##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    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
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 000-22433
 Brigham Exploration Company
  Delaware
    
    1311
    
    75-2692967(State of other jurisdiction
    
    (Primary Standard Industrial
    
    (I.R.S. Employerof incorporation or organization)
    
    Classification Code Number)
    
    Identification Number)
 6300 Bridge Point Parkway, Building 2, Suite 500, Austin, Texas 78730
 (512) 427-3300
  þ o
  Large Accelerated Filer
o
    
    Accelerated Filer
þ
    
    Non-Accelerated Filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
  o þ
 Class
    
    OutstandingCommon Stock, par value
$.01 per share as of November 3, 2008
    
    46,510,925




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##### 



Brigham Exploration Company
 Third Quarter 2008 Form 10-Q Report
 TABLE OF CONTENTS
 PagePART I  FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSConsolidated Balance Sheets  September 30, 2008 and December 31, 2007
    
    
    1Consolidated Statements of Operations  Three and nine months ended September 30, 2008 and 2007
    
    
    2Consolidated Statement of Stockholders Equity  Nine months ended September 30, 2008
    
    
    3Consolidated Statements of Cash Flows  Nine months ended September 30, 2008 and 2007
    
    
    4Notes to the Consolidated Financial Statements
    
    
    5ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    15ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    32ITEM 4. CONTROLS AND PROCEDURES
    
    
    34PART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    35ITEM 1.A. RISK FACTORS
    
    
    35ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    35ITEM 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    35ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
    
    
    35ITEM 5. OTHER INFORMATION
    
    
    35ITEM 6. EXHIBITS
    
    
    35SIGNATURES
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share data)
(Unaudited)
 September 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    8,663
    
    
    $
    13,863Restricted cash
    
    
    2,562
    
    
    
    Accounts receivable
    
    
    28,436
    
    
    
    14,609Derivative assets
    
    
    1,876
    
    
    
    1,416Other current assets
    
    
    6,006
    
    
    
    2,617Total current assets
    
    
    47,543
    
    
    
    32,505Oil and natural gas properties, using the full cost method includingProved, net
    
    
    506,507
    
    
    
    448,663Unproved
    
    
    105,194
    
    
    
    61,544611,701
    
    
    
    510,207Other property and equipment, net
    
    
    968
    
    
    
    1,034Land
    
    
    404
    
    
    
    Deferred loan fees, net
    
    
    3,278
    
    
    
    3,687Other noncurrent assets
    
    
    4,367
    
    
    
    995Total assets
    
    $
    668,261
    
    
    $
    548,428LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    30,949
    
    
    $
    12,301Royalties payable
    
    
    7,662
    
    
    
    5,978Accrued drilling costs
    
    
    14,782
    
    
    
    14,841Participant advances received
    
    
    1,591
    
    
    
    2,095Derivative liabilities
    
    
    1,041
    
    
    
    1,812Other current liabilities
    
    
    8,748
    
    
    
    4,691Total current liabilities
    
    
    64,773
    
    
    
    41,718Senior Notes
    
    
    158,670
    
    
    
    158,492Senior credit facility
    
    
    72,900
    
    
    
    10,000Series A Preferred Stock, mandatorily redeemable, $.01 par value,
$20 stated and redemption value, 2,250,000 shares authorized,
505,051 shares issued and outstanding at September 30, 2008 and
December 31, 2007
    
    
    10,101
    
    
    
    10,101Deferred income taxes
    
    
    54,827
    
    
    
    41,625Other taxes payable
    
    
    332
    
    
    
    2,162Other noncurrent liabilities
    
    
    5,475
    
    
    
    5,303Commitments and contingencies (Note 4)Stockholders equity:Common stock, $.01 par value, 90 million shares authorized,
45,818,667 and 45,304,139 shares issued and 45,678,105 and
45,197,303 shares outstanding at September 30, 2008 and
December 31, 2007, respectively
    
    
    458
    
    
    
    453Additional paid-in capital
    
    
    211,824
    
    
    
    207,526Treasury stock, at cost; 140,562 and 106,836 shares at September
30, 2008 and December 31, 2007, respectively
    
    
    (1,190
    )
    
    
    (854
    )Accumulated other comprehensive income (loss)
    
    
    
    
    
    
    115Retained earnings
    
    
    90,091
    
    
    
    71,787Total stockholders equity
    
    
    301,183
    
    
    
    279,027Total liabilities and stockholders equity
    
    $
    668,261
    
    
    $
    548,428
   1




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Oil and natural gas sales
    
    $
    31,731
    
    
    $
    29,481
    
    
    $
    101,112
    
    
    $
    92,250Gain (loss) on derivatives, net
    
    
    15,435
    
    
    
    1,648
    
    
    
    (3,928
    )
    
    
    420Other revenue
    
    
    25
    
    
    
    17
    
    
    
    104
    
    
    
    7347,191
    
    
    
    31,146
    
    
    
    97,288
    
    
    
    92,743Costs and expenses:Lease operating
    
    
    3,092
    
    
    
    2,564
    
    
    
    8,626
    
    
    
    8,458Production taxes
    
    
    1,383
    
    
    
    951
    
    
    
    4,107
    
    
    
    1,573General and administrative
    
    
    2,502
    
    
    
    2,514
    
    
    
    7,691
    
    
    
    6,973Depletion of oil and natural gas properties
    
    
    11,718
    
    
    
    14,776
    
    
    
    36,566
    
    
    
    45,347Impairment of oil and natural gas properties
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,505Depreciation and amortization
    
    
    159
    
    
    
    147
    
    
    
    464
    
    
    
    468Accretion of discount on asset retirement obligations
    
    
    83
    
    
    
    87
    
    
    
    263
    
    
    
    29818,937
    
    
    
    21,039
    
    
    
    57,717
    
    
    
    69,622Operating income
    
    
    28,254
    
    
    
    10,107
    
    
    
    39,571
    
    
    
    23,121Other income (expense):Interest income
    
    
    49
    
    
    
    271
    
    
    
    163
    
    
    
    536Interest expense, net
    
    
    (3,762
    )
    
    
    (3,976
    )
    
    
    (10,663
    )
    
    
    (11,071
    )Other income (expense)
    
    
    16
    
    
    
    105
    
    
    
    419
    
    
    
    1,007(3,697
    )
    
    
    (3,600
    )
    
    
    (10,081
    )
    
    
    (9,528
    )Income before income taxes
    
    
    24,557
    
    
    
    6,507
    
    
    
    29,490
    
    
    
    13,593Income tax expense:Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    (9,297
    )
    
    
    (2,324
    )
    
    
    (11,186
    )
    
    
    (5,227
    )(9,297
    )
    
    
    (2,324
    )
    
    
    (11,186
    )
    
    
    (5,227
    )Net income
    
    $
    15,260
    
    
    $
    4,183
    
    
    $
    18,304
    
    
    $
    8,366Net income per share available to common stockholders:Basic
    
    $
    0.34
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    $
    0.19Diluted
    
    $
    0.33
    
    
    $
    0.09
    
    
    $
    0.40
    
    
    $
    0.18Weighted average shares outstanding:Basic
    
    
    45,481
    
    
    
    45,123
    
    
    
    45,358
    
    
    
    45,085Diluted
    
    
    46,632
    
    
    
    45,477
    
    
    
    46,334
    
    
    
    45,490
   2




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 
 CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
 (In thousands)
(Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid In
    
    
    Treasury
    
    
    Comprehensive
    
    
    Retained
    
    
    StockholdersShares
    
    
    Amounts
    
    
    Capital
    
    
    Stock
    
    
    Income (Loss)
    
    
    Earnings
    
    
    EquityBalance, December 31, 2007
    
    
    45,304
    
    
    $
    453
    
    
    $
    207,526
    
    
    $
    (854
    )
    
    $
    115
    
    
    $
    71,787
    
    
    $
    279,027Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,304
    
    
    
    18,304Net (gains) losses
included in net
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (177
    )
    
    
    
    
    
    
    (177
    )Tax benefit (provision)
related to hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    62Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,189Exercises of employee
stock options
    
    
    386
    
    
    
    4
    
    
    
    2,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050Vesting of restricted stock
    
    
    129
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation
    
    
    
    
    
    
    
    
    
    
    2,253
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,253Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (336
    )
    
    
    
    
    
    
    
    
    
    
    (336
    )Balance, September 30, 2008
    
    
    45,819
    
    
    $
    458
    
    
    $
    211,824
    
    
    $
    (1,190
    )
    
    $
    
    
    
    $
    90,091
    
    
    $
    301,183
   3




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
(Unaudited)
 Nine Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    18,304
    
    
    $
    8,366Adjustments to reconcile net income to cash provided by operating
activities:Depletion of oil and natural gas properties
    
    
    36,566
    
    
    
    45,347Impairment of oil and natural gas properties
    
    
    
    
    
    
    6,505Depreciation and amortization
    
    
    464
    
    
    
    468Stock based compensation
    
    
    1,223
    
    
    
    1,455Amortization of deferred loan fees and debt issuance costs
    
    
    810
    
    
    
    713Market value adjustment for derivative instruments
    
    
    (1,645
    )
    
    
    2,985Accretion of discount on asset retirement obligations
    
    
    263
    
    
    
    298Deferred income taxes
    
    
    11,186
    
    
    
    5,227Other noncash items
    
    
    4
    
    
    
    (4
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (13,827
    )
    
    
    361Other current assets
    
    
    (3,163
    )
    
    
    77Accounts payable
    
    
    18,648
    
    
    
    (2,807
    )Royalties payable
    
    
    1,684
    
    
    
    1,688Participant advances received
    
    
    (504
    )
    
    
    (3,320
    )Other current liabilities
    
    
    4,057
    
    
    
    5,593Other noncurrent assets
    
    
    (330
    )
    
    
    514Other noncurrent liabilities
    
    
    (102
    )
    
    
    (114
    )Net cash provided by operating activities
    
    
    73,638
    
    
    
    73,352Cash flows from investing activities:Additions to oil and natural gas properties
    
    
    (136,822
    )
    
    
    (108,453
    )Additions to restricted cash
    
    
    (2,562
    )
    
    
    Proceeds from the sale of oil and natural gas properties
    
    
    
    
    
    
    35,435Additions to other property and equipment
    
    
    (402
    )
    
    
    (600
    )Additions to land
    
    
    (404
    )
    
    
    Decrease (increase) in drilling advances paid
    
    
    (3,061
    )
    
    
    (1,545
    )Net cash used by investing activities
    
    
    (143,251
    )
    
    
    (75,163
    )Cash flows from financing activities:Proceeds from senior notes offering
    
    
    
    
    
    
    34,825Increase in senior credit facility
    
    
    62,900
    
    
    
    46,400Repayment of senior credit facility
    
    
    
    
    
    
    (72,300
    )Deferred loan fees paid and equity costs
    
    
    (223
    )
    
    
    (974
    )Proceeds from exercise of employee stock options
    
    
    2,072
    
    
    
    230Repurchases of common stock
    
    
    (336
    )
    
    
    (174
    )Net cash provided by financing activities
    
    
    64,413
    
    
    
    8,007Net increase (decrease) in cash and cash equivalents
    
    
    (5,200
    )
    
    
    6,196Cash and cash equivalents, beginning of year
    
    
    13,863
    
    
    
    4,300Cash and cash equivalents, end of period
    
    $
    8,663
    
    
    $
    10,496
   4




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1. Organization and Nature of Operations
  2. Basis of Presentation
    3. Restricted Cash
  4. Commitments and Contingencies
   5. Net Income Available Per Common Share
   5




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average common shares
outstanding  basic
    
    
    45,481
    
    
    
    45,123
    
    
    
    45,358
    
    
    
    45,085Plus: Potential common sharesStock options and restricted stock
    
    
    1,151
    
    
    
    354
    
    
    
    976
    
    
    
    405Weighted average common shares
outstanding  diluted
    
    
    46,632
    
    
    
    45,477
    
    
    
    46,334
    
    
    
    45,490Stock options excluded from diluted
EPS due to the anti-dilutive effect
    
    
    64
    
    
    
    2,595
    
    
    
    341
    
    
    
    2,525
 6. Income Taxes
  September 30,
    
    
    September 30,2008
    
    
    2007Current income taxes:Federal
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    Deferred income taxes:Federal
    
    
    10,269
    
    
    
    4,926State
    
    
    917
    
    
    
    301$
    11,186
    
    
    $
    5,227
   (In thousands)Unrecognized tax benefits at December 31, 2007
    
    $
    2,162Increases (decreases) resulting from tax positions taken in the current period
    
    
    (1,830
    )Decreases relating to settlements with taxing authorities
    
    
    Reductions resulting from the lapse of applicable statutes of limitations
    
    
    Unrecognized tax benefits at September 30, 2008
    
    $
    332
   6




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  7. Derivative Instruments and Hedging Activities
  Natural Gas and Crude Oil Derivative Contracts
 Cash flow hedges
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Natural GasAverage price per Mcf realized excluding gas hedging results
    
    $
    10.08
    
    
    $
    6.71
    
    
    $
    10.23
    
    
    $
    7.23Average price per Mcf including gas hedging settlement results
    
    $
    9.44
    
    
    $
    7.31
    
    
    $
    9.83
    
    
    $
    7.56Increase (decrease) in revenue, in thousands
    
    $
    (1,104
    )
    
    $
    1,996
    
    
    $
    (2,336
    )
    
    $
    3,313Average price per Mcf including gas hedging settlement
results and any unrealized gains (losses)
    
    $
    16.72
    
    
    $
    7.31
    
    
    $
    9.95
    
    
    $
    7.34Increase (decrease) in revenue, in thousands
    
    $
    11,430
    
    
    $
    1,967
    
    
    $
    (1,611
    )
    
    $
    1,121OilAverage price per Bbl realized excluding oil hedging results
    
    $
    112.60
    
    
    $
    73.65
    
    
    $
    110.54
    
    
    $
    66.95Average price per Bbl including oil hedging settlement results
    
    $
    104.38
    
    
    $
    73.43
    
    
    $
    101.85
    
    
    $
    67.26Increase (decrease) in revenue, in thousands
    
    $
    (1,050
    )
    
    $
    (21
    )
    
    $
    (3,237
    )
    
    $
    92Average price per Bbl including oil hedging settlement
results and any unrealized gains (losses)
    
    $
    143.96
    
    
    $
    70.35
    
    
    $
    104.32
    
    
    $
    64.60Increase (decrease) in revenue, in thousands
    
    $
    4,005
    
    
    $
    (319
    )
    
    $
    (2,317
    )
    
    $
    (701
    )
  7




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  Natural
    
    
    
    
    
    
    Purchased
    
    
    WrittenGas
    
    
    Oil
    
    
    Put
    
    
    CallSettlement Period
    
    (MMBTU)
    
    
    (Barrels)
    
    
    Nymex
    
    
    NymexNatural Gas Costless Collars10/01/08  10/31/08
    
    
    50,000
    
    
    
    
    
    
    $
    7.25
    
    
    $
    10.4010/01/08  12/31/08
    
    
    240,000
    
    
    
    
    
    
    $
    9.75
    
    
    $
    11.5004/01/09  09/30/09
    
    
    120,000
    
    
    
    
    
    
    $
    7.25
    
    
    $
    9.8010/01/08  03/31/09
    
    
    180,000
    
    
    
    
    
    
    $
    8.00
    
    
    $
    10.2010/01/08  03/31/09
    
    
    300,000
    
    
    
    
    
    
    $
    8.00
    
    
    $
    11.2010/01/08  03/31/09
    
    
    300,000
    
    
    
    
    
    
    $
    7.75
    
    
    $
    9.8201/01/09  03/31/09
    
    
    220,000
    
    
    
    
    
    
    $
    10.25
    
    
    $
    12.2504/01/09  09/30/09
    
    
    420,000
    
    
    
    
    
    
    $
    8.00
    
    
    $
    10.7004/01/09  09/30/09
    
    
    300,000
    
    
    
    
    
    
    $
    7.00
    
    
    $
    9.73Oil Costless Collars10/01/08  10/31/08
    
    
    
    
    
    
    3,000
    
    
    $
    65.70
    
    
    $
    90.0010/01/08  12/31/08
    
    
    
    
    
    
    6,000
    
    
    $
    57.50
    
    
    $
    75.5010/01/08  12/31/08
    
    
    
    
    
    
    6,000
    
    
    $
    85.00
    
    
    $
    117.0010/01/08  12/31/08
    
    
    
    
    
    
    6,000
    
    
    $
    57.50
    
    
    $
    76.0010/01/08  10/31/08
    
    
    
    
    
    
    6,000
    
    
    $
    90.00
    
    
    $
    120.0011/01/08  12/31/08
    
    
    
    
    
    
    8,000
    
    
    $
    87.75
    
    
    $
    120.0011/01/08  06/30/09
    
    
    
    
    
    
    24,000
    
    
    $
    62.00
    
    
    $
    81.7501/01/09  03/31/09
    
    
    
    
    
    
    21,000
    
    
    $
    86.50
    
    
    $
    120.00
 Natural
    
    
    Purchased
    
    
    Written
    
    
    WrittenGas
    
    
    Put
    
    
    Call
    
    
    PutSettlement Period
    
    (MMBTU)
    
    
    Nymex
    
    
    Nymex
    
    
    NymexNatural Gas Three Way Costless Collars10/01/08  03/31/09
    
    
    300,000
    
    
    $
    8.00
    
    
    $
    10.35
    
    
    $
    5.50
  Natural
    
    
    Purchased
    
    
    Written
    
    
    WrittenGas
    
    
    Put
    
    
    Call
    
    
    PutSettlement Period
    
    (MMBTU)
    
    
    Nymex
    
    
    Nymex
    
    
    NymexNatural Gas Collars10/01/09
 03/31/10
    
    
    420,000
    
    
    $
    8.00
    
    
    $
    10.00
    
    
    $
    5.50
 8. Fair Values
  Fair Value Measurements at September 30, 2008 UsingQuoted Prices in
    
    
    Significant Other
    
    
    SignificantActive Markets
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    for Identical Assets
    
    
    Inputs
    
    
    InputsDescription
    
    2007
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Current derivative liabilities
    
    $
    (1,812
    )
    
    $
    
    
    
    $
    (1,041
    )
    
    $
    Other non-current liabilities
    
    
    (256
    )
    
    
    
    
    
    
    
    
    
    
    Current derivative assets
    
    
    1,416
    
    
    
    
    
    
    
    1,876
    
    
    
    Other non-current assets
    
    
    25
    
    
    
    
    
    
    
    6
    
    
    
    $
    (627
    )
    
    $
    
    
    
    $
    841
    
    
    $
    
  8




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 9. Oil and Gas Properties
       10. Senior Notes
     9




---



##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 11. Asset Retirement Obligations
   Nine Months EndedSeptember 30,2008
    
    
    2007Beginning asset retirement obligations
    
    $
    5,047
    
    
    $
    5,002Liabilities incurred for new wells placed on production
    
    
    267
    
    
    
    325Liabilities settled
    
    
    (102
    )
    
    
    (41
    )Revisions to estimates due to sale of oil and gas properties
    
    
    
    
    
    
    (615
    )Accretion of discount on asset retirement obligations
    
    
    263
    
    
    
    298$
    5,475
    
    
    $
    4,969
 11. Stock Based Compensation
   2008
    
    
    2007Risk-free interest rate
    
    
    3.0
    %
    
    
    4.6
    %Expected life (in years)
    
    
    5.0
    
    
    
    5.0Expected volatility
    
    
    47
    %
    
    
    49
    %Expected dividend yield
    
    
    
    
    
    
    Weighted average fair value per share of stock compensation
    
    $
    4.70
    
    
    $
    2.97
  10




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Pre-tax stock based compensation expense
    
    $
    746
    
    
    $
    1,100
    
    
    $
    2,253
    
    
    $
    2,628Capitalized stock based compensation
    
    
    (341
    )
    
    
    (481
    )
    
    
    (1,030
    )
    
    
    (1,171
    )Tax benefit
    
    
    (142
    )
    
    
    (217
    )
    
    
    (428
    )
    
    
    (510
    )Stock based compensation expense, net
    
    $
    263
    
    
    $
    402
    
    
    $
    795
    
    
    $
    947
 Stock Based Plan Descriptions and Share Information
    11




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    
    2007Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOptions outstanding at the beginning of the
year
    
    
    3,046,166
    
    
    $
    7.14
    
    
    
    3,243,566
    
    
    $
    7.08Granted
    
    
    18,000
    
    
    $
    10.56
    
    
    
    35,000
    
    
    $
    6.18Forfeited or cancelled
    
    
    (64,800
    )
    
    $
    7.83
    
    
    
    (145,300
    )
    
    $
    8.06Exercised
    
    
    (385,715
    )
    
    $
    5.36
    
    
    
    (57,000
    )
    
    $
    4.05Options outstanding at the end of the quarter
    
    
    2,613,651
    
    
    $
    7.41
    
    
    
    3,076,266
    
    
    $
    7.08Options exercisable at the end of the quarter
    
    
    1,685,951
    
    
    $
    7.04
    
    
    
    1,645,366
    
    
    $
    6.34
   Options Outstanding
    
    
    Options ExercisableNumber
    
    
    Weighted-
    
    
    
    
    
    
    Number
    
    
    Weighted-Outstanding at
    
    
    Average
    
    
    Weighted-
    
    
    Exercisable at
    
    
    Average
    
    
    Weighted-September 30,
    
    
    Remaining
    
    
    Average
    
    
    September 30,
    
    
    Remaining
    
    
    AverageExercise Price
    
    2008
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    2008
    
    
    Contractual Life
    
    
    Exercise Price$3.05 to $3.41
    
    
    44,000
    
    
    1.0 years
    
    $
    3.40
    
    
    
    44,000
    
    
    1.0 years
    
    $
    3.403.66 to 5.08
    
    
    339,200
    
    
    1.0 years
    
    $
    4.29
    
    
    
    339,200
    
    
    1.0 years
    
    $
    4.296.10 to 6.73
    
    
    1,134,576
    
    
    3.1 years
    
    $
    6.49
    
    
    
    683,376
    
    
    2.6 years
    
    $
    6.597.22 to 8.84
    
    
    736,875
    
    
    3.6 years
    
    $
    8.45
    
    
    
    473,375
    
    
    3.1 years
    
    $
    8.658.93 to 12.31
    
    
    359,000
    
    
    4.1 years
    
    $
    11.64
    
    
    
    146,000
    
    
    4.0 years
    
    $
    11.48$3.05 to $12.31
    
    
    2,613,651
    
    
    3.1 years
    
    $
    7.41
    
    
    
    1,685,951
    
    
    2.5 years
    
    $
    7.04
   Restricted Stock
   12




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    
    2007Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceRestricted shares outstanding at the
beginning of the year
    
    
    653,623
    
    
    $
    7.16
    
    
    
    391,367
    
    
    $
    8.60Shares granted
    
    
    109,000
    
    
    $
    8.40
    
    
    
    379,550
    
    
    $
    5.78Lapse of restrictions
    
    
    (128,813
    )
    
    $
    5.98
    
    
    
    (78,131
    )
    
    $
    6.46Forfeitures
    
    
    (29,940
    )
    
    $
    6.58
    
    
    
    (27,053
    )
    
    $
    8.35Shares outstanding at the end of the quarter
    
    
    603,870
    
    
    $
    7.67
    
    
    
    665,733
    
    
    $
    7.25
 12. Comprehensive Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    15,260
    
    
    $
    4,183
    
    
    $
    18,304
    
    
    $
    8,366Net (gains) losses included in net income
    
    
    
    
    
    
    (68
    )
    
    
    (177
    )
    
    
    (1,231
    )Tax benefits (provisions) related to
cash flow hedges
    
    
    
    
    
    
    24
    
    
    
    62
    
    
    
    431Other Comprehensive Income, net
    
    $
    15,260
    
    
    $
    4,139
    
    
    $
    18,189
    
    
    $
    7,566
 13. New Accounting Pronouncements
     13




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##### Table of Contents



BRIGHAM EXPLORATION COMPANY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
     14




---



##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  General Overview
    
    
    Focus on Core Provinces and Trends;
    
    Internally Generate Inventory of High Quality Exploratory Prospects;
    
    Leverage Our Operational Expertise;
    
    Evaluate and Selectively Pursue New Potential Plays;
    
    Capitalize on Exploration Successes Through Development of Our Field Discoveries;
    
    Continue to Actively Drill Our Multi-Year Prospect Inventory; and
    
    Enhance Returns Through Operational Control.
 Overview of Third Quarter and First Nine Months 2008 Financial Results
 th
  15




---



##### Table of Contents



th
     Overview of Third Quarter 2008 Operational Results
 Rocky Mountain Province
 Williston Basin
      16




---



##### Table of Contents



Onshore Gulf Coast
 Southern Louisiana Trend
       Third Quarter and First Nine Months 2008 Results
 Comparison of the three month and nine month periods ended September 30, 2008 and 2007.
 Production volumes
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Oil (MBbls)
    
    
    128
    
    
    
    32
    %
    
    
    97
    
    
    
    373
    
    
    
    25
    %
    
    
    298Natural gas (MMcf)
    
    
    1,722
    
    
    
    (48
    %)
    
    
    3,327
    
    
    
    5,861
    
    
    
    (41
    %)
    
    
    9,997Total (MMcfe)(1)
    
    
    2,488
    
    
    
    (36
    %)
    
    
    3,909
    
    
    
    8,097
    
    
    
    (31
    %)
    
    
    11,784Average daily production ( MMcfe/d)(2)
    
    
    27.6
    
    
    
    (36
    %)
    
    
    43.4
    
    
    
    30.0
    
    
    
    (31
    %)
    
    
    43.6
 (1)
    
    MMcfe is defined as one million cubic feet equivalent of natural gas, determined using
the ratio of six MMcf of natural gas to one MBbl of crude oil, condensate or natural gas
liquids.(2)
    
    Average daily production calculated using 30 days per calendar month.   17




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##### Table of Contents



Revenue, Commodity Prices and Hedging
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Oil revenue:Oil revenue
    
    $
    14,381
    
    
    
    101
    %
    
    $
    7,145
    
    
    $
    41,178
    
    
    
    106
    %
    
    $
    19,953Oil derivative settlement gains (losses)
    
    
    (1,050
    )
    
    
    4900
    %
    
    
    (21
    )
    
    
    (3,237
    )
    
    NM
    
    
    
    92Oil revenue including oil derivative settlements
    
    $
    13,331
    
    
    
    87
    %
    
    $
    7,124
    
    
    $
    37,941
    
    
    
    89
    %
    
    $
    20,045Oil derivative unrealized gains (losses)
    
    
    5,055
    
    
    NM
    
    
    
    (299
    )
    
    
    920
    
    
    NM
    
    
    
    (793
    )Oil revenue including derivative settlements
and unrealized gains (losses)
    
    $
    18,386
    
    
    
    169
    %
    
    $
    6,825
    
    
    $
    38,861
    
    
    
    102
    %
    
    $
    19,252Natural gas revenue:Natural gas revenue
    
    $
    17,350
    
    
    
    (22
    %)
    
    $
    22,336
    
    
    $
    59,934
    
    
    
    (17
    %)
    
    $
    72,297Natural gas derivative settlement gains (losses)
    
    
    (1,104
    )
    
    NM
    
    
    
    1,996
    
    
    
    (2,336
    )
    
    NM
    
    
    
    3,313Natural gas revenue including derivative
settlements
    
    $
    16,246
    
    
    
    (33
    %)
    
    $
    24,332
    
    
    $
    57,598
    
    
    
    (24
    %)
    
    $
    75,610Natural gas derivative unrealized gains (losses)
    
    
    12,534
    
    
    NM
    
    
    
    (28
    )
    
    
    725
    
    
    NM
    
    
    
    (2,192
    )Natural gas revenue including derivative
settlements and unrealized gains (losses)
    
    $
    28,780
    
    
    
    18
    %
    
    $
    24,304
    
    
    $
    58,323
    
    
    
    (21
    %)
    
    $
    73,418Oil and natural gas revenue:Oil and natural gas revenue
    
    $
    31,731
    
    
    
    8
    %
    
    $
    29,481
    
    
    $
    101,112
    
    
    
    10
    %
    
    $
    92,250Oil and natural gas derivative settlement gains
(losses)
    
    
    (2,154
    )
    
    NM
    
    
    
    1,975
    
    
    
    (5,573
    )
    
    NM
    
    
    
    3,405Oil and natural gas revenue including
derivative settlement gains (losses)
    
    
    29,577
    
    
    
    (6
    %)
    
    
    31,456
    
    
    
    95,539
    
    
    
    0
    %
    
    
    95,655Oil and natural gas derivative unrealized gains
(losses)
    
    
    17,589
    
    
    NM
    
    
    
    (327
    )
    
    
    1,645
    
    
    NM
    
    
    
    (2,985
    )Oil and natural gas revenue including
derivative settlements and unrealized gains
(losses)
    
    
    47,166
    
    
    
    52
    %
    
    
    31,129
    
    
    
    97,184
    
    
    
    5
    %
    
    
    92,670Other revenue
    
    
    25
    
    
    
    47
    %
    
    
    17
    
    
    
    104
    
    
    
    42
    %
    
    
    73Total revenue
    
    $
    47,191
    
    
    
    52
    %
    
    $
    31,146
    
    
    $
    97,288
    
    
    
    5
    %
    
    $
    92,743
  18




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Average oil prices:Oil price (per Bbl)
    
    $
    112.60
    
    
    
    53
    %
    
    $
    73.65
    
    
    $
    110.54
    
    
    
    65
    %
    
    $
    66.95Oil price including derivative
settlement gains (losses) (per Bbl)
    
    
    104.38
    
    
    
    42
    %
    
    
    73.43
    
    
    
    101.85
    
    
    
    51
    %
    
    
    67.26Oil price including derivative
settlements and unrealized gains
(losses) (per Bbl)
    
    
    143.96
    
    
    
    105
    %
    
    
    70.35
    
    
    
    104.32
    
    
    
    61
    %
    
    
    64.60Average natural gas prices:Natural gas price (per Mcf)
    
    $
    10.08
    
    
    
    50
    %
    
    $
    6.71
    
    
    $
    10.23
    
    
    
    41
    %
    
    $
    7.23Natural gas price including derivative
settlement gains (losses) (per Mcf)
    
    
    9.44
    
    
    
    29
    %
    
    
    7.31
    
    
    
    9.83
    
    
    
    30
    %
    
    
    7.56Natural gas price including derivative
settlements and unrealized gains
(losses) (per Mcf)
    
    $
    16.72
    
    
    
    129
    %
    
    $
    7.31
    
    
    $
    9.95
    
    
    
    36
    %
    
    $
    7.34Average equivalent prices:Natural gas equivalent price (per Mcfe)
    
    $
    12.75
    
    
    
    69
    %
    
    $
    7.54
    
    
    $
    12.49
    
    
    
    60
    %
    
    $
    7.83Natural gas equivalent price including
derivative settlement gains (losses)
(per Mcfe)
    
    
    11.89
    
    
    
    48
    %
    
    
    8.05
    
    
    
    11.80
    
    
    
    45
    %
    
    
    8.12Natural gas equivalent price including
derivative settlements and unrealized
gains (losses) (per Mcfe)
    
    $
    18.96
    
    
    
    138
    %
    
    $
    7.96
    
    
    $
    12.00
    
    
    
    53
    %
    
    $
    7.86
 For the three
    
    
    For the ninemonth periods
    
    
    month periodsended September 30,
    
    
    ended September 30,2008 and 2007
    
    
    2008 and 2007Change in revenue from the sale of oilVolume variance impact
    
    $
    2,261
    
    
    $
    4,987Price variance impact
    
    
    4,975
    
    
    
    16,238Cash settlement of hedging contracts
    
    
    (1,029
    )
    
    
    (3,329
    )Unrealized hedge gain or loss
    
    
    5,354
    
    
    
    1,713Total change
    
    $
    11,561
    
    
    $
    19,609Change in revenue from the sale of natural gasVolume variance impact
    
    $
    (10,784
    )
    
    $
    (29,923
    )Price variance impact
    
    
    5,798
    
    
    
    17,560Cash settlement of hedging contracts
    
    
    (3,100
    )
    
    
    (5,649
    )Unrealized hedge gain or loss
    
    
    12,562
    
    
    
    2,917Total change
    
    $
    4,476
    
    
    $
    (15,095
    )Change in revenue from the sale of oil and natural gasVolume variance impact
    
    $
    (8,523
    )
    
    $
    (24,936
    )Price variance impact
    
    
    10,773
    
    
    
    33,798Cash settlement of hedging contracts
    
    
    (4,129
    )
    
    
    (8,978
    )Unrealized hedge gain or loss
    
    
    17,916
    
    
    
    4,630Total change
    
    $
    16,037
    
    
    $
    4,514
  19




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##### Table of Contents




    
    a 48% decrease in natural gas production, partially offset by an 32% increase in oil
production resulted in an overall $8.5 million decrease in oil and natural gas revenues;
    
    a 50% increase in the sales price of natural gas and a 53% increase in the sales price of
oil resulted in a $10.8 million increase in oil and natural gas revenues;
    
    a $2.1 million derivative settlement loss in the third quarter 2008 versus a $2.0 million
derivative settlement gain in third quarter 2007 decreased revenues by $4.1 million; and
    
    a $17.6 million unrealized derivative gain in third quarter 2008 versus a $0.3 million
unrealized derivative loss in third quarter 2007 increased revenues by $17.9 million.
  
    
    a 41% decrease in natural gas production partially offset by a 25% increase in oil
production resulted in a $24.9 million decrease in oil and natural gas revenues;
    
    a 41% increase in the sales price of natural gas and a 65% increase in the sales price of
oil resulted in a $33.8 million increase in oil and natural gas revenues;
    
    a $5.6 million derivative settlement loss in the first nine months 2008 versus a $3.4
million derivative settlement gain in third quarter 2007 decreased revenues by $9.0 million;
and
    
    a $1.6 million unrealized derivative gain in first nine months 2008 versus a $3.0 million
unrealized derivative loss in the first nine months 2007 increased revenues by $4.6 million.
 Hedging.
  20




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Oil collarsVolumes (Bbls)
    
    
    49,000
    
    
    
    (16
    %)
    
    
    58,500
    
    
    
    141,500
    
    
    
    (32
    %)
    
    
    207,500Average floor price ($  per Bbl)
    
    $
    74.92
    
    
    
    34
    %
    
    $
    56.00
    
    
    $
    68.42
    
    
    
    22
    %
    
    $
    56.01Average ceiling price ($  per Bbl)
    
    $
    100.07
    
    
    
    22
    %
    
    $
    82.00
    
    
    $
    92.37
    
    
    
    14
    %
    
    $
    80.86Gain (loss) upon settlement 
($ in thousands)
    
    $
    (1,050
    )
    
    
    4900
    %
    
    $
    (21
    )
    
    $
    (3,237
    )
    
    NM
    
    
    $
    92Total oilGain (loss) upon settlement
 ($ in thousands)
    
    $
    (1,050
    )
    
    
    4900
    %
    
    $
    (21
    )
    
    $
    (3,237
    )
    
    NM
    
    
    $
    92Natural gas collarsVolumes (MMbtu)
    
    
    1,130,000
    
    
    
    (46
    %)
    
    
    2,090,000
    
    
    
    4,020,000
    
    
    
    (32
    %)
    
    
    5,885,000Average floor price ($  per MMbtu)
    
    $
    7.42
    
    
    
    5
    %
    
    $
    7.10
    
    
    $
    7.494
    
    
    
    3
    %
    
    $
    7.25Average ceiling price ($  per MMbtu)
    
    $
    9.95
    
    
    
    (9
    %)
    
    $
    10.89
    
    
    $
    10.751
    
    
    
    (14
    %)
    
    $
    12.44Gain (loss) upon settlement
 ($ in thousands)
    
    $
    (1,104
    )
    
    NM
    
    
    $
    1,996
    
    
    $
    (2,336
    )
    
    NM
    
    
    $
    3,313Total gasGain (loss) upon settlement 
($ in thousands)
    
    $
    (1,104
    )
    
    NM
    
    
    $
    1,996
    
    
    $
    (2,336
    )
    
    NM
    
    
    $
    3,313
 Other revenue
 Operating costs and expenses
 Production costs.
 Unit-of-Production
    
    
    Amount(Per Mcfe)
    
    
    (In thousands)Three months ended September 30,
    
    
    Three months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Production costs:Operating & maintenance
    
    $
    1.07
    
    
    
    123
    %
    
    $
    0.48
    
    
    $
    2,684
    
    
    
    45
    %
    
    $
    1,847Expensed workovers
    
    
    0.04
    
    
    
    (43
    %)
    
    
    0.07
    
    
    
    92
    
    
    
    (68
    %)
    
    
    292Ad valorem taxes
    
    
    0.13
    
    
    
    18
    %
    
    
    0.11
    
    
    
    316
    
    
    
    (26
    %)
    
    
    425Lease operating expenses
    
    $
    1.24
    
    
    
    88
    %
    
    $
    0.66
    
    
    $
    3,092
    
    
    
    21
    %
    
    $
    2,564Production taxes
    
    
    0.56
    
    
    
    133
    %
    
    
    0.24
    
    
    
    1,383
    
    
    
    45
    %
    
    
    951Production costs
    
    $
    1.80
    
    
    
    100
    %
    
    $
    0.90
    
    
    $
    4,475
    
    
    
    27
    %
    
    $
    3,515
  21




---



##### Table of Contents




    
    Per unit operating and maintenance (O&M) expense increased by $0.59 per Mcfe, or 123%, from
the corresponding period last year because of the impact from our lower production volumes, as
well as increased salt water disposal expense, compressor and equipment rental expense and
fuel costs;
    
    Production tax expense increased $0.32 per Mcfe, or 133%, from the third quarter 2007. The
increase was attributable to a $0.3 million decrease in production tax abatements in the third
quarter 2008 versus the third quarter 2007 and the migration of our production mix towards a
higher production tax environment in North Dakota.
 Unit-of-Production
    
    
    Amount(Per Mcfe)
    
    
    (In thousands)Nine months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007Production costs:Operating & maintenance
    
    $
    0.82
    
    
    
    46
    %
    
    $
    0.56
    
    
    $
    6,542
    
    
    
    (1
    %)
    
    $
    6,585Expensed workovers
    
    
    0.16
    
    
    
    220
    %
    
    
    0.05
    
    
    
    1,316
    
    
    
    114
    %
    
    
    616Ad valorem taxes
    
    
    0.09
    
    
    
    (18
    %)
    
    
    0.11
    
    
    
    768
    
    
    
    (39
    %)
    
    
    1,257Lease operating expenses
    
    $
    1.07
    
    
    
    49
    %
    
    $
    0.72
    
    
    $
    8,626
    
    
    
    2
    %
    
    $
    8,458Production taxes
    
    
    0.51
    
    
    
    292
    %
    
    
    0.13
    
    
    
    4,107
    
    
    
    161
    %
    
    
    1,573Production costs
    
    $
    1.58
    
    
    
    86
    %
    
    $
    0.85
    
    
    $
    12,733
    
    
    
    27
    %
    
    $
    10,031
  
    
    Per unit O&M expense increased by $0.26 per Mcfe, or 46%, because of lower production
volumes in the first nine months 2008 versus the first nine months 2007;
    
    Workover expense increased $0.11 per Mcfe, or 220% because of an increase in the number and
cost of our workovers; and
    
    Production taxes increased $0.38 per Mcfe, or 292%, due to a $2.6 million decrease in
production tax abatements in the first nine months of 2008 versus the first nine months of
2007, as well as the aforementioned production mix migration towards a higher production tax
environment in North Dakota.
 General and administrative expenses.
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007(In thousands, except per unit measurements)General and administrative costs
    
    $
    4,650
    
    
    
    0
    %
    
    $
    4,636
    
    
    $
    14,403
    
    
    
    9
    %
    
    $
    13,163Capitalized general and administrative costs
    
    
    (2,148
    )
    
    
    1
    %
    
    
    (2,122
    )
    
    
    (6,712
    )
    
    
    8
    %
    
    
    (6,190
    )General and administrative expenses
    
    $
    2,502
    
    
    
    0
    %
    
    $
    2,514
    
    
    $
    7,691
    
    
    
    10
    %
    
    $
    6,973General and administrative expense ($  per Mcfe)
    
    $
    1.01
    
    
    
    58
    %
    
    $
    0.64
    
    
    $
    0.95
    
    
    
    61
    %
    
    $
    0.59
    22




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##### Table of Contents



Depletion of oil and natural gas properties
 Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007(In thousands, except per unit measurements)Depletion of oil and natural gas properties
    
    $
    11,718
    
    
    
    (21
    %)
    
    $
    14,776
    
    
    $
    36,566
    
    
    
    (19
    %)
    
    $
    45,347Depletion of oil and natural gas
properties ($  per Mcfe)
    
    $
    4.71
    
    
    
    25
    %
    
    $
    3.78
    
    
    $
    4.52
    
    
    
    17
    %
    
    $
    3.85
  Impairment of oil and natural gas properties
    Net interest expense.
  23




---



##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007(In thousands)Interest on Senior Notes
    
    $
    3,851
    
    
    
    10
    %
    
    $
    3,490
    
    
    $
    11,551
    
    
    
    12
    %
    
    $
    10,273Interest on senior credit facility
    
    
    612
    
    
    
    (25
    %)
    
    
    811
    
    
    
    1,112
    
    
    
    (48
    %)
    
    
    2,159Commitment fees
    
    
    64
    
    
    
    12
    %
    
    
    57
    
    
    
    198
    
    
    
    26
    %
    
    
    157Dividend on mandatorily redeemable preferred stock
    
    
    153
    
    
    
    0
    %
    
    
    153
    
    
    
    455
    
    
    
    0
    %
    
    
    453Amortization of deferred loan and debt issuance costs
    
    
    261
    
    
    
    7
    %
    
    
    243
    
    
    
    759
    
    
    
    11
    %
    
    
    686Other general interest expense
    
    
    0
    
    
    
    (100
    %)
    
    
    1
    
    
    
    0
    
    
    
    (100
    %)
    
    
    2Capitalized interest expense
    
    
    (1,179
    )
    
    
    51
    %
    
    
    (779
    )
    
    
    (3,412
    )
    
    
    28
    %
    
    
    (2,659
    )Net interest expense
    
    $
    3,762
    
    
    
    (5
    %)
    
    $
    3,976
    
    
    $
    10,663
    
    
    
    (4
    %)
    
    $
    11,071Weighted average debt outstanding
    
    $
    231,399
    
    
    
    18
    %
    
    $
    196,663
    
    
    $
    206,676
    
    
    
    7
    %
    
    $
    193,275Average interest rate on outstanding indebtedness (a)
    
    
    8.0
    %
    
    
    (12
    %)
    
    
    9.1
    %
    
    
    8.6
    %
    
    
    (4
    %)
    
    
    9.0
    %
 
 (a)
    
    Calculated as the sum of the interest expense on our outstanding indebtedness,
commitment fees that we pay on our unused borrowing capacity and the dividend on our
mandatorily redeemable preferred stock divided by our weighted average debt and
preferred stock outstanding for the period.   Other income (expense).
  Three months ended September 30,
    
    
    Nine months ended September 30,2008
    
    
    % Change
    
    
    2007
    
    
    2008
    
    
    % Change
    
    
    2007(In thousands)Other income (expense):Non-cash gain (loss)
    
    
    
    
    
    NM
    
    
    
    
    
    
    
    
    
    
    
    (100
    %)
    
    
    40Cash income (expense)
    
    
    16
    
    
    
    (85
    %)
    
    
    105
    
    
    
    419
    
    
    
    (57
    %)
    
    
    967Total other income
    
    $
    16
    
    
    
    (85
    %)
    
    $
    105
    
    
    $
    419
    
    
    
    (58
    %)
    
    $
    1,007
  Income taxes.
  24




---



##### Table of Contents



Capital Expenditures
  
    
    cost of acquiring and maintaining our lease acreage position and our seismic resources;
    
    cost of drilling and completing new oil and natural gas wells;
    
    cost of installing new production infrastructure;
    
    cost of maintaining, repairing and enhancing existing oil and natural gas wells;
    
    cost related to plugging and abandoning unproductive or uneconomic wells; and
    
    indirect costs related to our exploration activities, including payroll and other
expenses attributable to our exploration professional staff.
  Amount2008
    
    
    Spent Through
    
    
    AmountBudget
    
    
    September 30, 2008
    
    
    Remaining (a)(In millions)Drilling
    
    $
    140,633
    
    
    $
    99,433
    
    
    $
    41,200Net land and seismic
    
    
    34,191
    
    
    
    28,230
    
    
    
    5,961Capitalized costs (b)
    
    
    13,636
    
    
    
    10,128
    
    
    
    3,508Asset retirement obligation
    
    
    491
    
    
    
    267
    
    
    
    224Total oil and gas capital expenditures (c)
    
    $
    188,951
    
    
    $
    138,058
    
    
    $
    50,893
 
 (a)
    
    Calculated based on the revised 2008 capital expenditure budget announced in July
2008 less amount spent through September 30, 2008.(b)
    
    Capitalized costs include capitalized interest expense, general and
administrative expense and stock compensation expense.(c)
    
    Excludes other property capital expenditures. Determination of Capital Expenditure Budget
   
    
    changes in commodity prices;
    
    variances in forecasted production and the resulting production of our newly drilled
wells;
    
    variances in our production levels from our existing oil and gas properties;
    
    variances in a prospects risked reserve size;
    
    variances in drilling and completion costs, service costs and the availability of
drilling equipment;
    
    variances in the availability and timing of drilling and completion services;
  25




---



##### Table of Contents




    
    economic and industry conditions at the time of drilling;
    
    the availability of more economically attractive prospects; and
    
    the ability to access external sources of capital.
  Liquidity and Capital Resources
 Sources of Capital
  9 5/8% Senior Notes Due 2014
   
    
    rank equally in right of payment with all our existing and future senior
indebtedness;
    
    rank senior to all of our future subordinated indebtedness; and
    
    are effectively junior in right of payment to all of our and the guarantors
existing and future secured indebtedness, including debt of our senior credit
agreement.
   Senior Credit Agreement
    26




---



##### Table of Contents



Percent of
    
    EurodollarBorrowing Base
    
    Rate
    
    
    Base RateUtilized
    
    Advances
    
    
    Advances(1)<50%
    
    
    1.500
    %
    
    
    0.000
    %50% and < 75%
    
    
    1.750
    %
    
    
    0.250
    %75% and < 90%
    
    
    2.000
    %
    
    
    0.500
    %90%
    
    
    2.250
    %
    
    
    0.750
    %
 
 (1)
    
    Base rate is defined as for any day a fluctuating rate per annum equal to the highest of: (a)
the Federal Funds Rate plus 1/2 of 1%, (b) the Eurodollar Rate with respect to Interest
Periods of one month plus 1.50% and (c) the rate of interest in effect for such day as
publicly announced from time to time by Bank of America as its prime rate. The prime rate
is a rate set by Bank of America based upon various factors including Bank of Americas costs
and desired return, general economic conditions and other factors, and is used as a reference
point for pricing some loans, which may be priced at, above, or below such announced rate. Any
change in such rate announced by Bank of America shall take effect at the opening of business
on the day specified in the public announcement of such change.  Percent ofBorrowing Base
    
    QuarterlyUtilized
    
    Commitment Fee<50%
    
    
    0.300
    %50% and < 75%
    
    
    0.375
    %75% and < 90%
    
    
    0.500
    %90%
    
    
    0.500
    %
    27




---



##### Table of Contents



Mandatorily Redeemable Preferred Stock
  Access to Capital Markets
   Off Balance Sheet Arrangements
  Analysis of Changes in Cash and Cash Equivalents
  Nine months ended September 30,2008
    
    
    % Change
    
    
    2007(In thousands)Net income
    
    $
    18,304
    
    
    
    119
    %
    
    $
    8,366Non-cash items
    
    
    48,871
    
    
    
    (22
    %)
    
    
    62,994Changes in working capital and other items
    
    
    6,463
    
    
    
    224
    %
    
    
    1,992Cash flows provided by operating activities
    
    $
    73,638
    
    
    
    0
    %
    
    $
    73,352Cash flows used by investing activities
    
    
    (143,251
    )
    
    
    91
    %
    
    
    (75,163
    )Cash flows provided by financing activities
    
    
    64,413
    
    
    
    704
    %
    
    
    8,007Net increase in cash and cash equivalents
    
    $
    (5,200
    )
    
    NM
    
    
    $
    6,196
 Analysis of net cash provided by operating activities
    28




---



##### Table of Contents



Analysis of changes in cash flows used in investing activities
 Nine months ended September 30,2008
    
    
    % Change
    
    
    2007(In thousands)Capital expenditures for oil and natural gas activities:Drilling
    
    $
    99,433
    
    
    
    40
    %
    
    $
    71,068Net land and seismic
    
    
    28,230
    
    
    
    183
    %
    
    
    9,969Capitalized cost
    
    
    10,128
    
    
    
    14
    %
    
    
    8,849Capitalized asset retirement obligation
    
    
    267
    
    
    
    (18
    %)
    
    
    325Total
    
    $
    138,058
    
    
    
    53
    %
    
    $
    90,211Reconciling Items:Asset Sale Proceeds including ARO liability reduction
    
    $
    
    
    
    
    (100
    %)
    
    $
    (36,050
    )Change in accrued drilling costs
    
    
    59
    
    
    
    (100
    %)
    
    
    19,742Change in drilling advances paid
    
    
    3,061
    
    
    
    98
    %
    
    
    1,545Change in restricted cash
    
    
    2,562
    
    
    NM
    
    
    
    Other
    
    
    (489
    )
    
    
    72
    %
    
    
    (285
    )Total Reconciling Items
    
    
    5,193
    
    
    NM
    
    
    
    (15,048
    )Net cash used in investing activities
    
    $
    143,251
    
    
    
    91
    %
    
    $
    75,163
  
    
    Drilling capital expenditures increased by $28.4 million primarily because of increased
drilling activity in the Williston Basin versus the corresponding period last year;
    
    Land and seismic expenditures increased by $18.3 million due to an increased level of land
and seismic acquisitions in the Williston Basin;
    
    Asset sale proceeds decreased by $36 million in the first nine months of 2008 due to the
impact of our Granite Wash asset sale, which was completed in September 2007;
    
    Drilling advances increased by $1.5 million associated with a higher level of non-operated
activity in the Williston Basin;
    
    Restricted cash increased by $2.6 million associated with the escrowing of funds for a
fixed cost drilling contract; and
    
    Offsetting the aforementioned increases was a $19.6 million decrease in our accrued
drilling costs.
 Analysis of changes in cash flows from financing activities
   29




---



##### Table of Contents



Common Stock Transactions
  Shares Issued
    
    
    Net Proceeds(In thousands, except share data)2008 common stock transactions:Exercise of employee stock options
    
    
    385,715
    
    
    $
    2,0722007 common stock transactions:Exercise of employee stock options
    
    
    57,000
    
    
    $
    231
 Other Matters
 Derivative Instruments
  Effects of Inflation and Changes in Prices
  Environmental and Other Regulatory Matters
   30




---



##### Table of Contents



New Accounting Pronouncements
        31




---



##### Table of Contents



Forward-Looking Information
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Management Opinion Concerning Derivative Instruments
  Derivative Instruments and Hedging Activities
       32




---



##### Table of Contents



Natural
    
    
    Purchased
    
    
    WrittenGas
    
    
    Put
    
    
    CallSettlement Period
    
    (MMbtu)
    
    
    (Nymex)
    
    
    (Nymex)Natural Gas Costless Collars10/01/08  10/31/08
    
    
    50,000
    
    
    
    7.25
    
    
    
    10.4010/01/08  12/31/08
    
    
    240,000
    
    
    
    9.75
    
    
    
    11.5010/01/08  03/31/09
    
    
    300,000
    
    
    
    7.75
    
    
    
    9.8210/01/08  03/31/09
    
    
    180,000
    
    
    
    8.00
    
    
    
    10.2010/01/08  03/31/09
    
    
    300,000
    
    
    
    8.00
    
    
    
    11.2001/01/09  01/31/09
    
    
    80,000
    
    
    
    10.25
    
    
    
    12.2502/01/09  03/31/09
    
    
    140,000
    
    
    
    10.25
    
    
    
    12.2504/01/09  09/30/09
    
    
    300,000
    
    
    
    7.00
    
    
    
    9.7304/01/09  09/30/09
    
    
    120,000
    
    
    
    7.25
    
    
    
    9.8004/01/09  09/30/09
    
    
    420,000
    
    
    
    8.00
    
    
    
    10.70
 Natural
    
    
    Purchased
    
    
    Written
    
    
    WrittenGas
    
    
    Put
    
    
    Call
    
    
    PutSettlement Period
    
    (MMbtu)
    
    
    (Nymex)
    
    
    (Nymex)
    
    
    (Nymex)Natural Gas Three Way Costless Collars10/01/08  03/31/09
    
    
    300,000
    
    
    $
    8.00
    
    
    $
    10.35
    
    
    $
    5.50
 Crude
    
    
    Purchased
    
    
    WrittenOil
    
    
    Put
    
    
    CallSettlement Period
    
    (Bbls)
    
    
    (Nymex)
    
    
    (Nymex)Oil Costless Collars10/01/08  12/31/08
    
    
    6,000
    
    
    
    85.00
    
    
    
    117.0010/01/08  10/31/08
    
    
    6,000
    
    
    
    90.00
    
    
    
    120.0010/01/08  12/31/08
    
    
    6,000
    
    
    
    57.50
    
    
    
    76.0010/01/08  10/31/08
    
    
    3,000
    
    
    
    65.70
    
    
    
    90.0010/01/08  12/31/08
    
    
    6,000
    
    
    
    57.50
    
    
    
    75.5011/01/08  06/30/09
    
    
    24,000
    
    
    
    62.00
    
    
    
    81.7511/01/08  12/31/08
    
    
    8,000
    
    
    
    87.75
    
    
    
    120.0001/01/09  03/31/09
    
    
    21,000
    
    
    
    86.50
    
    
    
    120.00
   Natural
    
    
    Purchased
    
    
    Written
    
    
    WrittenGas
    
    
    Put
    
    
    Call
    
    
    PutSettlement Period
    
    (MMbtu)
    
    
    (Nymex)
    
    
    (Nymex)
    
    
    (Nymex)Natural Gas Three Way Costless Collars10/01/09  03/31/10
    
    
    420,000
    
    
    $
    8.00
    
    
    $
    10.00
    
    
    $
    5.50
  33




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   34




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Issuer Purchases of Equity Securities
  Total Number of
    
    
    Average PricePeriod
    
    Shares Purchased
    
    
    Paid per ShareJuly 2008
    
    
    5,516
    
    
    $
    15.50September 2008
    
    
    9,779
    
    
    $
    11.09
 
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSON OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 31.1
    
    
    Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193432.1
    
    
    Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. § 135032.2
    
    
    Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. § 1350
  35




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##### Table of Contents



SIGNATURES
  BRIGHAM EXPLORATION COMPANYBy:
    /s/  BEN M. BRIGHAMBen M. BrighamChief Executive Officer, President
and Chairman of the BoardBy:
    /s/  EUGENE B. SHEPHERD, JR.Eugene B. Shepherd, Jr.Executive Vice President and

Chief Financial Officer  36




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description31.1
    
    
    Certification of Chief Executive Officer of the Company pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193431.2
    
    
    Certification of Chief Financial Officer of the Company pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 193432.1
    
    
    Certification of Chief Executive Officer of the Company pursuant to 18 U.S.C. § 135032.2
    
    
    Certification of Chief Financial Officer of the Company pursuant to 18 U.S.C. § 1350
  37