
            
            $
            (421
            )
            
            $
            14,707
            
            
            $
            49,564
            
            
            $
            51,394Total
      operating expenses
            
            
            (1,549
            )
            
            
            (13,980
            )
            
            
            (23,779
            )
            
            
            (39,051
            )Interest
      expense
            
            
            196
            
            
            
            (5,774
            )
            
            
            (13,398
            )
            
            
            (17,246
            )Income
      (loss) from discontinued operations
            
            
            (1,774
            )
            
            
            (5,047
            )
            
            
            12,387
            
            
            
            (4,903
            )Income
      tax benefit
            
            
            ―
            
            
            
            656
            
            
            
            ―
            
            
            
            1,024Income
      (loss) from discontinued operations, net of taxes
            
            $
            (1,774
            )
            
            $
            (4,391
            )
            
            $
            12,387
            
            
            $
            (3,879
            )




The
Company computed interest expense related to discontinued operations in
accordance with Emerging Issues Task Force Issue No. 87-24, “Allocation of Interest to
Discontinued Operations” based on debt required to be repaid as a result
of the disposal transaction.




On
August 15, 2008, the Company completed the sale of certain of its assets in
the Verden area in Oklahoma to Laredo Petroleum, Inc. (“Laredo”) for a contract
price of $185.0 million, subject to closing adjustments.  Net proceeds
and the carrying value of net assets sold were approximately $167.5
million.  The Verden assets were acquired by the Company with its
acquisition of oil and gas properties from Dominion Resources, Inc. (“Dominion”)
in August 2007.  The Company used the net proceeds from the sale to
reduce indebtedness (see Note 8).




In
addition, on October 9, 2008, the Company entered into an agreement to sell
its deep rights in certain central Oklahoma acreage, which includes the Woodford
Shale interval, for a contract price of $229.1 million, subject to closing
adjustments.  The sale includes no producing reserves and Linn Energy
will retain the rights to the shallow portion of this acreage.  The
Company anticipates closing in the fourth quarter of 2008, subject to closing
conditions.  There can be no assurance that all of the conditions to
closing will be satisfied.  At September 30, 2008, the carrying value
of net assets to be sold of approximately $58.1 million is included in
“noncurrent assets held for sale” on the condensed consolidated balance
sheet.  These assets were acquired by the Company with its acquisition of
oil and gas properties from Dominion in August 2007.  The Company
plans to use the net proceeds from the sale to reduce indebtedness (see
Note 8).




(3)
            Acquisitions




The
Company accounts for its acquisitions using the purchase method of accounting as
prescribed in SFAS No. 141, “Business
Combinations.”  On January 31, 2008, the Company completed
the acquisition of certain oil and gas properties located primarily in the
Mid-Continent region from Lamamco Drilling Company (“Lamamco”) for a contract
price of $552.2 million, subject to closing adjustments (“Mid-Continent
IV”).  The acquisition was financed with a combination of borrowings
under the Company’s credit facility and proceeds from a term loan entered into
at closing (see Note 8).


6
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


The
following presents the purchase accounting for the Mid-Continent IV
acquisition, based on estimates of fair value:




Mid-Continent
      IV(in
      thousands)Cash
            
            $
            537,124Estimated
      transaction costs
            
            
            635537,759Fair
      value of liabilities assumed
            
            
            4,029Total
      purchase price
            
            $
            541,788





The
following presents the allocation of the purchase price for the
Mid-Continent IV acquisition, based on estimates of fair
value:




Mid-Continent
      IV(in
      thousands)Current
      assets
            
            $
            1,811Oil
      and gas properties
            
            
            537,868Other
      property and equipment
            
            
            2,109$
            541,788




The
purchase price and purchase price allocation above are based on reserve reports,
published market prices and estimates by management.  The most
significant assumptions are related to the estimated fair values assigned to
proved oil and gas properties.  To estimate the fair values of these
properties, the Company utilized estimates of oil and gas
reserves.  The Company estimated future prices to apply to the
estimated reserve quantities acquired, and estimated future operating and
development costs to arrive at estimates of future net revenues.  The
Company also reviewed comparable purchases and sales of oil and gas properties
within the same regions.




The
following unaudited pro forma financial information presents a summary of Linn
Energy’s consolidated results of continuing operations for the three and nine
months ended September 30, 2008 and 2007, assuming the
Mid-Continent IV acquisition had been completed as of January 1, 2007,
including adjustments to reflect the allocation of the purchase price to the
acquired net assets.  The pro forma financial information also assumes
that the following 2007 acquisitions were completed as of January 1,
2007:




·
            February 1,
      2007, acquisition of certain oil and gas properties and related assets in
      the Texas Panhandle for a contract price of $415.0 million
      (“Mid-Continent I”)




·
            June 12,
      2007, acquisition of certain oil and gas properties in the Texas Panhandle
      for a contract price of $90.5 million
      (“Mid-Continent II”)




·
            August 31,
      2007, acquisition of certain oil and gas properties in the Mid-Continent,
      in Oklahoma, Kansas and the Texas Panhandle for a contract price of
      $2.05 billion
(“Mid-Continent III”)




The
revenues and expenses of the Mid-Continent I, Mid-Continent II and
Mid-Continent III assets are included in the consolidated results of the Company
as of February 1, 2007, June 12, 2007 and


7
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


September 1,
2007, respectively.  The revenues and expenses of the
Mid-Continent IV assets are included in the consolidated results of the
Company effective February 1, 2008.  The pro forma financial
information is not necessarily indicative of the results of operations if the
acquisitions had been effective as of January 1, 2007.  All amounts
reflect continuing operations.




Three
      Months Ended September 30,
            
            Nine
      Months Ended
                September 30,2007
            
            2008
            
            2007(in
      thousands, except per unit amounts)Total
      revenues and other
            
            $
            81,183
            
            
            $
            400,323
            
            
            $
            265,758Total
      operating expenses
            
            $
            97,376
            
            
            $
            360,321
            
            
            $
            268,299Loss
      from continuing operations
            
            $
            (51,488
            )
            
            $
            (61,391
            )
            
            $
            (96,482
            )Loss
      from continuing operations per unit:Units
      – basic
            
            $
            (0.64
            )
            
            $
            (0.54
            )
            
            $
            (1.56
            )Units
      – diluted
            
            $
            (0.64
            )
            
            $
            (0.54
            )
            
            $
            (1.56
            )Class
      D – basic
            
            $
            (0.64
            )
            
            $
            ―
            
            
            $
            (1.56
            )Class
      D – diluted
            
            $
            (0.64
            )
            
            $
            ―
            
            
            $
            (1.56
            )




(4)
            Goodwill




The
entire goodwill balance of $64.4 million at December 31, 2007 related to
the Mid-Continent III acquisition in August 2007 (see
Note 3).




The
following reflects the changes in the carrying amount of goodwill during the
nine months ended September 30, 2008 and the year ended December 31,
2007 (in thousands):




Balance,
      December 31, 2006
            
            $
            —Mid-Continent
      III acquisition
            
            
            64,419Balance,
      December 31, 2007
            
            
            64,419Purchase
      accounting adjustments:Post
      closing statement and other
            
            
            7,935Verden
      assets (1)
            
            
            (19,200
            )Woodford
      Shale assets (1)
            
            
            (53,154
            )Balance,
      September 30, 2008
            
            $
            —




(1)
            Represents
      update to preliminary purchase accounting in which amounts were allocated
      to unproved oil and gas properties and subsequently sold or held for sale
      as of September 30, 2008 (see
Note 2).




(5)
            Unitholders’
      Capital




Issuance
of Units




During
the nine months ended September 30, 2008, the Company issued 410,000 units
in connection with the termination of certain contractual obligations in the
Western region (equal to a fair value of approximately $8.7
million).


8
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


During
the nine months ended September 30, 2008, the Company issued 600,000 units
in connection with the acquisition of certain gas properties in the Appalachian
Basin (equal to a fair value of approximately $14.7 million).




Cancellation
of Units




During
the nine months ended September 30, 2008, the Company purchased 94,521
restricted units from employees for approximately $2.0 million in conjunction
with the vesting of restricted unit awards.  The proceeds were used to
fund the employees’ minimum payroll taxes on the awards, and the Company
canceled the units.




(6)
            Oil
      and Gas Capitalized Costs




Aggregate
capitalized costs related to oil and gas production activities with applicable
accumulated depreciation, depletion and amortization are presented
below:




September 30,
            
            December 31,2008
            
            2007(in
      thousands)Proved
      properties:Leasehold
      acquisition
            
            $
            3,306,728
            
            
            $
            3,095,400Development
            
            
            331,914
            
            
            
            254,251Unproved
      properties
            
            
            95,833
            
            
            
            156,908Gas
      compression plant and pipelines
            
            
            87,938
            
            
            
            112,1823,822,413
            
            
            
            3,618,741Less
      accumulated depletion, depreciation and amortization
            
            
            (205,520
            )
            
            
            (127,265
            )$
            3,616,893
            
            
            $
            3,491,476




(7)
            Business
      and Credit Concentrations




For the
three and nine months ended September 30, 2008, the Company’s four largest
customers represented approximately 17%, 12%, 11% and 10% and 19%, 11%, 11% and
10%, respectively, of the Company’s sales.  For the three and nine
months ended September 30, 2007, the Company’s two largest customers
represented approximately 27% and 25%, and 31% and 25%, respectively, of the
Company’s sales.




At
September 30, 2008, three customers’ trade accounts receivable from oil,
gas and natural gas liquids (“NGL”) sales accounted for more than 10% of the
Company’s total trade accounts receivable.  As of September 30,
2008, trade accounts receivable from the Company’s three largest customers
represented approximately 19%, 14% and 10% of the Company’s
receivables.  At December 31, 2007, three customers’ trade
accounts receivable from oil, gas and NGL sales accounted for more than 10% of
the Company’s total trade accounts receivable.  As of
December 31, 2007, trade accounts receivable from the Company’s three
largest customers represented approximately 22%, 13% and 12% of the Company’s
receivables.





9
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


(8)Debt




At
September 30, 2008 and December 31, 2007, the Company had the
following debt outstanding:




September 30,
            
            December 31,2008
            
            2007(in
      thousands)Credit
      facility (1)
            
            $
            1,521,393
            
            
            $
            1,443,000Senior
      notes, net (2)
            
            
            250,086
            
            
            
            —Less
      current maturities
            
            
            —
            
            
            
            —$
            1,771,479
            
            
            $
            1,443,000




(1)
            Variable
      rate of 4.39% at September 30, 2008 and 7.02% at December 31,
      2007.




(2)
            Fixed
      rate of 9.875%; net of unamortized discount of approximately $5.8 million
      at September 30, 2008.




Credit
Facility




At
September 30, 2008, the Company had a $1.85 billion borrowing base under
its Third Amended and Restated Credit Agreement (“Credit Facility”) with a
maturity of August 2010.  During the third quarter of 2008, the
Company repaid $513.6 million in indebtedness under its Credit Facility with net
proceeds from the sales of Appalachian Basin and Verden properties (see
Note 2).




The
borrowing base under the Credit Facility will be redetermined semi-annually by
the lenders in their sole discretion, based on, among other things, reserve
reports as prepared by reserve engineers taking into account the oil and gas
prices at such time.  At the Company’s election, interest on
borrowings under the Credit Facility is determined by reference to either the
London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.00%
and 1.75% per annum or the alternate base rate (“ABR”) plus an applicable margin
between 0% and 0.25% per annum.




Certain
subsidiaries of Lehman Brothers Holdings Inc. (“Lehman Holdings”), including
Lehman Brothers Commodity Services Inc. (“Lehman Commodity Services”), were
lenders in the Company’s Credit Facility.  In September 2008 and
October 2008, Lehman Holdings and Lehman Commodity Services, respectively, filed
voluntary petitions for reorganization under Chapter 11 of the United
States Bankruptcy Code (see Note 11).  At September 30,
2008, available borrowing under the Credit Facility was $313.9 million, which
includes a $6.5 million reduction in availability for outstanding letters of
credit and an $8.2 million reduction for the unfunded portion of Lehman
Holdings’ subsidiaries’ approximate 2.5% commitment.  In October 2008,
the Company replaced Lehman Holdings’ subsidiaries with another lender and
Lehman Holdings’ subsidiaries no longer participate in the Company’s Credit
Facility.  Available borrowing under the Credit Facility was $285.2
million at October 31, 2008 which includes a $6.4 million reduction in
availability for outstanding letters of credit and the restoration of the
previously unavailable Lehman Holdings’ subsidiaries’ commitment.




Term
Loan




On
January 31, 2008, in order to fund a portion of the January 2008
acquisition of oil and gas properties in the Mid-Continent (see Note 3),
the Company entered into a $400.0 million Second Lien Term Loan Agreement (“Term
Loan”) maturing on July 31, 2009.  Interest was determined by
reference to LIBOR plus an applicable margin of 5.0% for the first twelve months
and 7.5% for the remaining period until maturity or a domestic bank rate plus an
applicable margin of 3.5% for the first twelve months and 6.0%


10
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


for the
remaining period until maturity.  On June 30, 2008, the Company
repaid $243.6 million in indebtedness under the Term Loan with net proceeds from
the Senior Notes (see below).  On July 1, 2008, the Company
repaid the balance of the term loan of $156.4 million.  Deferred
financing fees associated with the Term Loan of approximately $1.9 million and
$4.6 million were written off during the three and nine months ended
September 30, 2008, respectively.




Senior
Notes




On
June 24, 2008, the Company entered into a purchase agreement with a group
of initial purchasers (“Initial Purchasers”) pursuant to which the Company
agreed to issue $255.9 million in aggregate principal amount of the Company’s
senior notes due 2018 (“Senior Notes”).  The Senior Notes were offered
and sold to the Initial Purchasers and then resold to qualified institutional
buyers each in transactions exempt from the registration requirements under the
Securities Act of 1933, as amended (“Securities Act”).  The Company
used the net proceeds (after deducting the Initial Purchasers’ discounts and
offering expense) of approximately $243.6 million to repay loans outstanding
under the Company’s Term Loan (see above).  In connection with the
Senior Notes, the Company incurred financing fees of approximately $7.3 million,
which will be amortized over the life of the Senior Notes and recorded in
interest expense.  The $5.9 million discount on the Senior Notes will
be amortized over the life of the Senior Notes and recorded in interest
expense.




The
Senior Notes were issued under an Indenture dated June 27, 2008
(“Indenture”), mature on July 1, 2018 and bear interest at
9.875%.  Interest is payable semi-annually beginning January 1,
2009.  The Senior Notes are general unsecured senior obligations of
the Company and are effectively junior in right of payment to any secured
indebtedness of the Company to the extent of the collateral securing such
indebtedness.  Each of the Company’s material subsidiaries guaranteed
the Senior Notes on a senior unsecured basis.  The Indenture provides
that the Company may redeem: 1) on or prior to July 1, 2011, up to 35%
of the aggregate principal amount of the Senior Notes at a redemption price of
109.875% of the principal amount, plus accrued and unpaid interest,
2) prior to July 1, 2013, all or part of the Senior Notes at a
redemption price equal to the principal amount, plus a make whole premium (as
defined in the Indenture) and accrued and unpaid interest, and 3) on or
after July 1, 2013, all or part of the Senior Notes at redemption prices
equal to 104.938% in 2013, 103.292% in 2014, 101.646% in 2015 and 100% in 2016
and thereafter.  The Indenture also provides that, if a change of
control (as defined in the Indenture) occurs, the holders have a right to
require the Company to repurchase all or part of the Senior Notes at a
redemption price equal to 101%, plus accrued and unpaid interest.




The
Senior Notes’ Indenture contains covenants that, among other things, limit the
Company’s ability to: (i) pay distributions on, purchase or redeem the
Company’s units or redeem its subordinated debt; (ii) make investments;
(iii) incur or guarantee additional indebtedness or issue certain types of
equity securities; (iv) create certain liens; (v) sell assets;
(vi) consolidate, merge or transfer all or substantially all of the
Company’s assets; (vii) enter into agreements that restrict distributions
or other payments from the Company’s restricted subsidiaries to the Company;
(viii) engage in transactions with affiliates; and (ix) create
unrestricted subsidiaries.





11
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


In
connection with the issuance and sale of the Senior Notes, the Company entered
into a Registration Rights Agreement (“Registration Rights Agreement”) with the
Initial Purchasers.  Under the Registration Rights Agreement, the
Company agreed to use its reasonable best efforts to file with the SEC and cause
to become effective a registration statement relating to an offer to issue new
notes having terms substantially identical to the Senior Notes in exchange for
outstanding Senior Notes.  In certain circumstances, the Company may
be required to file a shelf registration statement to cover resales of the
Senior Notes.  The Company will not be obligated to file the
registration statements described above if the restrictive legend on the Senior
Notes has been removed and the Senior Notes are freely tradable (in each case,
other than with respect to persons that are affiliates of the Company) pursuant
to Rule 144 under the Securities Act, as of the 366th day after the Senior
Notes were issued.  If the Company fails to satisfy its obligations
under the Registration Rights Agreement, the Company may be required to pay
additional interest to holders of the Senior Notes under certain
circumstances.




(9)
            Derivatives




Commodity
Derivatives




The
Company sells oil, gas and NGL in the normal course of its business and utilizes
derivative instruments to minimize the variability in cash flows due to price
movements in oil, gas and NGL.  The Company enters into derivative
instruments such as swap contracts, collars and put options to economically
hedge a portion of its forecasted oil, gas and NGL sales.  Oil puts
are also used to economically hedge NGL sales.  The Company did not
designate these contracts as cash flow hedges under SFAS No. 133 “Accounting for Derivative
Instruments and Hedging Activities,” as amended, (“SFAS 133”);
therefore, the changes in fair value of these instruments are recorded in
current earnings.  See Note 10 for additional disclosures about
oil and gas commodity derivatives as required by Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”).




12
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


The
following table summarizes open positions as of September 30, 2008 and
represents, as of such date, derivatives in place through December 31,
2014, on annual production volumes:




Year
                2008
            
            Year
                2009
            
            Year
                2010
            
            Year
                2011
            
            Year
                2012
            
            Year
                2013
            
            Year
                2014Gas
      Positions:Fixed
      Price Swaps:Hedged
      Volume (MMMBtu)
            
            
            9,936
            
            
            
            39,586
            
            
            
            39,566
            
            
            
            31,901
            
            
            
            29,662
            
            
            
            ―
            
            
            
            ―Average
      Price ($/MMBtu)
            
            $
            8.68
            
            
            $
            8.53
            
            
            $
            8.20
            
            
            $
            8.27
            
            
            $
            8.46
            
            
            $
            ―
            
            
            $
            ―Puts:Hedged
      Volume (MMMBtu)
            
            
            1,766
            
            
            
            6,960
            
            
            
            6,960
            
            
            
            6,960
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Average
      Price ($/MMBtu)
            
            $
            8.07
            
            
            $
            7.50
            
            
            $
            7.50
            
            
            $
            7.50
            
            
            $
            ―
            
            
            $
            ―
            
            
            $
            ―PEPL
      Puts: (1)Hedged
      Volume (MMMBtu)
            
            
            964
            
            
            
            5,334
            
            
            
            10,634
            
            
            
            13,259
            
            
            
            5,934
            
            
            
            ―
            
            
            
            ―Average
      Price ($/MMBtu)
            
            $
            7.85
            
            
            $
            7.85
            
            
            $
            7.85
            
            
            $
            7.85
            
            
            $
            7.85
            
            
            $
            ―
            
            
            $
            ―Total:Hedged
      Volume (MMMBtu)
            
            
            12,666
            
            
            
            51,880
            
            
            
            57,160
            
            
            
            52,120
            
            
            
            35,596
            
            
            
            ―
            
            
            
            ―Average
      Price ($/MMBtu)
            
            $
            8.53
            
            
            $
            8.32
            
            
            $
            8.05
            
            
            $
            8.06
            
            
            $
            8.36
            
            
            $
            ―
            
            
            $
            ―Oil
      Positions:Fixed
      Price Swaps:Hedged
      Volume (MBbls)
            
            
            688
            
            
            
            2,437
            
            
            
            2,150
            
            
            
            2,073
            
            
            
            2,025
            
            
            
            2,275
            
            
            
            2,200Average
      Price ($/Bbl)
            
            $
            82.11
            
            
            $
            90.00
            
            
            $
            90.00
            
            
            $
            84.22
            
            
            $
            84.22
            
            
            $
            84.22
            
            
            $
            84.22Puts:
      (2)Hedged
      Volume (MBbls)
            
            
            467
            
            
            
            1,843
            
            
            
            2,250
            
            
            
            2,352
            
            
            
            500
            
            
            
            ―
            
            
            
            ―Average
      Price ($/Bbl)
            
            $
            73.34
            
            
            $
            120.00
            
            
            $
            110.00
            
            
            $
            69.11
            
            
            $
            77.73
            
            
            $
            ―
            
            
            $
            ―Collars:Hedged
      Volume (MBbls)
            
            
            ―
            
            
            
            250
            
            
            
            250
            
            
            
            276
            
            
            
            348
            
            
            
            ―
            
            
            
            ―Average
      Floor Price ($/Bbl)
            
            $
            ―
            
            
            $
            90.00
            
            
            $
            90.00
            
            
            $
            90.00
            
            
            $
            90.00
            
            
            $
            ―
            
            
            $
            ―Average
      Ceiling Price ($/Bbl)
            
            $
            ―
            
            
            $
            114.25
            
            
            $
            112.00
            
            
            $
            112.25
            
            
            $
            112.35
            
            
            $
            ―
            
            
            $
            ―Total:Hedged
      Volume (MBbls)
            
            
            1,155
            
            
            
            4,530
            
            
            
            4,650
            
            
            
            4,701
            
            
            
            2,873
            
            
            
            2,275
            
            
            
            2,200Average
      Price ($/Bbl)
            
            $
            78.57
            
            
            $
            102.21
            
            
            $
            99.68
            
            
            $
            77.00
            
            
            $
            83.79
            
            
            $
            84.22
            
            
            $
            84.22Gas
      Basis Differential Positions:PEPL
      Basis Swaps: (3)Hedged
      Volume (MMMBtu)
            
            
            9,036
            
            
            
            34,666
            
            
            
            29,366
            
            
            
            26,741
            
            
            
            34,066
            
            
            
            ―
            
            
            
            ―Hedged
      Differential ($/MMBtu)
            
            $
            (0.95
            )
            
            $
            (0.95
            )
            
            $
            (0.95
            )
            
            $
            (0.95
            )
            
            $
            (0.95
            )
            
            $
            ―
            
            
            $
            ―




(1)
            Settle
      on the Panhandle Eastern Pipeline (“PEPL”) spot price of gas to hedge
      basis differential associated with gas production in the Mid-Continent
      region.




(2)
            The
      Company utilizes oil puts to hedge revenues associated with its NGL
      production.




(3)
            Represents
      a swap of the basis between the New York Mercantile Exchange (“NYMEX”) and
      the PEPL spot price of gas of $(0.95) per MMBtu for the volumes
      hedged.




Settled
derivatives on gas production for the three and nine months ended
September 30, 2008 included a volume of 12,906 MMMBtu and 38,064 MMMBtu at
an average contract price of $8.53 and $8.47, respectively.  Settled
derivatives on oil and NGL production for the three and nine months ended
September 30, 2008 included a volume of 1,013 MBbls and 3,151 MBbls at an
average contract price of $78.07 and $77.56, respectively.  The gas
derivatives are settled based on the closing NYMEX future price of gas or on the
published PEPL spot price of gas on the settlement date, which occurs on the
third day


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 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


preceding
the production month.  The oil transactions are settled based on the
average month’s daily NYMEX price of light oil and settlement occurs on the
final day of the production month.




By using
derivative instruments to economically hedge exposures to changes in commodity
prices, the Company exposes itself to credit risk and market
risk.  Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract.  When the fair value of a
derivative contract is positive, the counterparty owes the Company, which
creates credit risk.  The Company minimizes the credit risk in
derivative instruments by 1) limiting its exposure to any single
counterparty, 2) entering into derivative instruments only with
counterparties that are also lenders in the Company’s Credit Facility, each of
which currently meet the Company’s minimum credit quality standard, and
3) monitoring the creditworthiness of the Company’s counterparties on an
ongoing basis.  See Note 11 for details about canceled commodity
contracts with Lehman Commodity Services.




Interest
Rate Swaps




The
Company has entered into interest rate swap agreements based on LIBOR to
minimize the effect of fluctuations in interest rates.  If LIBOR is
lower than the fixed rate in the contract, the Company is required to pay the
counterparties the difference, and conversely, the counterparties are required
to pay the Company if LIBOR is higher than the fixed rate in the
contract.  The Company did not designate the interest rate swap
agreements as cash flow hedges under SFAS No. 133; therefore, the changes
in fair value of these instruments are recorded in current
earnings.  See Note 10 for additional disclosures about interest
rate swaps as required by SFAS 157.




The
following presents the settlement terms of the interest rate swaps:




Year
                2008
            
            Year
                2009
            
            Year
                2010
            
            Year
                2011(1)(dollars
      in thousands)Notional
      Amount
            
            $
            1,212,000
            
            
            $
            1,212,000
            
            
            $
            1,212,000
            
            
            $
            1,212,000Fixed
      Rate
            
            
            4.20
            %
            
            
            5.06
            %
            
            
            5.06
            %
            
            
            5.06
            %




(1)
            Represents
      interest rate swaps that settle in January
2011.




Outstanding
Notional Amounts




The
following presents the outstanding notional amounts and maximum number of months
outstanding of derivative instruments:




September 30,
            
            December 31,2008
            
            2007Outstanding
      notional amounts of gas contracts (MMMBtu)
            
            
            209,422
            
            
            
            275,769Maximum
      number of months gas contracts outstanding
            
            
            51
            
            
            
            59Outstanding
      notional amounts of oil contracts (MBbls)
            
            
            22,383
            
            
            
            16,214Maximum
      number of months oil contracts outstanding
            
            
            75
            
            
            
            72Outstanding
      notional amount of interest rate swaps (in thousands)
            
            $
            1,212,000
            
            
            $
            1,212,000Maximum
      number of months interest rate swaps outstanding
            
            
            27
            
            
            
            36





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TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


Balance
Sheet Presentation




The
Company’s commodity derivatives and interest rate swap derivatives are presented
on a net basis in “derivative instruments” on the condensed consolidated balance
sheets.  The following summarizes the fair value of derivatives
outstanding on a gross basis:




September 30,
            
            December 31,2008
            
            2007(in
      thousands)Assets:Commodity
      derivatives
            
            $
            299,128
            
            
            $
            246,124Interest
      rate swaps
            
            
            179
            
            
            
            2,548$
            299,307
            
            
            $
            248,672Liabilities:Commodity
      derivatives
            
            $
            341,126
            
            
            $
            260,058Interest
      rate swaps
            
            
            37,739
            
            
            
            32,475$
            378,865
            
            
            $
            292,533




The
Company’s counterparties are participants in its Credit Facility (see
Note 8) which is secured by the Company’s oil and gas reserves; therefore,
the Company is not required to post any collateral.  The Company does
not require collateral from the counterparties.  The maximum amount of
loss due to credit risk, based on the gross fair value of financial instruments
that the Company would incur if its counterparties failed completely to perform
according to the terms of the contracts was approximately $8.4 million at
September 30, 2008.  In accordance with the Company’s standard
practice, its commodity and interest rate swap derivatives are subject to
counterparty netting under the agreements governing such derivatives and
therefore the risk of such loss is mitigated at September 30,
2008.




Gain
(Loss) on Derivatives




Gains and
losses on derivatives are reported on the condensed consolidated statements of
operations in “gain (loss) on oil and gas derivatives” and “loss on interest
rate swaps” and include realized and unrealized gains
(losses).  Realized gains (losses), excluding canceled commodity
derivatives, represent amounts related to the settlement of derivative
instruments, and for commodity derivatives, are aligned with the underlying
production.  Unrealized gains (losses) represent the change in fair
value of the derivative instruments and are non-cash items.  The
following presents the Company’s reported gains and losses on derivative
instruments:




Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007(in
      thousands)Realized
      gains (losses):Commodity
      derivatives
            
            $
            (28,270
            )
            
            $
            10,756
            
            
            $
            (62,289
            )
            
            $
            24,649Canceled
      commodity derivatives
            
            
            (13,161
            )
            
            
            ―
            
            
            
            (81,358
            )
            
            
            ―Interest
      rate swaps
            
            
            (5,817
            )
            
            
            647
            
            
            
            (11,479
            )
            
            
            729$
            (47,248
            )
            
            $
            11,403
            
            
            $
            (155,126
            )
            
            $
            25,378Unrealized
      gains (losses):Commodity
      derivatives (1)
            
            $
            887,249
            
            
            $
            (76,196
            )
            
            $
            (150,133
            )
            
            $
            (168,237
            )Interest
      rate swaps
            
            
            (3,877
            )
            
            
            (3,798
            )
            
            
            (6,004
            )
            
            
            (3,683
            )$
            883,372
            
            
            $
            (79,994
            )
            
            $
            (156,137
            )
            
            $
            (171,920
            )Total
      gains (losses):Commodity
      derivatives
            
            $
            845,818
            
            
            $
            (65,440
            )
            
            $
            (293,780
            )
            
            $
            (143,588
            )Interest
      rate swaps
            
            
            (9,694
            )
            
            
            (3,151
            )
            
            
            (17,483
            )
            
            
            (2,954
            )$
            836,124
            
            
            $
            (68,591
            )
            
            $
            (311,263
            )
            
            $
            (146,542
            )




(1)
            Includes
      a net unrealized gain of approximately $6.7 million related to canceled
      derivative contracts with Lehman Commodity Services (see Note 11) for
      the three and nine months ended September 30,
  2008.


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ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


During
the three and nine months ended September 30, 2008, the Company canceled
(before the contract settlement date) derivative contracts on estimated future
gas production resulting in realized losses of $13.2 million and $81.4 million,
respectively.  The future gas production under the canceled contracts
primarily related to properties in the Verden area and the Appalachian Basin
(see Note 2).




In
addition, in September 2008, the Company canceled (before the contract
settlement date) all of its commodity derivative contracts with Lehman Commodity
Services as counterparty.  The Company entered into contracts for
substantially the same volumes at identical strike prices with another
participant in its Credit Facility for a cost of approximately $67.6
million.  As a result, effective September 17, 2008, Lehman
Commodity Services was no longer a counterparty to any of the Company’s
commodity derivative contracts and the Company’s overall derivative positions
are unchanged.  See Note 11 for details about the Company’s
receivable for the canceled derivative contracts from Lehman Commodity
Services.




(10)
            Fair
      Value of Financial Instruments




The
Company accounts for its oil and gas commodity derivatives and interest rate
swaps at fair value (see Note 9) on a recurring basis.  Effective
January 1, 2008, the Company adopted SFAS 157 for these financial
instruments.  SFAS 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value hierarchy based on
the quality of inputs used to measure fair value, and enhances disclosure
requirements for fair value measurements.  The impact of the adoption
of SFAS 157 to the Company’s results of operations was a decrease to net
income by approximately $66.6 million, or $0.58 per unit, for the three months
ended September 30, 2008, resulting from an assumed credit risk
adjustment.  The impact of the adoption was an increase to net income
by approximately $21.4 million, or $0.19 per unit, for the nine months ended
September 30, 2008, resulting from an assumed credit risk
adjustment.




The fair
value of derivative instruments is determined utilizing pricing models for
significantly similar instruments.  The models use a variety of
techniques to arrive at fair value, including quotes and pricing
analysis.  Inputs to the pricing models include publicly available
prices and forward curves generated from a compilation of data gathered from
third parties.


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ENERGY, LLC
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TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


Fair
Value Hierarchy




In
accordance with SFAS 157, the Company has categorized its financial
instruments, based on the priority of inputs to the valuation technique, into a
three-level fair value hierarchy.  The fair value hierarchy gives the
highest priority to quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3).




Financial
assets and liabilities recorded on the condensed consolidated balance sheets are
categorized based on the inputs to the valuation techniques as
follows:




Level 1
            Financial
      assets and liabilities for which values are based on unadjusted quoted
      prices for identical assets or liabilities in an active market that
      management has the ability to
access.




Level 2
            Financial
      assets and liabilities for which values are based on quoted prices in
      markets that are not active or model inputs that are observable either
      directly or indirectly for substantially the full term of the asset or
      liability (commodity derivatives and interest rate
  swaps).






Level 3
            Financial
      assets and liabilities for which values are based on prices or valuation
      techniques that require inputs that are both unobservable and significant
      to the overall fair value measurement.  These inputs reflect
      management’s own assumptions about the assumptions a market participant
      would use in pricing the asset or
liability.




As
required by SFAS 157, when the inputs used to measure fair value fall
within different levels of the hierarchy in a liquid environment, the level
within which the fair value measurement is categorized is based on the lowest
level input that is significant to the fair value measurement in its
entirety.  The Company conducts a review of fair value hierarchy
classifications on a quarterly basis.  Changes in the observability of
valuation inputs may result in a reclassification for certain financial assets
or liabilities.




The
following presents the Company’s fair value hierarchy for assets and liabilities
measured at fair value on a recurring basis at September 30,
2008.  These items are included in “derivative instruments” on the
condensed consolidated balance sheet.




Fair
      Value Measurements on a Recurring Basis
                September 30,
      2008Level
      2
            
            Netting(1)
            
            Total(in
      thousands)Assets:Commodity
      derivatives
            
            $
            299,128
            
            
            $
            (235,900
            )
            
            $
            63,228Interest
      rate swaps
            
            $
            179
            
            
            $
            (179
            )
            
            $
            ―Liabilities:Commodity
      derivatives
            
            $
            341,126
            
            
            $
            (235,900
            )
            
            $
            105,226Interest
      rate swaps
            
            $
            37,739
            
            
            $
            (179
            )
            
            $
            37,560




(1)
            Represents
      counterparty netting under derivative netting
  agreements.




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TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)





(11)
            Commitments
      and Contingencies




On
September 15, 2008, Lehman Holdings filed a voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code (“Chapter
11”) with the United States Bankruptcy Court for the Southern District of New
York (the “Court”).  On October 3, 2008, Lehman Commodity Services
also filed a voluntary petition for reorganization under Chapter 11 with the
Court.  As of September 30, 2008, the Company had a receivable of
approximately $67.6 million from Lehman Commodity Services for canceled
derivative contracts (see Note 9).  The Company is pursuing
various legal remedies to protect its interests.  Based on market
expectations, at September 30, 2008, the Company estimated approximately
$6.7 million of the receivable balance to be collectible.  The net
receivable of approximately $6.7 million is included in “other current assets,
net” on the condensed consolidated balance sheet at September 30,
2008.  The associated gain of approximately $67.6 million and the
estimated loss of approximately $60.9 million is included in “gain (loss) on oil
and gas derivatives” on the condensed consolidated statements of operations for
the three and nine months ended September 30, 2008, for a net gain of
approximately $6.7 million.  The Company believes that the ultimate
disposition of this matter will not have a material adverse effect on its
business, financial position, results of operations or liquidity.




From time
to time the Company is a party to various legal proceedings or is subject to
industry rulings that could bring rise to claims in the ordinary course of
business.  The Company is not currently a party to any litigation or
pending claims that it believes would have a material adverse effect on its
business, financial position, results of operations or liquidity.












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TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)





(12)
            Earnings
      Per Unit




The
following table summarizes the calculation of basic and diluted net income
(loss) per unit:




Three
      Months Ended September 30,
            
            Nine
      Months Ended September 30,2008
            
            2007
            
            2008
            
            2007(in
      thousands, except per unit amounts)Income
      (loss) from continuing operations
            
            $
            921,943
            
            
            $
            (71,831
            )
            
            $
            (62,397
            )
            
            $
            (157,316
            )Net
      income (loss) from discontinued operations
            
            
            160,668
            
            
            
            (4,391
            )
            
            
            173,507
            
            
            
            (3,879
            )Net
      income (loss)
            
            $
            1,082,611
            
            
            $
            (76,222
            )
            
            $
            111,110
            
            
            $
            (161,195
            )Weighted
      average units outstanding:Basic
      units outstanding
            
            
            114,321
            
            
            
            69,207
            
            
            
            114,111
            
            
            
            58,072Dilutive
      effect of unit equivalents
            
            
            155
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Diluted
      units outstanding
            
            
            114,476
            
            
            
            69,207
            
            
            
            114,111
            
            
            
            58,072Weighted average Class D
      units outstanding:(1)Basic
      Class D units outstanding
            
            
            ―
            
            
            
            11,792
            
            
            
            ―
            
            
            
            3,974Dilutive
      effect of unit equivalents
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Diluted
      Class D units outstanding
            
            
            ―
            
            
            
            11,792
            
            
            
            ―
            
            
            
            3,974Net
      income (loss) per unit – continuing operations:Units
      – basic
            
            $
            8.06
            
            
            $
            (0.89
            )
            
            $
            (0.55
            )
            
            $
            (2.54
            )Units
      – diluted
            
            $
            8.05
            
            
            $
            (0.89
            )
            
            $
            (0.55
            )
            
            $
            (2.54
            )Class D
      units – basic (1)
            
            $
            ―
            
            
            $
            (0.89
            )
            
            $
            ―
            
            
            $
            (2.54
            )Class D
      units – diluted (1)
            
            $
            ―
            
            
            $
            (0.89
            )
            
            $
            ―
            
            
            $
            (2.54
            )Net
      income (loss) per unit – discontinued operations:Units
      – basic
            
            $
            1.41
            
            
            $
            (0.05
            )
            
            $
            1.52
            
            
            $
            (0.06
            )Units
      – diluted
            
            $
            1.41
            
            
            $
            (0.05
            )
            
            $
            1.52
            
            
            $
            (0.06
            )Class D
      units – basic (1)
            
            $
            ―
            
            
            $
            (0.05
            )
            
            $
            ―
            
            
            $
            (0.06
            )Class D
      units – diluted (1)
            
            $
            ―
            
            
            $
            (0.05
            )
            
            $
            ―
            
            
            $
            (0.06
            )Net
      income (loss) per unit:Units
      – basic
            
            $
            9.47
            
            
            $
            (0.94
            )
            
            $
            0.97
            
            
            $
            (2.60
            )Units
      – diluted
            
            $
            9.46
            
            
            $
            (0.94
            )
            
            $
            0.97
            
            
            $
            (2.60
            )Class D
      units – basic (1)
            
            $
            ―
            
            
            $
            (0.94
            )
            
            $
            ―
            
            
            $
            (2.60
            )Class D
      units – diluted (1)
            
            $
            ―
            
            
            $
            (0.94
            )
            
            $
            ―
            
            
            $
            (2.60
            )




(1)
            Class D
      units were converted to units on a one-for-one basis in November
      2007.




19
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ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


Basic
units outstanding excludes the effect of average anti-dilutive common stock
equivalents related to unit options and warrants and unvested restricted units
of 2.1 million and 2.5 million for the three and nine months ended
September 30, 2008, respectively.  Basic units outstanding
excludes the effect of average anti-dilutive common stock equivalents related to
unit options and warrants and unvested restricted units of 2.0 million and 1.9
million for the three and nine months ended September 30, 2007,
respectively.  In addition, basic units outstanding excludes the
effect of average anti-dilutive Class D units for the three and nine months
ended September 30, 2007.  All equivalent units were
anti-dilutive for the nine months ended September 30, 2008 and the three
and nine months ended September 30, 2007, as the Company reported a loss
from continuing operations.




(13)
            Unit-Based
      Compensation




Employee
Grants




During
the nine months ended September 30, 2008, the Company granted an aggregate
584,770 restricted units and 691,000 unit options to employees, primarily as
part of its annual review of employee compensation, with an aggregate fair value
of approximately $14.3 million.  The majority of these restricted
units and options vest ratably over three years.  In addition, during
the nine months ended September 30, 2008, the Company granted 15,784
phantom units to independent members of its Board of Directors with a fair value
of approximately $0.4 million.  The phantom units vest over one
year.  For the three and nine months ended September 30, 2008,
the Company recorded unit-based compensation expense in continuing operations of
approximately $3.9 million and $11.4 million, respectively, as a non-cash charge
against income before income taxes and it is included in “operating expenses” or
“general and administrative expenses” on the condensed consolidated statements
of operations.  For the three and nine months ended September 30,
2007, the Company recorded unit-based compensation and unit warrant expense in
continuing operations of approximately $3.1 million and $10.6 million,
respectively.




(14)
            Income
      Taxes




The
Company is a limited liability company treated as a partnership for federal and
state income tax purposes with all income tax liabilities and/or benefits of the
Company being passed through to the unitholders, with the exception of the state
of Texas.  As such, no recognition of federal income taxes for the
Company or its subsidiaries that are organized as limited liability companies
have been provided for in the accompanying financial
statements.  Limited liability companies are subject to state income
taxes in Texas.  In addition, certain of the Company’s subsidiaries
are Subchapter C-corporations subject to federal and state income
taxes.




(15)
            Related
      Party Transactions




Lehman
Holdings




During
2007 and through July 3, 2008, on an aggregate basis, a group of certain
direct or indirect wholly owned subsidiaries of Lehman Holdings owned over 10%
of the Company’s outstanding units.  As such, Lehman Holdings was
considered a related party under the provisions of SFAS No. 57 “Related Party Disclosures”
during that time frame.  Lehman Holdings’ subsidiaries provided
certain services to the Company, including participation in the Company’s Credit
Facility, Term Loan, offering of Senior Notes (see Note 8), sale of
Appalachian Basin assets (see Note 2) and sale of commodity derivative
instruments (see Note 9), which were all consummated on terms equivalent to
those that prevail in arm’s-length transactions.  A reference to
“Lehman” hereafter in this footnote refers to Lehman Holdings or one or more of
its subsidiaries, as applicable.  See Note 11 for details about
Lehman’s Chapter 11 filings.


20
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ENERGY, LLC
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TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


During
the nine months ended September 30, 2008 (through July 3), the Company
paid Lehman interest on borrowings of approximately $2.2 million and financing
fees of approximately $1.8 million.  During the three and nine months
ended September 30, 2007, the Company paid Lehman interest on borrowings of
approximately $0.5 million and $1.2 million, respectively, and financing fees of
approximately $0.1 million and $0.1 million,
respectively.




During
the three and nine months ended September 30, 2007, in conjunction with its
private placements of units, the Company paid Lehman underwriting fees of
approximately $10.0 million and $13.5 million, respectively.  Lehman
was a participant in the private placements and the Company received
approximately $260.0 million and $378.7 million, respectively, of proceeds from
Lehman in relation to these transactions during the three and nine months ended
September 30, 2007.




During
the nine months ended September 30, 2008 (through July 3), the Company
paid distributions on units to Lehman of approximately $18.5
million.  During the three and nine months ended September 30,
2007, the Company paid distributions on units to Lehman of approximately $2.4
million and $5.7 million, respectively.  During the nine months ended
September 30, 2008 (through July 3), the Company paid Lehman
approximately $18.8 million, on settled commodity derivative
contracts.  During the three and nine months ended September 30,
2007, Lehman paid the Company approximately $0.2 million and $1.1 million,
respectively, on settled commodity derivative contracts.  During the
nine months ended September 30, 2008 (through July 3), the Company
purchased approximately $1.3 million of deal contingent oil swap contracts from
Lehman.  In addition, during the three and nine months ended
September 30, 2007, the Company paid Lehman approximately $204.1 million
for oil and gas swap contracts.




The
following sets forth the amounts due to or from Lehman as of December 31,
2007 (in thousands):




Assets:Current
      oil and gas derivative assets
            
            $
            14,226Liabilities:Accrued
      interest payable
            
            $
            162Other
      current liabilities
            
            $
            1,278Long-term
      debt
            
            $
            40,404Noncurrent
      oil and gas derivative liabilities
            
            $
            7,028




Other




Eric P.
Linn, brother of the Company’s Chairman and Chief Executive Officer, served as
President of one of the Company’s wholly owned
subsidiaries.  Effective March 31, 2008, Mr. Linn’s employment
with the Company terminated and he executed a Severance Agreement and
Release.  Under the terms of that agreement, Mr. Linn will
receive $0.2 million in cash, six months of outplacement services, accelerated
vesting of certain unvested restricted units and unvested options, and payment
of COBRA coverage until December 31, 2008 or until obtainment of other
comparable health care benefits.







21
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ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)





(16)
            Supplemental
      Disclosures to the Consolidated Statements of Cash
  Flows




Nine
      Months Ended
                September 30,2008
            
            2007(in
      thousands)Supplemental
      disclosure of cash flow information:Cash
      payments for interest
            
            $
            78,176
            
            
            $
            29,339Supplemental
      disclosure of non-cash investing activities:In
      connection with the purchase of oil and gas properties,liabilities
      were assumed as follows:Fair
      value of assets acquired
            
            $
            584,238
            
            
            $
            2,581,913Cash
      paid
            
            
            (575,622
            )
            
            
            (2,572,614
            )Liabilities
      assumed, net
            
            $
            8,616
            
            
            $
            9,299Supplemental
      disclosure of non-cash financing activities:Units
      issued in connection with the purchase of oil and gas
      properties
            
            $
            23,455
            
            
            $
            ―




For
purposes of the statement of cash flows, the Company considers all highly liquid
short-term investments with original maturities of three months or less to be
cash equivalents.  Restricted cash of $1.1 million and $0.5 million is
included in “other noncurrent assets” on the condensed consolidated balance
sheets at September 30, 2008 and December 31, 2007, respectively, and
represents cash the Company has deposited into a separate account and designated
for asset retirement obligations in accordance with contractual
agreements.




The
Company manages its working capital and cash requirements to borrow only as
needed from its Credit Facility.  At December 31, 2007, the
Company had approximately $5.2 million of outstanding checks, the balance of
which is included in “other current liabilities” on the condensed consolidated
balance sheet.




(17)
            Recently
      Issued Accounting Standards




In April
2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 142-3, “Determination of the Useful Life of
Intangible Assets,”which amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset.  The intent of this FSP is to improve
the consistency between the useful life of a recognized intangible asset and the
period of expected cash flows used to measure the fair value of the
asset.  This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008.  The Company is
currently evaluating the impact the provisions of this FSP will have on its
results of operations and financial position, but does not expect it will be
material.




In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities - an Amendment of FASB Statement 133”(“SFAS 161”).SFAS 161 requires
expanded disclosure regarding derivatives and hedging activities including
disclosure of the fair values of derivative instruments and their gains and
losses in tabular form.  SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early adoption
encouraged.  The Company adopted SFAS 161 effective
January 1, 2008 (see Note 9).  The adoption of the
requirements of SFAS 161, which solely expanded disclosures, had no effect
on the Company’s results of operations or financial position.




In
February 2008, the FASB issued FASB Staff Position FAS 157-2, “Effective Date of FASB Statement
No. 157,” which defers the effective date of SFAS 157 for one
year for certain nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements


22
 Table of Contents
 LINN
ENERGY, LLC
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
  (Unaudited)


on a
recurring basis.  On January 1, 2008, the Company adopted the
provisions of SFAS 157 related to financial assets and liabilities and to
nonfinancial assets and liabilities measured at fair value on a recurring basis
(see Note 10).  On January 1, 2009, the Company will adopt
the provisions for nonfinancial assets and nonfinancial liabilities that are not
required or permitted to be measured at fair value on a recurring basis, which
include those measured at fair value in goodwill impairment testing,
indefinite-lived intangible assets measured at fair value for impairment
assessment, nonfinancial long-lived assets measured at fair value for impairment
assessment, asset retirement obligations initially measured at fair value, and
those initially measured at fair value in a business combination.  The
Company is currently evaluating the impact the provisions of SFAS 157
related to these items will have on its results of operations and financial
position.




In
October 2008, the FASB issued FASB Staff Position FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active”(“FSP 157-3”), which
clarifies the application of SFAS 157 in a market that is not
active.  FSP 157-3 is effective upon issuance and the Company is
currently evaluating the impact that FSP 157-3 will have on its results of
operations and financial position, but does not expect it will be
material.




(18)
            Subsequent
      Event




In
October 2008, the Board of Directors of the Company authorized the repurchase of
up to $100.0 million of the Company’s outstanding units.  The Company
may purchase units from time to time on the open market or in negotiated
purchases.  The timing and amounts of any such repurchases will be at
the discretion of management, subject to market conditions and other factors,
and will be in accordance with applicable securities laws and other legal
requirements.  The repurchase plan does not obligate the Company to
acquire any specific number of units and may be discontinued at any
time.








23
 Table of Contents
 Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations


The
following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this Quarterly
Report on Form 10-Q and in the Company’s Annual Report on Form
10-K.  A reference to a “Note” herein refers to the accompanying Notes
to Condensed Consolidated Financial Statements contained in Item 1. “Financial
Statements.”




Executive
Summary




Linn
Energy is an independent oil and gas company focused on the development and
acquisition of long life properties which complement its asset profile in
producing basins within the United States. From its initial public offering
in January 2006 through the date of this report (excluding the Appalachian Basin
properties sold in July 2008 discussed below), the Company has completed ten
acquisitions of working and royalty interests in oil and gas properties and
related gathering and pipeline assets.  Total acquired proved reserves
were approximately 1.7 Tcfe at an acquisition cost of approximately $2.15 per
Mcfe.  See Note 3 for details about the Company’s recent
acquisitions.  The Company finances acquisitions with a combination of
proceeds from the issuance of its units, bank borrowings and cash flow from
operations.




On
July 1, 2008, the Company completed the sale of its interests in oil and
gas properties located in the Appalachian Basin to XTO for a contract price of
$600.0 million, subject to closing adjustments (see Note 2).  The
assets include approximately 197 Bcfe of proved reserves at December 31,
2007.  Net proceeds were $568.1 million and the carrying value of net
assets sold was $405.3 million, resulting in a gain on the sale of $162.8
million, which is recorded in “discontinued operations: gain on sale of assets,
net of taxes” on the condensed consolidated statements of
operations.  The gain is subject to normal post-closing
adjustments.  The Company used the net proceeds from the sale to repay
loans outstanding under its term loan agreement and reduce indebtedness under
its Credit Facility (see Note 8).  Also, in March 2008, the
Company exited the drilling and service business in the Appalachian Basin
provided by its wholly owned subsidiary Mid Atlantic.  During the
three and nine months ended September 30, 2008, the Company recorded a loss
on the sale of the Mid Atlantic assets of $0.3 million and $1.6 million,
respectively, which is also recorded in “discontinued operations: gain on sale
of assets, net of taxes” on the condensed consolidated statements of
operations.




The
results of the Company’s Appalachian Basin and Mid Atlantic operations are
classified as discontinued operations for all periods
presented.  Unless otherwise indicated, results of operations
information presented herein relates only to Linn Energy’s continuing
operations.




Third
quarter 2008 results from continuing operations included the
following:




·
            oil,
      gas and NGL sales of approximately $240.6 million, compared to $61.3
      million in the third quarter of
2007;


·
            daily
      production of 227.4 MMcfe/d, compared to 90.6 MMcfe/d in the third quarter
      of 2007;


·
            lease
      operating expenses of $1.90 per Mcfe, compared to $2.03 per Mcfe in the
      third quarter of 2007;


·
            capital
      expenditures of $59.2 million, excluding expenditures for acquisitions and
      discontinued operations;


·
            63
      wells drilled; and


·
            average
      of 9 operated drilling rigs.




Nine
months ended September 30, 2008 results from continuing operations included
the following:




·
            oil,
      gas and NGL sales of approximately $672.1 million, compared to $117.4
      million in the nine months ended September 30,
  2007;


·
            daily
      production of 215.5 MMcfe/d, compared to 57.7 MMcfe/d in the nine months
      ended September 30, 2007;


·
            lease
      operating expenses of $1.56 per Mcfe, compared to $1.92 per Mcfe in the
      nine months ended September 30,
2007;


·
            capital
      expenditures of $222.4 million, excluding expenditures for acquisitions
      and discontinued operations; for 2008, the Company estimates its total
      capital expenditures from continuing operations will be approximately
      $300.0 million;


·
            209
      wells drilled; and


·
            average
      of 12 operated drilling rigs.


24
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Canceled
Commodity Contracts




During
the three and nine months ended September 30, 2008, the Company canceled
(before the contract settlement date) derivative contracts on estimated future
gas production resulting in realized losses of $13.2 million and $81.4 million,
respectively.  The future gas production under the canceled contracts
primarily related to properties in the Appalachian Basin and Verden areas (see
Note 2).  In addition, in September 2008, the Company canceled
(before the contract settlement date) all of its commodity derivative contracts
with Lehman Commodity Services as counterparty and entered into contracts for
substantially the same volumes at identical strike prices with another
participant in its Credit Facility for a cost of approximately $67.6
million.  As a result, effective September 17, 2008, Lehman
Commodity Services was no longer a counterparty to any of the Company’s
commodity derivative contracts and the Company’s overall derivative positions
are unchanged.




In
September and October 2008, Lehman Holdings and Lehman Commodity Services,
respectively, filed voluntary petitions for reorganization under
Chapter 11.  As of September 30, 2008, the Company had a
receivable of approximately $67.6 million from Lehman Commodity Services for
canceled derivative contracts (see Note 9).  The Company is
pursuing various legal remedies to protect its interests.  Based on
market expectations, at September 30, 2008, the Company estimated
approximately $6.7 million of the receivable balance to be
collectible.  The net receivable of approximately $6.7 million is
included in “other current assets, net” on the condensed consolidated balance
sheet at September 30, 2008.  The associated gain of
approximately $67.6 million and the estimated loss of approximately $60.9
million is included in “gain (loss) on oil and gas derivatives” on the condensed
consolidated statements of operations for the three and nine months ended
September 30, 2008, for a net gain of approximately $6.7
million.  The Company believes that the ultimate disposition of this
matter will not have a material adverse effect on its business, financial
position, results of operations or liquidity.




Asset
Sales




On
August 15, 2008, the Company completed the sale of certain of its assets in
the Verden area in Oklahoma to Laredo for a contract price of $185.0 million,
subject to closing adjustments.  The assets include approximately
50,000 net acres and 45 Bcfe of proved reserves at December 31,
2007.  Net proceeds and the carrying value of net assets sold were
approximately $167.5 million.  The Verden assets were acquired by the
Company with its acquisition of oil and gas properties from Dominion in August
2007.  The Company used the net proceeds from the sale to reduce
indebtedness (see Note 8).




In
addition, on October 9, 2008, the Company entered into an agreement to sell
its deep rights in certain central Oklahoma acreage, which includes the Woodford
Shale interval, for a contract price of $229.1 million, subject to closing
adjustments.  The sale includes approximately 38,000 net acres and no
producing reserves.  Linn Energy will retain the rights to the shallow
portion of this acreage.  The Company anticipates closing in the
fourth quarter of 2008, subject to closing conditions.  There can be
no assurance that all of the conditions to closing will be satisfied.  At
September 30, 2008, the carrying value of net assets to be sold of
approximately $58.1 million is included in “noncurrent assets held for sale” on
the condensed consolidated balance sheet.  These assets were acquired by
the Company with its acquisition of oil and gas properties from Dominion in
August 2007.  The Company plans to use the net proceeds from the sale
to reduce indebtedness (see Note 8).




Unit
Repurchase Plan




In
October 2008, the Board of Directors of the Company authorized the repurchase of
up to $100.0 million of the Company's outstanding units.  The Company
may purchase units from time to time on the open market or in negotiated
purchases.  The timing and amounts of any such repurchases will be at
the discretion of management, subject to market conditions and other factors,
and will be in accordance with applicable securities laws and other legal
requirements.  The repurchase plan does not obligate the Company to
acquire any specific number of units and may be discontinued at any
time.


25
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Results
of Operations – Continuing Operations




Three
Months Ended September 30, 2008 Compared to Three Months Ended
September 30, 2007




Three
      Months Ended September 30,2008
            
            2007
            
            Variance(in
      thousands)Revenues
      and other:Gas
      sales
            
            $
            100,558
            
            
            $
            23,913
            
            
            $
            76,645Oil
      sales
            
            
            95,888
            
            
            
            23,499
            
            
            
            72,389NGL
      sales
            
            
            44,188
            
            
            
            13,906
            
            
            
            30,282Total
      oil, gas and NGL sales
            
            
            240,634
            
            
            
            61,318
            
            
            
            179,316Gain
      (loss) on oil and gas derivatives (1)
            
            
            845,818
            
            
            
            (65,440
            )
            
            
            911,258Natural
      gas marketing revenues
            
            
            4,647
            
            
            
            2,995
            
            
            
            1,652Other
      revenues
            
            
            561
            
            
            
            924
            
            
            
            (363
            )$
            1,091,660
            
            
            $
            (203
            )
            
            $
            1,091,863Expenses:Operating
      expenses:Lease
      operating and other
            
            $
            39,730
            
            
            $
            16,880
            
            
            $
            22,850Production
      and ad valorem taxes
            
            
            17,240
            
            
            
            5,426
            
            
            
            11,814Natural
      gas marketing expenses
            
            
            4,061
            
            
            
            2,451
            
            
            
            1,610General
      and administrative expenses (2)
            
            
            18,695
            
            
            
            12,657
            
            
            
            6,038Bad
      debt expenses
            
            
            1,436
            
            
            
            ―
            
            
            
            1,436Depreciation,
      depletion and amortization
            
            
            51,727
            
            
            
            16,825
            
            
            
            34,902$
            132,889
            
            
            $
            54,239
            
            
            $
            78,650Other
      income and (expenses)
            
            $
            (35,826
            )
            
            $
            (16,412
            )
            
            $
            (19,414
            )




Notes
to table:




(1)
            During
      the three months ended September 30, 2008, the Company canceled
      (before the contract settlement date) derivative contracts on estimated
      future gas production primarily associated with properties in the Verden
      area (see Note 2) resulting in a realized loss of $13.2
      million.




(2)
            General
      and administrative expenses for the three months ended September 30,
      2008 and 2007 includes approximately $3.9 million and $3.1 million,
      respectively, of non-cash unit-based compensation and unit warrant
      expenses.










26
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued





Three
      Months Ended September 30,2008
            
            2007
            
            VarianceAverage daily production– continuing
      operations:Gas
      (MMcf/d)
            
            
            126.6
            
            
            
            51.0
            
            
            
            148.2
            %Oil
      (MBbls/d)
            
            
            9.5
            
            
            
            3.6
            
            
            
            163.9
            %NGL
      (MBbls/d)
            
            
            7.3
            
            
            
            3.0
            
            
            
            143.3
            %Total
      (MMcfe/d)
            
            
            227.4
            
            
            
            90.6
            
            
            
            151.0
            %Average daily production– discontinued
      operations:Total
      (MMcfe/d)
            
            
            1.0
            
            
            
            23.4
            
            
            
            (95.7
            )%Weighted average prices
      (hedged):(1)Gas
      (Mcf)
            
            $
            8.05
            
            
            $
            7.37
            
            
            
            9.2
            %Oil
      (Bbl)
            
            $
            85.30
            
            
            $
            70.70
            
            
            
            20.7
            %NGL
      (Bbl)
            
            $
            65.56
            
            
            $
            50.75
            
            
            
            29.2
            %Weighted average prices
      (unhedged):(2)Gas
      (Mcf)
            
            $
            8.63
            
            
            $
            5.10
            
            
            
            69.2
            %Oil
      (Bbl)
            
            $
            109.96
            
            
            $
            70.36
            
            
            
            56.3
            %NGL
      (Bbl)
            
            $
            65.56
            
            
            $
            50.75
            
            
            
            29.2
            %Representative
      NYMEX oil and gas prices:Gas
      (MMBtu)
            
            $
            10.25
            
            
            $
            6.16
            
            
            
            66.4
            %Oil
      (Bbl)
            
            $
            117.98
            
            
            $
            75.38
            
            
            
            56.5
            %Costs
      per Mcfe of production:Operating
      expenses:Lease
      operating and other
            
            $
            1.90
            
            
            $
            2.03
            
            
            
            (6.4
            )%Production
      and ad valorem taxes
            
            $
            0.82
            
            
            $
            0.65
            
            
            
            26.2
            %General
      and administrative expenses (3)
            
            $
            0.89
            
            
            $
            1.52
            
            
            
            (41.4
            )%Depreciation,
      depletion and amortization
            
            $
            2.47
            
            
            $
            2.02
            
            
            
            22.3
            %




Notes
to table:




(1)
            Includes
      the effect of realized losses of $28.2 million (excluding the $13.2
      million loss noted on the previous page) and realized gains of $10.8
      million on derivatives for the three months ended September 30, 2008
      and 2007, respectively.




(2)
            Does
      not include the effect of realized gains (losses) on
      derivatives.




(3)
            General
      and administrative expenses for the three months ended September 30,
      2008 and 2007 includes approximately $3.9 million and $3.1 million,
      respectively, of non-cash unit-based compensation and unit warrant
      expenses.  Excluding these amounts, general and administrative
      expenses for the three months ended September 30, 2008 and 2007 were
      $0.71 per Mcfe and $1.15 per Mcfe, respectively.  This is a
      non-GAAP measure used by management to analyze the Company’s
      performance.




27
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Oil,
Gas and NGL Sales




Oil, gas
and NGL sales increased by approximately $179.3 million, or 292%, to
approximately $240.6 million for the three months ended September 30, 2008,
from $61.3 million for the three months ended September 30,
2007.




The
increase in gas, oil and NGL revenues was primarily attributable to increased
production as a result of acquisitions and, to a lesser extent,
drilling.  Total production increased to 227.4 MMcfe/d during the
three months ended September 30, 2008, from 90.6 MMcfe/d during the three
months ended September 30, 2007.  The increase in production was
due primarily to the Mid-Continent III oil and gas properties acquired in
August 2007 (see Note 3).  In addition, the Company drilled 63
wells during the three months ended September 30, 2008, compared to 17
wells during the same period of 2007.  Volume increases during the
three months ended September 30, 2008 increased total gas, oil and NGL
revenues by $93.7 million compared to the same period of 2007.




Gas
production increased to 126.6 MMcf/d during the three months ended
September 30, 2008, from 51.0 MMcf/d during the three months ended
September 30, 2007, primarily due to the 2007 and 2008 acquisitions in the
Mid-Continent region (see Note 3) and to drilling.  The increase
in the weighted average price of gas for the period, to $8.63 per Mcf, from
$5.10 per Mcf, contributed approximately $41.1 million to the increase in gas
revenues.




Oil
production increased to 9.5 MBbls/d during the three months ended
September 30, 2008, from 3.6 MBbls/d during the three months ended
September 30, 2007, due to acquisitions in the Mid-Continent region and the
drilling of new wells.  Acquisitions and drilling also increased NGL
production to 7.3 MBbls/d during the three months ended September 30, 2008,
from 3.0 MBbls/d during the comparative period of the prior year.  The
increase in the weighted average price of oil for the period, to $109.96 per
Bbl, from $70.36 per Bbl, contributed approximately $34.5 million to the
increase in oil revenues.  The increase in the weighted average price
of NGL for the period, to $65.56 per Bbl, from $50.75 per Bbl, contributed
approximately $10.0 million to the increase in NGL revenues.




Commodity
Derivative Activities




The
Company determines the fair value of its oil and gas derivatives using pricing
models that use a variety of techniques, including quotes and pricing
analysis.  See Note 9 and Note 10 for additional information
and details regarding derivatives in place through December 31,
2014.  During the three months ended September 30, 2008, the
Company had commodity derivative contracts for approximately 111% of its gas
production and 66% of its oil and NGL production, which resulted in realized
losses of approximately $28.2 million, or $41.4 million including $13.2 million
of realized losses on canceled derivative contracts.  During the three
months ended September 30, 2008, the Company canceled (before the contract
settlement date) derivative contracts on estimated future gas production
primarily associated with properties in the Verden area (see Note 2)
resulting in a realized loss of approximately $13.2 million.  During
the three months ended September 30, 2007, the Company recorded realized
gains of approximately $10.8 million.  Unrealized gains and losses
result from changes in market valuations of derivatives as future commodity
price expectations change compared to the contract prices on the
derivatives.  During the third quarter of 2008, expected future oil
and gas prices decreased, which resulted in unrealized gains on derivatives of
approximately $887.2 million for the three months ended September 30,
2008.  The Company reported unrealized losses of approximately $76.2
million for the three months ended September 30, 2007.  The three
months ended September 30, 2008 also includes a net unrealized gain of
approximately $6.7 million related to canceled derivative contracts with Lehman
Commodity Services (see Note 11).




Expenses




Lease
Operating and Other


Lease
operating and other expenses include expenses such as labor, field office,
vehicle, supervision, transportation, maintenance, tools and supplies and
workover expenses.  As noted below, total lease operating expenses
increased; however, lease operating expenses per equivalent unit of production
(excluding production and ad valorem taxes) decreased to $1.90 per Mcfe for the
three months ended September 30, 2008, compared to $2.03 per Mcfe for the
three months ended September 30, 2007, due to acquired properties providing
cost efficiencies and economies of scale.


28
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Lease
operating and other expenses increased by approximately $22.8 million, or 135%,
to $39.7 million for the three months ended September 30, 2008, from $16.9
million for the three months ended September 30, 2007.  Operating
expenses increased primarily due to higher production and costs associated with
the 2007 and 2008 acquisitions in the Mid-Continent region.




Production
and Ad Valorem Taxes


Production
and ad valorem taxes were approximately 7% and 9% of total sales for the three
months ended September 30, 2008 and 2007,
respectively.  Production and ad valorem taxes increased by
approximately $11.8 million, to $17.2 million for the three months ended
September 30, 2008, from $5.4 million for the three months ended
September 30, 2007.  Production taxes, which are a function of
revenues generated from production, increased by approximately $10.6 million
compared to the same period of 2007.  Ad valorem taxes, which are
based on the value of reserves and production equipment and vary by location,
increased by approximately $1.2 million compared to the three months ended
September 30, 2007.




General
and Administrative Expenses


General
and administrative expenses are costs not directly associated with field
operations and include costs of employees and executive officers, related
benefits, office leases and professional fees.  As noted below, total
general and administrative expenses increased; however, expenses per equivalent
unit of production decreased to $0.89 per Mcfe for the three months ended
September 30, 2008, compared to $1.52 per Mcfe for the three months ended
September 30, 2007, due to increases in production, cost efficiencies and
economies of scale provided by acquired properties.




General
and administrative expenses increased by approximately $6.0 million, or 47%, to
$18.7 million for the three months ended September 30, 2008, from $12.7
million for the three months ended September 30, 2007.  The
increase in general and administrative expenses over the third quarter of 2007
was primarily due to costs incurred to support the Company’s increased size and
infrastructure growth.  Salaries and benefits expense and employee
unit-based compensation expense increased approximately $3.1 million and $0.9
million, respectively, during the three months ended September 30, 2008
compared to the same period of 2007.  Information technology costs,
such as software, data administration and data conversion costs increased by
approximately $0.7 million during the three months ended September 30, 2008
compared to the same period of 2007.  In addition, control of well
insurance expense increased by approximately $1.9 million during the three
months ended September 30, 2008, primarily for properties in the
Mid-Continent region acquired in 2007 and 2008 (see Note 3).  The
increase in general and administrative expenses was partially offset by recovery
of expenses under a transition services agreement with XTO (see
Note 2).




Bad
Debt Expenses


During
the three months ended September 30, 2008, the Company recorded bad debt
expense of approximately $1.4 million associated with accounts receivable from a
customer that filed a petition for reorganization under
Chapter 11.




Depreciation,
Depletion and Amortization


Depreciation,
depletion and amortization increased by approximately $34.9 million, to $51.7
million for the three months ended September 30, 2008, from $16.8 million
for the three months ended September 30, 2007.  Higher total
production levels, primarily due to the Company’s acquisitions in the
Mid-Continent in 2008 and 2007, were the main reason for the
increase.




Other
Income and (Expenses)


Other
income and (expenses) increased by approximately $19.4 million, to expense of
$35.8 million for the three months ended September 30, 2008, compared to
expense of $16.4 million for the three months ended September 30, 2007,
primarily due to an increase in interest expense of approximately $11.7 million
related to increased debt levels associated with borrowings to fund acquisitions
and drilling.  In addition, total losses on interest rate swaps
increased approximately $6.5 million over the prior year.  The
Company’s interest rate swaps were not designated as cash flow hedges under
SFAS 133, even though they reduce exposure to changes in interest rates
(see Note 9).  The changes in fair values of these instruments
were recorded as unrealized losses of approximately $3.9 million and $3.8
million for the three months ended September 30, 2008 and 2007,
respectively.  These amounts are non-cash


29
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


items.  Additionally,
the Company wrote-off deferred financing fees associated with its Term Loan (see
Note 8), of approximately $1.9 million during the three months ended
September 30, 2008, which contributed to the increase in other income and
(expenses).




Income
Taxes


Income
tax expense was approximately $1.0 million for both the three months ended
September 30, 2008 and 2007.  The Company is a limited liability
company treated as a partnership for federal and state income tax
purposes.  Limited liability companies are subject to state income
taxes in Texas.  Certain of the Company’s subsidiaries are
Subchapter C-corporations subject to federal and state income
taxes.  Tax expense for the three months ended September 30, 2008
primarily represents Texas margin tax expense.  Tax expense for the
three months ended September 30, 2007 relates primarily to 2006 expense
recovery.  The Company’s taxable subsidiaries generated net operating
losses for the year ended December 31, 2006, which were subsequently
recovered through an intercompany service charge, resulting in tax expense for
the three months ended September 30, 2007.







30
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Results
of Operations – Continuing Operations




Nine
Months Ended September 30, 2008 Compared to Nine Months Ended
September 30, 2007




Nine
      Months Ended
                September 30,2008
            
            2007
            
            Variance(in
      thousands)Revenues
      and other:Gas
      sales
            
            $
            304,317
            
            
            $
            41,241
            
            
            $
            263,076Oil
      sales
            
            
            257,940
            
            
            
            45,708
            
            
            
            212,232NGL
      sales
            
            
            109,835
            
            
            
            30,431
            
            
            
            79,404Total
      oil, gas and NGL sales
            
            
            672,092
            
            
            
            117,380
            
            
            
            554,712Loss
      on oil and gas derivatives (1)
            
            
            (293,780
            )
            
            
            (143,588
            )
            
            
            (150,192
            )Natural
      gas marketing revenues
            
            
            11,056
            
            
            
            7,656
            
            
            
            3,400Other
      revenues
            
            
            1,682
            
            
            
            2,056
            
            
            
            (374
            )$
            391,050
            
            
            $
            (16,496
            )
            
            $
            407,546Expenses:Operating
      expenses:Lease
      operating and other
            
            $
            92,350
            
            
            $
            30,184
            
            
            $
            62,166Production
      and ad valorem taxes
            
            
            47,382
            
            
            
            9,731
            
            
            
            37,651Natural
      gas marketing expenses
            
            
            9,738
            
            
            
            6,426
            
            
            
            3,312General
      and administrative expenses (2)
            
            
            56,093
            
            
            
            34,850
            
            
            
            21,243Data
      license expenses
            
            
            2,475
            
            
            
            ―
            
            
            
            2,475Bad
      debt expenses
            
            
            1,436
            
            
            
            ―
            
            
            
            1,436Depreciation,
      depletion and amortization
            
            
            146,210
            
            
            
            29,295
            
            
            
            116,915$
            355,684
            
            
            $
            110,486
            
            
            $
            245,198Other
      income and (expenses)
            
            $
            (96,716
            )
            
            $
            (25,327
            )
            
            $
            (71,389
            )




Notes
to table:




(1)
            During
      the nine months ended September 30, 2008, the Company canceled
      (before the contract settlement date) derivative contracts on estimated
      future gas production primarily associated with properties in the
      Appalachian Basin and Verden areas (see Note 2) resulting in realized
      losses of $81.4 million.




(2)
            General
      and administrative expenses for the nine months ended September 30,
      2008 and 2007 includes approximately $11.3 million and $10.6 million,
      respectively, of non-cash unit-based compensation and unit warrant
      expenses.




31
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued




Nine
      Months Ended
                September 30,2008
            
            2007
            
            VarianceAverage daily production– continuing
      operations:Gas
      (MMcf/d)
            
            
            126.1
            
            
            
            27.1
            
            
            
            365.3
            %Oil
      (MBbls/d)
            
            
            8.9
            
            
            
            2.9
            
            
            
            206.9
            %NGL
      (MBbls/d)
            
            
            6.0
            
            
            
            2.2
            
            
            
            172.7
            %Total
      (MMcfe/d)
            
            
            215.5
            
            
            
            57.7
            
            
            
            273.5
            %Average daily production– discontinued
      operations:Total
      (MMcfe/d)
            
            
            16.5
            
            
            
            23.4
            
            
            
            (29.5
            )%Weighted average prices
      (hedged):(1)Gas
      (Mcf)
            
            $
            8.75
            
            
            $
            8.02
            
            
            
            9.1
            %Oil
      (Bbl)
            
            $
            80.85
            
            
            $
            64.72
            
            
            
            24.9
            %NGL
      (Bbl)
            
            $
            67.34
            
            
            $
            52.42
            
            
            
            28.5
            %Weighted average prices
      (unhedged):(2)Gas
      (Mcf)
            
            $
            8.78
            
            
            $
            5.55
            
            
            
            58.2
            %Oil
      (Bbl)
            
            $
            106.06
            
            
            $
            58.23
            
            
            
            82.1
            %NGL
      (Bbl)
            
            $
            67.34
            
            
            $
            50.38
            
            
            
            33.7
            %Representative
      NYMEX oil and gas prices:Gas
      (MMBtu)
            
            $
            9.74
            
            
            $
            6.83
            
            
            
            42.6
            %Oil
      (Bbl)
            
            $
            113.29
            
            
            $
            66.23
            
            
            
            71.1
            %Costs
      per Mcfe of production:Operating
      expenses:Lease
      operating and other
            
            $
            1.56
            
            
            $
            1.92
            
            
            
            (18.8
            )%Production
      and ad valorem taxes
            
            $
            0.80
            
            
            $
            0.62
            
            
            
            29.0
            %General
      and administrative expenses (3)
            
            $
            0.95
            
            
            $
            2.21
            
            
            
            (57.0
            )%Depreciation,
      depletion and amortization
            
            $
            2.48
            
            
            $
            1.86
            
            
            
            33.3
            %




Notes
to table:




(1)
            Includes
      the effect of realized losses of $62.2 million (excluding the $81.4
      million losses noted on the previous page) and realized gains of $24.6
      million on derivatives for the nine months ended September 30, 2008
      and 2007, respectively.




(2)
            Does
      not include the effect of realized gains (losses) on
      derivatives.




(3)
            General
      and administrative expenses for the nine months ended September 30,
      2008 and 2007 includes approximately $11.3 million and $10.6 million,
      respectively, of non-cash unit-based compensation and unit warrant
      expenses.  Excluding these amounts, general and administrative
      expenses for the nine months ended September 30, 2008 and 2007 were
      $0.76 per Mcfe and $1.54 per Mcfe, respectively.  This is a
      non-GAAP measure used by management to analyze the Company’s
      performance.




32
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Oil,
Gas and NGL Sales




Oil, gas
and NGL sales increased by approximately $554.7 million, or 472%, to
approximately $672.1 million for the nine months ended September 30, 2008,
from $117.4 million for the nine months ended September 30,
2007.




The
increase in gas, oil and NGL revenues was primarily attributable to increased
production as a result of acquisitions and, to a lesser extent,
drilling.  Total production increased to 215.5 MMcfe/d during the nine
months ended September 30, 2008, from 57.7 MMcfe/d during the nine months
ended September 30, 2007.  The increase in production was due
primarily to the Mid-Continent III oil and gas properties acquired in
August 2007 (see Note 3).  In addition, the Company drilled 209
wells during the nine months ended September 30, 2008, compared to 75 wells
during the same period of 2007.  Volume increases during the nine
months ended September 30, 2008 increased total gas, oil and NGL revenues
by $299.0 million compared to the same period of 2007.




Gas
production increased to 126.1 MMcf/d during the nine months ended
September 30, 2008, from 27.1 MMcf/d during the nine months ended
September 30, 2007, primarily due to the 2007 and 2008 acquisitions in the
Mid-Continent region (see Note 3) and to drilling.  The increase
in the weighted average price of gas for the period, to $8.78 per Mcf, from
$5.55 per Mcf, contributed approximately $111.7 million to the increase in gas
revenues.




Oil
production increased to 8.9 MBbls/d during the nine months ended
September 30, 2008, from 2.9 MBbls/d during the nine months ended
September 30, 2007, due to acquisitions in the Mid-Continent region and the
drilling of new wells.  Acquisitions and drilling also increased NGL
production to 6.0 MBbls/d during the nine months ended September 30, 2008,
from 2.2 MBbls/d during the comparative period of the prior year.  The
increase in the weighted average price of oil for the period, to $106.06 per
Bbl, from $58.23 per Bbl, contributed approximately $116.3 million to the
increase in oil revenues.  The increase in the weighted average price
of NGL for the period, to $67.34 per Bbl, from $50.38 per Bbl, contributed
approximately $27.7 million to the increase in NGL revenues.




Commodity
Derivative Activities




The
Company determines the fair value of its oil and gas derivatives using pricing
models that use a variety of techniques, including quotes and pricing
analysis.  See Note 9 and Note 10 for additional information
and details regarding derivatives in place through December 31,
2014.  During the nine months ended September 30, 2008, the
Company had commodity derivative contracts for approximately 110% of its gas
production and 78% of its oil and NGL production, which resulted in realized
losses of approximately $62.2 million, or $143.6 million including $81.4 million
of realized losses on canceled derivative contracts.  During the nine
months ended September 30, 2008, the Company canceled (before the contract
settlement date) derivative contracts on estimated future gas production
primarily associated with properties in the Appalachian Basin and Verden areas
(see Note 2) resulting in realized losses of $81.4
million.  During the nine months ended September 30, 2007, the
Company recorded realized gains of approximately $24.6
million.  Unrealized gains and losses result from changes in market
valuations of derivatives as future commodity price expectations change compared
to the contract prices on the derivatives.  During the first six
months of 2008 and the first nine months of 2007, expected future oil and gas
prices increased, which resulted in unrealized losses on derivatives of
approximately $150.1 million and $168.2 million for the nine months ended
September 30, 2008 and 2007, respectively.  Market value
adjustments, if realized in the future, would be offset by higher actual prices
for production.  The nine months ended September 30, 2008 also
includes a net unrealized gain of approximately $6.7 million related to canceled
derivative contracts with Lehman Commodity Services (see
Note 11).


33
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Expenses




Lease
Operating and Other


Lease
operating and other expenses include expenses such as labor, field office,
vehicle, supervision, transportation, maintenance, tools and supplies and
workover expenses.  As noted below, total lease operating expenses
increased; however, lease operating expenses per equivalent unit of production
(excluding production and ad valorem taxes) decreased to $1.56 per Mcfe for the
nine months ended September 30, 2008, compared to $1.92 per Mcfe for the
nine months ended September 30, 2007, due to acquired properties providing
cost efficiencies and economies of scale.




Lease
operating and other expenses increased by approximately $62.2 million, or 206%,
to $92.4 million for the nine months ended September 30, 2008, from $30.2
million for the nine months ended September 30, 2007.  Operating
expenses increased primarily due to higher production and costs associated with
the 2007 and 2008 acquisitions in the Mid-Continent region, including expenses
associated with the addition of approximately 150 field and direct field support
employees in the third quarter of 2007.




Production
and Ad Valorem Taxes


Production
and ad valorem taxes were approximately 7% and 8% of total sales for the nine
months ended September 30, 2008 and 2007,
respectively.  Production and ad valorem taxes increased by
approximately $37.7 million, to $47.4 million for the nine months ended
September 30, 2008, from $9.7 million for the nine months ended
September 30, 2007.  Production taxes, which are a function of
revenues generated from production, increased by approximately $33.3 million
compared to the same period of 2007.  Ad valorem taxes, which are
based on the value of reserves and production equipment and vary by location,
increased by approximately $4.4 million compared to the nine months ended
September 30, 2007.




General
and Administrative Expenses


General
and administrative expenses are costs not directly associated with field
operations and include costs of employees and executive officers, related
benefits, office leases and professional fees.  As noted below, total
general and administrative expenses increased; however, expenses per equivalent
unit of production decreased to $0.95 per Mcfe for the nine months ended
September 30, 2008, compared to $2.21 per Mcfe for the nine months ended
September 30, 2007, due to increases in production, cost efficiencies and
economies of scale provided by acquired properties.




General
and administrative expenses increased by approximately $21.2 million, or 61%, to
$56.1 million for the nine months ended September 30, 2008, from $34.9
million for the nine months ended September 30, 2007.  The
increase in general and administrative expenses over the first nine months of
2007 was primarily due to costs incurred to support the Company’s increased size
and infrastructure growth, including the addition of a regional operating office
in Oklahoma.  Salaries and benefits expense and employee unit-based
compensation expense increased approximately $15.0 million and $2.2 million,
respectively, during the nine months ended September 30, 2008 compared to
the same period of 2007.  Information technology costs, such as
software, data administration and data conversion costs increased by
approximately $4.0 million during the nine months ended September 30, 2008
compared to the same period of 2007.  In addition, control of well
insurance expense increased by approximately $2.6 million during the nine months
ended September 30, 2008, primarily for properties in the Mid-Continent
region acquired in 2007 and 2008 (see Note 3).  The increase in
general and administrative expenses was partially offset by lower professional
service fees, unit warrant expenses and recovery of expenses under a transition
services agreement with XTO (see Note 2).




Data
License Expenses


The
Company incurred expenses of approximately $2.5 million for data license fees
during the nine months ended September 30, 2008.  These expenses
primarily represent payments for access to 3-D seismic and other data libraries
in the Mid-Continent for periods ranging from one to 50 years or more and enable
the Company to maximize drilling opportunities in that region.





34
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Bad
Debt Expenses


During
the nine months ended September 30, 2008, the Company recorded bad debt
expense of approximately $1.4 million associated with accounts receivable from a
customer that filed a petition for reorganization under
Chapter 11.




Depreciation,
Depletion and Amortization


Depreciation,
depletion and amortization increased by approximately $116.9 million, to $146.2
million for the nine months ended September 30, 2008, from $29.3 million
for the nine months ended September 30, 2007.  Higher total
production levels, primarily due to the Company’s acquisitions in the
Mid-Continent in 2008 and 2007, were the main reason for the
increase.




Other
Income and (Expenses)


Other
income and (expenses) increased by approximately $71.4 million, to expense of
$96.7 million for the nine months ended September 30, 2008, compared to
expense of $25.3 million for the nine months ended September 30, 2007,
primarily due to an increase in interest expense of approximately $51.8 million
related to higher debt levels associated with borrowings to fund acquisitions
and drilling.  In addition, total losses on interest rate swaps
increased by approximately $14.5 million over the prior year.  The
Company’s interest rate swaps were not designated as cash flow hedges under
SFAS 133, even though they reduce exposure to changes in interest rates
(see Note 9).  The changes in fair values of these instruments
were recorded as unrealized losses of approximately $6.0 million and $3.7
million for the nine months ended September 30, 2008 and 2007,
respectively.  These amounts are non-cash
items.  Additionally, the Company wrote-off deferred financing fees
associated with its Term Loan (see Note 8), of approximately $4.6 million
during the nine months ended September 30, 2008, which contributed to the
increase in other income and (expenses).




Income
Taxes


Income
tax expense was approximately $1.0 million and $5.0 million for the nine months
ended September 30, 2008 and 2007, respectively.  The Company is
a limited liability company treated as a partnership for federal and state
income tax purposes.  Limited liability companies are subject to state
income taxes in Texas.  Certain of the Company’s subsidiaries are
Subchapter C-corporations subject to federal and state income
taxes.  Tax expense for the nine months ended September 30, 2008
primarily represents Texas margin tax expense.  Tax expense for the
nine months ended September 30, 2007 relates primarily to 2006 expense
recovery.  The Company’s taxable subsidiaries generated net operating
losses for the year ended December 31, 2006, which were subsequently
recovered through an intercompany service charge, resulting in tax expense for
the nine months ended September 30, 2007.




Results
of Operations – Discontinued Operations




The
following table presents comparative data for the Company’s discontinued
operations related to its Appalachian Basin assets.  See Note 2
for additional details about discontinued operations.




Three
      Months Ended
            
            
            
            
            Nine
      Months EndedSeptember 30,
            
            
            
            
            September 30,2008
            
            2007
            
            Variance
            
            2008
            
            2007
            
            VarianceAverage
      daily production:Gas
      (MMcf/d)
            
            
            1.0
            
            
            
            22.8
            
            
            
            (95.6
            )%
            
            
            15.9
            
            
            
            22.8
            
            
            
            (30.3
            )%Oil
      (MBbls/d)
            
            
            ―
            
            
            
            0.1
            
            
            
            (100.0
            )%
            
            
            0.1
            
            
            
            0.1
            
            
            
            ―Total
      (MMcfe/d)
            
            
            1.0
            
            
            
            23.4
            
            
            
            (95.7
            )%
            
            
            16.5
            
            
            
            23.4
            
            
            
            (29.5
            )%




35
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


The sale
of properties in the Appalachian Basin (see Note 2) will produce taxable
gains or losses to unitholders.  The amount of gain or loss will be
determined at unitholder level, based on each affected unitholder’s tax basis in
the disposed properties and allocated sale proceeds and in accordance with the
terms of the Company’s Second Amended and Restated Limited Liability Company
Agreement, as amended, and the applicable tax laws, and will be reflected in
unitholder K-1s to be provided in the spring of 2009.




Liquidity
and Capital Resources




The
Company has utilized public and private equity, proceeds from bank borrowings
and cash flow from operations for capital resources and liquidity.  To
date, the primary use of capital has been for the acquisition and development of
oil and gas properties.  The Company manages its working capital and
cash requirements to borrow only as needed.  The Company had $285.2
million in available borrowing capacity at October 31, 2008.




As the
Company pursues growth, it continually monitors the capital resources available
to meet future financial obligations and planned capital
expenditures.  The Company’s future success in growing reserves and
production will be highly dependent on the capital resources available and its
success in drilling for or acquiring additional reserves.  The Company
actively reviews acquisition opportunities on an ongoing basis.  If
the Company were to make significant additional acquisitions for cash, it would
need to borrow additional amounts, if available, or obtain additional debt or
equity financing.  The Company’s Credit Facility and Senior Notes
impose certain restrictions on the Company’s ability to obtain additional debt
financing.  Based upon current expectations, the Company believes
liquidity and capital resources will be sufficient for the conduct of its
business and operations.




Cash
Flows




The
following presents a comparative cash flow summary for the periods
reported.




Nine
      Months Ended
                September 30,2008
            
            2007
            
            Variance(in
      thousands)Cash
      flow statement information:Net
      cash:Provided
      by (used in) operating activities (1)
      (2)
            
            $
            42,788
            
            
            $
            (187,968
            )
            
            $
            230,756Used
      in investing activities
            
            
            (84,105
            )
            
            
            (2,636,304
            )
            
            
            2,552,199Provided
      by financing activities
            
            
            87,145
            
            
            
            2,851,265
            
            
            
            (2,764,120
            )Increase
      in cash and cash equivalents
            
            $
            45,828
            
            
            $
            26,993
            
            
            $
            18,835





(1)
            The
      nine months ended September 30, 2008 and 2007 includes premiums paid
      for derivatives of approximately $129.5 million and $257.1 million,
      respectively.  Premiums paid during the nine months ended
      September 30, 2008 include $67.6 million for contracts that replaced
      those with Lehman Commodity Services (see
  Note 11).




(2)
            During
      the nine months ended September 30, 2008, the Company cancelled
      (before the contract settlement date) derivative contracts on estimated
      future gas production resulting in realized losses of $81.4
      million.  The future gas production under the canceled contracts
      primarily related to properties in the Appalachian Basin and Verden
      areas.




36
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Operating
Activities




At
September 30, 2008, the Company had $47.3 million cash and cash equivalents
compared to $1.4 million at December 31, 2007.  Cash provided by
operating activities for the nine months ended September 30, 2008 was
approximately $42.8 million, compared to cash used by operating activities of
$188.0 million for the nine months ended September 30, 2007.  The
increase in cash provided by operating activities was primarily due to increased
production during the nine months ended September 30,
2008.  During the nine months ended September 30, 2008, the
Company canceled (before the contract settlement date) derivative contracts on
estimated future gas production primarily associated with properties in the
Appalachian Basin and Verden areas (see Note 2) resulting in realized
losses of approximately $81.4 million.  In addition, premiums paid for
derivatives were approximately $129.5 million during the nine months ended
September 30, 2008, compared to $257.1 million during the nine months ended
September 30, 2007.  Premiums paid during the nine months ended
September 30, 2008 include $67.6 million for contracts that replaced those
with Lehman Commodity Services (see Note 11).  The premiums paid
were for derivative contracts that hedge future production for up to five
years.  These derivative contracts are expected to provide or
stabilize the Company’s future cash flow and were funded through the Company’s
Credit Facility.  See Note 9 for additional details about
commodity derivatives.  The amount of derivative contracts the Company
enters into in the future will be directly related to expected future
production.




Investing
Activities




Cash used
in investing activities was approximately $84.1 million for the nine months
ended September 30, 2008, compared to $2.64 billion for the nine months
ended September 30, 2007.  The decrease in cash used in investing
activities was due to a decrease in acquisition and development activity and an
increase in proceeds from asset sales during the nine months ended
September 30, 2008, compared to the same period of the prior
year.




The total
cash used in investing activities for the nine months ended September 30,
2008 includes $510.1 million for the January 2008 acquisition of properties in
the Mid-Continent (see Note 3).  Other acquisitions, including
acquisitions of additional working interests in current wells, were
approximately $65.5 million and other property and equipment purchases were $2.8
million.  The total for the nine months ended September 30, 2008
also includes approximately $249.8 million for the drilling and development of
oil and gas properties.  During the nine months ended
September 30, 2008, the Company also received proceeds from the sale of oil
and gas properties to XTO and Laredo, and other plant and equipment of
approximately $744.1 million (see Note 2).




Financing
Activities




Cash
provided by financing activities was approximately $87.1 million for the nine
months ended September 30, 2008, compared to $2.85 billion for the nine
months ended September 30, 2007.  During the nine months ended
September 30, 2008, total proceeds from the issuance of debt were $1.42
billion and total repayments of debt were $1.10 billion.  See
additional discussion about the Company’s Credit Facility, Term Loan and Senior
Notes below.  In addition, see detail of distributions paid during the
nine months ended September 30, 2008 below.


37
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Distributions




Under the
limited liability company agreement, Company unitholders are entitled to receive
a quarterly distribution of available cash to the extent there is sufficient
cash from operations after establishment of cash reserves and payment of fees
and expenses.  The following provides a summary of distributions paid
by the Company during the nine months ended September 30,
2008:




DistributionsDate
      Paid
            
            Period
      Covered by Distribution
            
            Per
      Unit
            
            Total(in
      millions)August
      2008
            
            April
      1 – June 30, 2008
            
            $
            0.63
            
            
            $
            72.6May
      2008
            
            January
      1 – March 31, 2008
            
            $
            0.63
            
            
            $
            72.6February
      2008
            
            October 1
      – December 31, 2007
            
            $
            0.63
            
            
            $
            72.2




In
October 2008, the Company’s Board of Directors declared a cash distribution of
$0.63 per unit, or $2.52 per unit on an annualized basis, with respect to the
third quarter of 2008.  The distribution totaling approximately $72.6
million will be paid on November 14, 2008 to unitholders of record as of
the close of business on November 7, 2008.




Credit
Facility




At
October 31, 2008, the Company had a $1.85 billion borrowing base under its
Credit Facility with a maturity of August 2010 (see
Note 8).  During the third quarter of 2008, the Company repaid
$513.6 million in indebtedness under its Credit Facility with net proceeds from
the sales of Appalachian Basin and Verden properties (see
Note 2).




The
borrowing base under the Credit Facility will be redetermined semi-annually by
the lenders in their sole discretion, based on, among other things, reserve
reports as prepared by reserve engineers taking into account the oil and gas
prices at such time.  At the Company’s election, interest on
borrowings under the Credit Facility is determined by reference to either LIBOR
plus an applicable margin between 1.00% and 1.75% per annum or the ABR plus an
applicable margin between 0% and 0.25% per annum.  As noted above, the
Company depends on its Credit Facility for future capital needs.  In
addition, the Company has drawn on the Credit Facility to fund or partially fund
quarterly cash distribution payments, since it uses operating cash flows for
investing activities and borrows as cash is needed.  Absent such
borrowing, the Company would have at times experienced a shortfall in cash
available to pay the declared quarterly cash distribution amount.  If
an event of default occurs and is continuing under the Credit Facility, the
Company would be unable to make borrowings to fund distributions.




Certain
subsidiaries of Lehman Holdings, including Lehman Commodity Services, were
lenders in the Company’s Credit Facility.  In September 2008 and
October 2008, Lehman Holdings and Lehman Commodity Services, respectively, filed
voluntary petitions for reorganization under Chapter 11 (see
“Contingencies” below).  In October 2008, the Company replaced Lehman
Holdings’ subsidiaries with other lenders and Lehman Holdings’ subsidiaries no
longer participate in the Company’s Credit Facility.  Available
borrowing under the Credit Facility was $285.2 million at October 31, 2008
which includes a $6.4 million reduction in availability for outstanding letters
of credit.




Term
Loan




On
January 31, 2008, in order to fund a portion of the January 2008
acquisition of oil and gas properties in the Mid-Continent (see Note 3),
the Company entered into a $400.0 million Term Loan maturing on July 31,
2009 (see Note 8).  On June 30, 2008, the Company repaid
$243.6 million in indebtedness under the Term Loan with net proceeds from the
Senior Notes (see below).  On July 1, 2008, the Company repaid
the balance of the term loan of $156.4 million.  Deferred financing
fees associated with the Term Loan of approximately $1.9 million and $4.6
million were written off during the three and nine months ended
September 30, 2008, respectively.


38
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Senior
Notes




On
June 24, 2008, the Company entered into a purchase agreement with a group
of Initial Purchasers pursuant to which the Company agreed to issue $255.9
million in aggregate principal amount of the Company’s Senior Notes due 2018
(see Note 8).  The Senior Notes were offered and sold to the
Initial Purchasers and then resold to qualified institutional buyers each in
transactions exempt from the registration requirements under the Securities
Act.  The Company used the net proceeds (after deducting the Initial
Purchasers’ discounts and offering expense) of approximately $243.6 million to
repay loans outstanding under the Company’s Term Loan (see above).  In
connection with the Senior Notes, the Company incurred financing fees of
approximately $7.3 million, which will be amortized over the life of the Senior
Notes and recorded in interest expense.  The $5.9 million discount on
the Senior Notes will be amortized over the life of the Senior Notes and
recorded in interest expense.




The
Senior Notes were issued under an Indenture dated June 27, 2008, mature on
July 1, 2018 and bear interest at 9.875%.  Interest is payable
semi-annually beginning January 1, 2009.  The Senior Notes are
general unsecured senior obligations of the Company and are effectively junior
in right of payment to any secured indebtedness of the Company to the extent of
the collateral securing such indebtedness.  Each of the Company’s
material subsidiaries guaranteed the Senior Notes on a senior unsecured
basis.  The Indenture provides that the Company may redeem: 1) on
or prior to July 1, 2011, up to 35% of the aggregate principal amount of
the Senior Notes at a redemption price of 109.875% of the principal amount, plus
accrued and unpaid interest, 2) prior to July 1, 2013, all or part of
the Senior Notes at a redemption price equal to the principal amount, plus a
make whole premium (as defined in the Indenture) and accrued and unpaid
interest, and 3) on or after July 1, 2013, all or part of the Senior
Notes at redemption prices equal to 104.938% in 2013, 103.292% in 2014, 101.646%
in 2015 and 100% in 2016 and thereafter.  The Indenture also provides
that, if a change of control (as defined in the Indenture) occurs, the holders
have a right to require the Company to repurchase all or part of the Senior
Notes at a redemption price equal to 101%, plus accrued and unpaid
interest.




The
Senior Notes’ Indenture contains covenants that, among other things, limit the
Company’s ability to: (i) pay distributions on, purchase or redeem the
Company’s units or redeem its subordinated debt; (ii) make investments;
(iii) incur or guarantee additional indebtedness or issue certain types of
equity securities; (iv) create certain liens; (v) sell assets;
(vi) consolidate, merge or transfer all or substantially all of the
Company’s assets; (vii) enter into agreements that restrict distributions
or other payments from the Company’s restricted subsidiaries to the Company;
(viii) engage in transactions with affiliates; and (ix) create
unrestricted subsidiaries.




In
connection with the issuance and sale of the Senior Notes, the Company entered
into a Registration Rights Agreement with the Initial
Purchasers.  Under the Registration Rights Agreement, the Company
agreed to use its reasonable best efforts to file with the SEC and cause to
become effective a registration statement relating to an offer to issue new
notes having terms substantially identical to the Senior Notes in exchange for
outstanding Senior Notes.  In certain circumstances, the Company may
be required to file a shelf registration statement to cover resales of the
Senior Notes.  The Company will not be obligated to file the
registration statements described above if the restrictive legend on the Senior
Notes has been removed and the Senior Notes are freely tradable (in each case,
other than with respect to persons that are affiliates of the Company) pursuant
to Rule 144 under the Securities Act, as of the 366th day after the Senior
Notes were issued.  If the Company fails to satisfy its obligations
under the Registration Rights Agreement, the Company may be required to pay
additional interest to holders of the Senior Notes under certain
circumstances.




Fair
Value of Financial Instruments




The
Company accounts for its oil and gas commodity derivatives and interest rate
swaps at fair value (see Note 9) on a recurring basis.  Effective
January 1, 2008, the Company adopted SFAS 157 for these financial
instruments.  SFAS 157 defines fair value, establishes a
framework for measuring fair value, establishes a fair value hierarchy based on
the quality of inputs used to measure fair value, and enhances disclosure
requirements for fair value measurements.  The impact of the adoption
of SFAS 157 to the Company’s results of operations was a decrease to net
income by approximately $66.6 million, or $0.58 per unit, for the three months
ended September 30, 2008, resulting from an assumed credit risk
adjustment.  The impact of the adoption was an increase to net income
by


39
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


approximately
$21.4 million, or $0.19 per unit, for the nine months ended September 30,
2008, resulting from an assumed credit risk adjustment.




The
Company’s counterparties are participants in its Credit Facility (see
Note 8) which is secured by the Company’s oil and gas reserves; therefore,
the Company is not required to post any collateral.  The Company does
not require collateral from the counterparties.  The maximum amount of
loss due to credit risk, based on the gross fair value of financial instruments
that the Company would incur if its counterparties failed completely to perform
according to the terms of the contracts was approximately $8.4 million at
September 30, 2008.  In accordance with the Company’s standard
practice, its commodity and interest rate swap derivatives are subject to
counterparty netting under agreements governing such derivatives and therefore
the risk of such loss is mitigated at September 30, 2008.




Off-Balance
Sheet Arrangements




At
September 30, 2008, the Company did not have any off-balance sheet
arrangements.




Contingencies




In
September and October 2008, Lehman Holdings and Lehman Commodity Services,
respectively, filed voluntary petitions for reorganization under Chapter 11
(see Note 11).  As of September 30, 2008, the Company had a
receivable of approximately $67.6 million from Lehman Commodity Services for
canceled derivative contracts (see Note 9).  The Company is
pursuing various legal remedies to protect its interests.  Based on
market expectations, at September 30, 2008, the Company estimated
approximately $6.7 million of the receivable balance to be
collectible.  The net receivable of approximately $6.7 million is
included in “other current assets, net” on the condensed consolidated balance
sheet at September 30, 2008.  The associated gain of
approximately $67.6 million and the estimated loss of approximately $60.9
million is included in “gain (loss) on oil and gas derivatives” on the condensed
consolidated statements of operations for the three and nine months ended
September 30, 2008, for a net gain of approximately $6.7
million.  The Company believes that the ultimate disposition of this
matter will not have a material adverse effect on its business, financial
position, results of operations or liquidity.




During
the nine months ended June 2008 and 2007, the Company made no significant
payments to settle any legal, environmental or tax proceedings.  The
Company regularly analyzes current information and accrues for probable
liabilities on the disposition of certain matters, as
necessary.  Liabilities for loss contingencies arising from claims,
assessments, litigation or other sources are recorded when it is probable that a
liability has been incurred and the amount can be reasonably
estimated.




Commitments
and Contractual Obligations




The
Company has contractual obligations for long-term debt, operating leases and
other long-term liabilities that were summarized in a table of contractual
obligations in the 2007 Annual Report on Form 10-K.  With the
exception of a $400.0 million Term Loan (repaid in July 2008) and $255.9 million
of Senior Notes, as of September 30, 2008, there have been no significant
changes to the Company’s contractual obligations from December 31,
2007.  See “Term Loan” and “Senior Notes” above for additional
details.





40
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Critical
Accounting Policies and Estimates




The
discussion and analysis of the Company’s financial condition and results of
operations is based upon the consolidated financial statements, which have been
prepared in accordance with GAAP.  The preparation of these financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities.  Certain accounting
policies involve judgments and uncertainties to such an extent that there is
reasonable likelihood that materially different amounts could have been reported
under different conditions, or if different assumptions had been
used.  The Company evaluates its estimates and assumptions on a
regular basis.  The Company bases estimates on historical experience
and various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources.  Actual results may differ from these estimates and
assumptions used in the preparation of financial statements.




As of
September 30, 2008, there have been no significant changes with regard to
the critical accounting policies disclosed in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007.  The
policies disclosed included the accounting for oil and gas properties, revenue
recognition, purchase accounting and derivative instruments.




New
Accounting Standards




See
Note 17 for detail regarding SFAS 157 implementation effective
January 1, 2008 and January 1, 2009, and also for detail regarding
SFAS 161 implementation effective January 1, 2008.





41
 Table of Contents
 Item
      2. Management’s Discussion and Analysis of Financial Condition and Results
      of Operations - Continued


Cautionary
Statement




This
Quarterly Report on Form 10-Q contains forward-looking statements that are
subject to a number of risks and uncertainties, many of which are beyond the
Company’s control.  These statements may include statements about the
Company’s:




·
            business
      strategy;


·
            acquisition
      strategy;


·
            financial
      strategy;


·
            drilling
      locations;


·
            oil,
      gas and NGL reserves;


·
            realized
      oil, gas and NGL prices;


·
            production
      volumes;


·
            lease
      operating expenses, general and administrative expenses and finding and
      development costs;


·
            future
      operating results; and


·
            plans,
      objectives, expectations and
intentions.




All of
these types of statements, other than statements of historical fact included in
this Quarterly Report on Form 10-Q, are forward looking
statements.  These forward-looking statements may be found in
Item 2.  In some cases, forward-looking statements can be
identified by terminology such as “may,” “will,” “could,” “should,” “expect,”
“plan,” “project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “pursue,” “target,” “continue,” the negative of such terms or other
comparable terminology.




The
forward-looking statements contained in this Quarterly Report on Form 10-Q
are largely based on Company expectations, which reflect estimates and
assumptions made by Company management.  These estimates and
assumptions reflect management’s best judgment based on currently known market
conditions and other factors.  Although the Company believes such
estimates and assumptions to be reasonable, they are inherently uncertain and
involve a number of risks and uncertainties beyond its control.  In
addition, management’s assumptions may prove to be inaccurate.  The
Company cautions that the forward-looking statements contained in this Quarterly
Report on Form 10-Q are not guarantees of future performance, and it cannot
assure any reader that such statements will be realized or the forward-looking
statements or events will occur.  Actual results may differ materially
from those anticipated or implied in forward-looking statements due to factors
listed in “Item 1A. Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2007 and herein, and
elsewhere in the Annual Report and also in the Company’s Quarterly Reports on
Form 10-Q.  The forward-looking statements speak only as of the
date made, and other than as required by law, the Company undertakes no
obligation to publicly update or revise any forward-looking statement, whether
as a result of new information, future events or otherwise.


42
 Table of Contents
 Item 3. Quantitative and Qualitative Disclosures About Market Risk


The
primary objective of the following information is to provide forward-looking
quantitative and qualitative information about potential exposure to market
risks.  A reference to a “Note” herein refers to the accompanying
Notes to Condensed Consolidated Financial Statements contained in Item 1.
“Financial Statements.”




Commodity
Price Risk




The
Company enters into derivative contracts with respect to a portion of its
projected production through various transactions that provide an economic hedge
of the risk related to the future prices received.  The Company does
not enter into derivative contracts for trading purposes.  See
Note 9 for additional details.  At September 30, 2008, the
fair value of contracts that settle during the next twelve months was an asset
of approximately $58.3 million and a liability of approximately $1.9 million for
a net asset of approximately $56.4 million, for which the Company is owed by its
counterparties.  A 10% increase in the index oil and gas prices above
the September 30, 2008 prices for the next twelve months would result in a
net liability of approximately $27.5 million which represents a decrease in the
fair value of approximately $83.9 million; conversely, a 10% decrease in the
index oil and gas prices would result in a net asset of approximately $143.4
million which represents an increase in the fair value of approximately $87.0
million.




Interest
Rate Risk




At
September 30, 2008, the Company had long-term debt outstanding under its
Credit Facility of approximately $1.52 billion, which incurred interest at
floating rates.  See Note 8 for additional details.  As
of September 30, 2008, the interest rate based on LIBOR was approximately
4.39%.  A 1% increase in LIBOR would result in an estimated $15.2
million increase in annual interest expense.  The Company has entered
into interest rate swap agreements based on LIBOR to minimize the effect of
fluctuations in interest rates.  See Note 9 for additional
details.


43
 Table of Contents
 Item 4. Controls and Procedures


Evaluation
of Disclosure Controls and Procedures




The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s reports under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to management, including the Company’s Chief Executive Officer and Chief
Financial Officer, and the Company’s Audit Committee of the Board of Directors,
as appropriate, to allow timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.




The
Company carried out an evaluation under the supervision and with the
participation of its management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its disclosure controls and
procedures as of the end of the period covered by this report.  Based
on this evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of September 30, 2008.




Changes
in the Company’s Internal Control Over Financial Reporting




The
Company’s management is also responsible for establishing and maintaining
adequate internal controls over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act.  The
Company’s internal controls were designed to provide reasonable assurance as to
the reliability of its financial reporting and the preparation and presentation
of the consolidated financial statements for external purposes in accordance
with accounting principles generally accepted in the United States.




There
were no changes in the Company’s internal controls over financial reporting
during the three months ended September 30, 2008 that materially affected,
or were reasonably likely to materially affect, the Company’s internal control
over financial reporting.


44
 Table of Contents
 PART II – OTHER INFORMATION


Item 1.        Legal
Proceedings




Not
applicable.




Item 1A.     Risk
Factors




Part I,
Item 1A, “Risk Factors,” included in the Company’s Annual Report
Form 10-K for the year ended December 31, 2007 includes a detailed
discussion of the Company’s risk factors.  The information presented
below updates, and should be read in conjunction with, the risk factors and
information disclosed in the Company’s 2007 Form 10-K.




Disruptions
in the capital and credit markets as a result of the global financial crisis may
adversely affect our hedge positions.




To
achieve more predictable cash flow and to reduce our exposure to fluctuations in
the prices of oil, gas and NGL, we enter into hedging arrangements for a
significant portion of our production.  Given the recent failures of
major financial institutions, we cannot be assured that our counterparties will
be able to perform under our hedge contracts.  If a counterparty fails
to perform and the hedging arrangement is terminated, our cash flow, and ability
to pay distributions could be impacted.




Unitholders
may be subject to taxable gains upon dispositions of properties.




We may
dispose of properties in transactions that result in gains that will be
allocated to you, and such gains may be either ordinary gains or capital gains
to you.  Even where we dispose of properties that are capital assets,
what otherwise would be capital gains to you may be recharacterized as ordinary
gains in order to “recapture” ordinary deductions that were previously allocated
to you related to the same properties.  In addition, such an
allocation of ordinary or capital gains may increase your taxable income, and
you may be required to pay federal income taxes and state and local income
taxes, even if we have not made a cash distribution to you subsequent to our
disposal of the properties.  Your allocable share of the taxable gains
also may be greater than your interest in our profits.  If you
contributed property in exchange for our units, your capital account would have
been credited with the fair market value of the property at the time (your
“book” basis), which may have exceeded your “tax” basis of
property.  This could also be the case if you held our units at a time
when we issued additional units to other unitholders (resulting in a revaluation
of our assets).  Gains are required to be allocated to you in order to
eliminate this “book-tax disparity.”




Item 2.        Unregistered
Sales of Equity Securities and Use of Proceeds




None.




Item 3.        Defaults
Upon Senior Securities




None.




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




None.




Item 5.        Other
Information




None.


45
 Table of Contents
 Item 6.        Exhibits




Exhibit Number
            
            
            
            Description2
            .1*†
            
            —
            
            Asset
      Purchase and Sale Agreement, dated October 9, 2008, between Linn
      Energy Holdings, LLC, Mid-Continent I, LLC, Mid-Continent II, LLC, Linn
      Operating, Inc. and Devon Energy Production Company, LP2
            .2†
            
            —
            
            First
      Amendment, dated as of August 6, 2008, to Asset Purchase and Sale
      Agreement between Linn Energy Holdings, LLC, Linn Operating, Inc.,
      Mid-Continent I, LLC, Mid-Continent II, LLC, Linn Exploration
      Mid-Continent, LLC, as sellers, and Laredo Petroleum, Inc., as
      buyer10
            .1
            
            —
            
            Fourth
      Amendment, dated effective August 20, 2008, to Third Amended and
      Restated Credit Agreement among Linn Energy, LLC, as Borrower, BNP
      Paribas, as Administrative Agent, and the lenders and agents party thereto
      (incorporated herein by reference to Exhibit 10.1 to Current Report
      on Form 8-K filed on August 26, 2008)31
            .1†
            
            —
            
            Section 302
      Certification of Michael C. Linn, Chairman and Chief Executive
      Officer of Linn Energy, LLC31
            .2†
            
            —
            
            Section 302
      Certification of Kolja Rockov, Executive Vice President and Chief
      Financial Officer of Linn Energy, LLC32
            .1†
            
            —
            
            Section 906
      Certification of Michael C. Linn, Chairman and Chief Executive
      Officer of Linn Energy, LLC32
            .2†
            
            —
            
            Section 906
      Certification of Kolja Rockov, Executive Vice President and Chief
      Financial Officer of Linn Energy,
LLC




†
            Filed
      herewith.




*
            The
      schedules to this agreement have been omitted from this filing pursuant to
      Item 601(b)(2) of Regulation S-K.  The Company will
      furnish copies of such schedules to the Securities and Exchange Commission
      upon request.





46
 Table of Contents


SIGNATURE




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




LINN
      ENERGY, LLC(Registrant)Date:
      November 6, 2008
            /s/  David
      B. RottinoDavid
      B. RottinoSenior
      Vice President and Chief Accounting Officer(As
      Duly Authorized Officer and Chief Accounting
  Officer)