**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**








(Mark
      One)


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




For
      the
      quarterly period ended September 30, 2006





**OR**





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








For
      the
      transition period from _________ to __________





Commission
      file number: **001-32169**





**ATLAS
      AMERICA, INC.**





(Exact
      name of registrant as specified in its charter)





**Delaware**
            
            **51-0404430**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**311
                Rouser Road****Moon
                Township, PA**
            
            **15108**(Address
                of principal executive offices)
            
            (Zip
                code)





Registrant's
      telephone number, including area code: **(412)
      262-2830**





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
o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
                accelerated filer o
            Accelerated
                filer x
            Non-accelerated
                filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o
      No x





The
      number of outstanding shares of the registrant’s common stock on November 1,
      2006 was 19.3 million shares.












**ATLAS
      AMERICA, INC.**


**INDEX
      TO QUARTERLY REPORT ON FORM 10-Q**





**Page****PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                Balance Sheets - September 30, 2006 and December 31, 2005
            3Consolidated
                Statements of Operations for the Three Months and Nine Months Ended
                September 30, 2006 and 2005
            4Consolidated
                Statement of Changes in Stockholders’ Equity for the Nine Months Ended
              September
                30, 2006
            5Consolidated
                Statements of Cash Flows for the Nine Months Ended September 30,
                2006 and
                2005
            6Notes
                to Consolidated Financial Statements
            7
                -
                30Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            31
                - 46Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            46
                - 51Item
                4.
            Controls
                and Procedures
            51**PART
                II**
            **OTHER
                INFORMATION**Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            52Item
                6.
            Exhibits
            52**SIGNATURES**
            
            53










**PART
      I. FINANCIAL INFORMATION**





**Item
      1.**   **Financial
      Statements**




**ATLAS
      AMERICA, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


(Unaudited)


(in
      thousands, except share data)




**September
                30,**
            
            **December
                31,****2006**
            
            **2005****ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            64,692
            
            $
            55,155Accounts
                receivable
            
            
            91,605
            
            
            89,830Prepaid
                expenses
            
            
            12,198
            
            
            5,772Deferred
                tax asset
            
            
            4,678
            
            
            6,249Advances
                to affiliate
            
            
            —
            
            
            492Total
                current assets
            
            
            173,173
            
            
            157,498Property
                and equipment, net
            
            
            840,518
            
            
            658,347Intangible
                assets, net
            
            
            31,564
            
            
            60,959Other
                assets, net
            
            
            43,101
            
            
            32,832Goodwill
            
            
            98,606
            
            
            146,544$
            1,186,962
            
            $
            1,056,180**LIABILITIES
                AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Current
                portion of long-term debt
            
            $
            144
            
            $
            1,351Accounts
                payable
            
            
            41,498
            
            
            56,769Liabilities
                associated with drilling contracts
            
            
            76,883
            
            
            70,514Accrued
                producer liabilities
            
            
            29,748
            
            
            32,537Accrued
                hedge liability
            
            
            16,819
            
            
            24,107Accrued
                liabilities
            
            
            42,774
            
            
            27,763Accrued
                income taxes
            
            
            31,566
            
            
            5,328Advances
                from affiliate
            
            
            265
            
            
            —Total
                current liabilities
            
            
            239,697
            
            
            218,369Long-term
                debt
            
            
            299,586
            
            
            297,430Deferred
                tax liability
            
            
            28,615
            
            
            29,369Other
                liabilities
            
            
            52,662
            
            
            54,865Minority
                interest
            
            
            446,488
            
            
            323,297Commitments
                and contingencies (Note 9)Stockholders’
                equity:Preferred
                stock, $0.01 par value: 1,000,000 authorized shares
            
            
            —
            
            
            —Common
                stock, $0.01 par value: 49,000,000 authorized shares
            
            
            200
            
            
            133Additional
                paid-in capital
            
            
            77,066
            
            
            75,967Treasury
                stock, at cost
            
            
            (29,514
            )
            
            (73
            )ESOP
                loan receivable
            
            
            (509
            )
            
            (564
            )Accumulated
                other comprehensive income (loss)
            
            
            8,650
            
            
            (5,116
            )Retained
                earnings
            
            
            64,021
            
            
            62,503Total
                stockholders’ equity
            
            
            119,914
            
            
            132,850$
            1,186,962
            
            $
            1,056,180




See
      accompanying notes to consolidated financial statements


3


**ATLAS
      AMERICA, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(in
      thousands, except per share data)


(Unaudited)




**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****REVENUES**Well
                construction and completion
            
            $
            50,641
            
            $
            35,580
            
            $
            135,329
            
            $
            103,780Gas
                and oil production
            
            
            21,888
            
            
            18,830
            
            
            66,696
            
            
            48,840Transmission,
                gathering and processing
            
            
            111,752
            
            
            97,414
            
            
            327,876
            
            
            221,487Administration
                and oversight
            
            
            2,990
            
            
            1,852
            
            
            8,487
            
            
            7,436Well
                services
            
            
            3,346
            
            
            2,532
            
            
            9,498
            
            
            7,304190,617
            
            
            156,208
            
            
            547,886
            
            
            388,847**COSTS
                AND EXPENSES**Well
                construction and completion
            
            
            44,037
            
            
            30,940
            
            
            117,677
            
            
            90,243Gas
                and oil production
            
            
            2,315
            
            
            1,681
            
            
            6,437
            
            
            4,849Transmission,
                gathering and processing
            
            
            96,205
            
            
            86,189
            
            
            270,981
            
            
            194,136Well
                services
            
            
            1,752
            
            
            1,367
            
            
            5,540
            
            
            3,976General
                and administrative
            
            
            12,814
            
            
            7,314
            
            
            33,197
            
            
            19,808Net
                expense reimbursement - affiliate
            
            
            345
            
            
            —
            
            
            1,041
            
            
            389Depreciation,
                depletion and amortization
            
            
            12,442
            
            
            7,736
            
            
            33,158
            
            
            19,023169,910
            
            
            135,227
            
            
            468,031
            
            
            332,424**OPERATING
                INCOME**
            
            
            20,707
            
            
            20,981
            
            
            79,855
            
            
            56,423**OTHER
                INCOME (EXPENSE**)Interest
                expense
            
            
            (5,932
            )
            
            (3,574
            )
            
            (19,448
            )
            
            (9,777
            )Minority
                interests
            
            
            (2,021
            )
            
            (3,806
            )
            
            (12,987
            )
            
            (7,553
            )Other,
                net
            
            
            3,518
            
            
            143
            
            
            4,643
            
            
            (29
            )(4,435
            )
            
            (7,237
            )
            
            (27,792
            )
            
            (17,359
            )Income
                before income taxes and extraordinary item
            
            
            16,272
            
            
            13,744
            
            
            52,063
            
            
            39,064Provision
                for income taxes
            
            
            (6,302
            )
            
            (4,656
            )
            
            (20,632
            )
            
            (15,016
            )Income
                before extraordinary item
            
            
            9,970
            
            
            9,088
            
            
            31,431
            
            
            24,048Extraordinary
                tax on gain on Atlas Pipeline Holdings, L.P.
            
            
            (29,846
            )
            
            —
            
            
            (29,846
            )
            
            —**Net
                income (loss)**
            
            $
            (19,876
            )
            $
            9,088
            
            $
            1,585
            
            $
            24,048**Net
                income (loss) per common share - basic**Net
                income before extraordinary item - basic
            
            $
            0.51
            
            $
            0.45
            
            $
            1.58
            
            $
            1.20Extraordinary
                item
            
            
            (1.52
            )
            
            —
            
            
            (1.50
            )
            
            —$
            (1.01
            )
            $
            0.45
            
            $
            0.08
            
            $
            1.20Weighted
                average common shares outstanding - basic
            
            
            19,597
            
            
            20,001
            
            
            19,839
            
            
            20,000**Net
                income (loss) per common share - diluted**Net
                income before extraordinary item - diluted
            
            $
            0.50
            
            $
            0.45
            
            $
            1.55
            
            $
            1.20Extraordinary
                item
            
            
            (1.49
            )
            
            —
            
            
            (1.47
            )
            
            —$
            (.99
            )
            $
            0.45
            
            $
            0.08
            
            $
            1.20Weighted
                average common shares outstanding - diluted
            
            
            20,000
            
            
            20,174
            
            
            20,272
            
            
            20,064





See
      accompanying notes to consolidated financial statements


4


**ATLAS
      AMERICA, INC.**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


**NINE
      MONTHS ENDED SEPTEMBER 30, 2006**


(in
      thousands, except share data)


(Unaudited)





**Accumulated****Additional**
            
            
            
            **ESOP**
            
            **Other**
            
            
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Treasury
                Stock**
            
            **Loan**
            
            **Comprehensive**
            
            **Retained**
            
            **Stockholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Shares**
            
            **Amount**
            
            **Receivable**
            
            **Income
                (Loss)**
            
            **Earnings**
            
            **Equity**Balance,
                January 1, 2006
            
            
            13,336,031
            
            $
            133
            
            $
            75,967
            
            
            (1,335
            )
            $
            (73
            )
            $
            (564
            )
            $
            (5,116
            )
            $
            62,503
            
            $
            132,850Net
                Income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,585
            
            
            1,585Other
                comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            13,766
            
            
            
            
            
            13,766Issuance
                of common stock
            
            
            6,665
            
            
            —
            
            
            65
            
            
            6,711
            
            
            415
            
            
            
            
            
            
            
            
            
            
            
            480Repurchase
                of common stock, at cost
            
            
            
            
            
            
            
            
            
            
            
            (667,342
            )
            
            (29,856
            )
            
            
            
            
            
            
            
            
            
            
            (29,856
            )Repayment
                of ESOP Loan
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            55
            
            
            
            
            
            
            
            
            55Stock
                option compensation
            
            
            
            
            
            
            
            
            1,079
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,079Three-for-two
                split (Note 16)
            
            
            6,664,598
            
            
            67
            
            
            (45
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            (67
            )
            
            (45
            )Balance,
                September 30, 2006
            
            
            20,007,294
            
            $
            200
            
            $
            77,066
            
            
            (661,966
            )
            $
            (29,514
            )
            $
            (509
            )
            $
            8,650
            
            $
            64,021
            
            $
            119,914




See
      accompanying notes to consolidated financial statements


5


**ATLAS
      AMERICA, INC.**


**CONSOLIDATED
      STATEMENT OF CASH FLOWS**


**NINE
      MONTHS ENDED SEPTEMBER 30, 2006**


(in
      thousands)


(Unaudited)




**Nine
                Months Ended****September
                30,****2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            1,585
            
            $
            24,048Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation,
                depletion and amortization
            
            
            33,158
            
            
            19,023Amortization
                of deferred financing costs
            
            
            2,008
            
            
            2,138Non-cash
                loss on derivative value
            
            
            (990
            )
            
            (2,682
            )Non-cash
                compensation on long-term incentive plans
            
            
            6,312
            
            
            3,051Minority
                interests
            
            
            12,987
            
            
            7,553Distributions
                paid to minority interests of Atlas Pipeline Partners, L.P.
            
            
            (27,940
            )
            
            (14,234
            )Gain
                on asset dispositions
            
            
            (2,738
            )
            
            (80
            )Write
                down of note receivable
            
            
            −
            
            
            487Deferred
                income taxes
            
            
            (7,686
            )
            
            1,550Changes
                in operating assets and liabilities
            
            
            27,149
            
            
            21,605Net
                cash provided by operating activities
            
            
            43,845
            
            
            62,459**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Business
                acquisition, net of cash acquired
            
            
            (30,000
            )
            
            (195,262
            )Capital
                expenditures
            
            
            (115,819
            )
            
            (82,303
            )Proceeds
                from sale of assets
            
            
            7,602
            
            
            135Decrease
                (increase) in other assets
            
            
            174
            
            
            (287
            )Net
                cash used in investing activities
            
            
            (138,043
            )
            
            (277,717
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Borrowings
            
            
            109,750
            
            
            358,248Principal
                payments on debt
            
            
            (144,805
            )
            
            (229,034
            )Payments
                to affiliate
            
            
            —
            
            
            (13,082
            )Issuance
                of Atlas Pipeline Partners, L.P. common and preferred
                units
            
            
            59,610
            
            
            91,720Issuance
                of Atlas Pipeline Partners, L.P. senior notes
            
            
            36,610
            
            
            —Proceeds
                from sale of Atlas Pipeline Holdings, L.P. initial public
                offering
            
            
            74,492
            
            
            —Treasury
                shares repurchased
            
            
            (29,856
            )
            
            —Decrease
                in other assets
            
            
            (2,066
            )
            
            (3,472
            )Net
                cash provided by financing activities
            
            
            103,735
            
            
            204,380Increase
                (decrease) in cash and cash equivalents
            
            
            9,537
            
            
            (10,878
            )Cash
                and cash equivalents at beginning of period
            
            
            55,155
            
            
            29,159Cash
                and cash equivalents at end of period
            
            $
            64,692
            
            $
            18,281





See
      accompanying notes to consolidated financial statements


6


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION**





**Principles
      of Consolidation**





The
      consolidated financial statements include the accounts of Atlas America, Inc.
      (the “Company” or “ATLS”) and all of its subsidiaries, which are wholly owned
      except for Atlas Pipeline Partners, L.P. (“Atlas Pipeline” or “APL”) and Atlas
      Pipeline Holdings, L.P. (“APL Holdings”). Atlas Pipeline is a master limited
      partnership in which the Company has a combined general and limited partner
      interest of 11% and 15% at September 30, 2006 and 2005, respectively. Ownership
      at September 30, 2006 is through APL Holdings, as on July 26, 2006, the Company
      contributed its ownership interest in Atlas Pipeline to APL Holdings. Concurrent
      with this transaction, APL Holdings issued 3,600,000 common units representing
      a
      17.1% ownership interest. As a result, the Company now owns an 82.9%
      interest in APL Holdings, a limited partnership which owns a 2% general
      partner interest in Atlas Pipeline, all the incentive distribution rights in
      APL
      and 1,641,026 common units of APL.





The
      consolidated financial statements and the information and tables contained
      in
      the notes to the consolidated financial statements as of September 30, 2006
      and
      for the three and nine months ended September 30, 2006 and 2005 are unaudited.
      Certain information and footnote disclosures normally included in financial
      statements prepared in accordance with accounting principles generally accepted
      in the United States of America have been condensed or omitted in these
      statements pursuant to the rules and regulations of the Securities and Exchange
      Commission. However, in the opinion of management, these interim financial
      statements include all the necessary adjustments to fairly present the results
      of the interim periods presented. The results of operations for the nine months
      ended September 30, 2006 may not necessarily be indicative of the results of
      operations for the full year ending December 31, 2006.




**Change
      in Fiscal Year End**





On
      June
      15, 2006, the Company’s Board of Directors approved the change of the Company’s
      fiscal year end to December 31 from September 30. On July 24, 2006, the Company
      filed a transition report on Form 10-Q for the quarter ended December 31, 2005
      pursuant to Rule 13a-10 of the Securities Exchange Act for transition period
      reporting. Accordingly, these consolidated financial statements reflect the
      Company’s new year end of December 31 and year-to-date amounts are for the nine
      month periods ended September 30, 2006 and 2005.





**Reclassifications**





Certain
      previously reported amounts in the three months and nine months ended September
      30, 2005 consolidated financial statements have been reclassified to conform
      to
      the September 30, 2006 consolidated financial statement presentation. The
      reclassifications reflect the following changes summarized as
      follows:




•
                Transmission,
                    gathering, and processing revenue and gas and oil production
                    expense have
                    been reduced by the Company’s proportionate well ownership in these
                    revenues and costs.  •
                    Administration
                        and oversight revenue previously reported as general and
                        administration
                        reimbursements are now being reported as separate line items
                        on the
                        consolidated financial statements in accordance with a change
                        in the
                        Company's drilling
                        agreements.
  •
                Exploration
                    costs previously combined with gas and oil production expense
                    are now
                    being combined with general and administrative expense due to
                    the
                    immaterial amount of total costs incurred in relation to other
                    line items
                    on the consolidated financial
                    statements.




7


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**September
      30, 2006**


(Unaudited)





**NOTE
      1 - BASIS OF PRESENTATION - (Continued)**





**Three
                Months Ended September 30, 2005****(in
                thousands)****Previously**
            
            
            
            **Current****Reported**
            
            **Reclassification**
            
            **Presentation**Transmission,
                gathering and processing revenue
            
            
            97,992
            
            
            (578
            )
            
            97,414Administration
                and oversight revenue
            
            
            285
            
            
            1,567
            
            
            1,852Total
                revenue reclassification
            
            
            
            
            
            989Gas
                and oil production expense
            
            
            2,403
            
            
            (722
            )
            
            1,681General
                and administrative expense
            
            
            5,603
            
            
            1,711
            
            
            7,314Total
                expense reclassification
            
            
            
            
            
            989**Nine
                Months Ended September 30, 2005****(in
                thousands)****Previously**
            
            
            
            
            
            **Current****Reported**
            
            
            **Reclassification**
            
            
            **Presentation**Transmission,
                gathering and processing revenue
            
            
            223,055
            
            
            (1,568
            )
            
            221,487Administration
                and oversight revenue
            
            
            285
            
            
            7,151
            
            
            7,436Total
                revenue reclassification
            
            
            
            
            
            5,583Gas
                and oil production expense
            
            
            7,268
            
            
            (2,419
            )
            
            4,849General
                and administrative expense
            
            
            11,806
            
            
            8,002
            
            
            19,808Total
                expense reclassification
            
            
            
            
            
            5,583




**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Reference
      is hereby made to the Company's Annual Report on Form 10-K for the fiscal year
      ended September 30, 2005, which contains a summary of significant accounting
      policies followed by the Company in the preparation of its consolidated
      financial statements. These policies were also followed in preparing the
      quarterly report included herein.





**Recently
      Issued Financial Accounting Standard**





In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”). SAB 108 was issued to provide consistency in how registrants quantify
      financial statement misstatements. The Company is required to and will initially
      apply SAB 108 in connection with the preparation of its annual financial
      statements for the year ending December 31, 2006. The Company does not expect
      the application of SAB 108 to have a material effect on its financial position
      and results of operations.




8


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
      (Continued)**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 158, *Employer’s
      Accounting for Defined Benefit Pension and Other Post Retirement
      Plans* (“SFAS
      158”). SFAS 158 requires an employer to recognize the overfunded or underfunded
      status of a defined benefit post retirement plan as an asset or liability,
      by
      recording the difference between the plan assets fair value and the benefit
      obligation. The employer must recognize after-tax gains and losses as a result
      of changes in the funded status as a component of other comprehensive income.
      The employer is also required to measure the funded status of a plan as of
      the
      date of its year end statements, and disclose in the notes to the statements
      additional information regarding the net periodic benefit costs. SFAS 158 is
      effective for the Company beginning January 1, 2007. The Company is currently
      evaluating the impact of its adoption of SFAS 158 on its financial position
      and
      results of operations.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurement* (“SFAS
      157”). SFAS 157 addresses the need for increased consistency in fair value
      measurements, defining fair value as the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants at the measurement date. It also establishes a framework for
      measuring fair value and expands disclosure requirements. SFAS 157 is effective
      for the Company beginning January 1, 2008. The Company is currently evaluating
      the impact of its adoption of SFAS 157 on its financial position and results
      of
      operations.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109* (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an entity’s financial statements and provides guidance on the recognition,
      de-recognition and measurement of benefits related to an entity’s uncertain tax
      positions. FIN 48 is effective for the Company beginning January 1, 2007. The
      Company is currently evaluating the impact of its adoption of FIN 48 on its
      financial position and results of operations.





**Receivables**





In
      evaluating its allowance for possible losses, the Company performs ongoing
      credit evaluations of its customers and adjusts credit limits based upon payment
      history and the customers’ current creditworthiness, as determined by the
      Company’s review of its customers’ credit information. The Company extends
      credit on an unsecured basis to many of its energy customers. At September
      30,
      2006 and December 31, 2005, the Company’s credit evaluation indicated that it
      has no need for an allowance for possible losses.





**Revenue
      Recognition**





Because
      there are timing differences between the delivery of natural gas, NGLs and
      oil
      and the Company’s receipt of a delivery statement, the Company has unbilled
      revenues. These revenues are accrued based upon volumetric data from the
      Company’s records and the Company’s estimates of the related transportation and
      compression fees which are, in turn, based upon applicable product prices.
      The
      Company had unbilled trade receivables at September 30, 2006 and December 31,
      2005 of $48.5 million
      and $71.6 million, respectively which are included in Accounts Receivable on
      its
      Consolidated Balance Sheets.




9


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      3 - COMPREHENSIVE INCOME**





Comprehensive
      income includes net income and other gains and losses affecting stockholders’
equity from non-owner sources that, under accounting principles generally
      accepted in the United States of America, have not been recognized in the
      calculation of net income. For the Company, this includes only changes in the
      fair value, net of taxes, of unrealized hedging gains and losses. A
      reconciliation of the Company’s comprehensive income for the periods indicated
      is as follows (in thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income (loss)
            
            $
            (19,876
            )
            $
            9,088
            
            $
            1,585
            
            $
            24,048Other
                comprehensive income (loss):Unrealized
                holding gain (loss) on hedging contracts,
              net
                of tax of ($5,817), $2,253, ($8,088) and $3,803
            
            
            9,873
            
            
            (4,006
            )
            
            13,515
            
            
            (6,762
            )Less
                reclassification adjustment for (gains) losses
              realized
                in net income, net of tax of ($324), ($406),
              ($215)
                and ($759)
            
            
            553
            
            
            722
            
            
            251
            
            
            1,349Total
                other comprehensive income (loss)
            
            
            10,426
            
            
            (3,284
            )
            
            13,766
            
            
            (5,413
            )Comprehensive
                income (loss)
            
            $
            (9,450
            )
            $
            5,804
            
            $
            15,351
            
            $
            18,635





**NOTE
      4 - EARNINGS PER SHARE**





Basic
      earnings per share is determined by dividing net income by the weighted average
      number of shares of common stock outstanding during the period. Diluted earnings
      per share is computed by dividing net income by the sum of the weighted average
      number of shares of common stock outstanding and dilutive potential shares
      issuable during the period. Dilutive potential shares of common stock consist
      of
      the excess of shares issuable under the terms of the Company’s stock incentive
      plan over the number of such shares that could have been reacquired (at the
      weighted average price of shares during the period) with the proceeds received
      from the exercise of the options (shown in thousands).





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Net
                income (loss)
            
            $
            (19,876
            )
            $
            9,088
            
            $
            1,585
            
            $
            24,048Weighted
                average common shares outstanding-basic(1)
            
            
            19,597
            
            
            20,001
            
            
            19,839
            
            
            20,000Dilutive
                effect of stock option and award plan(1)
            
            
            403
            
            
            173
            
            
            433
            
            
            64Weighted
                average common shares-diluted(1)
            
            
            20,000
            
            
            20,174
            
            
            20,272
            
            
            20,064




(1)
            The
              shares for the three months and nine months ended September 30, 2005
              have
              been restated to reflect the three for two stock split on March 10,
              2006.





**NOTE
      5 - PROPERTY AND EQUIPMENT**





Property
      and equipment is stated at cost. Depreciation, depletion and amortization is
      based on cost less estimated salvage value primarily using the
      unit-of-production or straight-line method over the assets estimated useful
      lives. Maintenance and repairs are expensed as incurred. Major renewals and
      improvements that extend the useful lives of property are
      capitalized.





10


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      5 - PROPERTY AND EQUIPMENT - (Continued)**





Property
      and equipment consists of the following at the dates indicated (in
      thousands):


**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Mineral
                interests:Proved
                properties
            
            $
            1,443
            
            $
            2,308Unproved
                properties
            
            
            1,002
            
            
            1,002Wells
                and related equipment
            
            
            323,930
            
            
            273,725Pipelines,
                processing and compression facilities
            
            
            589,653
            
            
            445,859Rights-of-way
            
            
            29,906
            
            
            15,769Land,
                building and improvements
            
            
            8,431
            
            
            7,799Support
                equipment
            
            
            5,226
            
            
            4,201Other
            
            
            9,706
            
            
            6,292969,297
            
            
            756,955Accumulated
                depreciation, depletion and amortization:Oil
                and gas properties and pipelines
            
            
            (123,244
            )
            
            (94,105
            )Other
            
            
            (5,535
            )
            
            (4,503
            )(128,779
            )
            
            (98,608
            )$
            840,518
            
            $
            658,347




On
        May 2,
        2006, Atlas Pipeline acquired the remaining 25% ownership interest in NOARK
        for
        $69.0 million in cash, including the repayment of the $39.0 million of NOARK
        notes at the date of acquisition (see Note 13). Atlas Pipeline acquired the
        initial 75% ownership interest in NOARK for approximately $179.8 million
        in
        October 2005 (see Note 13). Due to the recent date of both acquisitions,
        the
        purchase price allocation is subject to adjustment and could change
        significantly as Atlas Pipeline continues to evaluate this
        allocation.





**NOTE
      6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL**





**Other
      Assets**





The
      following table provides information about other assets at the dates indicated
      (in thousands):





**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Deferred
                financing costs, net of accumulated amortization of $5,071 and
                $3,063
            
            $
            14,579
            
            $
            15,654Investments
            
            
            1,545
            
            
            1,647Security
                deposits
            
            
            1,601
            
            
            1,725Long-term
                hedge receivable from Partnerships
            
            
            1,156
            
            
            9,340Long-term
                hedge receivable
            
            
            24,097
            
            
            4,387Other
            
            
            123
            
            
            79$
            43,101
            
            $
            32,832





Deferred
      financing costs are recorded at cost and are amortized over the terms of the
      related loan agreements which range from three to ten years. Long-term hedge
      receivable from Partnerships represents amounts due from affiliated partnerships
      for unrealized long-term holding losses from hedging activities allocated to
      them.




11


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL -
      (Continued)**





**Intangible
      Assets**





*Customer
      contracts and relationships.* At
      September 30, 2006, Atlas Pipeline had $26.1 million of intangible assets,
      net
      of accumulated amortization of $3.5 million which was recorded in connection
      with natural gas gathering contracts and customer relationships assumed in
      its
      acquisition of Elk City (see Note 13). Statement of Financial Accounting
      Standard No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS
      142”), requires that intangible assets such as these gas gathering contracts and
      customer relations with finite useful lives be amortized over their respective
      estimated useful lives. If an intangible asset has a finite useful life, but
      the
      precise length of that life is not known, that intangible asset shall be
      amortized over the best estimate of its useful life. At a minimum, Atlas
      Pipeline will assess the useful lives and residual values of all intangible
      assets on an annual basis to determine if adjustments are required. During
      the
      third quarter of 2006, Atlas Pipeline adjusted the preliminary purchase price
      allocation for NOARK and eliminated the
      previously estimated allocated value of customer contracts and customer
      relationships related to this acquisition based upon a preliminary finding
      by an
      independent valuation firm. Amortization expense on the customer contract and
      relationships intangible assets related to Elk City, which have estimated lives
      of eight and twenty years, respectively, and are being amortized on a
      straight-line basis, was $1.4 million and $492,000 for the nine months ended
      September 30, 2006 and 2005, respectively.





*Partnership
      management and operating contracts.* Included
      in intangible assets are partnership management and operating contracts acquired
      through acquisitions which are recorded at fair value on their acquisition
      dates. The Company amortizes contracts acquired on the declining balance and
      straight-line methods, over their respective estimated lives, ranging from
      five
      to thirteen years. Amortization expense for these contracts for the nine months
      ended September 30, 2006 and 2005 was $659,000 and $467,000,
      respectively.





Aggregate
      estimated annual amortization expense for all of the contracts described
      above for the next five fiscal periods ending September 30 is as follows:
      2007-$3.2 million; 2008-$3.2 million; 2009-$3.2 million; 2010-$3.1 million
      and
      2011-$3.1 million.





The
      following table provides information about intangible assets at the dates
      indicated (in thousands):





**September
                30, 2006**
            
            **December
                31, 2005****Accumulated**
            
            
            
            **Accumulated****Cost**
            
            **Amortization**
            
            **Cost**
            
            **Amortization**Customer
                contracts and relations
            
            $
            29,650
            
            $
            (3,517
            )
            $
            56,950
            
            $
            (2,081
            )Partnership
                management and operating contracts
            
            
            14,343
            
            
            (8,912
            )
            
            14,343
            
            
            (8,253
            )$
            43,993
            
            $
            (12,429
            )
            $
            71,293
            
            $
            (10,334
            )




12


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL -
      (Continued)**





**Goodwill**





The
      Company applies the provisions of SFAS No. 142 which requires that goodwill
      no
      longer be amortized, but instead evaluated for impairment at least annually.
      The
      evaluation of impairment under SFAS 142 requires the use of projections,
      estimates and assumptions as to the future performance of the Company’s
      operations, including anticipated future revenues, expected future operating
      costs and the discount factor used. Actual results could differ from
      projections, resulting in revisions to the Company’s assumptions and, if
      required, recognition of an impairment loss. The Company’s evaluation of
      goodwill at September 30, 2005 (the most recent valuation date) indicated there
      was no impairment loss and no impairment indicators have arisen since that
      date.
      The Company will continue to evaluate its goodwill at least annually or when
      impairment indicators arise, and will reflect the impairment of goodwill, if
      any, within the consolidated statements of income in the period in which the
      impairment is indicated. A reconciliation of the Company’s goodwill for the
      periods indicated is as follows (in thousands).





**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Goodwill
                at beginning of period, net of accumulated amortization of
                $4,532
            
            $
            146,544
            
            $
            37,470Adjustment
                to goodwill related to Atlas Pipeline acquisitions (see Note
                13)
            
            
            (47,938
            )
            
            109,074Goodwill
                at end of period, net of accumulated amortization of
                $4,532
            
            $
            98,606
            
            $
            146,544





**NOTE
      7 - ASSET RETIREMENT OBLIGATIONS**





The
      Company accounts for the estimated plugging and abandonment costs for its oil
      and gas properties in accordance with SFAS 143, *Accounting
      for Asset Retirement Obligations* .





A
      reconciliation of the Company’s liability for well plugging and abandonment
      costs for the periods indicated is as follows (in thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Asset
                retirement obligations, beginning of period
            
            $
            19,760
            
            $
            7,151
            
            $
            18,499
            
            $
            5,618Liabilities
                incurred
            
            
            490
            
            
            ―
            
            
            1,616
            
            
            120Liabilities
                settled
            
            
            (67
            )
            
            (53
            )
            
            (180
            )
            
            (133
            )Revision
                in estimates
            
            
            ―
            
            
            10,501
            
            
            ―
            
            
            11,789Accretion
                expense
            
            
            124
            
            
            52
            
            
            372
            
            
            257Asset
                retirement obligations, end of period
            
            $
            20,307
            
            $
            17,651
            
            $
            20,307
            
            $
            17,651





The
      above
      accretion expense is included in depreciation, depletion and amortization in
      the
      Company’s consolidated statements of operations and the asset retirement
      obligation liabilities are included in other liabilities in the Company’s
      consolidated balance sheets. The revision in estimate for the three months
      and
      nine months ended September 30, 2005 was due to increased estimated costs of
      plugging and abandoning wells.





13


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)


**NOTE
      8 - DEBT**





Total
      debt consists of the following at the dates indicated (in
      thousands):





**September
                30,**
            
            **December
                31,****2006**
            
            **2005**Senior
                notes - Atlas Pipeline
            
            $
            286,005
            
            $
            250,000Revolving
                credit facility - Atlas Pipeline
            
            
            13,500
            
            
            9,500Installment
                notes - NOARK
            
            
            —
            
            
            39,000Other
                debt
            
            
            225
            
            
            281299,730
            
            
            298,781Less
                current maturities
            
            
            144
            
            
            1,351$
            299,586
            
            $
            297,430





**Atlas
      Pipeline**





*Credit
      Facility.*Atlas
      Pipeline has a $225.0 million credit facility with a syndicate of banks which
      matures in June 2011. The credit facility bears interest, at Atlas Pipeline’s
      option, at either (i) adjusted London Interbank Offered Rate (“LIBOR”) plus the
      applicable margin, as defined, or (ii) the higher of the federal funds rate
      plus
      0.5% or the Wachovia Bank prime rate (each plus the applicable margin). The
      weighted average interest rate on the outstanding credit facility borrowings
      at
      September 30, 2006 was 7.1%. Up to $50.0 million of the credit facility may
      be
      utilized for letters of credit, of which $10.1 million was outstanding at
      September 30, 2006. These outstanding letter of credit amounts were not
      reflected as borrowings on the Company’s consolidated balance sheets. Borrowings
      under the credit facility are secured by a lien on and security interest in
      all
      of Atlas Pipeline’s property and that of its subsidiaries, and by the guaranty
      of each of its subsidiaries. The credit facility contains customary covenants,
      including restrictions on Atlas Pipeline’s ability to incur additional
      indebtedness; make certain acquisitions, loans or investments; make distribution
      payments to its unitholders if an event of default exists; and enter into a
      merger or sale of assets, including the sale or transfer of interests in its
      subsidiaries. Atlas Pipeline is in compliance with these covenants as of
      September 30, 2006.





The
      events which constitute an event of default are also customary for loans of
      this
      size, including payment defaults, breaches of representations or covenants
      contained in the credit agreements, adverse judgments against Atlas Pipeline
      in
      excess of a specified amount and a change of control of the general
      partner.




14


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)


**NOTE
      8 - DEBT (Continued)**





*Senior
      Notes.* In
      December 2005, Atlas Pipeline, issued $250.0 million of 10-year, 8.125% senior
      unsecured notes (“Senior Notes”) in a private placement transaction pursuant to
      Rule 144A and Regulation S under the Securities Act of 1933 for net proceeds
      of
      $243.1 million, after underwriting commissions and other transaction costs.
      In
      May 2006, Atlas Pipeline issued an additional $35.0 million of senior unsecured
      notes at 103% par value, with a resulting effective yield of approximately
      7.6%,
      for net proceeds of $36.6 million including accrued interest and net of initial
      purchaser’s discount and other transaction costs. Interest on the Senior Notes
      is payable semi-annually in arrears on June 15 and December 15. The Senior
      Notes
      are redeemable at any time on or after December 15, 2010 at certain redemption
      prices, together with accrued unpaid interest to the date of redemption. In
      addition, prior to December 15, 2008, Atlas Pipeline may redeem up to 35% of
      the
      aggregate principal amount of the Senior Notes with the proceeds of certain
      equity offerings at a stated redemption price. The Senior Notes are also subject
      to repurchase by Atlas Pipeline at a price equal to 101% of their principal
      amount, plus accrued and unpaid interest, upon a change of control or upon
      certain asset sales for which the net proceeds are not reinvested into Atlas
      Pipeline within 360 days. The Senior Notes are junior in right of payment to
      Atlas Pipeline’s secured debt, including Atlas Pipeline’s obligations under its
      credit facility.





The
      indenture governing the Senior Notes contains covenants, including limitations
      of Atlas Pipeline’s ability to: incur certain liens; engage in sale/leaseback
      transactions; incur additional indebtedness; declare or pay distributions if
      an
      event of default has occurred; redeem, repurchase or retire equity interests
      or
      subordinated indebtedness; make certain investments; or merge, consolidate
      or
      sell substantially all of its assets. Atlas Pipeline is in compliance with
      these
      covenants as of September 30, 2006.





In
      connection with a Senior Notes registration rights agreement entered into by
      Atlas Pipeline, it agreed to (a) file an exchange offer registration statement
      with the Securities and Exchange Commission for the Senior Notes by April 19,
      2006, (b) cause the exchange offer registration statement to be declared
      effective by the Securities and Exchange Commission by July 18, 2006, and (c)
      cause the exchange offer to be consummated by August 17, 2006. If Atlas Pipeline
      had not met the aforementioned deadlines, the Senior Notes would have been
      subject to additional interest, up to 1% per annum, until such time that the
      deadlines had been met. On April 19, 2006, Atlas Pipeline filed an exchange
      offer registration statement for the Senior Notes with the Securities and
      Exchange Commission, which was declared effective on July 11, 2006. The exchange
      offer was consummated on August 17, 2006, thereby fulfilling all of the
      requirements of the Senior Notes registration rights agreement by the specified
      dates.





**Atlas
      America**





*Revolving
      Credit Facility.* In April
      2006, the Company increased its credit facility, which is led by Wachovia Bank,
      N.A. (“Wachovia”), to a maximum of $200.0 million. The revolving credit facility
      has a current borrowing base of $150.0 million which may be redetermined subject
      to changes in the Company’s oil and gas reserves. Up to $50.0 million of the
      facility may be in the form of standby letters of credit. The facility is
      secured by the Company’s assets and bears interest at either the base rate plus
      the applicable margin or at adjusted LIBOR plus the applicable margin, elected
      at the Company’s option.





The
      base
      rate for any day equals the higher of the federal funds rate plus 0.50% or
      the
      Wachovia prime rate. Adjusted LIBOR is LIBOR divided by 1.00 minus the
      percentage prescribed by the Federal Reserve Board for determining the reserve
      requirement for Euro currency funding. The applicable margin ranges from 0.0%
      to
      0.75% for base rate loans and 1.00% to 1.75% for LIBOR loans.





15


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      8 - DEBT (Continued)**





The
      Wachovia credit facility requires the Company to maintain specified ratios
      of
      current assets to current liabilities, interest coverage (as defined), and
      debt
      to earnings before interest, taxes, depreciation, depletion and amortization
      (“EBITDA”). In addition, the facility limits sales, leases or transfers of
      assets and the incurrence of additional indebtedness. The facility limits the
      dividends payable by the Company, on a cumulative basis, to 50% of the Company’s
      net income from October 1, 2005 to the date of determination plus $5.0 million.
      The Company is in compliance with these covenants as of September 30, 2006.
      The
      facility terminates in April 2011, when all outstanding borrowings must be
      repaid. At September 30, 2006 and December 31, 2005, $1.5 million and $16.5
      million, respectively, was outstanding under this facility under letters of
      credit which are not reflected as borrowings on the Company’s consolidated
      balance sheet.


On
        July
        26, 2006, Atlas Pipeline Holding, L.P. (“AHD”), as borrower, and Atlas Pipeline
        GP, as guarantor, entered into a $50.0 million revolving credit facility
        (-0-
        outstanding at September 30, 2006) with Wachovia Bank, National Association,
        as
        administrative agent and issuing bank, and a syndicate of banks. AHD’s credit
        facility matures in April 2010 and bears interest, at its option, at either
        (i)
        adjusted LIBOR (as defined in the credit facility) or (ii) the higher of
        the
        federal funds rate plus 0.5% or the Wachovia Bank, National Association prime
        rate, except that no more than five LIBOR loans may be outstanding at any
        time.
        Borrowings under the credit facility are secured by a first-priority lien
        on a
        security interest in all of the AHD’s assets, including a pledge of Atlas
        Pipeline GP’s interests in Atlas Pipeline, and are guaranteed by Atlas Pipeline
        GP and AHD’s other subsidiaries (excluding Atlas Pipeline and its subsidiaries).
        The credit facility contains customary covenants, including restrictions
        on its
        ability to incur additional indebtedness; make certain acquisitions, loans
        or
        investments; make distribution payments to AHD’s unitholders if an event of
        default exists or would result from such distribution; or enter into a merger
        or
        sale of substantially all of AHD’s property or assets, including the sale or
        transfer of interests in its subsidiaries. AHD is in compliance with these
        covenants as of September 30, 2006.





Annual
      debt principal payments over the next five years ending September 30 are as
      follows (in thousands):





2007
            
            $
            1442008
            
            
            672009
            
            
            142010
            
            
            —2011
                and thereafter
            
            
            299,505$
            299,730





**NOTE
      9 ─ COMMITMENTS AND CONTINGENCIES**





The
      Company is a party to various routine legal proceedings arising out of the
      ordinary course of its business. Management believes that none of these actions,
      individually or in the aggregate, will have a material adverse effect on the
      Company’s financial condition or results of operations.


In
        October 2006, the Company tentatively settled a class action lawsuit filed
        in
        February 2000 in New York pertaining to the payment of royalty revenues to
        landowners. Under the terms of the settlement, the Company has agreed to
        pay
        $300,000, upgrade certain gathering systems and cap certain transportation
        expenses chargeable to the landowners.




At
      September 30, 2006, Atlas Pipeline is committed to expend approximately $23.2
      million on pipeline extensions, compressor station upgrades and processing
      facility upgrades, including $2.1 million related to the Sweetwater gas plant,
      Atlas Pipeline's new gas processing plant which commenced operations in Beckham
      County, Oklahoma in September 2006.




16


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      10 - DERIVATIVE INSTRUMENTS**





*Atlas
      America.* The
      Company from time to time enters into financial hedges in the form of natural
      gas futures and option contracts to hedge its exposure to changes in natural
      gas
      prices. At any point in time, such contracts may include regulated New York
      Mercantile Exchange (“NYMEX”) futures and options contracts and non-regulated
      over-the-counter futures contracts with qualified counterparties. NYMEX
      contracts are generally settled with offsetting positions, but may be settled
      by
      the delivery of natural gas.





The
      Company formally documents all relationships between hedging instruments and
      the
      items being hedged, including the Company’s risk management objective and
      strategy for undertaking the hedging transactions. This includes matching the
      natural gas futures and options contracts to the forecasted transactions. The
      Company assesses, both at the inception of the hedge and on an ongoing basis,
      whether the derivatives are highly effective in offsetting changes in the fair
      value of hedged items. Historically these contracts have qualified and been
      designated as cash flow hedges and recorded at their fair values. Derivatives
      are recorded on the balance sheet as assets and liabilities at fair value.
      Gains
      or losses on future contracts are determined as the difference between the
      contract price and a reference price, generally prices on NYMEX. Changes in
      fair
      value are recognized in stockholders’ equity as accumulated other comprehensive
      income (loss) and recognized within the consolidated statements of operations
      in
      the month the hedged gas is settled. If it is determined that a derivative
      is
      not highly effective as a hedge or it has ceased to be a highly effective hedge,
      due to the loss of correlation between changes in gas reference prices under
      a
      hedging instrument and actual gas prices, the Company will discontinue hedge
      accounting for the derivative and subsequent changes in fair value for the
      derivative will be recognized immediately into earnings.





At
      September 30, 2006, the Company had 119 open natural gas futures contracts
      related to natural gas sales covering 38.1 million mmbtus of natural gas,
      maturing through December 31, 2009 at a combined average settlement price of
      $8.85 per mmbtu. The Company recognized a gain of $2.0 million and $4.9 million
      on settled contracts covering natural gas production for the three months and
      nine months ended September 30, 2006, respectively, which is included within
      gas
      and oil production on the Company’s consolidated statements of operations. The
      Company recognized no gains or losses during the three months and nine months
      ended September 30, 2006 for hedge ineffectiveness or as a result of the
      discontinuance of these cash flow hedges. The Company did not have any hedge
      gain or loss in 2005.





*Atlas* *Pipeline.* Atlas
      Pipeline also enters into certain financial hedges in the form of financial
      swap and option instruments that are classified as cash flow hedges in
      accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activity* .
      Atlas
      Pipeline enters into these instruments to hedge its forecasted natural gas,
      NGLs
      and condensate sales against the variability in expected future cash flows
      attributable to changes in market prices. The swap instruments are contractual
      agreements between counterparties to exchange obligations of money as the
      underlying natural gas, NGLs and condensate are sold. Under these swap
      agreements, Atlas Pipeline receives a fixed price and pays a floating price
      based on certain indices for the relevant contract period.




17


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      10 - DERIVATIVE INSTRUMENTS (Continued)**





Atlas
      Pipeline formally documents all relationships between hedging instruments and
      the items being hedged, including the risk management objective and strategy
      for
      undertaking the hedging transactions. This includes matching the natural gas
      futures and options contracts to the forecasted transactions. Atlas Pipeline
      assesses both at the inception of the hedge and on an ongoing basis, whether
      the
      derivatives are effective in offsetting changes in the forecasted cash flow
      of
      hedged items. If Atlas Pipeline determines that a derivative is not effective
      as
      a hedge or that it has ceased to be an effective hedge due to the loss of
      correlation between the hedging instrument and the underlying commodity, Atlas
      Pipeline will discontinue hedge accounting for the derivative, and subsequent
      changes in fair value for the derivative, which is determined through the
      utilization of market data, will be recognized immediately into
      earnings.





Ineffective
      hedge gains or losses are recorded in the Company’s consolidated statements of
      operations while the hedge contracts are open and may increase or decrease
      until
      settlement of the contract. Atlas Pipeline recognized losses of $4.9 million
      and
      $2.5 million for the three months ended September 30, 2006 and 2005,
      respectively, and losses of $10.5 million and $4.4 million for the nine months
      ended September 30, 2006 and 2005, respectively, related to the settlement
      of
      qualifying hedge instruments. Atlas Pipeline also recognized a gain of $2.6
      million and a loss of $800,000 for the three months ended September 30, 2006
      and
      2005, respectively, and a gain of $3.5 million and a loss of $700,000 for the
      nine months ended September 30, 2006 and 2005, respectively, related to the
      change in market value of non-qualifying or ineffective hedges. Such gains
      and
      losses are included within transmission, gathering and processing in the
      Company’s consolidated statements of operations.





At
      September 30, 2006 and December 31, 2005, the Company reflected a net hedging
      asset and liability on its balance sheets of $10.7  million
      and $41.5 million, respectively. Of the $8.7 million net gain in accumulated
      other comprehensive income at September 30, 2006, the Company will reclassify
      $4.5 million of gains to its consolidated statements of operations over the
      next
      twelve month period as these contracts expire, and $4.2 million of gains will
      be
      reclassified in later periods if the fair values of the instruments remain
      at
      current market values. Actual amounts that will be reclassified will vary as
      a
      result of future price changes.





At
      September 30, 2006, the Company (including Atlas Pipeline) had the following
      financial hedges in place:





**Natural
      Gas Fixed-Price Swaps - Atlas** **(1)**


Twelve
                Month
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)September
                30,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2007
            
            
            10,110,000
            
            
            $
            9.26
            
            
            $
            20,1162008
            
            
            14,640,000
            
            
            
            8.75
            
            
            
            9,9452009
            
            
            10,950,000
            
            
            
            8.65
            
            
            
            7,8622010
            
            
            2,430,000
            
            
            
            8.61
            
            
            
            1,650$
            39,573


18


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      10 - DERIVATIVE INSTRUMENTS (Continued)**





**Natural
      Gas Liquids Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(4)December
                31,
            
            (gallons)
            
            (per
                gallon)
            
            (in
                thousands)2006
            
            
            17,262,000
            
            
            $
            0.788
            
            
            $
            (1,908
            )2007
            
            
            84,924,000
            
            
            
            0.849
            
            
            
            (2,344
            )2008
            
            
            33,012,000
            
            
            
            0.697
            
            
            
            (5,659
            )2009
            
            
            8,568,000
            
            
            
            0.746
            
            
            
            (1,244
            )$
            (11,155
            )





**Crude
      Oil Sales Options (associated with NGL volume)**


Associated
            
            AverageProduction
            
            Crude
            
            NGL
            
            Crude
            
            Fair
                ValuePeriodEnded
            
            Volume
            
            Volume
            
            Strike
                Price
            
            Liability(3)
            
            Option
                TypeDecember
                31,
            
            (barrels)
            
            (gallons)
            
            (per
                barrel)
            
            (in
                thousands)2008
            
            
            720,000
            
            
            
            40,219,000
            
            
            $
            60.00
            
            
            $
            -
            
            
            
            Puts
                purchased2008
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            84.00
            
            
            
            -
            
            
            
            Calls
                sold2009
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            60.00
            
            
            
            -
            
            
            
            Puts
                purchased2009
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            81.00
            
            
            
            -
            
            
            
            Calls
                sold$
            -




**Natural
      Gas Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            200,000
            
            
            $
            7.019
            
            
            $
            1072007
            
            
            1,080,000
            
            
            
            7.255
            
            
            
            (451
            )2008
            
            
            240,000
            
            
            
            7.270
            
            
            
            (223
            )$
            (567
            )





**Natural
      Gas Basis Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            300,000
            
            
            $
            (0.525
            )
            
            $
            492007
            
            
            1,080,000
            
            
            
            (0.535
            )
            
            
            3692008
            
            
            240,000
            
            
            
            (0.555
            )
            
            
            131$
            549




19


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      10 - DERIVATIVE INSTRUMENTS (Continued)**





**Natural
      Gas Purchases**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            720,000
            
            
            $
            8.384
            
            
            $
            (1,369
            )2007
            
            
            6,960,000
            
            
            
            8.855
            (5)
            
            
            (10,084
            )2008
            
            
            3,336,000
            
            
            
            8.872
            (6)
            
            
            (3,553
            )2009
            
            
            2,400,000
            
            
            
            8.450
            
            
            
            (1,682
            )$
            (16,688
            )





**Natural
      Gas Basis Purchases**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            1,080,000
            
            
            $
            (0.835
            )
            
            $
            1892007
            
            
            6,960,000
            
            
            
            (0.903
            )
            
            
            2722008
            
            
            3,336,000
            
            
            
            (1.042
            )
            
            
            2722009
            
            
            2,400,000
            
            
            
            (0.600
            )
            
            
            130$
            863





**Crude
      Oil Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Strike
                Price
            
            Liability(3)December
                31,
            
            (barrels)
            
            (per
                barrel)
            
            (in
                thousands)2006
            
            
            17,800
            
            
            $
            53.358
            
            
            $
            (179
            )2007
            
            
            77,900
            
            
            
            56.175
            
            
            
            (900
            )2008
            
            
            65,400
            
            
            
            59.424
            
            
            
            (621
            )2009
            
            
            33,000
            
            
            
            62.700
            
            
            
            (159
            )$
            (1,859
            )





**Crude
      Oil Sales Options**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Strike
                Price
            
            Liability(3)December
                31,
            
            (barrels)
            
            (per
                barrel)
            
            (in
                thousands)
            
            Option
                Type2006
            
            
            3,300
            
            
            $
            60.000
            
            
            $
            -
            
            
            
            Puts
                purchased2006
            
            
            3,300
            
            
            
            73.380
            
            
            
            -
            
            
            
            Calls
                sold2007
            
            
            13,200
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2007
            
            
            13,200
            
            
            
            73.380
            
            
            
            -
            
            
            
            Calls
                sold2008
            
            
            17,400
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2008
            
            
            17,400
            
            
            
            72.807
            
            
            
            -
            
            
            
            Calls
                sold2009
            
            
            30,000
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2009
            
            
            30,000
            
            
            
            71.250
            
            
            
            -
            
            
            
            Calls
                sold$
            -Total
                net asset
            $
            10,716




20


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      10 - DERIVATIVE INSTRUMENTS (Continued)**





(1)
            
            Represents
                ATLS’ hedged volumes. All others are related to Atlas
                Pipeline.(2)
            
            MMBTU
                represents million British Thermal Units.(3)
            
            Fair
                value based on forward NYMEX natural gas and light crude prices,
                as
                applicable.(4)
            
            Fair
                value based upon management estimates, including forecasted forward
                NGL
                prices as a function of forward NYMEX natural gas, light crude prices
                and
                propane prices.(5)
            
            Includes
                Atlas Pipelines’ premium received from its sale of an option for it to
                sell 4,800,000 mmbtu of natural gas at an average price of $15.25
                per
                mmbtu for the year ended December 31, 2007, partially offset by its
                premium paid from its purchase of an option to purchase 1,200,000
                mmbtu of
                natural gas at $26.00 per mmbtu.(6)
            
            Includes
                Atlas Pipelines’ premium received from its sale of an option for it to
                sell 936,000 mmbtu of natural gas for the year ended December 31,
                2008 at
                $15.50 per mmbtu.








The
      following table sets forth the fair values of derivative instruments at the
      dates indicated (in thousands):





**September
                30, 2006****Book
                Value**
            
            **Fair
                Value**AssetsDerivative
                instruments
            
            $
            47,838
            
            $
            47,838$
            47,838
            
            $
            47,838LiabilitiesDerivative
                instruments
            
            
            (37,122
            )
            
            (37,122
            )$
            (37,122
            )
            $
            (37,122
            )$
            10,716
            
            $
            10,716





The
      fair
      value of the derivatives are included in the combined balance sheets as
      follows:





Unrealized
                hedge gains - short term
            
            $
            23,742Other
                assets - long term (see Note 6)
            
            
            24,097Unrealized
                hedge loss - short term
            
            
            (16,819
            )Unrealized
                hedge loss - long term
            
            
            (20,304
            )$
            10,716





Of
      the
      $10.7 million net unrealized hedge gain, the Company’s retained portion of $8.7
      million is included in accumulated other comprehensive income, and $2.1 million
      is reallocated to the Partnerships, to Minority Interest - Atlas Pipeline,
      and
      Deferred Tax Payable, and included in the balance sheet as components
      of:





Other
                assets (see Note 6)
            
            $
            1,156Accrued
                liabilities - short term
            
            
            (11,265
            )Unrealized
                hedge loss - long term
            
            
            (12,052
            )Minority
                interest - Atlas Pipeline
            
            
            25,593Deferred
                income tax
            
            
            (5,498
            )$
            (2,066
            )





21


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**





**NOTE
      11 - OPERATING SEGMENT INFORMATION**





The
      Company’s operations include three reportable operating segments. These
      operating segments reflect the way the Company manages its operations and makes
      business decisions. The Company does not allocate income taxes to its operating
      segments. Operating segment data for the periods indicated are as follows (in
      thousands):





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2006
            
            2005
            
            2006
            
            2005**Gas
                & Oil Production**Revenues
            
            $
            21,888
            
            $
            18,830
            
            $
            66,696
            
            $
            48,840Costs
                and expenses
            
            
            (2,315
            )
            
            (1,681
            )
            
            (6,437
            )
            
            (4,849
            )Segment
                profit
            
            $
            19,573
            
            $
            17,149
            
            $
            60,259
            
            $
            43,991**Partnership
                Management (a)**Revenues
            
            $
            59,449
            
            $
            41,126
            
            $
            160,323
            
            $
            121,685Costs
                and expenses
            
            
            (45,814
            )
            
            (32,323
            )
            
            (123,376
            )
            
            (94,250
            )Segment
                profit
            
            $
            13,635
            
            $
            8,803
            
            $
            36,947
            
            $
            27,435**Atlas
                Pipeline (b)**Revenues
            
            $
            109,280
            
            $
            96,252
            
            $
            320,867
            
            $
            218,322Costs
                and expenses
            
            
            (96,180
            )
            
            (86,173
            )
            
            (270,822
            )
            
            (194,105
            )Segment
                profit
            
            $
            13,100
            
            $
            10,079
            
            $
            50,045
            
            $
            24,217**Reconciliation
                of segment profit to net income before tax**Segment
                profitGas
                & Oil Production
            
            $
            19,573
            
            $
            17,149
            
            $
            60,259
            
            $
            43,991Partnership
                Management
            
            
            13,635
            
            
            8,803
            
            
            36,947
            
            
            27,435Atlas
                Pipeline
            
            
            13,100
            
            
            10,079
            
            
            50,045
            
            
            24,217Total
                segment profit
            
            
            46,308
            
            
            36,031
            
            
            147,251
            
            
            95,643General
                and administrative expenses
            
            
            (12,814
            )
            
            (7,314
            )
            
            (33,197
            )
            
            (19,808
            )Compensation
                reimbursement-affiliate
            
            
            (345
            )
            
            -
            
            
            (1,041
            )
            
            (389
            )Depreciation,
                depletion and amortization
            
            
            (12,442
            )
            
            (7,736
            )
            
            (33,158
            )
            
            (19,023
            )Other
                income (expense) - net
            
            
            (4,435
            )
            
            (7,237
            )
            
            (27,792
            )
            
            (17,359
            )Net
                Income before tax
            
            $
            16,272
            
            $
            13,744
            
            $
            52,063
            
            $
            39,064




**Balance
                Sheet**
            
            September
                30,
            
            December
                31,Goodwill
            
            2006
            
            2005Gas
                & Oil Production
            
            $
            21,527
            
            $
            21,527Partnership
                Management
            
            
            13,639
            
            
            13,639Atlas
                Pipeline
            
            
            63,440
            
            
            111,378$
            98,606
            
            $
            146,544Total
                AssetsGas
                & Oil Production
            
            $
            306,963
            
            $
            255,494Partnership
                Management
            
            
            45,684
            
            
            34,321Atlas
                Pipeline
            
            
            769,413
            
            
            736,977Corporate
                other
            
            
            64,902
            
            
            29,388$
            1,186,962
            
            $
            1,056,180




22


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      11 - OPERATING SEGMENT INFORMATION (Continued)**





(a)
            
            Includes
                revenues and expenses from well construction, completion and services,
                administration and oversight and the Company’s transportation operations
                which do not meet the quantitative threshold for reporting segment
                information.(b)
            
            Includes
                revenues and expenses from Atlas Pipeline’s Appalachian and Mid-Continent
                operations, less revenues from affiliates of $6.2 million and $7.1
                million
                for the three months ended September 30, 2005 and 2006, and revenues
                from
                affiliates of $16.6 million and $22.8 million for the nine months
                ended
                September 30, 2005 and 2006,
                respectively.





Operating
      profit per segment represents total revenues less costs and expenses
      attributable thereto, including provision for possible losses and excluding
      interest, general corporate expenses and depreciation, depletion and
      amortization.





**NOTE
      12 - BENEFIT PLANS**





*Stock
      Incentive Plan.* The
      Company adopted a Stock Incentive Plan (the “Plan”) in fiscal 2004 which
      authorized the granting of up to 2.0 million shares of the Company’s common
      stock to employees, affiliates, consultants and directors of the Company in
      the
      form of incentive stock options (“ISOs”), non-qualified stock options, stock
      appreciation rights (“SARs”), restricted stock and deferred units.





Prior
      to
      October 1, 2005, the Company accounted for stock-based compensation in
      accordance with the intrinsic value method as prescribed by Accounting
      Principles Board Opinion No. 25, *Accounting
      for Stock Issued to Employees* (“APB
      No. 25”). Accordingly, no compensation expense was recognized upon issuance of
      stock options under the Company’s stock incentive plan; however, compensation
      expense was recognized in connection with the issuance of deferred units granted
      under the incentive plan.





*Adoption
      of SFAS No. 123R* .
      In
      December 2004, the FASB issued SFAS No. 123R, *Share-Based
      Payment* (“SFAS
      No. 123R”), a revision of SFAS No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”). SFAS 123R supersedes APB No. 25 and its related implementation
      guidance, and requires entities to recognize compensation expense for awards
      of
      equity instruments to employees based on the grant-date fair value of those
      awards (with limited exceptions). SFAS No. 123R also requires the benefits
      of
      tax deductions in excess of recognized compensation expense to be reported
      as a
      financing cash flow, rather than as an operating cash flow as prescribed under
      the prior accounting rules.





The
      adoption of SFAS No. 123R at October 1, 2005 primarily resulted in a change in
      the Company’s method of recognizing the fair value of share-based compensation.
      Specifically, the adoption of SFAS No. 123R resulted in the recording of
      compensation expense for employee stock options. Results for the three months
      and nine months ended September 30, 2005 have not been restated. Had
      compensation expense for employee stock options granted under the Company’s
      stock incentive plan been determined based on fair value at the grant date
      consistent with SFAS No. 123, the Company’s net income for the three months and
      nine months ended September 30, 2005 would have been reduced to the pro forma
      amounts indicated below (in thousands, except per share data):




23


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      12 - BENEFIT PLANS (Continued)**





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2005**Net
                income, as reported
            
            $
            9,088
            
            $
            24,048Stock-based
                employee compensation expense reported in net income
            
            
            —
            
            
            —Stock-based
                employee compensation expense determined under the
              fair
                value-based method for all awards, net of income taxes
            
            
            (7,032
            )
            
            (7,147
            )Pro
                forma net income
            
            $
            2,056
            
            $
            16,901Net
                income per common share:Basic
                - as reported
            
            $
            .45
            
            $
            1.20Basic
                - pro forma
            
            $
            .10
            
            $
            .85Diluted
                - as reported
            
            $
            .45
            
            $
            1.20Diluted
                - pro forma
            
            $
            .10
            
            $
            .84





*Stock
      Options* .
      In July
      2005, options for 1,166,250 shares were issued under the Plan. Options under
      the
      Plan become exercisable as to 25% of the optioned shares each year after the
      date of grant, except options totaling 750,000 shares awarded to Messrs. Edward
      Cohen and Jonathan Cohen which are immediately exercisable, and expire not
      later
      than ten years after the date of grant. Additional options issued in January
      and
      April 2006 also vest over a service period of four years, expiring ten years
      from date of grant. Compensation cost is recorded on a graded-vesting schedule.
      For the three months and nine months ended September 30, 2006, the Company
      recorded compensation expense of $361,000 and $1.0 million, respectively for
      these options. At September 30, 2006, the Company had unamortized compensation
      expense of $4.5 million.





Transactions
      for stock options issued under the Plan are summarized as follows:





WeightedAverage
            
            AggregateWeighted
            
            Remaining
            
            IntrinsicAverage
            
            Contractual
            
            ValueShares
            
            Exercise
                Price
            
            Term
                (in Years)
            
            (in
                Thousands)Outstanding
                at December 31, 2005
            
            
            1,166,250
            
            $
            25.47
            
            
            9.5Granted
            
            
            65,000
            
            $
            46.68
            
            
            9.6Exercised
            
            
            (150
            )
            $
            25.47
            
            
            8.7Forfeited
                or expired
            
            
            (450
            )
            $
            25.47
            
            
            8.7Outstanding
                at September 30, 2006
            
            
            1,230,650
            
            $
            26.59
            
            
            8.8
            
            $
            19,781Options
                exercisable at September 30, 2006
            
            
            853,913Available
                for grant
            
            
            754,348





The
      per
      share weighted average fair value of stock options granted during 2006 was
      calculated using the binomial (lattice) model with the following weighted
      average assumptions: (a) expected dividend yield 0%, (b) risk-free interest
      rate
      of 5.1%, (c) volatility of 37%, and (d) an expected life of 6.5
      years.




24


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      12 - BENEFIT PLANS (Continued)**





*Deferred
      Stock Units.* Under
      the Plan, non-employee directors of the Company are awarded deferred units
      that
      vest over a four year period. Each unit represents the right to receive one
      share of the Company’s common stock upon vesting. Units will vest sooner upon a
      change in control of the Company or death or disability of a grantee, provided
      the grantee has completed at least six month’s service. The fair value of the
      grants is based on the closing stock price on the grant date, and is being
      charged to operations over the requisite service periods using a straight-line
      attribution method. Upon termination of service by a grantee, all unvested
      units
      are forfeited. Non-cash compensation expense recognized during the three months
      ended September 30, 2006 and 2005 with respect to these units was $12,700 and
      $6,200, respectively. Non-cash compensation recognized during the nine months
      ended September 30, 2006 and 2005 was $29,400 and $14,600, respectively.
      Unamortized expense as of September 30, 2006 for deferred stock units is
      $181,000.





The
      following table summarizes the activity of deferred units for the nine months
      ended September 30, 2006:





WeightedWeighted
            
            Average
            
            AggregateAverage
            
            Remaining
            
            IntrinsicGrant
                Date
            
            Contractual
            
            ValueUnits
            
            Fair
                Value
            
            Term
                (in Years)
            
            (in
                Thousands)Non-vested
                shares outstanding at December 31, 2005
            
            
            10,985
            
            $
            13.65
            
            
            2.8Granted
            
            
            1,916
            
            $
            46.97
            
            
            3.7Vested
            
            
            (2,415
            )
            $
            10.34
            
            
            2.0Forfeited
            
            
            -
            
            $
            -
            
            
            -Non-vested
                shares outstanding at September 30, 2006
            
            
            10,486
            
            $
            20.51
            
            
            2.6
            
            $
            448





*Restricted
      Stock Units* .
      Restricted stock units are granted from time to time to employees of the
      Company. Each unit represents the right to receive one share of the Company’s
      common stock upon vesting. The units are issued to the Restricted Stock Plan
      when granted, and paid out to the employees on vesting. The units vest
      one-fourth at each anniversary date over a four year service period. The fair
      value of the grant is based on the closing price on the grant date, and is
      being
      expensed over the requisite service period using a straight line attribution
      method. Non-cash compensation expense recognized during the three and nine
      months ended September 30, 2006 with respect to these units was $4,400 and
      $11,700, respectively. There was no such expense in 2005. Unamortized expense
      as
      of September 30, 2006 for restricted units is $58,000.





25


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      12 - BENEFIT PLANS (Continued)**





The
      following table summarizes the activity of restricted units for the nine months
      ended September 30, 2006:





WeightedWeighted
            
            Average
            
            AggregateAverage
            
            Remaining
            
            IntrinsicGrant
                Date
            
            Contractual
            
            ValueUnits
            
            Fair
                Value
            
            Term
                (in Years)
            
            (in
                Thousands)Non-vested
                shares outstanding at December 31, 2005
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            1,500
            
            $
            46.71
            
            
            3.3Vested
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -Non-vested
                shares outstanding at September 30, 2006
            
            
            1,500
            
            $
            46.71
            
            
            3.3
            
            $
            64





*Atlas
      Pipeline Long-Term Incentive Plan.* Atlas
      Pipeline has a Long-Term Incentive Plan (“LTIP”), in which officers, employees
      and non-employee managing board members of its general partner and employees
      of
      the general partner’s affiliates are eligible to participate. Atlas Pipeline
      recognized $450,000 and $651,000 in compensation expense related to these grants
      and their associated distributions for the three months ended September 30,
      2006
      and 2005, respectively, and $1.3 million and $1.7 million for the nine months
      ended September 30, 2006 and 2005, respectively. At September 30, 2006, Atlas
      Pipeline had approximately $2.7 million of unrecognized compensation expense
      related to the unvested portion of these awards.





The
      following table represents the LTIP phantom unit activity for the periods
      indicated:





**Nine
                Months Ended****September
                30,****2006**
            
            **2005**Outstanding
                - beginning of period
            
            
            110,128
            
            
            58,329Granted(1)
            
            
            34,091
            
            
            67,399Vested
            
            
            (31,152
            )
            
            (14,581
            )Forfeited
            
            
            -
            
            
            (1,019
            )Outstanding
                - end of period
            
            
            113,067
            
            
            110,128





(1)
            The
                weighted average price for phantom unit awards on the date of grant,
                which
                is utilized in the calculation of compensation expense and does not
                represent an exercise price to be paid by the recipient, was $43.05
                for
                awards granted for the three months ended September 30, 2006, and
                $42.99
                and $48.59 for awards granted for the nine months ended September
                30, 2006
                and 2005, respectively.





26


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      12 - BENEFIT PLANS (Continued)**





Atlas
      Pipeline also has incentive compensation agreements which have granted awards
      to
      certain key employees retained from previously consummated acquisitions. These
      individuals are entitled to receive common units of Atlas Pipeline upon
      achievement of pre-determined performance targets. Atlas Pipeline recognized
      $1.2 million and $100,000 in compensation expense for the three months ended
      September 30, 2006 and 2005, respectively, and $3.8 million and $1.1 million
      for
      the nine months ended September 30, 2006 and 2005, respectively. At September
      30, 2006, Atlas Pipeline had approximately $4.0 million of unrecognized
      compensation expense related to the unvested portion of these awards based
      on
      management’s estimate of probable outcomes of performance targets.





*Employee
      Stock Ownership Plan.* On June
      30, 2005, the Company was spun-off from Resource America, Inc. (“RAI”)
      (NASDAQ:REXI), its former parent, in the form of a tax-free dividend to RAI
      shareholders. In connection with the spin-off from RAI, the Company established
      an Employee Stock Ownership Plan ("ESOP") in June 2005. The ESOP, which is
      a
      qualified non-contributory retirement plan, was established to acquire shares
      of
      the Company's common stock for the benefit of all employees who are 21 years
      of
      age or older and have completed 1,000 hours of service for the Company. In
      addition, as a result of the spin-off, the ESOP holds 181,000 shares
      of RAI stock, all of which are allocated to participants. In June 2006, 107,800
      RAI shares in the Company’s ESOP were transferred to the RAI ESOP for 45,800
      shares of Atlas America common stock in an even exchange. The Company loaned
      $602,000 (payable in quarterly installments of $18,508 plus interest at 7.5%)
      to
      the ESOP, which was used by the ESOP to acquire the remaining unallocated 40,375
      shares of RAI common stock. Contributions to the ESOP are made at the discretion
      of the Company's Board of Directors. The cost of shares purchased by the ESOP
      but not yet allocated to participants is shown as a reduction of stockholders’
equity. The unearned benefits expense (a reduction in stockholders' equity)
      will
      be reduced by the amount of any loan principal payments made by the ESOP to
      the
      Company. Any dividends which may be paid on allocated shares will reduce
      retained earnings; dividends on unearned ESOP shares will be used to service
      the
      related debt.





The
      common stock purchased by the ESOP with the money borrowed is held by the ESOP
      trustee in a suspense account. On an annual basis, as the ESOP loan is paid
      down, a portion of the common stock will be released from the suspense account
      and allocated to participating employees. As of September 30, 2006, there were
      250,400 shares allocated to participants and 51,000 shares which are
      unallocated. Compensation expense related to the plan amounted to $28,800 and
      $86,600 for the three months and nine months ended September 30, 2006,
      respectively. The fair value of unearned ESOP shares was $2.2 million at
      September 30, 2006.





*Supplemental
      Employment Retirement Plan (“SERP”).* In May
      2004, the Company entered into an employment agreement with its Chairman of
      the
      Board, Chief Executive Officer and President, Edward E. Cohen, pursuant to
      which
      the Company has agreed to provide him with a SERP and with certain financial
      benefits upon termination of his employment. Under the SERP, Mr. Cohen will
      be
      paid an annual benefit equal to the product of (a) 6.5% multiplied by, (b)
      his
      base salary at the time of his retirement, death or other termination of
      employment with the Company, multiplied by, (c) the amount of years he shall
      be
      employed by the Company commencing upon the effective date of the SERP
      agreement, limited to an annual maximum benefit of 65% of his final base salary
      and a minimum of 26% of his final base salary. During the three months ended
      September 30, 2006 and 2005, operations were charged $40,300 and $40,000, and
      during the nine months ended September 30, 2006 and 2005, operations were
      charged $120,900 and $119,000, respectively, with respect to this
      commitment.










27


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      13 − ACQUISITIONS BY ATLAS PIPELINE**





*NOARK.*  On
      May 2,
      2006, Atlas Pipeline acquired the remaining 25% equity ownership interest in
      NOARK from Southwestern, a wholly-owned subsidiary of Southwestern Energy
      Company (NYSE: SWN), for a net purchase price of $65.5 million, consisting
      of
      $69.0 million of cash to the seller (including the repayment of $39.0 million
      of
      outstanding NOARK notes at the date of acquisition), less the seller’s interest
      in NOARK’s working capital (including cash on hand and net payables to the
      seller) at the date of acquisition of $3.5 million, which was funded through
      borrowings under Atlas Pipeline’s senior secured credit facility. In
      October 2005, Atlas
      Pipeline acquired from Enogex, Inc., a wholly-owned subsidiary of OGE Energy
      Corp. (NYSE: OGE), all of the outstanding equity of Atlas Arkansas Pipeline,
      LLC, which owned the initial 75% interest in NOARK, for total consideration
      of
      $179.8 million, including $16.8 million for working capital adjustments and
      other related transaction costs. Atlas Pipeline funded this acquisition through
      borrowings under its senior secured credit facility. NOARK’s assets included a
      Federal Energy Regulatory Commission (“FERC”)-regulated interstate pipeline and
      an unregulated natural gas gathering system. The
      acquisition was accounted for using the purchase method of accounting under
      SFAS
      No. 141, *Business
      Combinations* (“SFAS
      No. 141”). The following table presents the preliminary purchase price
      allocation, including professional fees and other related acquisition costs,
      to
      the assets acquired and liabilities assumed, based on their fair values at
      the
      date of acquisition (in thousands):





Cash
                and cash equivalents
            
            $
            16,215Accounts
                receivable
            
            
            11,091Prepaid
                expenses
            
            
            497Property,
                plant and equipment
            
            
            232,576Other
                assets
            
            
            140Total
                assets acquired
            
            
            260,519Accounts
                payable and accrued liabilities
            
            
            (50,689
            )Net
                assets acquired
            
            
            209,830Less:
                Cash and cash equivalents acquired
            
            
            (16,215
            )Net
                cash paid for acquisition
            
            $
            193,615





Due
      to
      its recent date of both acquisitions, the purchase price allocation for NOARK
      is
      based upon preliminary data that is subject to adjustment and could change
      significantly as Atlas Pipeline continues to evaluate this
      allocation .
      Atlas
      Pipeline’s ownership interest in the results of NOARK’s operations associated
      with each acquisition is included within the Company’s consolidated financial
      statements from the respective date of acquisition.





*Elk
      City.* In April
      2005, Atlas Pipeline acquired all of the outstanding equity interests in ETC
      Oklahoma Pipeline, Ltd. (“Elk City”), a Texas limited partnership, for $196.0
      million, including related transaction costs. Elk City’s principal assets
      included approximately 300 miles of natural gas pipelines located in the
      Anadarko Basin in western Oklahoma, a natural gas processing facility in Elk
      City, Oklahoma and a gas treatment facility in Prentiss, Oklahoma. The
      acquisition was accounted for using the purchase method of accounting under
      SFAS
      No. 141. The following table presents the purchase price allocation, including
      professional fees and other related acquisition costs, to the assets acquired
      and liabilities assumed, based on their fair values at the date of acquisition
      (in thousands):





28


**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      13 − ACQUISITIONS BY ATLAS PIPELINE (Continued)**





Accounts
                receivable
            
            $
            5,587Other
                assets
            
            
            497Property,
                plant and equipment
            
            
            104,106Intangible
                assets - customer contracts
            
            
            12,390Intangible
                assets - customer relationships
            
            
            17,260Goodwill
            
            
            61,136Total
                assets acquired
            
            
            200,976Accounts
                payable and accrued liabilities
            
            
            (4,970
            )Net
                assets acquired
            
            $
            196,006





Atlas
      Pipeline recorded goodwill in connection with this acquisition as a result
      of
      Elk City’s significant cash flow and its strategic industry position. Elk City’s
      results of operations are included within Atlas Pipeline’s consolidated
      financial statements from its date of acquisition.





The
      following data presents unaudited pro forma revenues, net income and basic
      and
      diluted net income per share of common stock for the Company as if the
      acquisitions discussed above, Atlas Pipeline's equity offerings, the net
      proceeds of which were utilized to repay debt borrowed to finance the
      acquisitions (see Note 14), and the issuance of $286.0 million of 8.125% senior
      notes (See Note 8), had occurred on January 1, 2005. The Company has prepared
      these pro forma financial results for comparative purposes only. These pro
      forma
      financial results may not be indicative of the results that would have occurred
      if Atlas Pipeline had completed these acquisitions at January 1, 2005 or the
      results that will be attained in the future (in thousands, except per share
      amounts):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30, 2005**
            
            **September
                30, 2005****As**
            
            **Pro
                Forma**
            
            **Pro**
            
            **As**
            
            **Pro
                Forma**
            
            **Pro****Reported**
            
            **Adjustments**
            
            **Forma**
            
            **Reported**
            
            **Adjustments**
            
            **Forma**Revenues
            
            $
            156,208
            
            $
            21,739
            
            $
            177,947
            
            $
            388,847
            
            $
            98,196
            
            $
            487,043Net
                income
            
            
            9,088
            
            
            422
            
            
            9,510
            
            
            24,048
            
            
            103
            
            
            24,151Net
                income per common share outstanding - basic
            
            
            0.45
            
            
            0.03
            
            
            0.48
            
            
            1.20
            
            
            0.01
            
            
            1.21Weighted
                average common shares - outstanding basic
            
            
            20,001
            
            
            20,001
            
            
            20,001
            
            
            20,000
            
            
            20,000
            
            
            20,000Net
                income per common share - diluted
            
            
            0.45
            
            
            0.02
            
            
            0.47
            
            
            1.20
            
            
            0.00
            
            
            1.20Weighted
                average common shares - outstanding diluted
            
            
            20,174
            
            
            20,174
            
            
            20,174
            
            
            20,064
            
            
            20,064
            
            
            20,064





**NOTE
      14 - EQUITY OFFERINGS**





On
      July
      26, 2006, the Company contributed its ownership interests in Atlas Pipeline
      Partners GP, LLC, its wholly-owned subsidiary and the general partner of Atlas
      Pipeline, to Atlas Pipeline Holdings, L.P. (NYSE: AHD), a wholly-owned
      subsidiary. Concurrent with this transaction, Atlas Pipeline Holdings, L.P.
      issued 3,600,000 common units, representing a 17.1% ownership interest, in
      an
      initial public offering at a price of $23.00 per unit. The net proceeds of
      approximately $74.1 million after underwriting discounts and commissions were
      distributed to the Company.





On
      May
      12, 2006, Atlas Pipeline sold 500,000 common units to Wachovia Securities,
      which
      offered the common units to public investors. The units, which were issued
      under
      Atlas Pipeline’s previously filed shelf registration statement, resulted in net
      proceeds of approximately $19.7 million, after underwriting commissions and
      other transaction costs. Atlas Pipeline utilized the net proceeds from the
      sale
      to partially repay borrowings under its credit facility made in connection
      with
      its recent acquisition of the remaining 25% interest in NOARK.




29




**ATLAS
      AMERICA, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**


**September
      30, 2006**


(Unaudited)





**NOTE
      14 - ATLAS PIPELINE OFFERINGS (Continued)**





On
      March
      13, 2006, Atlas Pipeline sold 30,000 6.5% cumulative convertible preferred
      units
      representing limited partner interests to Sunlight Capital Partners, LLC, an
      affiliate of Elliott & Associates, for aggregate proceeds of $30.0 million.
      Atlas Pipeline also sold an additional 10,000 6.5% cumulative preferred units
      to
      Sunlight Capital Partners for $10.0 million on May 19, 2006, pursuant to Atlas
      Pipeline’s right to require Sunlight Capital Partners to purchase such
      additional units under the purchase agreement with Sunlight. The preferred
      units
      are entitled to receive dividends of 6.5% per annum commencing on March 13,
      2007, which will accrue and be paid quarterly on the same date as the
      distribution payment date for Atlas Pipeline’s common units. The preferred units
      are convertible, at the holder’s option, into Atlas Pipeline’s common units
      commencing on the date immediately following the first record date after March
      13, 2007 at a conversion price equal to the lesser of $41.00 or 95% of the
      market price of Atlas Pipeline’s common units as of the date of the notice of
      conversion. Atlas Pipeline may elect to pay cash rather than issue common units
      in satisfaction of a conversion request. Atlas Pipeline has the right to call
      the preferred units at a specified premium. Atlas Pipeline has filed a
      registration statement to cover the resale of the common units underlying the
      preferred units. The net proceeds from the initial issuance of the preferred
      units were used to fund a portion of Atlas Pipeline’s capital expenditures in
      2006, including the construction of the Sweetwater gas plant and related
      gathering system. The proceeds from the issuance of the additional 10,000
      preferred units were used to reduce indebtedness under Atlas Pipeline’s credit
      facility incurred in connection with the acquisition of the remaining 25%
      interest in NOARK.





**NOTE
      15 - REPURCHASE OF COMMON SHARES**





In
      November 2005, the Company announced that its Board of Directors authorized
      a
      repurchase program through which the Company may repurchase up to $50.0 million
      of its common stock. Repurchases may be made from time to time through open
      market purchases or privately negotiated transactions at the discretion of
      the
      Company and in accordance with the rules of the Securities and Exchange
      Commission, as applicable. The amount and timing of any repurchases will depend
      on market and other relevant conditions. The Company repurchased 667,342 shares
      at a cost of $29.9 million during the nine months ended September 30,
      2006.





**NOTE
      16 - COMMON STOCK SPLIT**





On
      February 6, 2006, the Company’s Board of Directors approved a three-for-two
      split of the Company’s common stock effected in the form of a 50% stock
      dividend. All shareholders of record as of February 28, 2006 received one
      additional share of common stock for every two shares held on that date. The
      additional shares of common stock were distributed on March 10, 2006, in the
      form of a stock dividend. Information pertaining to shares and earnings per
      share has been restated in the accompanying financial statements and notes
      to
      the consolidated financial statements to reflect this split.





**NOTE
      17 - ATLAS ENERGY OFFERING**





On
      July
      28, 2006, the Company’s wholly-owned subsidiary, Atlas Energy Resources, LLC
      (“Atlas Energy”), filed a registration statement with the Securities and
      Exchange Commission for an initial public offering of 5,750,000 common units,
      representing an approximate 16.9% limited partner interest in it. Atlas Energy
      will own substantially all of the Company’s natural gas and oil exploration and
      production assets. The Company will enter into a management agreement with
      Atlas
      Energy and be responsible for its day-to-day operations.




**NOTE
        18 - EXTRAORDINARY ITEM**




The
        Company received $74.5 million in proceeds associated with an initial public
        offering of Atlas Pipeline Holdings, L.P. (NYSE: AHD - “Atlas Holdings”) units
        on July 26, 2006. Although this transaction did not generate a gain in
        accordance with generally accepted accounting principles, the distribution
        of
        the net proceeds of $74.1 million to us generated a taxable gain which resulted
        in an extraordinary tax charge of $29.8 million, or $1.49 and $1.47 per
        share-diluted in the quarter and nine months ended September 30, 2006,
        respectively.




30


**Item
      2.**   **Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      (Unaudited)**





**When
      used in this Form 10-Q, the words “believes” “anticipates,” “expects” and
      similar expressions are intended to identify forward-looking statements. Such
      statements are subject to certain risks and uncertainties more particularly
      described in Item 1A, under the caption “Risk Factors”, in our annual report on
      Form 10-K for fiscal 2005. These risks and uncertainties could cause actual
      results to differ materially. Readers are cautioned not to place undue reliance
      on these forward-looking statements, which speak only as of the date hereof.
      We
      undertake no obligation to publicly release the results of any revisions to
      forward-looking statements which we may make to reflect events or circumstances
      after the date of this Form 10-Q or to reflect the occurrence of unanticipated
      events.**





**General**




Energy
      Development and Production




We
      focus
      on the development and production of natural gas and, to a lesser extent, oil
      principally in the Appalachian Basin. We sponsor and manage tax-advantaged
      investment partnerships, in which we co-invest, to finance the exploitation
      and
      development of our acreage.





As
      of
      September 30, 2006, our energy development and production assets consisted
      generally of:


•
                interests
                    in over 7,000 gross producing wells;  •
                equity
                    interests in 91 investment partnerships;  •
                approximately
                    569,000 gross (516,000 net) acres, primarily in the Appalachian
                    Basin,
                    over half of which, or 308,000 gross (295,000 net) acres, are
                    undeveloped;
                    and  •
                an
                    interest in a joint venture that gives us the right to drill
                    up to 300 net
                    wells before June 30, 2007 on approximately 209,000 acres in
                    Tennessee.





For
      the
      nine month period ended September 30, 2006, we produced 26,554 Mcfe/d. As of
      September 30, 2006, we had identified over 500 proved undeveloped drilling
      locations and over 2,400 additional potential drilling locations on our acreage
      and our Tennessee joint venture acreage.




We
      fund
      the drilling of natural gas and oil wells on our acreage by sponsoring and
      managing tax-advantaged investment partnerships. We generally structure our
      investment partnerships so that, upon formation of a partnership, we co-invest
      in and contribute leasehold acreage to it, enter into drilling and well
      operating agreements with it and become its managing general
      partner.





We
      derive
      our energy development and production revenues from our equity interest in
      the
      oil and gas produced by the investment partnerships as well as the fees paid
      by
      them to us for acting as the managing general partner as follows:




31





•
            *Gas
                and oil production.*We
                receive an interest in each investment partnership proportionate
                to the
                value of our co-investment in it and the value of the acreage we
                contribute to it, typically 27% to 30% of the overall capitalization
                of a
                particular partnership. We also receive an incremental interest in
                each
                partnership, typically 7%, for which we do not make any additional
                capital
                contribution. Consequently, our equity interest in the reserves and
                production of each partnership is typically between 34% and
                37%.•
            *Partnership
                management*.
                As managing general partner of our investment partnerships, we receive
                the
                following fees:•
            
            *Well
                construction and completion*.
                For each well that is drilled by an investment partnership, we are
                reimbursed for the total cost to drill and complete the well and
                receive a
                15% mark-up on those costs.•
            
            *Administration
                and oversight.*For each well drilled by an investment partnership, we receive a
                fixed fee
                of approximately $15,000. Additionally, the partnerships pay us a
                monthly
                per well administrative fee of $75 for the life of the well. Because
                we
                co-invest in these partnerships, the net fee that we receive is reduced
                by
                our proportionate interest in the well.•
            
            *Well
                services*.
                Each partnership pays us a monthly per well operating fee, currently
                $275
                to $285 (subject to inflationary increases), for the life of the
                well.
                Because we co-invest in the partnerships, the net fee that we receive
                is
                reduced by our proportionate interest in the well.•
            
            *Gathering.*Each partnership pays us a gathering fee, generally equal to 10%
                of the
                gas sales price. We pay gathering fees, generally equal to 16% of
                the gas
                sales price, to Atlas Pipeline.





Our
      revenue, cash flow from operations and future growth depend substantially on
      factors beyond our control, such as economic, political and regulatory
      developments and competition from other sources of energy. Historically, natural
      gas and oil prices have been volatile and may fluctuate widely in the future.
      Sustained periods of low prices for natural gas or oil could materially and
      adversely affect our financial position, our results of operations, the
      quantities of natural gas and oil reserves that we can economically produce
      and
      our access to capital.




Higher
      natural gas and oil prices have led to higher demand for drilling rigs,
      operating personnel and field supplies and services and have caused increases
      in
      the costs of those goods and services. To date, the higher sales prices have
      more than offset the higher drilling and operating costs.




We
      face
      the challenge of natural production declines. As initial reservoir pressures
      are
      depleted, natural gas production from a given well decreases. We attempt to
      overcome this natural decline by drilling to find additional reserves and
      acquiring more reserves than we produce. Our future growth will depend in part
      on our ability to continue to add reserves in excess of production. Our
      business strategy for increasing our reserve base includes acquisitions of
      undeveloped properties or companies with significant amounts of undeveloped
      property. At September 30, 2006, we had $148.5 million available under our
      credit facility, which could be employed to finance such
      acquisitions.




Atlas
      Pipeline




In
        addition to our energy development and production business, we own 11% of
        Atlas
        Pipeline through our general partner interest and limited partner
        units.
 
 Atlas
        Pipeline is active in the transmission, gathering and processing segments
        of the
        midstream natural gas industry. In the Mid-Continent region of Oklahoma,
        Arkansas, northern Texas, and the Texas panhandle, Atlas Pipeline owns and
        operates approximately 1,900 miles of active intrastate gas gathering pipelines
        and a 565-mile interstate natural gas pipeline. Atlas Pipeline also operates
        two
        gas processing plants and a treating facility in Velma, Elk City, Sweetwater,
        and Prentiss, Oklahoma where natural gas liquids and impurities are removed.
        In
        Appalachia, it owns and operates approximately 1,500 miles of natural gas
        gathering pipelines in western Pennsylvania, western New York, and eastern
        Ohio.


32


***Recent
      Developments***





***The
      Company***





On
      November 1, 2006, our wholly-owned subsidiary, Atlas Energy
      Resources, LLC (“Atlas Energy”) ,
      filed a
      second amendment to its registration statement with the Securities and Exchange
      Commission for an initial public offering of 6,075,000 common units,
      representing an approximate 16.9% limited partner interest in it. Atlas Energy
      will own substantially all of our natural gas and oil exploration and production
      assets. We will enter into a management agreement with Atlas Energy and be
      responsible for its day-to-day operations.





On
      June
      15, 2006, our Board of Directors approved the change of our year end to December
      31 from September 30. On July 24, 2006, we filed a transition report on Form
      10-Q for the quarter ended December 31, 2005 pursuant to Rule 13a-10 of the
      Securities and Exchange Commission for transition period reporting. Accordingly,
      our consolidated financial statements reflect our new year end of December
      31
      and year-to-date amounts are for the nine month periods ended September 30,
      2006
      and 2005. We will file our 2006 calendar year Form 10-K on or before March
      16,
      2007.





In
      April
      2006, we increased our credit facility, which is led by Wachovia Bank, N.A.
      (“Wachovia”), to a maximum of $200.0 million. The revolving credit facility has
      a current borrowing base of $150.0 million which may be redetermined subject
      to
      changes in our oil and gas reserves. Up to $50.0 million of the facility may
      be
      in the form of standby letters of credit. The facility is secured by our assets
      and bears interest at either the base rate plus the applicable margin or at
      the
      adjusted London Interbank Offered Rate (“LIBOR”) plus the applicable margin,
      elected at our option.





The
      base
      rate for any day equals the higher of the federal funds rate plus 0.50% or
      the
      Wachovia prime rate. Adjusted LIBOR is LIBOR divided by 1.00 minus the
      percentage prescribed by the Federal Reserve Board for determining the reserve
      requirement for Euro currency funding. The applicable margin ranges from 0.0%
      to
      0.75% for base rate loans and 1.00% to 1.75% for LIBOR loans.





The
      Wachovia credit facility requires us to maintain specified ratios of current
      assets to current liabilities, interest coverage (as defined) and debt to
      earnings before interest, taxes, depreciation, depletion and amortization
      (“EBITDA”). In addition, the facility limits sales, leases or transfers of
      assets and the incurrence of additional indebtedness. The facility limits the
      dividends payable by us, on a cumulative basis, to 50% of our net income from
      October 1, 2005 to the date of determination plus $5.0 million. The facility
      terminates in April 2011, when all outstanding borrowings must be repaid. At
      September 30, 2006 and December 31, 2005, $1.5 million was outstanding under
      this facility in the form of letters of credit which are not reflected as
      borrowings on the Company’s consolidated balance sheet.





On
      February 6, 2006, our Board of Directors approved a three-for-two stock split
      effected in the form of a 50% stock dividend. Shareholders of record as of
      February 28, 2006, received one additional share of common stock for each two
      shares of common stock they owned on that date. The shares were distributed
      on
      March 10, 2006. After the split, there were approximately 20.0 million shares
      of
      our common stock outstanding and the adjusted per-share stock price was reported
      by the Nasdaq Stock Market, effective March 13, 2006.




*Atlas
      Pipeline
      Holdings*


On
        July
        26, 2006, we contributed our ownership interests in Atlas Pipeline Partners
        GP,
        LLC, our wholly-owned subsidiary to Atlas Pipeline Holdings, L.P. (NYSE:
        AHD), a
        wholly-owned subsidiary. Concurrent with this transaction, Atlas Pipeline
        Holdings, L.P. issued 3,600,000 common units, representing a 17.1% ownership
        interest, in an initial public offering at a price of $23.00 per unit.
        Substantially all of the net proceeds from this offering were distributed
        to
        us.
  On.
        July
        26, 2006, Atlas Pipeline Holding, L.P., as borrower, and Atlas PipeGP,
        as
        guarantor, entered into a $50.0 million revolving credit facility (-0-outstanding
        atSeptember
        30, 2006) with Wachovia Bank, National Association, as administrative agent
        andissuing
        bank, and a syndicate of banks. AHD's credit facility matures in April 2010
        and
        bears interest, at its option, at either (i) adjusted LIBOR (as defined in
        the
        credit facility) or (ii) thehigher
        ofthefederal
        fundsrate
        plus*0.5%*or
        the
        Wachovia Bank, National Association primerate,except
        that no more than five LIBOR loans may be outstanding at any time. Borrowingsunder
        thecreditfacility
        are secured by a first-priority lien on a security interest in all of theAHD's
        assets,including
        a pledge of Atlas Pipeline GP's interests in Atlas Pipeline, andareguaranteed
        by Atlas Pipeline GP and AHD's other subsidiaries (excluding Atlas Pipeline
        and
        itssubsidiaries).The
        credit facility contains customary covenants, including restrictions on its
        ability to incur additional indebtedness; make certain acquisitions, loans
        or
        investments; make distribution payments to AHD's unitholders if an event
        ofdefault
        exists or wouldresultfromsuchdistribution;
        or enter into a merger or sale of substantially all of AHD's property or
        assets,including
        the sale or transfer of interests in its subsidiaries. AHD is in compliance
        with
        thesecovenants
        as of September 30, 2006.


***Atlas
      Pipeline***





On
      September 27, 2006, Atlas Pipeline announced the commencement of operations
      of
      its new gas processing plant and gathering system, or Sweetwater plant, in
      Beckham County, Oklahoma. The Sweetwater plant, with a processing capacity
      of
      120 MMcf/d, is located west of its Elk City gas plant, and was built to further
      access natural gas production actively being developed in western Oklahoma
      and
      the Texas panhandle.








33


In
      May
      2006, Atlas Pipeline acquired the remaining 25% equity ownership interest in
      NOARK from Southwestern for a net purchase price of $65.5 million, consisting
      of
      $69.0 million of cash to the seller (including the repayment of $39.0 million
      of
      outstanding NOARK notes at the date of acquisition), less the seller’s interest
      in working capital at the date of acquisition of $3.5 million. In October 2005,
      Atlas Pipeline acquired from Enogex, a wholly-owned subsidiary of OGE Energy
      Corp., all of the outstanding equity of Atlas Arkansas, which owned the initial
      75% interest in NOARK, for $163.0 million, plus $16.8 million for working
      capital adjustments and related transaction costs. NOARK’s principal assets
      include the Ozark Gas Transmission system, a 565-mile interstate natural gas
      pipeline, and Ozark Gas Gathering, a 365-mile natural gas gathering
      system.





On
      May
      12, 2006, Atlas Pipeline sold 500,000 common units to Wachovia Securities,
      which
      has offered the common unit to public investors. The units, which were issued
      under its previously filed shelf registration statement, resulted in net
      proceeds of approximately $19.7 million, after underwriting commissions and
      other transaction costs. Atlas Pipeline utilized the net proceeds from the
      sale
      to partially repay borrowings under its credit facility made in connection
      with
      its recent acquisition of the remaining 25% interest in NOARK.





Atlas
      Pipeline has an effective shelf registration statement with the Securities
      and
      Exchange Commission that permits it to periodically issue equity and debt
      securities for a total value of up to $500 million. As of September 30, 2006,
      $352.1 million remains available for issuance under the shelf registration
      statement. However, the amount, type and timing of any offerings will depend
      upon, among other things, its funding requirements, prevailing market
      conditions, and compliance with its credit facility covenants.





On
      March
      13, 2006, Atlas Pipeline sold 30,000 6.5% cumulative convertible preferred
      units
      representing limited partner interests to Sunlight Capital Partners, LLC, an
      affiliate of Elliott & Associates, for aggregate proceeds of $30.0 million.
      Atlas Pipeline also sold an additional 10,000 6.5% cumulative preferred units
      to
      Sunlight Capital Partners for $10.0 million on May 19, 2006, pursuant to its
      right to require Sunlight Capital Partners to purchase such additional units
      under the purchase agreement with Sunlight. The preferred units are entitled
      to
      receive dividends of 6.5% per annum commencing on March 13, 2007, which will
      accrue and be paid quarterly on the same date as the distribution payment date
      for our common units. The preferred units are convertible, at the holder’s
      option, into common units commencing on the date immediately following the
      first
      record date after March 13, 2007 at a conversion price equal to the lesser
      of
      $41.00 or 95% of the market price of our common units as of the date of the
      notice of conversion. Atlas Pipeline may elect to pay cash rather than issue
      common units in satisfaction of a conversion request. Atlas Pipeline has the
      right to call the preferred units at a specified premium. Atlas Pipeline has
      also agreed to file a registration statement to cover the resale of the common
      units underlying the preferred units. The net proceeds from the initial issuance
      of the preferred units was used to fund a portion of its capital expenditures
      in
      2006, including the construction of the Sweetwater gas plant and related
      gathering system. The proceeds from the issuance of the additional 10,000
      preferred units was used to reduce indebtedness under its credit facility
      incurred in connection with the acquisition of the remaining 25% interest in
      NOARK. The preferred units are reflected on our consolidated balance sheet
      as
      Minority Interest. Dividends accrued and paid on the preferred units and any
      premium paid upon their redemption, if any, will be recognized as a reduction
      to
      Atlas Pipeline’s net income.




34


Atlas
      Pipeline has a $225.0 million credit facility with a syndicate of banks which
      matures in June 2011. The credit facility bears interest, at its option, at
      either (i) adjusted LIBOR plus the applicable margin, as defined, or (ii) the
      higher of the federal funds rate plus 0.5% or the Wachovia Bank prime rate
      (each
      plus the applicable margin). The applicable margin ranges from 0.25% to 1.5%
      for
      base rate loans and 1.25% to 2.5% for LIBOR loans. The weighted average interest
      rate on the outstanding borrowings under the credit facility was 7.1% at
      September 30, 2006. Up to $50.0 million of the credit facility may be utilized
      for letters of credit, of which $10.1 million was outstanding at September
      30,
      2006. These outstanding letter of credit amounts were not reflected as
      borrowings on our consolidated balance sheet. Borrowings under the credit
      facility are secured by a lien on and security interest in all of its property
      and that of its wholly-owned subsidiaries, and by the guaranty of each of its
      wholly-owned subsidiaries. The credit facility contains customary covenants,
      including restrictions on Atlas Pipeline’s ability to incur additional
      indebtedness; make certain acquisitions, loans or investments; make distribution
      payments to its unitholders if an event of default exists; or enter into a
      merger or sale of assets, including the sale or transfer of interests in its
      subsidiaries. Atlas Pipeline is in compliance with these covenants as of
      September 30, 2006.





The
      credit facility requires Atlas Pipeline to maintain a ratio of senior secured
      debt (as defined in the credit facility) to EBITDA (as defined in the credit
      facility) of not more than 4.0 to 1.0; a funded debt (as defined in the credit
      facility) to EBITDA ratio of not more than 5.25 to 1.0; and an interest coverage
      ratio (as defined in the credit facility) of not less than 3.0 to 1.0. The
      credit facility defines EBITDA to include pro forma adjustments, acceptable
      to
      the administrator of the facility, following material acquisitions.





In
      December 2005, Atlas Pipeline issued $250.0 million of 10-year, 8.125% senior
      unsecured notes (“Senior Notes”) in a private placement transaction pursuant to
      Rule 144A and Regulation S under the Securities Act of 1933 for net proceeds
      of
      $243.1 million, after underwriting commissions and other transaction costs.
      In
      May 2006, Atlas Pipeline issued an additional $35.0 million of senior unsecured
      notes at 103% par value, with a resulting effective yield of approximately
      7.6%,
      for net proceeds of $36.6 million. Interest on the Senior Notes is payable
      semi-annually in arrears on June 15 and December 15. The Senior Notes are
      redeemable at any time on or after December 15, 2010 at certain redemption
      prices, together with accrued and unpaid interest to the date of redemption.
      The
      Senior Notes are also redeemable at any time prior to December 15, 2010 at
      stated redemption prices, together with accrued and unpaid interest to the
      date
      of redemption. In addition, prior to December 15, 2008, Atlas Pipeline may
      redeem up to 35% of the aggregate principal amount of the Senior Notes with
      the
      proceeds of certain equity offerings at a stated redemption price. The Senior
      Notes are also subject to repurchase by it at a price equal to 101% of their
      principal amount, plus accrued and unpaid interest, upon a change of control
      or
      upon certain asset sales if it does not reinvest the net proceeds within 360
      days. The Senior Notes are junior in right of payment to Atlas Pipeline’s
      secured debt, including its obligations under the credit facility.





In
      connection with a Senior Notes registration rights agreement entered into by
      Atlas Pipeline, it agreed to (a) file an exchange offer registration statement
      with the Securities and Exchange Commission for the Senior Notes by April 19,
      2006, (b) cause the exchange offer registration statement to be declared
      effective by the Securities and Exchange Commission by July 18, 2006, and (c)
      cause the exchange offer to be consummated by August 17, 2006. If it does not
      meet the aforementioned deadlines, the Senior Notes will be subject to
      additional interest, up to 1% per annum, until such time that the deadlines
      have
      been met. On April 19, 2006, Atlas Pipeline filed an exchange offer registration
      statement for the Senior Notes with the Securities and Exchange Commission,
      which was declared effective on July 11, 2006. The exchange offer was
      consummated on August 17, 2006, thereby fulfilling all of the requirements
      of
      the Senior Notes registration rights agreement by the specified
      dates.





**General
      Trends and Outlook**





***The
      Company***





We
      expect
      our development and production of natural gas and oil business to continue
      to be
      affected by the following key trends. Our expectations are based on assumptions
      made by us and information currently available to us. To the extent our
      underlying assumptions about or interpretations of available information prove
      to be incorrect, our actual results may vary materially from our expected
      results.




35


*Natural
      gas supply and outlook.* We
      believe that current natural gas prices will continue to cause relatively high
      levels of natural gas-related drilling in the United States as producers seek
      to
      increase their level of natural gas production. Although the number of natural
      gas wells drilled in the United States has increased overall in recent years,
      a
      corresponding increase in production has not been realized, primarily as a
      result of smaller discoveries and the decline in production from existing wells.
      We believe that an increase in United States drilling activity, additional
      sources of supply such as liquefied natural gas, and imports of natural gas
      will
      be required for the natural gas industry to meet the expected increased demand
      for, and to compensate
      for the slowing production of, natural gas in the United States. The areas
      in
      which we operate are experiencing significant drilling activity as a result
      of
      recent high natural gas prices, new increased drilling for deeper natural gas
      formations and the implementation of new exploration and production
      techniques.





While
      we
      anticipate continued high levels of exploration and production activities in
      the
      areas in which we operate, fluctuations in energy prices can greatly affect
      production rates and investments by third parties in the development of new
      natural gas reserves. Drilling activity generally decreases as natural gas
      prices decrease. We have no control over the level of drilling activity in
      the
      areas of our operations.





*Impact
      of inflation.* Inflation
      in the United States did not have a material impact on our results of operations
      for the nine-month period ended September 30, 2006. It may in the future,
      however, increase the cost to acquire or replace property, plant and equipment,
      and may increase the costs of labor and supplies. To the extent permitted by
      competition and our existing agreements, we have and will continue to pass
      along
      increased costs to our investors and customers in the form of higher
      fees .





***Atlas
      Pipeline***





The
      midstream natural gas industry links the exploration and production of natural
      gas and the delivery of its components to end-use markets and provides natural
      gas gathering, compression, dehydration, treating, conditioning, processing,
      fractionation, and transportation services. This industry group is generally
      characterized by regional competition based on the proximity of gathering
      systems and processing plants to natural gas producing wells.





Atlas
      Pipeline faces competition for natural gas transportation and in obtaining
      natural gas supplies for its processing and related services operations.
      Competition for natural gas supplies is based primarily on the location of
      gas-gathering facilities and gas-processing plants, operating efficiency and
      reliability, and the ability to obtain a satisfactory price for products
      recovered. Competition for customers is based primarily on price, delivery
      capabilities, flexibility, and maintenance of high-quality customer
      relationships. Many of Atlas Pipeline’s competitors operate as master limited
      partnerships and enjoy a cost of capital comparable to and, in some cases lower
      than, its. Other competitors, such as major oil and gas and pipeline companies,
      have capital resources and control supplies of natural gas substantially greater
      than ours. Smaller local distributors may enjoy a marketing advantage in their
      immediate service areas. Atlas Pipeline believes the primary difference between
      it and some of its competitors is that it provides an integrated and responsive
      package of midstream services, while some of its competitors provide only
      certain services. Atlas Pipeline believes that offering an integrated package
      of
      services, while remaining flexible in the types of contractual arrangements
      that
      it offers producers, allows it to compete more effectively for new natural
      gas
      supplies in its regions of operations.





As
      a
      result of its percentage of proceeds, or POP, and keep whole contracts, Atlas
      Pipeline’s results of operations and financial condition substantially depend
      upon the price of natural gas and NGLs. Atlas Pipeline believes that future
      natural gas prices will be influenced by supply deliverability, the severity
      of
      winter and summer weather and the level of United States economic growth. Based
      on historical trends, Atlas Pipeline generally expects NGL prices to follow
      changes in crude oil prices over the long term, which it believes will in large
      part be determined by the level of production from major crude oil exporting
      countries and the demand generated by growth in the world economy. The number
      of
      active oil and gas rigs has increased in recent years, mainly due to recent
      significant increases in natural gas prices, which could result in sustained
      increases in drilling activity during the current and future periods. However,
      energy market uncertainty could negatively impact North American drilling
      activity in the short term. Lower drilling levels over a sustained period would
      have a negative effect on natural gas volumes gathered and
      processed.




36


**Results
      of Operations for the Three Months and Nine Months Ended September 30, 2006 and
      2005**





***Well
      Construction and Completion***





Our
      well
      construction and completion revenues and costs and expenses incurred represent
      the billings and costs associated with completion of wells for investment
      partnerships we sponsor. The following table sets forth information relating
      to
      these revenues and the related costs, gross profit margins and number of net
      wells drilled during the periods indicated (dollars in thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Average
                construction and completion revenue per well
            
            $
            301
            
            $
            220
            
            $
            295
            
            $
            217Average
                construction and completion cost per well
            
            
            262
            
            
            191
            
            
            256
            
            
            188Average
                construction and completion gross profit per well
            
            $
            39
            
            $
            29
            
            $
            39
            
            $
            29Gross
                profit margin
            
            $
            6,604
            
            $
            4,640
            
            $
            17,652
            
            $
            13,537Gross
                margin percent
            
            
            13
            %
            
            13
            %
            
            13
            %
            
            13
            %Net
                wells drilled(1)
            
            
            168
            
            
            162
            
            
            459
            
            
            479









(1)
            Reflects
              net wells drilled for investment
              partnerships.





Our
      well
      construction and completion margin was $6.6 million and $17.7 million in the
      three months and nine months ended September 30, 2006, an increase of $2.0
      million (42%) and $4.2 million (30%) from $4.6 million and $13.5 million in
      the
      three months and nine months ended September 30, 2005, respectively. During
      the
      three months ended September 30, 2006, the increase of $2.0 million in gross
      margin was attributable to an increase in the gross profit per well ($1.7
      million) and the number of wells drilled ($238,000). In the nine months ended
      September 30, 2006, the increase of $4.2 million was attributable to an increase
      in the gross profit per well ($4.9 million) partially offset by a decrease
      in
      the number of wells drilled ($767,000). Since our drilling contracts are on
      a
“cost plus” basis (typically cost plus 15%), an increase in our average cost per
      well also results in an increase in our average revenue per well. The increase
      in our average cost per well in the three months and nine months ended September
      30, 2006 resulted from an increase in the cost of tangible equipment, leases,
      site preparation and reclamation expenses, as well as increased costs due to
      drilling into deeper formations.





It
      should
      be noted that “Liabilities associated with drilling contracts” on our balance
      sheet includes $71.6 million of funds raised in our investment programs during
      the current year that have not been applied to the completion of wells as of
      September 30, 2006 due to the timing of drilling operations, and thus had not
      been recognized as well construction and completion revenue. We expect to
      recognize this amount as revenue by March 31, 2007. We
      completed our $200.0 million registered partnership offering in August 2006
      for
      a total of $147.6 million raised in the nine months ended September 30, 2006.
      We
      anticipate raising an additional $71.0 million in the fourth quarter 2006,
      for a
      total of $218.6 million raised in calendar year 2006. We
      anticipate oil and gas prices will continue to favorably impact our fundraising
      and therefore our well construction and completion revenues in the twelve months
      ending September 30, 2007.





37


***Gas
      and Oil Production***





The
      following table sets forth information relating to our production revenues,
      production volumes, sales prices, production costs and depletion for our
      operations for the periods indicated:





**Three
                Months Ended**
            
            **Nine
                Months Ended****September
                30,**
            
            **September
                30,****2006**
            
            **2005**
            
            **2006**
            
            **2005**Production
                revenues (in thousands):Gas(1)
            
            $
            19,402
            
            $
            16,460
            
            $
            59,332
            
            $
            42,679Oil
            
            $
            2,489
            
            $
            2,344
            
            $
            7,323
            
            $
            6,097Production
                volume:Gas
                (mcf/day)(1)
                (2)(3)
            
            
            25,955
            
            
            22,724
            
            
            24,064
            
            
            21,097Oil
                (bbls/day)
            
            
            416
            
            
            415
            
            
            415
            
            
            428Total
                (mcfe/day)(3)
            
            
            28,451
            
            
            25,214
            
            
            26,554
            
            
            23,665Average
                sales prices:Gas
                (per mcf)(3) (4)
            
            $
            8.13
            
            $
            7.87
            
            $
            9.03
            
            $
            7.41Oil
                (per bbl)(3)
            
            $
            65.01
            
            $
            61.37
            
            $
            64.59
            
            $
            52.23Production
                costs(5):As
                a percent of production revenues
            
            
            11
            %
            
            9
            %
            
            10
            %
            
            10
            %Per
                mcfe(3)
            
            $
            .88
            
            $
            .72
            
            $
            .89
            
            $
            .75Depletion
                per mcfe(3)
            
            $
            2.14
            
            $
            1.65
            
            $
            2.04
            
            $
            1.47





(1)
            Excludes
                sales to landowners.(2)
            Production
                quantities consist of the sum of (i) our proportionate share of production
                from wells in which we have a direct interest, based on our proportionate
                net revenue interest in such wells, and (ii) our proportionate share
                of
                production from wells owned by the investment partnerships in which
                we
                have an interest, based on our equity interest in each such partnership
                and based on each partnership’s proportionate net revenue interest in
                these wells.(3)
            “Mcf”
                and “mmcf” means thousand cubic feet and million cubic feet; “mcfe” and
                “mmcfe” means thousand cubic feet equivalent and million cubic feet
                equivalent, and “bbls” means barrels. Bbls are converted to mcfe using the
                ratio of six mcfs to one bbl.(4)
            Our
              average sales price before the effects of financial hedging was $7.32
              and
              $8.10 for the three months and nine months ended September 30, 2006.
              We
              did not have any financial hedges in the three months and nine months
              ended September 30, 2005.(5)
            Production
              costs include labor to operate the wells and related equipment, repairs
              and maintenance, materials and supplies, property taxes, severance
              taxes,
              insurance and production overhead.





Our
      natural gas revenues were $19.4 million and $59.3 million in the three months
      and nine months ended September 30, 2006, an increase of $2.9 million (18%)
      and
      $16.6 million (39%) from $16.5 million and $42.7 million in the three months
      and
      nine months ended September 30, 2005. The increase in the three months and
      nine
      months ended September 30, 2006 was attributable to an increase in the volume
      of
      natural gas produced of 14% and 14% and an increase in the average sales price
      of natural gas of 3% and 22% in the three months and nine months ended September
      30, 2006, respectively. The $2.9 million increase in gas revenues in the three
      months ended September 30, 2006 as compared to the prior period consisted of
      $2.4 million attributable to an increase in production volumes, and $527,000
      attributable to increases in natural gas sales prices. The $16.6 million
      increase in natural gas revenues in the nine months ended September 30, 2006
      as
      compared to the prior year period consisted of $9.3 million attributable to
      increases in natural gas sales prices and $7.3 million attributable to increased
      production volumes.





38


The
      increase in our gas production volumes resulted from production associated
      with
      new wells drilled for our investment partnerships. We believe that gas volumes
      will be favorably impacted in the remainder of 2006 as ongoing projects to
      extend and enhance our gathering systems in the Appalachian Basin are completed
      and wells drilled are connected in these areas of expansion.





Our
      oil
      revenues were $2.5 million and $7.3 million in the three months and nine months
      ended September 30, 2006, an increase of $145,000 (6%) and $1.2 million (20%)
      from $2.3 million and $6.1 million in the three months and nine months ended
      September 30, 2005, primarily due to an increase in the average sales price
      of
      oil of 6% and 24% for the three months and nine months ended September 30,
      2006
      as compared to the prior year similar periods. The $145,000 increase in oil
      revenues in three months ended September 30, 2006 as compared to the prior
      year
      period consisted of $139,000 attributable to increases in sales prices and
      $6,000 attributable to increased production volumes. The $1.2 million increase
      in oil revenues for the nine months ended September 30, 2006 as compared to
      the
      prior year period consisted of $1.4 million attributable to increases in sales
      prices partially offset by a decrease of $217,000 attributable to lower
      production volumes.





Our
      production costs were $2.3 million and $6.4 million in the three months and
      nine
      months ended September 30, 2006, an increase of $634,000 (38%) and $1.6 million
      (33%) from $1.7 million and $4.8 million in the three months and nine months
      ended September 30, 2005. These increases are a result of an increase in labor
      and maintenance costs associated with an increase in the number of wells we
      own
      and operate from the prior year period.





***Transmission,
      Gathering and Processing***





Our
      transmission, gathering and processing revenues and related expenses for the
      three months and nine months ended September 30, 2006 increased significantly
      from the prior year periods due to Atlas Pipeline’s acquisitions of Elk City on
      April 15, 2005 and NOARK on October 31, 2005 and May 2, 2006.





Our
      revenues increased $14.4 million (15%) and $106.4 million (48%) to $111.8
      million and $327.9 million for the three months and nine months ended September
      30, 2006 from $97.4 million and $221.5 million for the three months and nine
      months ended September 30, 2005, primarily due to contributions from Elk City
      and NOARK.





Our
      expenses increased $10.0 million (12%) and $76.9 million (40%) to $96.2 million
      and $271.0 million for the three months and nine months ended September 30,
      2006
      from $86.2 million and $194.1 million for the three months and nine months
      ended
      September 30, 2005, primarily due to acquisitions.





***Administration
      and Oversight***





Our **** administration
      and oversight fees represent supervision and administrative charges for
      construction and completion and ongoing administration of wells drilled for
      our
      investment partnerships. For each well drilled for our investment partnerships,
      we receive a fixed fee of approximately $15,000 and generally an ongoing monthly
      per well fee of $75. Due to a change in our more recent drilling agreements,
      these fees are shown as separate lines on our September 30, 2006
      consolidated statements of operations rather than as reimbursement of our
      general and administrative costs. We have reclassified the three month and
      nine
      month ended September 30, 2005 amounts to conform to our current
      presentation.




39




Our
      revenues were $3.0 million and $8.5 million for the three months and nine months
      ended September 30, 2006 compared to $1.9 million and $7.4 million for the
      three
      and nine months ended September 30, 2005, an increase of $1.1 million (61%)
      and
      $1.1 (14%) primarily due to an increase in the number of wells we manage for
      our
      investment partnerships.






***Well
      Services***





Our
      well
      services revenues were $3.3 million and $9.5 million in the three months and
      nine months ended September 30, 2006, an increase of $814,000 (32%) and $2.2
      million (30%) from $2.5 million and $7.3 million in the three months and nine
      months ended September 30, 2005. These increases resulted from an increase
      in
      the number of wells operated for our investment partnerships due to additional
      wells drilled in the three and nine months ended September 30,
      2006.





Our
      well
      services expenses were $1.8 and $5.5 million in the three months and nine months
      ended September 30, 2006, an increase of $385,000 (28%) and $1.5 million (39%)
      from $1.4 million and $4.0 million in the three months and nine months ended
      September 30, 2005. These increases were attributable to an increase in wages,
      benefits, and field office expenses associated with an increase in employees
      due
      to the increase in the number of wells we operate for our investment
      partnerships.





***Other
      Income, Costs and Expenses***





Our
      general and administrative expenses were $12.8 million and $33.2 million in
      the
      three months and nine months ended September 30, 2006, an increase of $5.5
      million and $13.4 million from $7.3 million and $19.8 million in the three
      months and nine months ended September 30, 2005, respectively. These expenses
      include, among other things, salaries and benefits not allocated to a specific
      energy activity, costs of running our energy corporate office, partnership
      syndication activities and outside services.





The
      increase of $5.5 million in the three months ended September 3, 2006 is
      principally attributable to the following:




•
            exploration
                costs increased $1.1 million due to the increase in the costs of
                our land
                department as we acquire additional well drilling
                sites;  •
            general
                and administrative expenses related to Atlas Pipeline’s min-continent
                operations increased $2.1 million primarily as a result of non-cash
                compensation expense and higher costs associated with the management
                of
                the NOARK acquisition;  •
            salaries
                and wages increased $1.2 million due to the increase in executive
                salaries
                and in the number of employees as a result of our spin-off from RAI;
                and  •
            professional
                and legal fees increased $790,000 primarily due to higher audit fees
                and
                implementation of Sarbanes-Oxley Section 404
                compliance.




40




The
      increase of $13.4 million in the nine months ended September 30, 2006 is
      principally attributable to the following:




•
                exploration
                    costs increased $1.4 million due to the increase in the costs
                    of our land
                    department as we acquire additional well drilling
                    sites;  •
                general
                    and administrative expenses related to Atlas Pipeline’s mid-continent
                    operations increased $5.6 million primarily as a result of non-cash
                    compensation expense and higher costs associated with the management
                    of
                    the NOARK acquisition;  •
                salaries
                    and wages increased $2.0 million due to the increase in executive
                    salaries
                    and in the number of employees as a result of our spin-off from
                    RAI.  •
                net
                    syndication expenses increased $1.9 million as we continue to
                    expand our
                    syndication activities and the drilling funds we raise in our
                    public and
                    private partnerships;  •
                professional
                    and legal fees increased $1.6 million primarily due to higher
                    audit fees
                    and implementation of Sarbanes-Oxley Section 404 compliance;
                    and  •
                directors’
                    fees increased $900,000 as a result of our spin-off from our
                    former
                    RAI.




Our
      depletion of oil and gas properties as a percentage of oil and gas revenues
      was
      26% and 22% in the three months and nine months ended September 30, 2006,
      respectively, compared to 20% and 19% in the three months and nine months ended
      September 30, 2005, respectively. Depletion expense per mcfe was $2.14 and
      $2.04
      in the three months and nine months ended September 30, 2006, an increase of
      $.49 (30%) and $.57 (39%) per mcfe from $1.65 and $1.47 in the three months
      and
      nine months ended September 30, 2005, respectively. Increases in our depletable
      basis and production volumes caused depletion expense to increase $1.8 million
      (47%) and $5.3 million (56%) to $5.6 million and $14.8 million in the three
      months and nine months ended September 30, 2006, respectively, compared to
      $3.8
      million and $9.5 million in the three months and nine months ended September
      30,
      2005, respectively. The variances from period to period are directly
      attributable to changes in our oil and gas reserve quantities, production
      levels, product prices and changes in the depletable cost basis of our oil
      and
      gas properties.





Depreciation
      and amortization increased $2.9 million (74%) and $8.8 million (92%), to $6.8
      million and $18.3 million in the three months and nine months ended September
      30, 2006, respectively, compared to $3.9 million and $9.5 million in the three
      months and nine months ended September 30, 2005, respectively. This was
      primarily due to the increased asset base associated with Atlas Pipeline’s
      acquisitions of Elk City and NOARK.





Our
      interest expense was $5.9 million and $19.4 million in the three months and
      nine
      months ended September 30, 2006, an increase of $2.3 million and $9.6 million
      from $3.6 million and $9.8 million in the three months and nine months ended
      September 30, 2005. Atlas Pipeline incurred interest expense of $5.7 million
      and
      $18.2 million in the three months and nine months ended September 30, 2006
      related primarily to its May 2006 and December 2005 issuance of the Senior
      Notes. This increase was partially offset by a decrease in interest expense
      associated with borrowings under its credit facility.





At
      September 30, 2006, we own 11% of the partnership interest in Atlas Pipeline
      through our general partner interest and limited partner units. Our ownership
      interest decreased 8% from 19% at September 30, 2005 as a result of the sale
      of
      17.1% of Atlas Pipeline Holdings, L.P. (“AHD”) our wholly-owned subsidiary, in
      an initial public offering on July 26, 2006. Our interest also decreased due
      to
      Atlas Pipeline’s issuance of $30.0 million 6.5% cumulative preferred units on
      March 13, 2006 and $10.0 million on May 19, 2006.




41


Because
      we control the operations of APL Holdings and Atlas Pipeline, we
      include them in our consolidated financial statements and show the
      ownership by the public as a minority interests. The minority interest
      in their  earnings was $2.0 million and $13.0 million for the three
      months and nine months ended September 30, 2006, as compared to $3.8 million
      and
      $7.6 million for the three months and nine months ended September 30, 2005,
      a
      decrease of $1.8 million and an increase of $5.4 million. The increase for
      the
      nine months ended September 30, 2006 was a result of an increase in the
      percentage interest of public unit holders and an increase in their net
      income, as discussed above.





Our
      effective tax rate was 39% and 40% for the three months and nine months ended
      September 30, 2006 as compared to 34% and 38% for the three months and nine
      months ended September 30, 2005. In addition, we incurred a $29.8 million
      extraordinary income tax charge on the taxable gain associated with the receipt
      of $74.1 million from APL Holdings as a result of the  sale of a 17.1%
      interest in APL Holdings for which they received $74.5 million in net proceeds
      after offerings costs in the three months ended September 30, 2006. For the
      nine
      months ended September 30, 2005, we incurred a $1.2 million income tax charge
      related to our spin-off from Resource America.





**Liquidity
      and Capital Resources**





*General.* We fund
      our development and production operations with a combination of cash generated
      by operations, capital raised through drilling investment partnerships and,
      if
      required, use of our credit facility. We fund our transmission, gathering and
      processing operations, which are conducted through Atlas Pipeline, through
      a
      combination of cash generated by operations, APL Holding’s and Atlas Pipeline’s
      credit facilities and the sale of their equity. The following table sets
      forth our sources and uses of cash (in thousands):





**Nine
                Months Ended****September
                30,****2006**
            
            **2005**Provided
                by operations
            
            $
            43,845
            
            $
            62,459Used
                in investing activities
            
            
            (138,043
            )
            
            (277,717
            )Provided
                by financing activities
            
            
            103,735
            
            
            204,380Increase
                (decrease) in cash and cash equivalents
            
            $
            9,537
            
            $
            (10,878
            )





We
      had
      $64.7 million in cash and cash equivalents at September 30, 2006, as compared
      to
      $55.2 million at December 31, 2005. Our level of cash is dependent on the timing
      of funds raised for our drilling investment partnerships at any balance sheet
      date. We raised $147.6 million during the nine months ended September 30, 2006.
      Our ratio of earnings from continuing operations before income taxes, minority
      interest and interest expense to fixed charges was 4.3 to 1 in the nine months
      ended September 30, 2006 as compared to 5.8 to 1 in the nine months ended
      September 30, 2005. We had a working capital deficit of $66.5 million at
      September 30, 2006, an increase of $5.6 million from the December 31,
      2005 of $60.9 million.





Our
      long-term debt (including current maturities) was 250% and 225% of our total
      equity at September 30, 2006 and December 31, 2005, respectively. Since December
      31, 2005, total stockholders’ equity has decreased by $12.9 million and total
      debt has increased by $949,000. Stockholders’ equity decreased principally due
      to stock repurchases of $29.9 million partially offset by a gain in other
      comprehensive income of $13.8 million and net income of $1.6 million for the
      nine months ended September 30, 2006.





On
      June
      16, 2006 we increased the borrowing base under our credit facility to $150.0
      million. At September 30, 2006, we had $148.5 million available on this credit
      facility. Atlas Pipeline had no outstanding balance on its $225.0 million credit
      facility and $214.9 million available at September 30, 2006. APL Holdings had
      no
      amounts outstanding and $50.0 million available under its credit facility at
      September 30, 2006.





*Cash
      flows from operating activities* . **** Cash
      provided by operations is an important source of short-term liquidity for us.
      It
      is directly affected by changes in the price of natural gas and oil, interest
      rates and our ability to raise funds from our drilling investment partnerships.
      Net cash provided by operating activities decreased $18.7 million in the nine
      months ended September 30, 2006 to $43.8 million from $62.5 million in the
      nine
      months ended September 30, 2005, substantially as a result of the following:




42





•
            a
                decrease in net income before depreciation and amortization of $8.5
                million in the nine months ended September 30, 2006 as compared to
                the
                prior year period, principally as a result of higher general and
                administrative expenses and a one-time extraordinary income tax charge
                of
                $29.8 million related to the distribution of proceeds to us of $74.1
                million from APL Holdings upon the sale of its units;•
            an
                increase in non-cash items of $4.9 million related to losses on APL’s
                hedge values and compensation expense resulting from grants under
                long-term incentive plans and gain on the sale of certain pipelines
                within
                the Velma System;•
            changes
                in minority interests and distributions paid to minority interests
                decreased cash flow by $8.3 million due to an increase in Atlas Pipeline’s
                earnings and our decreased ownership percentage, offset by higher
                distributions paid to minority interests;•
            changes
                in our deferred tax liability decreased cash flow by $9.2 million
                as
                compared to the nine months ended September 30, 2005 which reflects
                the
                impact of timing differences between accounting and tax records;
                and•
            changes
                in operating assets and liabilities increased operating cash flow
                by $5.5
                million in the nine months ended September 30, 2006, compared to
                the nine
                months ended September 30, 2005.





*Cash
      flows from investing activities.* **** Cash
      used
      in our investing activities decreased $139.7 million in the nine months ended
      September 30, 2006 to $138.0 million from $277.7 million in the nine months
      ended September 30, 2005 primarily as a result of the following:





•
            cash
                used by Atlas Pipeline for acquisitions decreased $165.3 million;•
            cash
                proceeds from sale of assets increased $7.5 million primarily due
                to the
                sale of certain gathering pipelines within the Velma System by Atlas
                Pipeline; and•
            capital
                expenditures increased $33.5 million due to an increase in the number
                of
                wells we drilled and expenditures related to Atlas Pipeline’s gathering
                system extensions.





*Cash
      flows from financing activities.* Cash
      provided by our financing activities decreased $100.7 million in the nine months
      ended September 30, 2006 to $103.7 million from $204.4 million in the nine
      months ended September 30, 2005, as a result of the following:




43




•
            we
                received aggregate proceeds of $59.6 million from Atlas Pipeline’s March
                2006 and May 2006 common and preferred unit offerings, a decrease
                of $32.1
                million, compared to $91.7 million received from its public offerings
                during the nine months ended September 30, 2005;•
            net
                borrowings on debt decreased by $127.7 million in the nine months
                ended
                September 30, 2006 as compared to the prior year similar period
                principally as a result of the issuance of the Senior Notes partially
                offset by payments on borrowings associated with the acquisition
                of NOARK;•
            we
                repurchased common stock at a cost of $29.9 million. There were no
                such
                repurchases in the nine months ended September 30, 2005.




These decreases were offset by the following:


•
            we
                received aggregate proceeds of $74.5 million from APL Holdings common
                unit
                offerings, which were distributed to the Company. There was no such
                offering in 2005.•
            payments
                to affiliate primarily related to our share of income taxes included
                in
                RAI’s income tax return decreased by $13.1 million in the nine months
                ended September 30, 2005, as a result of our spin-off from RAI; there
                was
                no such payment made in the nine months ended September 30,
                2006.





*Capital
      Requirements:* During
      the nine months ended September 30, 2006, our capital expenditures related
      primarily to investments in our drilling partnerships and pipeline expansions,
      in which we invested $52.5 million and $58.8 million, respectively. For the
      three months and nine months ended September 30, 2006 and the remaining quarter
      of 2006, we funded and expect to continue to fund these capital
      expenditures through cash on hand, borrowings under our credit facilities,
      and
      from operations. We have established three credit facilities to fund our capital
      expenditures.





The
      level
      of capital expenditures we must devote to our exploration and production
      operations depends upon the level of funds raised through our drilling
      investment partnerships. We have budgeted to raise up to $219.0 million in
      2006
      through drilling partnerships. During the nine months ended September 30, 2006
      we had raised $147.6 million. We believe cash flows from operations and amounts
      available under our credit facility will be adequate to fund our contributions
      to these partnerships. However, the amount of funds we raise and the level
      of
      our capital expenditures will vary in the future depending on market conditions
      for natural gas and other factors.





We
      continuously evaluate acquisitions of gas and oil and pipeline assets. In order
      to make any acquisition, we believe we will be required to access outside
      capital either through debt or equity placements or through joint venture
      operations with other energy companies. There can be no assurance that we will
      be successful in our efforts to obtain outside capital.




44


**Contractual
      Obligations and Commercial Commitments**





The
      following table summarizes our contractual obligations at September 30,
      2006:





Payments
                Due By Period(in
                thousands)Less
                than
            
            1
                -
                3
            
            4
                -
                5
            
            After
                5Contractual
                cash obligations
            
            Total
            
            1
                Year
            
            Years
            
            Years
            
            YearsLong-term
                debt(1)
            
            $
            299,730
            
            $
            144
            
            $
            81
            
            $
            13,500
            
            $
            286,005Secured
                revolving credit facilities
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                lease obligations
            
            
            4,574
            
            
            1,990
            
            
            2,206
            
            
            377
            
            
            1Capital
                lease obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Unconditional
                purchase obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                long-term obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                contractual cash obligations
            
            $
            304,304
            
            $
            2,134
            
            $
            2,287
            
            $
            13,877
            
            $
            286,006





(1)
            
            Not
                included in the table above are estimated interest payments calculated
                at
                the rates in effect at September 30, 2006 of: 2007 - $24.1 million;
                2008 -
                $24.1 million; 2009 - $24.1 million; 2010 - $24.1 million and 2011
                - $23.9
                million.





Payments
                Due By Period(in
                thousands)Less
                than
            
            1
                -
                3
            
            4
                -
                5
            
            After
                5Other
                commercial commitments
            
            Total
            
            1
                Year
            
            Years
            
            Years
            
            YearsStandby
                letters of credit
            
            $
            11,545
            
            $
            11,520
            
            $
            25
            
            $
            -
            
            $
            -Guarantees
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Standby
                replacement commitments
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                commercial commitments
            
            
            23,292
            
            
            23,292
            
            
            -
            
            
            -
            
            
            -Total
                commercial commitments
            
            $
            34,837
            
            $
            34,812
            
            $
            25
            
            $
            -
            
            $
            -





**Critical
      Accounting Policies**





The
      discussion and analysis of our financial condition and results of operations
      are
      based upon our consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States
      of
      America. The preparation of these financial statements requires us to make
      estimates and judgments that affect the reported amounts of our assets,
      liabilities, revenues, costs and expenses, and related disclosure of contingent
      assets and liabilities. On an on-going basis, we evaluate our estimates,
      including those related to the provision for possible losses, deferred tax
      assets and liabilities, goodwill and identifiable intangible assets, and certain
      accrued liabilities. We base our estimates on historical experience and on
      various other assumptions that we believe 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 under different
      assumptions or conditions.





For
      a
      detailed discussion on the application of policies critical to our business
      operations and other accounting policies, see our Annual Report on Form 10-K
      for
      the year ended September 30, 2005, Note 2 of the "Notes to Consolidated
      Financial Statements" and Note 2 to the “Notes to Consolidated Financial
      Statements” included in this report.




45


**Recently
      Issued Financial Accounting Standard**




In
      September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”). SAB 108 was issued to provide consistency in how registrants quantify
      financial statement misstatements. We are required to and will initially apply
      SAB 108 in connection with the preparation of our annual financial
      statements for the year ending December 31, 2006. We do not expect the
      application of SAB 108 to have a material effect on our financial position
      and
      results of operations.





In
      September 2006, the Financial Accounting Standards Board, or FASB, issued
      Statement of Financial Accounting Standards No. 158, *Employer’s
      Accounting for Defined Benefit Pension and Other Post Retirement
      Plans* ,
      or SFAS
      158. SFAS 158 requires an employer to recognize the overfunded or underfunded
      status of a defined benefit post retirement plan as an asset or liability,
      by
      recording the difference between the plan assets fair value and the benefit
      obligation. The employer must recognize after-tax gains and losses as a result
      of changes in the funded status as a component of other comprehensive income.
      The employer is also required to measure the funded status of a plan as of
      the
      date of its year end statements, and disclose in the notes to the statements
      additional information regarding the net periodic benefit costs. SFAS 158 is
      effective for the Company beginning January 1, 2007. We are currently
      evaluating the impact of the adoption of SFAS 158 on our financial
      position and results of operations.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, *Fair
      Value Measurement* ,
      or SFAS
      157. SFAS 157 addresses the need for increased consistency in fair value
      measurements, defining fair value as the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants at the measurement date. It also establishes a framework for
      measuring fair value and expands disclosure requirements. SFAS 157 is effective
      for the Company beginning January 1, 2008. We are currently evaluating the
      impact of the adoption of SFAS 157 on our financial position and
      results of operations.





In
      June
      2006, the FASB issued FASB Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
      109,* or FIN
      48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an entity’s financial statements and provides guidance on the recognition,
      de-recognition and measurement of benefits related to an entity’s uncertain tax
      positions. FIN 48 is effective for us beginning January 1, 2007. We are
      currently evaluating the impact of the adoption on our financial position
      and results of operations.





**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 our potential exposure to market
      risks. The term “market risk” refers to the risk of loss arising from adverse
      changes in interest rates and oil and gas prices. The disclosures are not meant
      to be precise indicators of expected future losses, but rather indicators of
      reasonable possible losses. This forward-looking information provides indicators
      of how we view and manage our ongoing market risk exposures. All of our market
      risk sensitive instruments were entered into for purposes other than
      trading.





**General**





We
      are
      exposed to various market risks, principally fluctuating interest rates and
      changes in commodity prices. These risks can impact our results of operations,
      cash flows and financial position. We manage these risks through regular
      operating and financing activities and periodically use derivative financial
      instruments.




46


The
      following analysis presents the effect on our earnings, cash flows and financial
      position as if the hypothetical changes in market risk factors occurred on
      September 30, 2006. Only the potential impacts of hypothetical assumptions
      are
      analyzed. The analysis does not consider other possible effects that could
      impact our business.





*Interest
      Rate Risk.* At
      September 30, 2006, we had no outstanding borrowings under our $200 million
      credit facility. Borrowings under our credit facility in future periods will
      subject us to movements in interest rates, which could negatively impact our
      net
      income and cash flow.





At
      September 30, 2006, Atlas Pipeline had a $225.0 million revolving credit
      facility ($13.5 million outstanding at September 30, 2006). The weighted average
      interest rate for these borrowings was 7.1% at September 30, 2006, and at
      December 31, 2005. Holding all other variables constant, if interest rates
      hypothetically increased or decreased by 10% our net annual income would change
      by approximately $6,500.





*Commodity
      Price Risk* .
      Our
      major market risk exposure in commodities is fluctuations in the pricing of
      our
      gas and oil production. Realized pricing is primarily driven by the prevailing
      worldwide prices for crude oil and spot market prices applicable to United
      States natural gas production. Pricing for gas and oil production has been
      volatile and unpredictable for many years. To limit our exposure to changing
      natural gas prices, we use physical hedges. Through our hedges, we seek to
      provide a measure of stability in the volatile environment of natural gas
      prices. These transactions are similar to NYMEX-based futures contracts, swaps
      and options, but also require firm delivery of the hedged quantity. Thus, we
      limit these arrangements to much smaller quantities than those projected to
      be
      available at any delivery point. For the twelve month period ending September
      30, 2007, we estimate approximately 76% of our produced natural gas volumes
      will
      be sold in this manner, leaving our remaining production to be sold at contract
      prices in the month produced or at spot market prices. We also negotiate with
      certain purchasers for delivery of a portion of natural gas we will produce
      for
      the upcoming twelve months. The prices under most of our gas sales contracts
      are
      negotiated on an annual basis and are index-based. Our risk management objective
      is to lock in a range of pricing for expected production volumes.





*Atlas
      America.* We
      also
      enter into financial hedges in the form of  natural gas futures and option
      contracts. At any point in time, such contracts may include regulated NYMEX
      futures and options contracts and non-regulated over-the-counter futures
      contracts with qualified counterparties. NYMEX contracts are generally settled
      with offsetting positions, but may be settled by the delivery of natural
      gas.





We formally
      document all relationships between hedging instruments and the items being
      hedged, including our risk management objective and strategy for undertaking
      the
      hedging transactions. This includes matching the natural gas futures and options
      contracts to the forecasted transactions. We assess, both at the inception
      of the hedge and on an ongoing basis, whether the derivatives are highly
      effective in offsetting changes in the fair value of hedged items. Historically
      these contracts have qualified and been designated as cash flow hedges and
      recorded at their fair values. Derivatives are recorded on the balance sheet
      as
      assets and liabilities at fair value. Gains or losses on future contracts are
      determined as the difference between the contract price and a reference price,
      generally prices on NYMEX. Changes in fair value are recognized in stockholders’
equity as accumulated other comprehensive income (loss) and recognized within
      the consolidated statements of income in the month the hedged gas is settled.
      If
      it is determined that a derivative is not highly effective as a hedge or it
      has
      ceased to be a highly effective hedge, due to the loss of correlation between
      changes in gas reference prices under a hedging instrument and actual gas
      prices, we will discontinue hedge accounting for the derivative and subsequent
      changes in fair value for the derivative will be recognized immediately into
      earnings.




47


At
      September 30, 2006, we had 119 open natural gas futures contracts related
      to natural gas sales covering 38.1 million mmbtus of natural gas, maturing
      through December 31, 2009 at a combined average settlement price of $8.85 per
      mmbtu. We recognized a gain of $2.0 million and $4.9 million on settled
      contracts covering natural gas production for the three months and nine months
      ended September 30, 2006, respectively, which is included within gas and oil
      production our consolidated statements of operations. We recognized no
      gains or losses during the three months and nine months ended September 30,
      2006
      for hedge ineffectiveness or as a result of the discontinuance of these cash
      flow hedges. We did not have any hedge gain or loss in  the three months
      and nine months ending September 30, 2005.





*Atlas* *Pipeline.* Atlas
      Pipeline also enters into certain financial hedges in the form of financial
      swap
      and option instruments that are classified as cash flow hedges in accordance
      with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activity* .
      Atlas
      Pipeline enters into these instruments to hedge its forecasted natural gas,
      NGLs
      and condensate sales against the variability in expected future cash flows
      attributable to changes in market prices. The swap instruments are contractual
      agreements between counterparties to exchange obligations of money as the
      underlying natural gas, NGLs and condensate are sold. Under these swap
      agreements, Atlas Pipeline receives a fixed price and pays a floating price
      based on certain indices for the relevant contract period.





Atlas
      Pipeline formally documents all relationships between hedging instruments and
      the items being hedged, including its risk management objective and strategy
      for
      undertaking the hedging transactions. This includes matching the natural gas
      futures and options contracts to the forecasted transactions. Atlas Pipeline
      assesses both at the inception of the hedge and on an ongoing basis, whether
      the
      derivatives are effective in offsetting changes in the forecasted cash flow
      of
      hedged items. If Atlas Pipeline determines that a derivative is not effective
      as
      a hedge or that it has ceased to be an effective hedge due to the loss of
      correlation between the hedging instrument and the underlying commodity, Atlas
      Pipeline will discontinue hedge accounting for the derivative, and subsequent
      changes in fair value for the derivative, which is determined through the
      utilization of market data, will be recognized immediately into
      earnings.





Ineffective
      hedge gains or losses are recorded in our consolidated statements of income
      while the hedge contracts are open and may increase or decrease until settlement
      of the contract. Atlas Pipeline recognized losses of $4.9 million and $2.5
      million for the three months ended September 30, 2006 and 2005, respectively,
      and losses of $10.5 million and $4.4 million for the nine months ended September
      30, 2006 and 2005, respectively, related to the settlement of qualifying hedge
      instruments. Atlas Pipeline also recognized a gain of $2.6 million and a loss
      of
      $800,000 for the three months ended September 30, 2006 and 2005, respectively,
      and a gain of $3.5 million and a loss of $700,000 for the nine months ended
      September 30, 2006 and 2005, respectively, related to the change in market
      value
      of non-qualifying or ineffective hedges. Such gains and losses are included
      within transmission, gathering and processing revenues in our consolidated
      statements of operations.





Atlas
      Pipeline closely monitors the risks associated with commodity price changes
      on
      its future operations and, where appropriate, uses various commodity instruments
      such as natural gas, crude oil and NGL contracts to hedge a portion of the
      value
      of its assets and operations from such price risks. Atlas Pipeline does not
      realize the full impact of commodity price changes because some of its sales
      volumes were previously hedged at prices different than actual market prices.
      Atlas Pipeline’s profitability is positively influenced by increases in natural
      gas and NGL prices and negatively influenced if such price decreases. A 10%
      change in the average price of NGLs, natural gas and condensate it processes
      and
      sells would result in a change to our consolidated income for the twelve-month
      period ending September 30, 2007 of approximately $1.0 million.




48


At
      September 30, 2006 and December 31, 2005, the Company reflected a net hedging
      asset and liability on its balance sheets of $10.7  million
      and $41.5 million, respectively. Of the $8.7 million net gain in accumulated
      other comprehensive income at September 30, 2006, the Company will reclassify
      $4.5 million of gains to its consolidated statements of operations over the
      next
      twelve month period as these contracts expire, and $4.2 million of gains will
      be
      reclassified in later periods if the fair values of the instruments remain
      at
      current market values. Actual amounts that will be reclassified will vary as
      a
      result of future price changes.





At
      September 30, 2006, the Company (including Atlas Pipeline) had the following
      financial hedges in place:





**Natural
      Gas Fixed-Price Swaps - Atlas** **(1)**


Twelve
                Month
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)September
                30,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2007
            
            
            10,110,000
            
            
            $
            9.26
            
            
            $
            20,1162008
            
            
            14,640,000
            
            
            
            8.75
            
            
            
            9,9452009
            
            
            10,950,000
            
            
            
            8.65
            
            
            
            7,8622010
            
            
            2,430,000
            
            
            
            8.61
            
            
            
            1,650$
            39,573





**Natural
      Gas Liquids Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(4)December
                31,
            
            (gallons)
            
            (per
                gallon)
            
            (in
                thousands)2006
            
            
            17,262,000
            
            
            $
            0.788
            
            
            $
            (1,908
            )2007
            
            
            84,924,000
            
            
            
            0.849
            
            
            
            (2,344
            )2008
            
            
            33,012,000
            
            
            
            0.697
            
            
            
            (5,659
            )2009
            
            
            8,568,000
            
            
            
            0.746
            
            
            
            (1,244
            )$
            (11,155
            )





**Crude
      Oil Sales Options (associated with NGL volume)**


Associated
            
            AverageProduction
            
            Crude
            
            NGL
            
            Crude
            
            Fair
                ValuePeriod
                Ended
            
            Volume
            
            Volume
            
            Strike
                Price
            
            Liability(3)
            
            Option
                TypeDecember
                31,
            
            (barrels)
            
            (gallons)
            
            (per
                barrel)
            
            (in
                thousands)2008
            
            
            720,000
            
            
            
            40,219,000
            
            
            $
            60.00
            
            
            $
            -
            
            
            
            Puts
                purchased2008
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            84.00
            
            
            
            -
            
            
            
            Calls
                sold2009
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            60.00
            
            
            
            -
            
            
            
            Puts
                purchased2009
            
            
            720,000
            
            
            
            40,219,000
            
            
            
            81.00
            
            
            
            -
            
            
            
            Calls
                sold$
            -




**Natural
      Gas Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            200,000
            
            
            $
            7.019
            
            
            $
            1072007
            
            
            1,080,000
            
            
            
            7.255
            
            
            
            (451
            )2008
            
            
            240,000
            
            
            
            7.270
            
            
            
            (223
            )$
            (567
            )





49


**Natural
      Gas Basis Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            300,000
            
            
            $
            (0.525
            )
            
            $
            492007
            
            
            1,080,000
            
            
            
            (0.535
            )
            
            
            3692008
            
            
            240,000
            
            
            
            (0.555
            )
            
            
            131$
            549





**Natural
      Gas Purchases**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Liability(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            720,000
            
            
            $
            8.384
            
            
            $
            (1,369
            )2007
            
            
            6,960,000
            
            
            
            8.855
            (5)
            
            
            (10,084
            )2008
            
            
            3,336,000
            
            
            
            8.872
            (6)
            
            
            (3,553
            )2009
            
            
            2,400,000
            
            
            
            8.450
            
            
            
            (1,682
            )$
            (16,688
            )





**Natural
      Gas Basis Purchases**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Fixed
                Price
            
            Asset(3)December
                31,
            
            (MMBTU)(2)
            
            (per
                MMBTU)
            
            (in
                thousands)2006
            
            
            1,080,000
            
            
            $
            (0.835
            )
            
            $
            1892007
            
            
            6,960,000
            
            
            
            (0.903
            )
            
            
            2722008
            
            
            3,336,000
            
            
            
            (1,042
            )
            
            
            2722009
            
            
            240,000
            
            
            
            (0.600
            )
            
            
            130$
            863


**Crude
      Oil Sales**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Strike
                Price
            
            Liability(3)December
                31,
            
            (barrels)
            
            (per
                barrel)
            
            (in
                thousands)2006
            
            
            17,800
            
            
            $
            53.358
            
            
            $
            (179
            )2007
            
            
            77,900
            
            
            
            56.175
            
            
            
            (900
            )2008
            
            
            65,400
            
            
            
            59.424
            
            
            
            (621
            )2009
            
            
            33,000
            
            
            
            62.700
            
            
            
            (159
            )$
            (1,859
            )





50


**Crude
      Oil Sales Options**


Production
            
            
            
            Average
            
            Fair
                ValuePeriod
                Ended
            
            Volumes
            
            Strike
                Price
            
            Liability3)December
                31,
            
            (barrels)
            
            (per
                barrel)
            
            (in
                thousands)
            
            Option
                Type2006
            
            
            3,300
            
            
            $
            60.000
            
            
            $
            -
            
            
            
            Puts
                purchased2006
            
            
            3,300
            
            
            
            73.380
            
            
            
            -
            
            
            
            Calls
                sold2007
            
            
            13,200
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2007
            
            
            13,200
            
            
            
            73.380
            
            
            
            -
            
            
            
            Calls
                sold2008
            
            
            17,400
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2008
            
            
            17,400
            
            
            
            72.807
            
            
            
            -
            
            
            
            Calls
                sold2009
            
            
            30,000
            
            
            
            60.000
            
            
            
            -
            
            
            
            Puts
                purchased2009
            
            
            30,000
            
            
            
            71.250
            
            
            
            -
            
            
            
            Calls
                sold$
            -Total
                net asset
            $
            10,716







(1)
            Represents
              ATLS’ hedged volumes. All others are related to Atlas
              Pipeline.(2)
            MMBTU
              represents million British Thermal Units.(3)
            Fair
              value based on forward NYMEX natural gas and light crude prices, as
              applicable.(4)
            Fair
              value based upon management estimates, including forecasted forward
              NGL
              prices as a function of forward NYMEX natural gas, light crude prices
              and
              propane prices.(5)
            Includes
              Atlas Pipelines’ premium received from its sale of an option for it to
              sell 4,800,000 mmbtu of natural gas at an average price of $15.25 per
              mmbtu for the year ended December 31, 2007, partially offset by its
              premium paid from its purchase of an option to purchase 1,200,000 mmbtu
              of
              natural gas at $26.00 per mmbtu.(6)
            Includes
              Atlas Pipelines’ premium received from its sale of an option for it to
              sell 936,000 mmbtu of natural gas for the year ended December 31, 2008
              at
              $15.50 per mmbtu.




**Item
      4.**   **Controls
      and Procedures**





As
      indicated in the certifications in Exhibit 31 of this report, the Company’s
      principal executive officer and principal financial officer have evaluated
      the
      Company’s disclosure controls and procedures as of September 30, 2006. Based on
      that evaluation, these officers have concluded that the Company’s disclosure
      controls and procedures are effective in ensuring that material information
      required to be in this quarterly report is made known to them on a timely basis.
      There were no changes during the Company’s last fiscal quarter that materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.




51


**PART
      II. OTHER INFORMATION**





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





**Issuer
      Purchase of Equity Securities**





**Shares
                Purchased As**
            
            **Maximum
                Number of****Part
                of Publicly**
            
            **Shares
                that May Yet****Total
                Number of**
            
            **Average
                Price**
            
            **Announced
                Plans**
            
            **Be
                Purchased Under****Shares
                Purchased**
            
            **paid
                Per Share**
            
            **or
                Programs**
            
            **the
                Plans or Programs**July
                1 - 31, 2006
            
            
            3,052
            
            
            41.00
            
            
            3,052August
                1 - 31, 2006
            
            
            165,307
            
            
            45.71
            
            
            165,307September
                1 - 30, 2006
            
            
            219,994
            
            $
            45.46
            
            
            219,994Total
            
            
            388,353
            
            $
            45.53
            
            
            388,353
            
            
            See
                Note 1





Note
      1:
      In November 2005, the Company announced that its Board of Directors authorized
      a
      repurchase program through which the Company may repurchase up to $50.0 million
      ($20.1 million remaining at September 30, 2006) of its common stock. Repurchases
      may be made from time to time through open market purchases or privately
      negotiated transactions at the discretion of the Company and in accordance
      with
      the rules of the Securities and Exchange Commission, as applicable. The amount
      and timing of any repurchases will depend on market and other relevant
      conditions. Purchases may be increased, decreased, or discontinued at any time
      without prior notice. Shares of stock repurchased under the plan are held as
      treasury shares.





**Item
      6.**   **Exhibits**





Exhibit
                No.
            Description3.1
            Amended
                and Restated Certificate of Incorporation(1)3.2
            Amended
                and Restated Bylaws(1)3.3
            Amendments
                to Bylaws(2)10.1
            Amended
                and Restated Credit Agreement among Atlas America, Inc., Wachovia
                Bank,
                National Association and other banks party thereto, dated April 27,
                2006(3)10.1(a)
            Consent,
                Limited Partner Waiver and First Amendment to Amended and Restated
                Credit
                Facility, dated as of October 6, 2006. (4)31.1
            Rule
                13(a)-14(a)/15d-14(a) Certification31.2
            Rule
                13(a)-14(a)/15d-14(a) Certification32.1
            Section
                1350 Certification32.2
            Section
                1350 Certification





(1)
            
            Previously
                filed as an exhibit to our Form 8-K filed on June 14,
                2005.(2)
            
            Previously
                filed as an exhibit to our Form 8K filed May 16, 2005.(3)
            
            Previously
                filed as an exhibit to our Form 10-Q for the quarter ended March
                31,
                2006.(4)
            
            Previously
                filed as an exhibit to our Form 8K filed October 12,
                2006.





52




**SIGNATURES**





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.




**ATLAS
                AMERICA, INC.****(Registrant)**Date: November
              8, 2006
            By:
            /s/ *Matthew
              A. Jones*Matthew
                A. JonesChief
                Financial Officer Date: November
              8, 2006
            By:
            /s/ *Nancy
              J. McGurk*Nancy
              J. McGurkSenior
                Vice President and Chief Accounting
                Officer




53