**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 March 31, 2006
 
 **OR**
 
 **[ 
                  ]**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 
 
 For
        the
        transition period from _________ to __________
 
 Commission
        file number: **333-112653**
 
 
 **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
        [  ]
 
 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
        [ ] Accelerated filer   [X] Non-accelerated filer [ ]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes
        [  ]
        No [X]
 
 The
        number of outstanding shares of the registrant’s common stock on May 1, 2006 was
        20.0 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 - March 31, 2006 and September 30, 2005
              3Consolidated
                  Statements of Income for the Three Months and Six Months Ended
                  March 31,
                  2006 and 2005
              4Consolidated
                  Statement of Changes in Stockholders’ Equity for the Six Months EndedMarch
                  31, 2006
              5Consolidated
                  Statements of Cash Flows for the Six Months Ended March 31, 2006
                  and
                  2005
              6Notes
                  to Consolidated Financial Statements
              7
                  -
                  26Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              27-
                  37Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              38-
                  41Item
                  4.
              Controls
                  and Procedures
              41**PART
                  II**
              **OTHER
                  INFORMATION**Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              41Item
                  6.
              Exhibits
              42**SIGNATURES**
              43
 
 
 
 
  2
   **PART
        I.  FINANCIAL INFORMATION**
  **Item
        1.**   **Financial
        Statements**
 **ATLAS
        AMERICA, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 (Unaudited)
 (in
        thousands, except share data)
 **March
                  31,**
              
              **September
                  30,****2006**
              
              **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              42,798
              
              $
              18,281Accounts
                  receivable
              
              
              86,510
              
              
              73,996Prepaid
                  expenses
              
              
              11,031
              
              
              5,063Deferred
                  tax asset
              
              
              5,294
              
              
              6,970Total
                  current assets
              
              
              145,633
              
              
              104,310Property
                  and equipment, net
              
              
              678,298
              
              
              505,967Intangible
                  assets, net
              
              
              59,578
              
              
              18,708Other
                  assets, net
              
              
              30,586
              
              
              15,360Goodwill
              
              
              145,797
              
              
              115,366$
              1,059,892
              
              $
              759,711**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Current
                  portion of long-term debt
              
              $
              1,365
              
              $
              122Accounts
                  payable
              
              
              35,285
              
              
              31,477Liabilities
                  associated with drilling contracts
              
              
              24,862
              
              
              60,971Accrued
                  producer liabilities
              
              
              28,317
              
              
              32,543Accrued
                  hedge liability
              
              
              13,052
              
              
              37,663Accrued
                  liabilities
              
              
              40,575
              
              
              18,231Advances
                  from affiliate
              
              
              367
              
              
              111Total
                  current liabilities
              
              
              143,823
              
              
              181,118Long-term
                  debt
              
              
              333,945
              
              
              191,605Deferred
                  tax liability
              
              
              30,735
              
              
              28,903Other
                  liabilities
              
              
              52,430
              
              
              47,612Minority
                  interest
              
              
              352,498
              
              
              190,122Commitments
                  and contingencies
              
              
              -
              
              
              -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
              
              
              76,425
              
              
              75,637Treasury
                  stock, at cost
              
              
              (548
              )
              
              -ESOP
                  loan receivable
              
              
              (546
              )
              
              (583
              )Accumulated
                  other comprehensive loss
              
              
              (2,867
              )
              
              (5,615
              )Retained
                  earnings
              
              
              73,797
              
              
              50,779Total
                  stockholders’ equity
              
              
              146,461
              
              
              120,351$
              1,059,892
              
              $
              759,711
  See
        accompanying notes to consolidated financial statements
 
 
  3
   
 **ATLAS
        AMERICA, INC.**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 (in
        thousands, except per share data)
 (Unaudited)
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005****REVENUES**Well
                  drilling
              
              $
              50,883
              
              $
              41,451
              
              $
              93,028
              
              $
              72,009Gas
                  and oil production
              
              
              22,866
              
              
              13,959
              
              
              46,952
              
              
              28,618Transmission,
                  gathering and processing
              
              
              112,635
              
              
              43,241
              
              
              241,375
              
              
              86,470Drilling
                  management fee
              
              
              2,906
              
              
              -
              
              
              4,482
              
              
              -Well
                  services
              
              
              2,766
              
              
              2,350
              
              
              5,327
              
              
              4,598192,056
              
              
              101,001
              
              
              391,164
              
              
              191,695**COSTS
                  AND EXPENSES**Well
                  drilling
              
              
              44,246
              
              
              36,044
              
              
              80,894
              
              
              62,617Gas
                  and oil production and exploration
              
              
              4,209
              
              
              1,913
              
              
              5,947
              
              
              3,162Transmission,
                  gathering and processing
              
              
              91,437
              
              
              37,462
              
              
              201,326
              
              
              73,142Well
                  services
              
              
              1,766
              
              
              1,316
              
              
              3,253
              
              
              2,507General
                  and administrative
              
              
              10,201
              
              
              1,494
              
              
              18,249
              
              
              3,154Compensation
                  reimbursement - affiliate
              
              
              415
              
              
              244
              
              
              578
              
              
              457Depreciation,
                  depletion and amortization
              
              
              10,102
              
              
              4,781
              
              
              20,426
              
              
              10,653162,376
              
              
              83,254
              
              
              330,673
              
              
              155,692**OPERATING
                  INCOME**
              
              
              29,680
              
              
              17,747
              
              
              60,491
              
              
              36,003**OTHER
                  INCOME (EXPENSE**)Interest
                  expense
              
              
              (6,721
              )
              
              (1,623
              )
              
              (12,868
              )
              
              (3,313
              )Minority
                  interest in Atlas Pipeline Partners, L.P.
              
              
              (6,255
              )
              
              (2,500
              )
              
              (13,000
              )
              
              (9,720
              )Arbitration
                  settlement, net
              
              
              -
              
              
              (136
              )
              
              -
              
              
              4,310Other,
                  net
              
              
              1,329
              
              
              (181
              )
              
              2,020
              
              
              (79
              )(11,647
              )
              
              (4,440
              )
              
              (23,848
              )
              
              (8,802
              )Income
                  before income taxes
              
              
              18,033
              
              
              13,307
              
              
              36,643
              
              
              27,201Provision
                  for income taxes
              
              
              6,672
              
              
              4,791
              
              
              13,558
              
              
              9,793**Net
                  income**
              
              $
              11,361
              
              $
              8,516
              
              $
              23,085
              
              $
              17,408**Net
                  income per common share - basic**Net
                  income per common share - basic
              
              $
              .57
              
              $
              .43
              
              $
              1.15
              
              $
              .87Weighted
                  average common shares outstanding
              
              
              20,001
              
              
              20,000
              
              
              20,002
              
              
              20,000**Net
                  income per common share - diluted**Net
                  income per common shares - diluted
              
              $
              .56
              
              $
              .43
              
              $
              1.14
              
              $
              .87Weighted
                  average common shares outstanding
              
              
              20,453
              
              
              20,007
              
              
              20,334
              
              
              20,007
 
 
 
 See
        accompanying notes to consolidated financial statements
 
 
  4
   
 
 **ATLAS
        AMERICA, INC.**
 **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **SIX
        MONTHS ENDED MARCH 31, 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,
                    October 1, 2005
                
                
                13,334,703
                
                $
                133
                
                $
                75,637
                
                
                -
                
                $
                -
                
                $
                (583
                )
                $
                (5,615
                )
                $
                50,779
                
                $
                120,351Net
                    Income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                23,085
                
                
                23,085Other
                    comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                2,748
                
                
                
                
                
                2,748Issuance
                    of common stock
                
                
                3,928
                
                
                -
                
                
                255
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                255Repurchase
                    of common stock, at cost
                
                
                
                
                
                
                
                
                
                
                
                (8,835
                )
                
                (548
                )
                
                
                
                
                
                
                
                
                
                
                (548
                )Repayment
                    of ESOP Loan
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                37
                
                
                
                
                
                
                
                
                37Stock
                    option compensation
                
                
                
                
                
                
                
                
                533
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                533Three-for-two
                    split (Note 16)
                
                
                6,667,098
                
                
                67
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (67
                )
                
                −Balance,
                    March 31, 2006
                
                
                20,005,729
                
                $
                200
                
                $
                76,425
                
                
                (8,835
                )
                $
                (548
                )
                $
                (546
                )
                $
                (2,867
                )
                $
                73,797
                
                $
                146,461
 
  
 
 
 See
        accompanying notes to consolidated financial statements
 
 
 
 
  5
 
 **ATLAS
        AMERICA, INC.**
 **CONSOLIDATED
        STATEMENT OF CASH FLOWS**
 **SIX
        MONTHS ENDED MARCH 31, 2006**
 (in
        thousands)
 (Unaudited)
 
 
 **Six
                  Months Ended****March
                  31,****2006**
              
              
              **2005****CASH
                  FLOWS FROM OPERATING ACTIVITIES:**Net
                  income
              
              $
              23,085
              
              $
              17,408Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation,
                  depletion and amortization
              
              
              20,426
              
              
              10,653Amortization
                  of deferred financing costs
              
              
              1,282
              
              
              621Non-cash
                  loss on derivative value
              
              
              650
              
              
              720Preferred
                  unit imputed dividend cost amortization
              
              
              95
              
              
              -Non-cash
                  compensation on long-term incentive plans
              
              
              4,067
              
              
              922Minority
                  interest in Atlas Pipeline Partners, L.P.
              
              
              13,000
              
              
              9,720Distributions
                  paid to minority interests of Atlas Pipeline Partners, L.P.
              
              
              (15,435
              )
              
              (7,845
              )Gain
                  on asset dispositions
              
              
              (28
              )
              
              (36
              )Deferred
                  income taxes
              
              
              2,034
              
              
              1,420Changes
                  in operating assets and liabilities
              
              
              (42,612
              )
              
              (1,621
              )Net
                  cash provided by operating activities
              
              
              6,564
              
              
              31,962**CASH
                  FLOWS FROM INVESTING ACTIVITIES:**Business
                  acquisition, net of cash acquired
              
              
              (163,630
              )
              
              -Capital
                  expenditures
              
              
              (64,018
              )
              
              (40,867
              )Proceeds
                  from sale of assets
              
              
              33
              
              
              66Decrease
                  (increase) in other assets
              
              
              579
              
              
              (789
              )Net
                  cash used in investing activities
              
              
              (227,036
              )
              
              (41,590
              )**CASH
                  FLOWS FROM FINANCING ACTIVITIES:**Borrowings
              
              
              282,091
              
              
              86,252Principal
                  payments on debt
              
              
              (428,138
              )
              
              (67,910
              )Payments
                  to affiliate
              
              
              -
              
              
              (19,448
              )Issuance
                  of Atlas Pipeline Partners, L.P. common and preferred
                  units
              
              
              151,002
              
              
              -Issuance
                  of Atlas Pipeline Partners, L.P.senior notes
              
              
              243,102
              
              
              -Increase
                  in other assets
              
              
              (3,068
              )
              
              (1,397
              )Net
                  cash provided by (used in) financing activities
              
              
              244,989
              
              
              (2,503
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              24,517
              
              
              (12,131
              )Cash
                  and cash equivalents at beginning of period
              
              
              18,281
              
              
              29,192Cash
                  and cash equivalents at end of period
              
              $
              42,798
              
              $
              17,061
 
 See
        accompanying notes to consolidated financial statements
  6
   **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **March
        31, 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”).  Atlas
        Pipeline is a master limited partnership in which the Company has a combined
        general and limited partnership interest of 14% and 24% at March 31, 2006
        and
        2005, respectively.
 
 The
        consolidated financial statements and the information and tables contained
        in
        the notes to the consolidated financial statements as of March 31, 2006 and
        for
        the six months ended March 31, 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 six
        months ended March 31, 2006 may not necessarily be indicative of the results
        of
        operations for the full fiscal year ending September 30, 2006. Certain
        reclassifications have been made to the consolidated financial statements
        as of
        September 30, 2005 and for the six months ended March 31, 2005 to conform
        to the
        presentation as of and for the six months ended March 31, 2006.
 
 **Spin-off
        from Resource America, Inc.**
 
 On
        June
        30, 2005, Resource America, Inc. (“RAI”) (NASDAQ: REXI) distributed its
        remaining 10.7 million shares of the Company to its stockholders in the form
        of
        a tax-free dividend. Each stockholder of RAI received 0.59367 shares of the
        Company’s common stock for each share of RAI common stock owned as of June 24,
        2005, the record date. Although the distribution itself is tax-free to RAI
        stockholders, as a result of the deconsolidation there may be some tax liability
        arising from prior unrelated corporate transactions among the Company and
        some
        of its subsidiaries. Any liability arising from this transaction will be
        paid by
        the Company to RAI. As of July 1, 2005, RAI no longer includes the company
        in its consolidated financial statements or tax returns. In connection with
        the
        spin-off, RAI and the Company entered into a series of agreements, including
        a
        tax matters agreement and a transition services agreement, which govern the
        future contractual obligations between the two companies.
 
 **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 Standards**
 
 In
        May 2005, the Financial Accounting Standards Board, (“FASB”) issued
        Statement No. 154, *Accounting
        Changes and Error Corrections* (“SFAS
        154”). SFAS 154 requires retrospective application to prior periods’ financial
        statements of changes in accounting principle. It also requires that the
        new
        accounting principle be applied to the balances of assets and liabilities
        as of
        the beginning of the earliest period for which retrospective application
        is
        practicable and that a corresponding adjustment be made to the opening balance
        of retained earnings for that period rather than being reported in an income
        statement. The statement will be effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15, 2005.
        The impact of SFAS 154 will depend on the nature and extent of any voluntary
        accounting changes and correction of errors after the effective date, but
        management does not currently expect SFAS 154 to have a material impact on
        the
        Company’s financial position or results of operations.
  7
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
        (Continued)**
 
 In
        March
        2005, the FASB issued FASB Interpretation No. 47, *Accounting
        for Conditional Asset Retirement Obligations* (“FIN
        47”), which will result in (a) more consistent recognition of liabilities
        relating to asset retirement obligations, (b) more information about expected
        future cash outflows associated with those obligations, and (c) more information
        about investments in long-lived assets because additional asset retirement
        costs
        will be recognized as part of the carrying amounts of the assets. FIN 47
        clarifies that the term conditional asset retirement obligation as used in
        SFAS
        No. 143, *Accounting
        for Asset Retirement Obligations,* refers
        to a legal obligation to perform an asset retirement activity in which the
        timing and (or) method of settlement are conditional on a future event that
        may
        or may not be within the control of the entity. The obligation to perform
        the
        asset retirement activity is unconditional even though uncertainty exists
        about
        the timing and (or) method of settlement. Uncertainty about the timing and
        (or)
        method of settlement of a conditional asset retirement obligation should
        be
        factored into the measurement of the liability when sufficient information
        exists.
 
 FIN
        47
        also clarifies when an entity would have sufficient information to reasonably
        estimate the fair value of an asset retirement obligation. FIN 47 is effective
        no later than the end of fiscal years ending after December 15, 2005.
        Retrospective application of interim financial information is permitted but
        is
        not required. Early adoption of this interpretation is encouraged. Management
        does not believe the interpretation will have a significant impact on the
        Company’s financial position or 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 March 31,
        2006
        and September 30, 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 March 31, 2006 and September 30,
        2005
        of $46.5 million and $57.1 million which are included in Accounts Receivable
        on
        its Consolidated Balance Sheets.
 
 **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 (shown in
        thousands).
  8
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        3 - COMPREHENSIVE INCOME - (Continued)**
 
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Net
                  income
              
              $
              11,361
              
              $
              8,516
              
              $
              23,085
              
              $
              17,408Other
                  comprehensive income (loss):Unrealized
                  holding gain (loss) on hedgingcontracts,
                  net of tax of ($1,476)
                $772, ($823) and($579)
              
              
              2,515
              
              
              (1,373
              )
              
              1,403
              
              
              1,029Less:
                  reclassification adjustment for (gains) lossesrealized
                  in net income,
                net of tax of $155, ($58),($791)
                  and ($29)
              
              
              (266
              )
              
              102
              
              
              1,345
              
              
              512,249
              
              
              (1,271
              )
              
              2,748
              
              
              1,080Comprehensive
                  income
              
              $
              13,610
              
              $
              7,245
              
              $
              25,833
              
              $
              18,488
 
 **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.  Earnings
        per share - diluted 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**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Net
                  income
              
              $
              11,361
              
              $
              8,516
              
              $
              23,085
              
              $
              17,408Weighted
                  average common shares outstanding-basic(1)
              
              
              20,001
              
              
              20,000
              
              
              20,002
              
              
              20,000Dilutive
                  effect of stock option and award plan(1)
              
              
              452
              
              
              7
              
              
              332
              
              
              7Weighted
                  average common shares-diluted(1)
              
              
              20,453
              
              
              20,007
              
              
              20,334
              
              
              20,007
 
  (1)
              
              The
                  shares for the three months and six months ended March 31, 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.
  9
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        5 - PROPERTY AND EQUIPMENT - (Continued)**
 
 Property
        and equipment consists of the following at the dates indicated (in
        thousands):
 
 **March
                  31,**
              
              **September
                  30,****2006**
              
              **2005**Mineral
                  interests:Proved
                  properties
              
              $
              2,099
              
              $
              2,852Unproved
                  properties
              
              
              1,002
              
              
              1,002Wells
                  and related equipment
              
              
              287,025
              
              
              255,879Pipelines,
                  processing and compression facilities
              
              
              455,271
              
              
              304,523Rights-of-way
              
              
              19,841
              
              
              15,110Land,
                  building and improvements
              
              
              8,052
              
              
              7,793Support
                  equipment
              
              
              4,416
              
              
              3,675Other
              
              
              7,566
              
              
              5,251785,272
              
              
              596,085Accumulated
                  depreciation, depletion and amortization:Oil
                  and gas properties and pipelines
              
              
              (102,210
              )
              
              (85,824
              )Other
              
              
              (4,764
              )
              
              (4,294
              )(106,974
              )
              
              (90,118
              )$
              678,298
              
              $
              505,967
  In
        October 2005, Atlas Pipeline completed the acquisition of a 75% interest
        in
        NOARK Pipeline System, Limited Partnership (“NOARK”) for approximately $179.8
        million (see Note 12). The purchase price allocations for this
        acquisition is based on estimated fair values determined by Atlas Pipeline,
        which are subject to adjustment and could change significantly as they are
        further evaluated. At March 31, 2006, the portion of the purchase price
        allocated to property, plant and equipment for NOARK is included in the
        pipelines, processing and compression facilities category within the above
        table.
 
 **NOTE
        6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL**
 
 **Other
        Assets**
 
 The
        following table provides information about other assets at the dates indicated
        (in thousands):
 
 **March
                  31,**
              
              **September
                  30,****2006**
              
              
              **2005**Deferred
                  financing costs, net of accumulated amortization of $3,801 and
                  $2,519
              
              $
              15,071
              
              $
              5,524Investments
              
              
              1,547
              
              
              1,647Security
                  deposits
              
              
              1,715
              
              
              1,779Hedge
                  receivable - long term
              
              
              12,235
              
              
              5,970Other
              
              
              18
              
              
              440$
              30,586
              
              $
              15,360
 
  10
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL -
        (Continued)**
 
 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.
 
 **Intangible
        Assets**
 
 *Customer
        contracts and relations.* At
        March
        31, 2006, Atlas Pipeline had $53.7 million of intangible assets, net of
        accumulated amortization of $3.2 million which was recorded in connection
        with
        natural gas gathering contracts and customer relations assumed in its
        acquisitions of Elk City and NOARK (See Note 12). 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. Amortization
        expense on the customer contract and relations intangible assets, which have
        estimated lives of eight and twenty years, respectively, and are being amortized
        on a straight-line basis, was $2.8 million and $0 for the six months ended
        March
        31, 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
        six months ended March 31, 2006 and 2005 was $439,000 and $466,000,
        respectively.
 
 The
        aggregate estimated annual amortization expense of customer relations and
        partnership management and operating contracts is approximately $5.4 million
        for
        each of the succeeding five-years ended March 31.
 
 The
        following table provides information about intangible assets at the dates
        indicated (in thousands):
 
 **March
                  31,**
              
              **September
                  30,****2006**
              
              **2005****Accumulated**
              
              
              
              **Accumulated****Cost**
              
              
              **Amortization**
              
              
              **Cost**
              
              
              **Amortization**Customer
                  contracts and relations
              
              $
              56,950
              
              $
              (3,242
              )
              $
              12,891
              
              $
              (492
              )Partnership
                  management and operating contracts
              
              
              14,343
              
              
              (8,473
              )
              
              14,343
              
              
              (8,034
              )Intangible
                  assets
              
              $
              71,293
              
              $
              (11,715
              )
              $
              27,234
              
              $
              (8,526
              )
 
 **Goodwill**
 
 The
        Company applies the provisions of SFAS No. 142, which require that goodwill
        no
        longer be amortized, but instead evaluated for impairment at least annually.
        The
        Company performs such evaluations 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).
  11
  
 **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        6 - OTHER ASSETS, INTANGIBLE ASSETS AND GOODWILL -
        (Continued)**
 
 **March
                  31,**
              
              **September
                  30,****2006**
              
              
              **2005**Goodwill
                  at beginning of period, net of accumulated amortization of
                  $4,532
              
              $
              115,366
              
              $
              37,470Additions
                  to goodwill related to Atlas Pipeline acquisitions (see Note
                  12)
              
              
              30,431
              
              
              77,896Goodwill
                  at end of period, net of accumulated amortization of
                  $4,532
              
              $
              145,797
              
              $
              115,366
 
 **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**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Asset
                  retirement obligations, beginning of period
              
              $
              18,499
              
              $
              5,618
              
              $
              17,651
              
              $
              4,888Liabilities
                  incurred
              
              
              676
              
              
              1,008
              
              
              1,401
              
              
              1,658Liabilities
                  settled
              
              
              -
              
              
              (28
              )
              
              -
              
              
              (32
              )Accretion
                  expense
              
              
              124
              
              
              109
              
              
              247
              
              
              193Asset
                  retirement obligations, end of period
              
              $
              19,299
              
              $
              6,707
              
              $
              19,299
              
              $
              6,707
 
 The
        above
        accretion expense is included in depreciation, depletion and amortization
        in the
        Company’s consolidated statements of income and the asset retirement obligation
        liabilities are included in other liabilities in the Company’s consolidated
        balance sheets.
 
 **NOTE
        8 - DEBT**
 
 Total
        debt consists of the following at the dates indicated (in
        thousands):
 
 **March
                  31,**
              
              **September
                  30,****2006**
              
              
              **2005**Senior
                  notes - Atlas Pipeline
              
              $
              250,000
              
              $
              -Revolving
                  credit facility - Atlas Pipeline
              
              
              -
              
              
              183,500Revolving
                  credit facility
              
              
              46,000
              
              
              8,000Installment
                  notes - NOARK
              
              
              39,000
              
              
              -Other
                  debt
              
              
              310
              
              
              227335,310
              
              
              191,727Less
                  current maturities
              
              
              1,365
              
              
              122$
              333,945
              
              $
              191,605
 
  12
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 **NOTE
        8 - DEBT - (Continued)**
 
 *Atlas
        Pipeline 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
        approximately $243.1 million, after underwriting commissions and other
        transaction costs. The Senior Notes are guaranteed by all of Atlas Pipeline’s
        existing subsidiaries, other than NOARK (see Note 18). Interest on the Senior
        Notes is payable semi-annually in arrears on June 15 and December 15, commencing
        on June 15, 2006. The Senior Notes are redeemable at any time on or after
        December 15, 2010 at specified 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 a make-whole redemption price.
        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 of Atlas
        Pipeline, upon certain asset sales if the net proceeds are not reinvested
        into
        Atlas Pipeline within specified time periods. The Senior Notes are junior
        in
        right of payment to the Atlas Pipeline 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 liens; engage in sale/leaseback
        transactions; incur additional indebtedness; declare or pay distributions;
        redeem, repurchase or retire equity interests or subordinated indebtedness;
        make
        investments; or merge, consolidate or sell substantially all of its assets.
        Atlas Pipeline is in compliance with these covenants as of March 31,
        2006.
 
 In
        connection with a registration rights agreement entered into by Atlas Pipeline
        upon issuance of the Senior Notes, Atlas Pipeline agreed to (a) file an exchange
        offer registration statement with the Securities and Exchange Commission
        by
        April 19, 2006, (b) cause the exchange offer registration statement to be
        declared effective by the Securities and Exchange Commission (“SEC”) by July 18,
        2006, and (c) cause the exchange offer to be consummated by August 17, 2006.
        If
        Atlas Pipeline 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 (See Note 18). Atlas Pipeline filed the exchange
        offer
        registration statement with the SEC on April 19, 2006.
 
 *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 $130.0 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 the adjusted London Interbank Offered Rate (“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.
  13
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 **NOTE
        8 - DEBT - (Continued)**
 
 The
        Wachovia credit facility requires the Company to maintain specified ratios
        of
        current assets to current liabilities 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 facility terminates
        in April 2011, when all outstanding borrowings must be repaid. At March 31,
        2006
        and September 30, 2005, $52.5 million and $9.5 million, respectively, were
        outstanding under this facility, including $6.5 million and $1.5 million,
        respectively, under letters of credit which are not reflected as borrowings
        on
        the Company’s consolidated balance sheet. At March 31, 2006 the Company’s
        weighted average interest rate on outstanding borrowings was 7.7%.
 
 *Installment
        notes - NOARK.*  At
        March 31, 2006, NOARK’s subsidiary, NOARK Pipeline Finance, L.L.C., had
        $39.0 million in principal amount outstanding of 7.15% notes due in 2018.
        The
        notes were acquired as part of Atlas Pipeline’s acquisition of NOARK on October
        31, 2005 and are allocated severally 100% to Southwestern (See Note 12).
        The
        notes are governed by an indenture dated June 1, 1998 for which UMB Bank,
        N.A. serves as trustee. Interest on the notes is payable semi-annually, in
        cash,
        in arrears on June 1 and December 1 of each year. The notes are
        subject to semi-annual redemption in installments of $0.6 million, plus accrued
        and unpaid interest. Additionally, at Southwestern’s option, these notes may be
        redeemed as of a particular payment date at their redemption price plus a
        make-whole premium and unpaid interest accrued to that date by giving the
        trustee at least 60 days notice. Under the NOARK partnership agreement, payments
        on the notes will be made from amounts otherwise distributable to Southwestern
        and, if those amounts are insufficient, Southwestern is required to make
        a
        capital contribution to NOARK. NOARK distributes available cash to the partners
        in accordance with their ownership interests after deduction of their respective
        portion of amounts payable on the notes (see Note 18).
 
 Annual
        debt principal payments over the next five years ending March 31 are as follows
        (in thousands):
  2007
              
              $
              1,3652008
              
              
              1,3232009
              
              
              1,2222010
              
              
              1,2002011
                  and thereafter
              
              
              330,200$
              335,310
  **NOTE
        9 - DERIVATIVE INSTRUMENTS**
 
 *Atlas
        America.* The
        Company from time to time enters into 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.
  14
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        9 - DERIVATIVE INSTRUMENTS - (Continued)**
 
 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 income
        in the
        month the hedged gas is sold. 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
        March
        31, 2006, the Company had 108 open natural gas futures contracts related
        to
        natural gas sales covering 11,452,000 dekatherms (“Dth”) (net to the Company) of
        natural gas, maturing through December 31, 2009 at a combined average settlement
        price of $8.94 per Dth. The Company recognized a gain of $1.4 million on
        settled
        contracts covering natural gas production for the three months and six months
        ended March 31, 2006. The Company recognized no gains or losses during the
        three
        months and six months ended March 31, 2006 for hedge ineffectiveness or as
        a
        result of the discontinuance of these cash flow hedges.
 
 *Atlas
        Pipeline.* Atlas
        Pipeline also enters into certain 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 is 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 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 will be recognized immediately into
        earnings. Atlas Pipeline recognized losses of $2.4 million and $669,000 related
        to the settlement of qualifying hedge instruments which are included in the
        Company’s consolidated statement of income for the three months ended March 31,
        2006 and 2005, respectively. Atlas Pipeline also recognized a gain of $1.2
        million and a loss of $224,000 related to the change in market value of
        non-qualifying or ineffective hedges which are included in the Company’s
        consolidated statement of income for the three months ended March 31, 2006
        and
        2005, respectively. Atlas Pipeline recognized losses of $8.0 million and
        $645,000 related to the settlement of qualifying hedge instruments which
        are
        included in the Company’s consolidated statement of income for the six months
        ended March 31, 2006 and 2005, respectively. Atlas Pipeline also recognized
        a
        gain of $860,000 and $216,000 related to the change in market value of
        non-qualifying or ineffective hedges which are included in the Company’s
        consolidated statement of income for the six months ended March 31, 2006
        and
        2005, respectively.
  15
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        9 - DERIVATIVE INSTRUMENTS - (Continued)**
 
 At
        March
        31, 2006 and September 30, 2005, the Company reflected net hedging liabilities
        on its balance sheets of $30.3  million
        and $46.7 million, respectively. Of the $2.9 million net loss in accumulated
        other comprehensive income (loss) at March 31, 2006, the Company will reclassify
        $800,000 of gains to its consolidated statements of income over the next
        twelve
        month period as these contracts expire, and $3.7 million of losses 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. Ineffective hedging gains or losses are recorded
        within its consolidated statements of income while the hedge contract is
        open
        and may increase or decrease until settlement of the contract.
  As
        of
        March 31, 2006, the Company (including Atlas Pipeline) had the following
        financial hedges in place:
 
 **Natural
        Gas Liquids Fixed - Price Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(1)Ended
                  March 31,
              
              
              (gallons)
              
              
              (per
                  gallon
              
              
              (in
                  thousands2007
              
              
              49,077,000
              
              $
              0.733
              
              $
              (9,269
              )2008
              
              
              36,099,000
              
              
              0.712
              
              
              (7,343
              )2009
              
              
              26,082,000
              
              
              0.701
              
              
              (5,208
              )2010
              
              
              6,426,000
              
              
              0.746
              
              
              (1,113
              )$
              (22,933
              )
 
 **Natural
        Gas Fixed - Price Swaps - Atlas** **(4)**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(3)Ended
                  March 31,
              
              (MMBTU)(2)
              
              (per
                  MMBTU)
              
              (in
                  thousands)2007
              
              
              1,349,700
              
              $
              10.760
              
              $
              8,2992008
              
              
              4,842,900
              
              
              8.760
              
              
              (11,153
              )2009
              
              
              4,039,100
              
              
              8.710
              
              
              (495
              )2010
              
              
              1,220,700
              
              
              8.350
              
              
              1,244$
              (2,105
              )
  **Natural
        Gas Fixed - Price Swaps**
  Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(3)Ended
                  March 31,
              
              (MMBTU)(2)
              
              (per
                  MMBTU)
              
              (in
                  thousands)2007
              
              
              3,530,000
              
              $
              7.530
              
              $
              (466
              )2008
              
              
              930,000
              
              
              7.257
              
              
              (2,021
              )2009
              
              
              120,000
              
              
              7.270
              
              
              (132
              )$
              (2,619
              )
 
  16
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        9 - DERIVATIVE INSTRUMENTS - (Continued)**
 
 **Natural
        Gas Basis Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Asset(3)Ended
                  March 31,
              
              
              (MMBTU)(2)
              
              
              (per
                  MMBTU)
              
              
              (in
                  thousands)2007
              
              
              3,870,000
              
              $
              (0.673
              )
              $
              (409
              )2008
              
              
              930,000
              
              
              (0.538
              )
              
              5412009
              
              
              120,000
              
              
              (0.555
              )
              
              45$
              177
 
 **Crude
        Oil Fixed - Price Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Strike
                  Price
              
              Liability(3)Ended
                  March 31,
              
              
              (barrels)
              
              
              (per
                  barrel)
              
              
              (in
                  thousand2007
              
              
              76,100
              
              $
              53.149
              
              $
              (1,198
              )2008
              
              
              80,400
              
              
              56.759
              
              
              (1,029
              )2009
              
              
              51,300
              
              
              60.019
              
              
              (437
              )2010
              
              
              27,000
              
              
              62.700
              
              
              (130
              )$
              (2,794
              )
 
 **Crude
        Oil Options**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Strike
                  Price
              
              Liability(3)Ended
                  March 31,
              
              
              (barrels)
              
              
              (per
                  barrel)
              
              
              (in
                  thousands)
              
              
              Option
                  Type2007
              
              
              9,900
              
              $
              60.000
              
              $
              -
              
              
              Puts
                  purchased2007
              
              
              9,900
              
              
              73.380
              
              
              -
              
              
              Calls
                  sold2008
              
              
              13,200
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2008
              
              
              13,200
              
              
              73.380
              
              
              -
              
              
              Calls
                  sold2009
              
              
              21,600
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2009
              
              
              21,600
              
              
              72.178
              
              
              -
              
              
              Calls
                  sold2010
              
              
              22,500
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2010
              
              
              22,500
              
              
              71.250
              
              
              -
              
              
              Calls
                  sold$
              -Total
                  net liability
              $
              (30,274
              )
   (1)
              
              Fair
                  value based upon management estimates, including forecasted forward
                  NGL
                  prices as a function of forward NYMEX natural gas and light crude
                  prices.(2)
              
              MMBTU
                  represents million British Thermal Units.(3)
              
              Fair
                  value based on forward NYMEX natural gas and light crude prices,
                  as
                  applicable.(4)
              
              Represents
                  ATLS’ hedged volumes. All others are related to Atlas
                  Pipeline.
 
  17
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        9 - DERIVATIVE INSTRUMENTS - (Continued)**
 
 The
        following table sets forth the book and estimated fair values of derivative
        instruments at the dates indicated (in thousands):
 
 **March
                  31, 2006**
              
              **September
                  30, 2005****Book
                  Value**
              
              **Fair
                  Value**
              
              **Book
                  Value**
              
              **Fair
                  Value**AssetsDerivative
                  instruments
              
              $
              15,909
              
              $
              15,909
              
              $
              20,963
              
              $
              20,963$
              15,909
              
              $
              15,909
              
              $
              20,963
              
              $
              20,963LiabilitiesDerivative
                  instruments
              
              $
              (46,183)
              
              $
              (46,183)
              
              $
              (67,625)
              
              $
              (67,625)$
              (46,183)
              
              $
              (46,183)
              
              $
              (67,625)
              
              $
              (67,625)$
              (30,274)
              
              $
              (30,274)
              
              $
              (46,662)
              
              $
              (46,662)
 
 **NOTE
        10 - OPERATING SEGMENT INFORMATION**
 
 The
        Company’s operations include four reportable operating segments.  In
        addition to the reportable operating segments, certain other activities are
        reported in the “Other” category.  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:
 
 **Three
                  Months Ended March 31, 2006**(in
                  thousands):Production
              
              Transmission,Well
              
              And
              
              Gathering
                  andDrilling
              
              
              Exploration
              
              
              Processing(a)
              
              
              Other(b)
              
              
              TotalRevenues
                  from external customers
              
              $
              50,883
              
              $
              22,866
              
              $
              110,349
              
              $
              7,958
              
              $
              192,056Revenues
                  from internal customers
              
              
              -
              
              
              -
              
              
              7,893
              
              
              -
              
              
              -Interest
                  income
              
              
              -
              
              
              -
              
              
              253
              
              
              42
              
              
              295Interest
                  expense
              
              
              -
              
              
              -
              
              
              6,316
              
              
              405
              
              
              6,721Depreciation,
                  depletion and amortization
              
              
              -
              
              
              4,200
              
              
              5,441
              
              
              461
              
              
              10,102Segment
                  profit (loss)
              
              
              5,970
              
              
              14,305
              
              
              10,158
              
              
              (12,400
              )
              
              18,033Goodwill
              
              
              6,389
              
              
              21,527
              
              
              110,632
              
              
              7,249
              
              
              145,797Segment
                  assets
              
              
              8,224
              
              
              268,511
              
              
              740,025
              
              
              43,132
              
              
              1,059,892
 
  18
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 
 **NOTE
        10 - OPERATING SEGMENT INFORMATION - (Continued)**
 
 **Three
                  Months Ended March 31, 2005**(in
                  thousands):Production
              
              Transmission,Well
              
              And
              
              Gathering
                  andDrilling
              
              
              Exploration
              
              
              Processing(a)
              
              
              Other(b)
              
              
              TotalRevenues
                  from external customers
              
              $
              41,451
              
              $
              13,959
              
              $
              42,344
              
              $
              3,247
              
              $
              101,001Revenues
                  from internal customers
              
              
              -
              
              
              -
              
              
              5,019
              
              
              -
              
              
              -Interest
                  income
              
              
              -
              
              
              -
              
              
              76
              
              
              6
              
              
              82Interest
                  expense
              
              
              -
              
              
              -
              
              
              1,134
              
              
              489
              
              
              1,623Depreciation,
                  depletion and amortization
              
              
              -
              
              
              3,114
              
              
              1,561
              
              
              106
              
              
              4,781Segment
                  profit (loss)
              
              
              4,892
              
              
              8,893
              
              
              4,668
              
              
              (5,146
              )
              
              13,307Goodwill
              
              
              6,389
              
              
              21,527
              
              
              2,305
              
              
              7,249
              
              
              37,470Segment
                  assets
              
              
              9,263
              
              
              194,287
              
              
              214,923
              
              
              32,961
              
              
              451,434**Six
                  Months Ended March 31, 2006**(in
                  thousands):Production
              
              
              Transmission,Well
              
              
              And
              
              
              Gathering
                  andDrilling
              
              
              Exploration
              
              
              Processing(a)
              
              
              Other(b)
              
              
              TotalRevenues
                  from external customers
              
              $
              93,028
              
              $
              46,952
              
              $
              237,682
              
              $
              13,502
              
              $
              391,164Revenues
                  from internal customers
              
              
              -
              
              
              -
              
              
              15,823
              
              
              -
              
              
              -Interest
                  income
              
              
              -
              
              
              -
              
              
              681
              
              
              63
              
              
              744Interest
                  expense
              
              
              -
              
              
              -
              
              
              12,033
              
              
              835
              
              
              12,868Depreciation,
                  depletion and amortization
              
              
              -
              
              
              8,677
              
              
              10,851
              
              
              898
              
              
              20,426Segment
                  profit (loss)
              
              
              10,982
              
              
              32,114
              
              
              20,358
              
              
              (26,811
              )
              
              36,643Goodwill
              
              
              6,389
              
              
              21,527
              
              
              110,632
              
              
              7,249
              
              
              145,797Segment
                  assets
              
              
              8,224
              
              
              268,511
              
              
              740,025
              
              
              43,132
              
              
              1,059,892**Six
                  Months Ended March 31, 2005**(in
                  thousands):Production
              
              
              Transmission,Well
              
              
              And
              
              
              Gathering
                  andDrilling
              
              
              Exploration
              
              
              Processing(a)
              
              
              Other(b)
              
              
              TotalRevenues
                  from external customers
              
              $
              72,009
              
              $
              28,618
              
              $
              84,414
              
              $
              6,654
              
              $
              191,695Revenues
                  from internal customers
              
              
              -
              
              
              -
              
              
              10,300
              
              
              -
              
              
              -Interest
                  income
              
              
              -
              
              
              -
              
              
              139
              
              
              56
              
              
              195Interest
                  expense
              
              
              -
              
              
              -
              
              
              2,304
              
              
              1,009
              
              
              3,313Depreciation,
                  depletion and amortization
              
              
              -
              
              
              5,918
              
              
              4,268
              
              
              467
              
              
              10,653Segment
                  profit (loss)
              
              
              8,570
              
              
              19,559
              
              
              15,361
              
              
              (16,289
              )
              
              27,201Goodwill
              
              
              6,389
              
              
              21,527
              
              
              2,305
              
              
              7,249
              
              
              37,470Segment
                  assets
              
              
              9,263
              
              
              194,287
              
              
              214,923
              
              
              32,961
              
              
              451,434
 
 (a)
              
              Includes
                  revenues and expenses from Atlas Pipeline’s Appalachia and Mid-Continent
                  operations.(b)
              
              Includes
                  revenues and expenses from well services and the Company’s transportation
                  operations which do not meet the quantitative threshold for reporting
                  segment information and general corporate expenses not allocable
                  to any
                  particular segment.
  19
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        10 - OPERATING SEGMENT INFORMATION - (Continued)**
 
 Operating
        profit (loss) per segment represents total revenues less costs and expenses
        attributable thereto, including interest, provision for possible losses and
        depreciation, depletion and amortization, excluding general corporate
        expenses.
 
 **NOTE
        11 - BENEFIT PLANS**
 
 In
        December 2004, the FASB issued SFAS No. 123R, *Share-Based
        Payment* (“SFAS
        No. 123R”). SFAS No. 123R is a revision of SFAS No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        No. 123”), and supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* (“APB
        No. 25”), and its related implementation guidance. On October 1, 2005,
        the Company adopted the provisions of SFAS No. 123R using the modified
        prospective method. SFAS No. 123R focuses primarily on accounting for
        transactions in which an entity obtains employee services in share-based
        payment
        transactions. The Statement 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. This requirement reduces net
        operating cash flows and increases net financing cash flows in periods after
        adoption. Total cash flow remains unchanged from what would have been reported
        under prior accounting rules.
  Prior
        to
        the adoption of SFAS No. 123R, the Company followed the intrinsic value
        method in accordance with APB No. 25 to account for its employee stock
        options. Accordingly, no compensation expense was recognized upon the 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. The adoption of SFAS No. 123R 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 six months ended March 31, 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 six months ended March 31, 2005 would have been reduced to the pro
        forma amounts indicated below (in thousands, except per share
        data):
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31, 2005**
              
              **March
                  31, 2005**Net
                  income, as reported
              
              $
              8,516
              
              $
              17,408Stock-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
              
              
              (78
              )
              
              (214
              )Pro
                  forma net income
              
              $
              8,438
              
              $
              17,194Net
                  income per common share:Basic
                  - as reported
              
              $
              .43
              
              $
              .87Basic
                  - pro forma
              
              $
              .42
              
              $
              .86Diluted
                  - as reported
              
              $
              .43
              
              $
              .87Diluted
                  - pro forma
              
              $
              .42
              
              $
              .86
  20
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 .
 **NOTE
        11 - BENEFIT PLANS - (Continued)**
 
 *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. In July 2005,
        options for 1,166,250 shares were issued under this Plan. In January 2006,
        additional options for 15,000 shares were issued. 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.  For the three months and six months ended
        March 31, 2006, the Company recorded compensation expense of $266,000 and
        $533,000. At March 31, 2006, the Company had unamortized compensation expense
        of
        $3.7 million.
 
 Transactions
        for stock options issued under the Plan are summarized as follows:
 
 **Three
                  Months and Six Months****Ended
                  March 31,****2006****Weighted**
              
              **Weighted****Average**
              
              **Average****Shares**
              
              **Exercise**
              
              **Contractual****Price**
              
              
              **Life
                  (Years)**Outstanding
                  - beginning of period
              
              
              1,166,250
              
              $
              25.47Granted
              
              
              15,000
              
              $
              42.76Exercised
              
              
              -
              
              $
              -0-Forfeited
              
              
              -
              
              $
              -0-Outstanding
                  - end of period
              
              
              1,181,250
              
              $
              25.69
              
              
              9.5Exercisable,
                  at end of period
              
              
              500,000
              
              $
              25.47
              
              
              9.5Available
                  for grant
              
              
              681,250Weighted
                  average fair value per share of optionsgranted
                  during the period
              
              
              
              
              $
              20.00
 
 
 The
        per
        share weighted average fair value of stock options granted during fiscal
        2006
        were 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. There
        were no stock options issued in the three months and six months ended March
        31,
        2005.
  21
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        11 - BENEFIT PLANS - (Continued)**
  Additionally,
        under the Plan, employees and 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 months service.
        The
        fair value of the grants awarded in total each year is being charged to
        operations over the requisite service periods. Upon termination of service
        by a
        grantee, all unvested units are forfeited. Non-cash compensation expense
        recognized during the three months ended March 31, 2006 and 2005 with respect
        to
        these units was $6,300 and $3,200, respectively. Non-cash compensation
        recognized during the six months ended March 31, 2006 and 2005 was $12,500
        and $6,300, respectively.
 The
          following table summarizes the activity of deferred units for the
          period:
 **Units**
                  
                  **Weighted
                      Average**
                    **Grant
                      Date Fair Value**Outstanding
                    - beginning of period
                  
                  
                  10,980
                  
                  $
                  13.67Granted
                  
                  
                  1,500
                  
                  $
                  46.71Vested
                  
                  
                  -
                  
                  
                  -Forfeited
                  
                  
                  -
                  
                  
                  -Outstanding
                    - end of period
                  
                  
                  12,480
                  
                  $
                  17.64
 *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
          and consultants are eligable to participate. 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 $2.2 million
          and $449,000 in compensation expense related to these grants and their
          associated distributions for the three months ended March 31, 2006 and
          2005,
          respectively, and $3.1 million and $808,000 for the six months ended March
          31,
          2006 and 2005, respectively.
  The
        following table represents the LTIP phantom unit activity for the periods
        indicated:
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Outstanding
                  - beginning of period
              
              
              110,128
              
              
              58,329
              
              
              109,706
              
              
              58,329Granted
              
              
              728
              
              
              66,977
              
              
              1,150
              
              
              66,977Vested
              
              
              -
              
              
              (105
              )
              
              -
              
              
              (105
              )Forfeited
              
              
              -
              
              
              (679
              )
              
              -
              
              
              (679
              )Outstanding
                  - end of period
              
              
              110,856
              
              
              124,522
              
              
              110,856
              
              
              124,522
 
 *Employee
        Stock Ownership Plan.* In June
        2005, in connection with the spin-off from RAI, the Company established an
        Employee Stock Ownership Plan (“ESOP”). 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 167,000 shares of RAI stock,
        of
        which 127,000 are allocated to participants. **** 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 March 31, 2006, there were
        76,500 shares allocated to participants and 22,500 shares which are unallocated.
        Compensation expense related to the plan amounted to $29,000 and $58,000
        for the
        three months and six months ended March 31, 2006, respectively. The fair
        value
        of unearned ESOP shares was $2.0 million at March 31, 2006 .
  22
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        11 - BENEFIT PLANS - (Continued)**
 
 *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
        March 31, 2006 and 2005, operations were charged $40,000 and $39,000, and
        during
        the six months ended March 31, 2006 and 2005, operations were charged $81,000
        and $79,000 ,
        respectively, with respect to this commitment.
 
 **NOTE
        12 − ACQUISITIONS BY ATLAS PIPELINE**
  **NOARK**
 
 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 owns a 75% interest in NOARK. NOARK’s assets included a Federal
        Energy Regulatory Commission (“FERC”)-regulated interstate pipeline and an
        unregulated natural gas gathering system. The remaining 25% interest in NOARK
        is
        owned by Southwestern, a wholly-owned subsidiary of Southwestern Energy Company
        (NYSE: SWN) (see Note 18).  Total
        consideration of $179.8 million, including $16.8 million for working capital
        adjustments and other related transaction costs, was funded through borrowings
        under Atlas Pipeline’s credit facility. The
        acquisition was accounted for using the purchase method of accounting under
        Statement of Financial Accounting Standards 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
              
              
              126,238Other
                  assets
              
              
              1,515Intangible
                  assets - customer contracts
              
              
              11,600Intangible
                  assets - customer relationships
              
              
              15,700Goodwill
              
              
              48,843Total
                  assets acquired
              
              
              231,699Accounts
                  payable and accrued liabilities
              
              
              (12,269
              )Total
                  debt
              
              
              (39,600
              )Total
                  liabilities assumed
              
              
              (51,869
              )Net
                  assets acquired
              
              
              179,830Less:
                  Cash and cash equivalents acquired
              
              
              (16,215
              )Net
                  cash paid for acquisition
              
              $
              163,615
 
  23
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        12 − ACQUISITIONS BY ATLAS PIPELINE - (Continued)**
 
 Due
        to
        its recent date of acquisition, 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 recorded goodwill in connection with this acquisition as a result
        of
        NOARK’s significant cash flow and its strategic industry and geographic
        position. Atlas Pipeline’s 75% ownership interest in the results of NOARK’s
        operations is included within its consolidated financial statements from
        its
        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):
 
 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 13), and the issuance of $250.0 million of 8.125%
        senior
        notes (See Note 8), had occurred on October 1, 2004. 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 October 1, 2004 or
        the
        results that will be attained in the future (shown in thousands except per
        share
        amounts):
  24
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
 
 **NOTE
        12 − ACQUISITIONS BY ATLAS PIPELINE - (Continued)**
  **Three
                    Months Ended**
                
                **Six
                    Months Ended****March
                    31, 2005**
                
                **March
                    31, 2005****As**
                
                **Pro
                    Forma**
                
                **Pro**
                
                **As**
                
                **Pro
                    Forma**
                
                **Pro****Reported**
                
                **Adjustments**
                
                **Forma**
                
                **Reported**
                
                **Adjustments**
                
                **Forma**Revenues
                
                $
                101,001
                
                $
                58,661
                
                $
                159,662
                
                $
                191,695
                
                $
                135,408
                
                $
                327,103Net
                    income
                
                
                8,516
                
                
                (318
                )
                
                8,198
                
                
                17,408
                
                
                (536
                )
                
                16,872Net
                    income per common share outstanding - basic
                
                
                .43
                
                
                (.02
                )
                
                .41
                
                
                .87
                
                
                (.03
                )
                
                .84Weighted
                    average common shares - outstanding basic
                
                
                20,000
                
                
                -
                
                
                20,000
                
                
                20,000
                
                
                -
                
                
                20,000Net
                    income per common share - diluted
                
                
                .43
                
                
                (.02
                )
                
                .41
                
                
                .87
                
                
                (.03
                )
                
                .84Weighted
                    average common shares - outstanding diluted
                
                
                20,007
                
                
                -
                
                
                20,007
                
                
                20,007
                
                
                -
                
                
                20,007
  **NOTE
        13 - ATLAS PIPELINE OFFERINGS**
 
 In
        November 2005, Atlas Pipeline sold 2.7 million common units, plus 330,000
        common
        units in December 2005 pursuant to an option exercised by the underwriters.
        The
        sale of the units resulted in net proceeds of $123.7 million, including a
        $2.7
        million contribution from the Company as general partner and after deducting
        underwriting discounts, commissions and estimated offering expenses of $6.4
        million. Atlas Pipeline used the net proceeds of the offering to repay a
        portion
        of the amounts outstanding under its credit facility.
 
 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, with aggregate proceeds of $30.0 million.
        Atlas Pipeline has the right, subject to specified conditions, before June
        11,
        2006, to require Sunlight Capital Partners to purchase an additional 10,000
        preferred units on the same terms. 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. The
        Company’s interest in Atlas Pipeline decreased to 14.1% as a result of these
        offerings.
 
 The
        preferred units are reflected on the Company’s consolidated balance sheet in
        Minority Interest and recorded at the amount of net proceeds received less
        an
        imputed dividend cost. The imputed dividend cost is the result of preferred
        units not having a dividend yield during the first year after their issuance
        on
        March 13, 2006. The initial imputed dividend cost of $1.9 million on the
        preferred units was recorded within accrued liabilities on the consolidated
        balance sheet and is based upon the present value of the net proceeds received
        using the 6.5% stated yield commencing March 13, 2007. The imputed dividend
        cost
        will be amortized for the period from issuance of the preferred units through
        March 13, 2007, and the amortization will be presented as a reduction of
        net
        income. Amortization of the imputed dividend cost for the three months ended
        March 31, 2006 was $95,000. 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 in determining net income attributable
        to common unitholders and the general partner.
 
 **NOTE
        14 - 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. Through March 31, 2006, the Company
        repurchased 8,835 shares at a cost of $548,000.
  25
  **ATLAS
        AMERICA, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)**
 **March
        31, 2006**
 (Unaudited)
  **NOTE
        15 - ATLAS PIPELINE HOLDINGS INITIAL PUBLIC OFFERING**
  In
        January 2006, the Company's wholly-owned subsidiary, Atlas Pipeline
        Holdings, L.P. ("AP Holdings"), filed a registration statement with the
        Securities and Exchange Commission for an initial public offering of 3,600,000
        common units, representing an approximate 17.1% limited partner interest
        in it.
        Upon completion of this offering, AP Holdings will own the general partner
        interest, all of the incentive distribution rights and an approximate 12%
        limited partner interest in Atlas Pipeline.
  **NOTE
        16 - COMMON STOCK SPLIT**
 
 On
        February 6, 2006, the Company’s Board of Directors authorized 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 have been restated in the accompanying financial statements and notes
        to
        the consolidated financial statements to reflect this split.
 
 **NOTE
        17 - PROPOSED PUBLIC OFFERING**
 
 On
        February 27, 2006, the Company
        announced that it intends to transfer to a newly-formed wholly-owned limited
        liability company subsidiary of the Company substantially all of its natural
        gas
        and oil exploration and production assets. The Company intends to make a
        registered initial public offering of a minority interest, estimated to be
        20%,
        in the newly-formed subsidiary.
 
 **NOTE
        18 - SUBSEQUENT EVENTS**
 
 On
        May 2,
        2006, Atlas Pipeline acquired the remaining 25% equity interest in NOARK
        from
        Southwestern Energy Company. Prior to this transaction, Atlas Pipeline owned
        a
        75% equity ownership interest in NOARK, which was acquired in October 2005
        from
        Enogex, Inc. Total consideration for the acquisition of $65.5 million, net
        of
        approximately $3.5 million for working capital purposes, was funded through
        borrowings under Atlas Pipeline’s credit facility. In connection with this
        acquisition, Southwestern Energy Company acquired the issuer of the NOARK
        notes
        and agreed to retain the obligation for the outstanding NOARK notes. As a
        result, neither NOARK nor Atlas Pipeline have any further liability in
        connection with the installment notes .
  On
        May 4, 2006, Atlas Pipeline issued an additional $35.0 million of senior
        unsecured notes due 2015 in a private placement at 103% of par value for
        net
        proceeds of $36.6 million, including accrued interest and net of initial
        purchaser’s discount and other transaction costs. Atlas Pipeline used the net
        proceeds from the private placement to partially repay borrowings under its
        credit facility made in connection with the recent acquisition of the remaining
        25% interest in NOARK. As part of the offering, NOARK and its subsidiaries
        became guarantors of the senior notes.
 
 On
        May 9,
        2006, Atlas Pipeline has agreed to sell approximately $20.0 million of its
        common units in a public offering under its previously filed shelf
        registration statement.  Atlas Pipeline will primarily utilize the net
        proceeds from the sale to repay a portion of borrowings under its credit
        facility in connection with its recent aquisition of the remaining 25% interest
        in NOARK.
  26
  
 **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***
 
 During
        the three months and six months ended March 31, 2006, we continued to grow
        our
        operations, increasing our total assets, revenues, number of wells drilled
        and
        number of wells operated.
 
 Our
        gross
        revenues depend, to a significant extent, on the price of natural gas and
        oil,
        which can fluctuate significantly.  We seek to balance this volatility with
        the more stable net income from our well drilling and well servicing operations
        which are principally fee-based.  Our business strategy for increasing our
        reserve base includes acquisitions of undeveloped properties or companies
        with
        significant amounts of undeveloped property.  At March 31, 2006, we had
        $77.5 million available under our credit facility, which could be employed
        to
        finance such acquisitions.
 
 ***Spin-off
        by Resource America***
 
 On
        June
        30, 2005, Resource America, Inc. (NASDAQ: REXI), or RAI, distributed its
        remaining 10.7 million shares of us to its stockholders in the form of a
        tax-free dividend. Each stockholder of RAI received 0.59367 shares of our
        common
        stock for each share of RAI common stock owned on June 24, 2005, the record
        date. Although the distribution itself will be tax-free to RAI’s stockholders,
        as a result of the deconsolidation there may be some tax liability arising
        from
        prior unrelated corporate transactions among us and some of our subsidiaries.
        Any liability arising from this transaction will be paid by us to RAI. In
        addition, we were required to make a non-recurring income tax payment to
        RAI, of
        $1.2 million associated with the spin-off.
 
 ***Recent
        Developments***
  The
        Company
 
 On
        January 12, 2006, our subsidiary, Atlas Pipeline Holdings, L.P. (“Atlas
        Holdings”), filed a registration statement with the Securities and Exchange
        Commission for an initial public offering of 3.6 million common units,
        representing an approximate 17% limited partner interest in it. Upon completion
        of this offering, Atlas Holdings will own the general partner interest, all
        of
        the incentive distribution rights and an approximate 12.8% limited partner
        interest in Atlas Pipeline.
  On
        February 6, 2006, our Board of Directors approved a three-for-two stock split
        effected in the form of a 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.
  27
  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 $130.0 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 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 March 31, 2006 and September 30,
        2005,
        $52.5 million and $9.5 million, respectively, were outstanding under this
        facility, including $6.5 million and $1.5 million, respectively, under letters
        of credit which are not reflected as borrowings on the Company’s consolidated
        balance sheet. At March 31, 2006, the Company’s weighted average interest rate
        on outstanding borrowings was 7.7%.
 
 Atlas
        Pipeline
 
 On
        October 31, 2005, Atlas Pipeline acquired all of the outstanding equity
        interests in a subsidiary of OGE Energy Corp., which owns a 75% operating
        interest in NOARK Pipeline System, Limited Partnership, or NOARK. NOARK’s assets
        include a FERC-regulated interstate pipeline and an unregulated natural gas
        gathering system. Total consideration of $179.8 million, including $16.8
        million
        for working capital adjustments and other related transaction costs, was
        funded
        through borrowings under Atlas Pipeline’s amended credit facility. The remaining
        25% interest in NOARK is owned by Southwestern Energy Pipeline Company
        (“Southwestern”), a wholly-owned subsidiary of Southwestern Energy
        Company.
 
 On
        November 28, 2005, Atlas Pipeline sold 2,700,000 limited partner units in
        a
        public offering for gross proceeds of $113.4 million. In addition, pursuant
        to
        an option granted to the underwriters of the offering, Atlas Pipeline sold
        330,000 limited partner units on December 27, 2005 for gross proceeds of
        $13.9
        million, or aggregate total gross proceeds of $127.3 million including the
        November 2005 offering. The units were issued under Atlas Pipeline’s previously
        filed Form S-3 shelf registration statement. The sale of the units resulted
        in
        net proceeds of approximately $120.9 million, after underwriting commissions
        and
        other transaction costs. Atlas Pipeline primarily utilized the net proceeds
        from
        the sale of the units to repay a portion of the amounts due under its credit
        facility.
  In
        December 2005, the Atlas Pipeline issued $250.0 million of 10-year, 8.125%
        senior unsecured notes, or Senior Notes, in a private placement transaction
        pursuant to Rule 144A and Regulation S under the Securities Act of 1933 for
        net
        proceeds of approximately $243.1 million, after underwriting commissions
        and
        other transaction costs. Interest on the Senior Notes is payable semi-annually
        in arrears on June 15 and December 15, commencing on June 15, 2006. The Senior
        Notes are redeemable at any time on or after December 15, 2010 at certain
        redemption prices, together with accrued an unpaid interest to the date of
        redemption. The Senior Notes are also redeemable at any time prior to December
        15, 2010 at a make-whole redemption price. 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 with
        which
        the net proceeds are not reinvested into Atlas Pipeline. The Senior Notes
        are
        junior in right of payment to the Atlas Pipeline secured debt, including
        Atlas
        Pipeline’s obligations under is credit facility. Atlas Pipeline utilized the net
        proceeds principally to repay indebtedness under its credit
        facility.
  28
  
 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, with aggregate proceeds of $30.0 million.
        Atlas Pipeline has the right, subject to specified conditions, before June
        11,
        2006, to require Sunlight Capital Partners to purchase an additional 10,000
        preferred units on the same terms. 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 agreed to file a registration statement to cover the resale
        of the common units underlying the preferred units. The net proceeds from
        the
        issuance of the preferred units will be used to fund a portion of its capital
        expenditures in 2006, including the construction of the Sweetwater gas plant
        and
        related gathering system.
 
 The
        preferred units are reflected on our consolidated balance sheets in Minority
        Interest and recorded at the amount of net proceeds received less an imputed
        dividend cost. The imputed dividend cost is the result of preferred units
        not
        having a dividend yield during the first year after their issuance on March
        13,
        2006. The initial imputed dividend cost of $1.9 million on the preferred
        units
        was recorded within accrued liabilities on the consolidated balance sheet
        and is
        based upon the present value of the net proceeds received using the 6.5%
        stated
        yield commencing March 13, 2007. The imputed dividend cost will be amortized
        for
        the period from issuance of the preferred units through March 13, 2007, and
        the
        amortization will be presented as a reduction of net income. Amortization
        of the
        imputed dividend cost for the three months ended March 31, 2005 was $95,000.
        Distributions 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 in determining net income attributable to common unitholders and
        the
        general partner.
  **Results
        of Operations for the Three Months and Six Months Ended March 31, 2006 and
        2005**
 
 ***Well
        Drilling***
 
 Our
        well
        drilling revenues and costs and expenses incurred represent the billings
        and
        costs associated with the completion of wells for drilling 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**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Average
                  drilling revenue per well
              
              $
              291
              
              $
              200
              
              $
              257
              
              $
              210Average
                  drilling cost per well
              
              
              253
              
              
              174
              
              
              223
              
              
              183Average
                  drilling gross profit per well
              
              $
              38
              
              $
              26
              
              $
              34
              
              $
              27Gross
                  profit margin
              
              $
              6,637
              
              $
              5,407
              
              $
              12,134
              
              $
              9,392Gross
                  margin percent
              
              
              13%
              
              
              13%
              
              
              13%
              
              
              13%Net
                  wells drilled(1)
              
              
              175
              
              
              207
              
              
              362
              
              
              343
 
  (1)
              
              Reflects
                  net wells drilled for investment partnerships.
 
  29
  
 Our
        well
        drilling gross margin was $6.6 million and $12.1 million in the three months
        and
        six months ended March 31, 2006, an increase of $1.2 million (23%) and $2.7
        million (29%) from $5.4 million and $9.4 million in the three months and
        six
        months ended March 31, 2005.  During the three months ended March 31, 2006,
        the increase of $1.2 million in gross margin was attributable to an increase
        in
        the gross profit per well ($2.4 million) partially offset by a decrease in
        the
        number of wells drilled ($1.2 million). In the six months ended March 31,
        2006,
        the increase of $2.7 million was attributable to an increase in the gross
        profit
        per well ($2.1 million) and an increase in the number of wells drilled
        ($637,000). 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 six months ended March 31, 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. In addition, it should be noted that “Liabilities associated with
        drilling contracts” on our balance sheet includes $8.8 million of funds raised
        in our drilling investment programs in calendar 2005 that have not been applied
        to the completion of wells as of March 31, 2006 due to the timing of drilling
        operations, and thus had not been recognized as well drilling revenue.  We
        expect to recognize this amount as revenue in the remainder of fiscal 2006.
        We
        completed our fundraising for calendar 2005 in November 2005 with a total
        of
        $52.5 million raised and plan to raise approximately $148 million to complete
        our $200 million registered partnership offering in the third fiscal quarter
        of
        2006. We anticipate favorable oil and gas prices will continue to favorably
        impact our fundraising and therefore our drilling revenues in fiscal
        2006.
 
 ***Gas
        and Oil
        Production***
 ******
 The
        following table sets forth information relating to our production revenues,
        production volumes, sales prices, production costs and depletion for the
        periods
        indicated:
 
 **Three
                  Months Ended**
              
              **Six
                  Months Ended****March
                  31,**
              
              **March
                  31,****2006**
              
              
              **2005**
              
              
              **2006**
              
              
              **2005**Production
                  revenues (in thousands):Gas(1)
              
              $
              20,492
              
              $
              12,285
              
              $
              42,344
              
              $
              24,982Oil
              
              $
              2,365
              
              $
              1,647
              
              $
              4,592
              
              $
              3,589Production
                  volume:Gas (mcf/day)(1)
                  (3)
              
              
              20,866
              
              
              19,315
              
              
              21,170
              
              
              19,806Oil (bbls/day)
              
              
              423
              
              
              406
              
              
              427
              
              
              427Total (mcfe/day)(3)
              
              
              23,404
              
              
              21,751
              
              
              23,732
              
              
              22,368Average
                  sales prices:Gas (per mcf)(3) (4)
              
              $
              10.91
              
              $
              7.07
              
              $
              10.99
              
              $
              6.93Oil (per bbl)(3)
              
              $
              62.13
              
              $
              45.06
              
              $
              59.07
              
              $
              46.18Production
                  costs(2):As a percent of production revenues
              
              
              8
              %
              
              12
              %
              
              8
              %
              
              10
              %Per
                  mcfe(3)
              
              $
              .90
              
              $
              .86
              
              $
              .84
              
              $
              .71Depletion
                  per mcfe(3)
              
              $
              1.98
              
              $
              1.41
              
              $
              2.00
              
              $
              1.34
 
  30
   (1)
              
              Excludes
                  sales to landowners.(2)
              
              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.(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
                  $9.37 and
                  $10.24 for the three months and six months ended March 31, 2006.
                  There
                  were no financial hedges in the three months and six months ended
                  March
                  31, 2005.
 
 Our
        natural gas revenues were $20.5 million and $42.3 million in the three months
        and six months ended March 31, 2006, an increase of $8.2 million (66%) and
        $17.4 million (69%) from $12.3 million and $25.0 million in the three months
        and
        six months ended March 31, 2005.  The increase in the three months and
        six months ended March 31, 2006 was attributable to an increase in the average
        sales price of natural gas of 54% and 59% and an increase of 8% and 7% in
        the
        volume of natural gas produced in the three months and six months ended March
        31, 2006. The $8.2 million increase in gas revenues in the three months ended
        March 31, 2006 as compared to the prior period consisted of $6.7 million
        attributable to increases in natural gas sales prices, and $1.5 attributable
        to
        increased production volumes. The $17.4 million increase in natural gas revenues
        in the six months ended March 31, 2006 as compared to the prior year period
        consisted of $14.6 million attributable to increases in natural gas sales
        prices
        and $2.7 million attributable to increased production volumes.
  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 fiscal 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 $2.4 million and $4.6 million in the three months and six months
        ended March 31, 2006, an increase of $718,000 (44%) and $1.0 million (28%)
        from
        $1.6 million and $3.6 million in the three months and six months ended March
        31,
        2005, primarily due to an increase in the average sales price of oil of 38%
        and
        28% for the three months and six months ended March 31, 2006 as compared
        to the
        prior year similar periods. The $718,000 increase in oil revenues in three
        months ended March 31, 2006 as compared to the prior period consisted of
        $624,000 attributable to increases in sales prices and an increase of $94,000
        attributable to increased production volumes. The $1.0 million increase in
        oil
        revenues for the six months ended March 31, 2006 as compared to the prior
        year
        period consisted of $998,000 attributable to increases in sales prices and
        $2,000 attributable to increased production volumes.
 
 Our
        production costs were $1.9 million and $3.6 million in the three months and
        six
        months ended March 31, 2006, an increase of $226,000 (13%) and $750,000 (26%)
        from $1.7 million and $2.9 million in the three months and six months ended
        March 31, 2005.  These increases include an increase in pumping labor and
        maintenance costs associated with an increase in the number of wells we own
        and
        operate from the prior year period. The decrease in production costs as a
        percent of production revenues in the three months and six months ended March
        31, 2006 as compared to March 31, 2005 was due to an increase in our average
        sales price which more than offset the slight increase in production costs
        per
        mcfe.
 
 ***Transmission,
        Gathering and Processing***
 
 Our
        transmission, gathering and processing revenues and related expenses for
        the
        three months ended March 31, 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.
  31
  Our
        revenues increased $69.4 million (161%) and $154.9 million (179%) to $112.6
        million and $241.4 million for the three months and six months ended March
        31,
        2006 from $43.2 million and $86.5 million for the three months and six months
        ended March 31, 2005, primarily due to contributions from Elk City and NOARK
        and
        an increase in commodity prices.
 
 Our
        expenses increased $53.9 million (144%) and $128.2 million (175%) to $91.4
        million and $201.3 million for the three months and six months ended March
        31,
        2006 from $37.5 million and $73.1 million for the three months and six months
        ended March 31, 2005, primarily due to acquisitions and an increase in commodity
        prices.
 
 ***Drilling
        Management Fee***
 
 Our
        drilling management fee represents supervision and administrative fees earned
        for drilling wells for our investment partnerships. Due to a change in our
        drilling agreement; we now classify these fees as revenue. In the previous
        year
        these fees were classified as reimbursements of our general and administrative
        costs in accordance with the then existing drilling agreement .
 
 ***Well
        Services***
 
 Our
        well
        services revenues were $2.8 million and $5.3 million in the three months
        and six
        months ended March 31, 2006, an increase of $416,000 (18%) and $728,000 (16%)
        from $2.3 million and $4.6 million in the three months and six months ended
        March 31, 2005. These increases resulted from an increase in the number of
        wells
        operated for our investment partnerships due to additional wells drilled
        in the
        twelve months ended March 31, 2006.
 
 Our
        well
        services expenses were $1.8 and $3.3 million in the three months and six
        months
        ended March 31, 2006, an increase of $450,000 (34%) and $746,000 (30%) from
        $1.3
        million and $2.5 million in the three months and six months ended March 31,
        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 $10.2 million and $18.2 million
        in the
        three months and six months ended March 31, 2006, an increase of $8.7 million
        and $15.1 million from $1.5 million and $3.1 million in the three months
        and six
        months ended March 31, 2005. 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 $8.7 million in the three months ended March 31, 2006 is principally
        attributable the following:
  •
              
              general
                  and administrative expenses related to Atlas Pipeline’s operations
                  increased $3.1 million primarily as a result of Atlas Pipeline’s
                  acquisitions of Elk City on April 14, 2005 and NOARK on October
                  31, 2005,
                  therefore, we had no such expenses in the quarter ended March 31,
                  2005. In
                  addition, general and administrative expense reimbursements from
                  our
                  investment partnerships decreased by $5.4 million as prior year
                  amounts
                  were reduced by reimbursements and credits from our drilling partnerships.
                  The reimbursements are now included in revenue as drilling management
                  fees
                  in accordance with a change in our drilling
                  agreements.
 
  32
  
 The
        increase of $15.1 million in the six months ended March 31, 2006 is principally
        attributed to the following:
 
 •
              
              general
                  and administrative expenses related to Atlas Pipeline’s Mid-Continent
                  operations were $5.9 million, an increase of $4.6 million primarily
                  attributable to costs associated with operations of Atlas Pipeline’s
                  acquisitions of Elk City and NOARK,•
              
              general
                  and administrative expense reimbursements from our investment partnerships
                  decreased by $6.5 million as prior year amounts were reduced by
                  reimbursements and credits from our drilling partnerships. The
                  reimbursements are now included in revenue as drilling management
                  fees in
                  accordance with a change in our drilling agreements,•
              
              salaries
                  and wages increased $1.1 million due to an increase in executive
                  salaries
                  and in the number of employees as a result of our spin-off from
                  RAI,
  •
              
              professional
                  and legal fees increased $2.0 million primarily due to higher audit
                  fees
                  and implementation of Sarbanes-Oxley Section 404
                  compliance,•
              
              expense
                  recognized in connection with our non-cash stock compensation was
                  $532,000; there were no such expenses in the prior year similar
                  period;
                  and•
              
              directors’
                  fees increased $443,000 as a result of our spin-off from
                  RAI.
 
 Our
        depletion of oil and gas properties as a percentage of oil and gas revenues
        was
        18% in the three months and six months ended March 31, 2006, compared to
        19% in
        the three months and six months ended March 31, 2005. Depletion expense per
        mcfe
        was $1.98 and $2.00 in the three months and six months ended March 31, 2006,
        an
        increase of $.57 (40%) and $.66 (49%) per mcfe from $1.41 and $1.34 in the
        three
        months and six months ended March 31, 2005. Increases in our depletable basis
        and production volumes caused depletion expense to increase $1.4 million
        (52%)
        and $3.1 million (58%) to $4.2 million and $8.6 million in the three months
        and
        six months ended Mach 31, 2006 compared to $2.8 million and $5.5 million
        in the
        three months and six months ended March 31, 2005. 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 $3.9 million (192%) and $6.6 million (127%), to
        $5.9 million and $11.8 million in the three months and six months ended March
        31, 2006 compared to $2.0 million and $5.2 million in the three months and
        six
        months ended March 31, 2005. This was primarily due to the increased asset
        base
        associated with Atlas Pipeline’s acquisitions.
 
 Our
        interest expense was $6.7 million and $12.9 million in the three months and
        six
        months ended March 31, 2006, an increase of $5.1 million and $9.6 million
        from
        $1.6 million and $3.3 million in the three months and six months ended March
        31,
        2005. This increase resulted primarily from an increase in outstanding
        borrowings by Atlas Pipeline to fund the acquisitions of Elk City and NOARK.
        Atlas Pipeline also incurred interest expense of $5.3 million and $5.9 million
        in the three months and six months ended March 31, 2006 related to its December
        2005 issuance of $250 million Senior Notes. We had no such expense in the
        three
        months or six months ended March 31, 2005.
 
 At
        March
        31, 2006, we own 14% of the partnership interest in Atlas Pipeline through
        our
        general partner interest and limited partner units. Our ownership interest
        decreased 10% from 24% at March 31, 2005 as a result of the completion by
        Atlas
        Pipeline of common unit offerings in June and November 2005. Our interest
        also
        decreased on March 13, 2006 due to Atlas Pipeline’s issuance of $30 million 6.5%
        cumulative preferred units.
  33
  
 Because
        we control the operations of Atlas Pipeline, we include it in our consolidated
        financial statements and show the ownership by the public as a minority
        interest.  The minority interest in Atlas Pipeline’s earnings was $6.3
        million and $13.0 million for the three months and six months ended March
        31,
        2006, as compared to $2.5 million and $9.7 million for the three months and
        six
        months ended March 31, 2005, an increase of $3.8 million and $3.3 million.
        These
        increases were a result of an increase in the percentage interest of public
        unit
        holders and an increase in Atlas Pipeline’s net income, as discussed above.
 
 Our
        effective tax rate increased to 37% for the three months and six months ended
        March 31, 2006 as compared to 36% for the three months and six months ended
        March 31, 2005 as a result of a reduction in statutory depletion benefits
        relative to increased net income.
 
 **Liquidity
        and Capital Resources**
 
 *General.* We
        fund our exploration 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,
        Atlas Pipeline’s credit facility and the sale of Atlas Pipeline’s equity. 
The following table sets forth our sources and uses of cash (in
        thousands):
 
 **Six
                  Months Ended****March
                  31,****2006**
              
              
              **2005**Provided
                  by operations
              
              $
              6,564
              
              $
              31,962Used
                  in investing activities
              
              
              (227,036
              )
              
              (41,590
              )Provided
                  by (used in) financing activities
              
              
              244,989
              
              
              (2,503
              )Increase
                  (decrease) in cash and cash equivalents
              
              $
              24,517
              
              $
              (12,131
              )
 
 We
        had
        $42.8 million in cash and cash equivalents at March 31, 2006, as compared
        to
        $18.3 million at September 30, 2005. Our ratio of earnings from continuing
        operations before income taxes, minority interest and interest expense to
        fixed
        charges was 5 to 1 in the six months ended March 31, 2006 as compared to
        12 to 1
        in the six months ended March 31, 2005.  We had working capital of $1.8
        million at March 31, 2006, an increase of $78.6 million from September 30,
        2005.  The increase in our working capital is due to an increase in cash
        and accounts receivable as a result of our Mid-Continent operations, including
        the NOARK acquisition, and a decrease in our accrued hedge liabilities and
        liabilities associated with our drilling partnerships. This was partially
        offset
        by an increase in accounts payable and accrued liabilities.
 
 Our
        long-term debt (including current maturities) was 229% and 159% of our total
        equity at March 31, 2006 and September 30, 2005, respectively.  Since
        September 30, 2005, total stockholders’ equity has increased by $26.1 million
        and total debt has increased by $143.6 million. Stockholders’ equity increased
        principally due to net earnings of $23.1 million for the six months ended
        March
        31, 2006. The increase in long-term debt relates to increased borrowings
        to fund
        Atlas Pipeline’s acquisitions and our drilling operations.
 
 On
        April
        27, 2006 we increased the borrowing base under our credit facility to $130.0
        million.  At March 31, 2006, we had $77.5 million available on this credit
        facility.  Atlas Pipeline had no outstanding balance on its $225.0 million
        credit facility and $214.0 million available at March 31, 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 $25.4 million in the six months
        ended
        March 31, 2006 to $6.6 million from $32.0 million in the six months ended
        March
        31, 2006, substantially as a result of the following:
  34
  •
              
              an
                  increase in net income before depreciation and amortization of
                  $16.1
                  million in the six months ended March 31, 2006 as compared to the
                  prior
                  year period, principally as a result of income included in our
                  financial
                  statements from our acquisitions, higher natural gas and oil prices
                  and
                  drilling profits;•
              
              an
                  increase in non-cash items of $3.1 million related to losses on
                  our hedge
                  values and compensation expense resulting from grants under long-term
                  incentive plans; and•
              
              changes
                  in minority interests and distributions paid to minority interests
                  decreased cash flow by $4.3 million due to an increase in Atlas
                  Pipeline's
                  earnings and our decreased ownership percentage, offset by higher
                  distributions paid to minority interests, and•
              
              changes
                  in our deferred tax liability increased cash flow by $614,000 as
                  compared
                  to the six months ended March 31, 2005 which reflects the impact
                  of timing
                  differences between accounting and tax records, and•
              
              changes
                  in operating assets and liabilities decreased operating cash flow
                  by $41.0
                  million in the six months ended March 31, 2006, compared to the
                  six months
                  ended March 31, 2005.
  This
        decrease is primarily a result of the following:
  •
                
                a
                    decrease of $3.6 million in accounts payable and accrued
                    liabilities•
                
                a
                    decrease of $29.8 million in liabilities associated with our
                    drilling
                    contracts, our level of liabilities associated with drilling
                    contracts is
                    dependent upon the remaining amount of our drilling obligations
                    at any
                    balance sheet date, which is dependent upon the timing of funds
                    raised
                    through our investment partnerships.•
                
                an
                    increase of $1.6 million in accounts receivable and prepaid
                    expenses
  *Cash
        flows from investing activities.* **** Cash
        used
        in our investing activities increased $185.4 million in the six months ended
        March 31, 2006 to $227.0 million from $41.6 million in the six months ended
        March 31, 2005 primarily as a result of the following:
 
 •
              
              cash
                  used in Atlas Pipeline’s acquisition of NOARK was $163.6 million; and•
              
              capital
                  expenditures increased $23.3 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 increased $247.5 million in the six
        months
        ended March 31, 2006 to $245.0 million from cash used of $2.5 million in
        the six
        months ended March 31, 2005, as a result of the following:
 
 •
              
              payments
                  to affiliate primarily related to our share of income taxes included
                  in
                  RAI’s income tax return decreased by $19.4 million in the six months
                  ended
                  March 31, 2006, there was no such payment made in the six months
                  ended
                  March 31, 2006, as a result of our spin-off from
                  RAI;•
              
              net
                  borrowings on debt increased by $78.7 million in the six months
                  ended
                  March 31, 2006 as compared to the prior year similar period principally
                  as
                  a result of the issuance of Atlas Pipeline’s Senior Notes partially offset
                  by payments on borrowings associated with the acquisition of NOARK;•
              
              we
                  received aggregate proceeds of $151.0 million from Atlas Pipeline’s
                  November 2005 and March 2006 common and preferred unit offerings;
                  there
                  were no such offerings in the first half of 2005;•
              
              an
                  increase in other assets of $1.7 million related to financing costs
                  associated with Atlas Pipeline’s Senior
                  Notes.
 
  35
  
 *Capital
        Requirements:* During
        the six months ended March 31, 2006, our capital expenditures related primarily
        to investments in our drilling partnerships and pipeline expansions, in which
        we
        invested $32.1 million and $30.4 million, respectively.  For the three
        months and six months ended March 31, 2006 and the remaining quarters of
        fiscal
        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 two 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 $200.0 million in
        fiscal 2006 through drilling partnerships.  Through the six months ended
        March 31, 2006 we had raised $52.5 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.
 
 **Contractual
        Obligations and Commercial Commitments**
 
 The
        following table summarizes our contractual obligations at March 31, 2006.
 
 Payments
                  Due By Period(in
                  thousands)Less
                  than
              
              2
                  -
                  3
              
              4
                  -
                  5
              
              After
                  5Contractual
                  cash obligations:
              
              
              Total
              
              
              1
                  Year
              
              
              Years
              
              
              Years
              
              
              YearsLong-term
                  debt(1)
              
              $
              335,310
              
              $
              1,365
              
              $
              2,545
              
              $
              2,400
              
              $
              329,000Secured
                  revolving credit facilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Operating
                  lease obligations
              
              
              4,719
              
              
              1,851
              
              
              2,341
              
              
              525
              
              
              2Capital
                  lease obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Unconditional
                  purchase obligations
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  long-term obligation
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Total
                  contractual cash obligations
              
              $
              340,029
              
              $
              3,216
              
              $
              4,886
              
              $
              2,925
              
              $
              329,002
 
 (1)
              
              Not
                  included in the table above are estimated interest payments calculated
                  at
                  the rates in effect at March 31, 2006 of: 2007 - $26.1 million;
                  2008 -
                  $26.0 million; 2009 - $26.0 million; 2010 - $26.0 million and 2011
                  - $23.6
                  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
              
              $
              17,525
              
              $
              17,500
              
              $
              25
              
              $
              -
              
              $
              -Guarantees
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Standby
                  replacement commitments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Other
                  commercial commitments
              
              
              28,333
              
              
              28,333
              
              
              -
              
              
              -
              
              
              -Total
                  commercial commitments
              
              $
              45,858
              
              $
              45,833
              
              $
              25
              
              $
              -
              
              $
              -
 
  36
  
 **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.
 
 **Recently
        Issued Financial Accounting Standards**
  In
        May 2005, the Financial Accounting Standards Board, or FASB, issued SFAS
        No. 154, “Accounting Changes and Error Corrections”, or SFAS 154. SFAS 154
        requires retrospective application to prior periods’ financial statements of
        changes in accounting principle. It also requires that the new accounting
        principle be applied to the balances of assets and liabilities as of the
        beginning of the earliest period for which retrospective application is
        practicable and that a corresponding adjustment be made to the opening balance
        of retained earnings for that period rather than being reported in an income
        statement. The statement will be effective for accounting changes and
        corrections of errors made in fiscal years beginning after December 15,
        2005. The impact of SFAS 154 will depend on the nature and extent of any
        voluntary accounting changes and correction of errors after the effective
        date,
        but management does not currently expect SFAS 154 to have a material impact
        on
        the Company’s financial position or results of operations.
 
 In
        March
        2005, the FASB issued FASB Interpretation No. 47, “Accounting for Conditional
        Asset Retirement Obligations” or FIN 47, which will result in (a) more
        consistent recognition of liabilities relating to asset retirement obligations,
        (b) more information about expected future cash outflows associated with
        those
        obligations, and (c) more information about investments in long-lived assets
        because additional asset retirement cost will be recognized as part of the
        carrying amounts of the assets. FIN 47 clarifies that the term conditional
        asset
        retirement obligation as used in Statement No. 143, “Accounting for Asset
        Retirement Obligations”, refers to a legal obligation to perform an asset
        retirement activity in which the timing and (or) method of settlement are
        conditional on a future event that may or may not be within the control of
        the
        entity. The obligation to perform the asset retirement activity is unconditional
        even though uncertainty exists about the timing and (or) method of settlement.
        Uncertainty about the timing and (or) method of settlement of a conditional
        asset retirement obligation should be factored into the measurement of the
        liability when sufficient information exists.
 
 FIN
        47
        also clarifies when an entity would have sufficient information to reasonably
        estimate the fair value of an asset retirement obligation. FIN 47 is effective
        no later than the end of fiscal years ending after December 15, 2005.
        Retrospective application of interim financial information is permitted but
        is
        not required. Early adoption of this interpretation is encouraged. We do
        not
        believe the interpretation will have a significant impact on our financial
        position or results of operations.
  37
  **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 following discussion is not meant to be a precise indicator of
        expected future losses, but rather an indicator 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.
 
 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
        March
        31, 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
        March
        31, 2006, the amount outstanding under our credit facility increased to $46
        million from $8.0 million at September 30, 2005.  The weighted average
        interest rate for this facility increased from 6.1% at September 30, 2005
        to
        7.7% at March 31, 2006 due to an increase in market index rates on these
        borrowings.
 
 At
        March
        31, 2006, Atlas Pipeline had a $225.0 million revolving credit facility ($0
        outstanding at March 31, 2006). The weighted average interest rate for these
        borrowings was 6.6% at September 30, 2005. Holding all other variables constant,
        if interest rates hypothetically increased or decreased by 10%, our net annual
        income would change by approximately $223,000.
 
 *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 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 March 31, 2007, we estimate approximately 62% 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.
 
 We
        also
        enter into natural gas futures and option contracts. At any point in time,
        such
        contracts may include regulated New York Mercantile Exchange, or 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.
  38
  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. 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 commodity is sold. 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 reference prices underlying a
        hedging instrument and actual commodity prices, we will discontinue hedge
        accounting for the derivative and subsequent changes in fair value for the
        derivative will be recognized immediately into earnings.
 
 At
        March
        31, 2006, we had 108 open natural gas futures contracts related to natural
        gas
        sales covering 11,452,000 dekatherms (“Dth”) (net to us) of natural gas,
        maturing through December 31, 2009 at a combined average settlement price
        of
        $8.94 per Dth. We recognized a gain of $1.4 million on settled contracts
        covering natural gas production for the three months and six months ended
        March
        31, 2006. We recognized no gains or losses during the three months and six
        months ended March 31, 2006 for hedge ineffectiveness or as a result of the
        discontinuance of these cash flow hedges.
 
 *Atlas
        Pipeline.* Atlas
        Pipeline also enters into certain 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 is 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 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 will be recognized immediately into
        earnings. Atlas Pipeline recognized losses of $2.4 million and $669,000 related
        to the settlement of qualifying hedge instruments which are included in our
        consolidated statements of income for the three months ended March 31, 2006
        and
        2005, respectively. Atlas Pipeline also recognized a gain of $1.2 million
        and a
        loss of $224,000 related to the change in market value of non-qualifying
        or
        ineffective hedges which are included in our consolidated statements of income
        for the three months ended March 31, 2006 and 2005, respectively. Atlas Pipeline
        recognized losses of $8.0 million and $645,000 related to the settlement
        of
        qualifying hedge instruments which are included in our consolidated statements
        of income for the six months ended March 31, 2006 and 2005, respectively.
        Atlas
        Pipeline also recognized gains of $860,000 and $216,000 related to the change
        in
        market value of non-qualifying or ineffective hedges which are included in
        our
        consolidated statements of income for the six months ended March 31, 2006
        and
        2005, respectively.
 
 At
        March
        31, 2006 and September 30, 2005, we reflected net hedging liabilities on
        our
        balance sheets of $30.3 million and $46.7 million, respectively. Of the $2.9
        million net loss in accumulated other comprehensive income (loss) at March
        31,
        2006, we will reclassify $800,000 of gains to our consolidated statements
        of
        income over the next twelve month period as these contracts expire, and $3.7
        million of losses 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. Ineffective hedging
        gains or losses are recorded within its consolidated statements of income
        while
        the hedge contract is open and may increase or decrease until settlement
        of the
        contract.
  39
   As
        of
        March 31, 2006, we (including Atlas Pipeline) had the following financial
        hedges
        in place:
 
 **Natural
        Gas Liquids Fixed - Price Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(1)Ended
                  March 31,
              
              
              (gallons)
              
              
              (per
                  gallon)
              
              
              (in
                  thousands)2007
              
              
              49,077,000
              
              $
              0.733
              
              $
              (9,269
              )2008
              
              
              36,099,000
              
              
              0.712
              
              
              (7,343
              )2009
              
              
              26,082,000
              
              
              0.701
              
              
              (5,208
              )2010
              
              
              6,426,000
              
              
              0.746
              
              
              (1,113
              )$
              (22,933
              )
 **Natural
        Gas Fixed - Price Swaps - Atlas** **(4)**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(3)Ended
                  March 31,
              
              
              (MMBTU)(2)
              
              
              (per
                  MMBTU)
              
              
              (in
                  thousands)2007
              
              
              1,349,700
              
              $
              10.760
              
              $
              8,2992008
              
              
              4,842,900
              
              
              8.760
              
              
              (11,153
              )2009
              
              
              4,039,100
              
              
              8.710
              
              
              (495
              )2010
              
              
              1,220,700
              
              
              8.350
              
              
              1,244$
              (2,105
              )
  **Natural
        Gas Fixed - Price Swaps**
  Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Liability(3)Ended
                  March 31,
              
              
              (MMBTU)(2)
              
              
              (per
                  MMBTU)
              
              
              (in
                  thousands)2007
              
              
              3,530,000
              
              $
              7.530
              
              $
              (466
              )2008
              
              
              930,000
              
              
              7.257
              
              
              (2,021
              )2009
              
              
              120,000
              
              
              7.270
              
              
              (132
              )$
              (2,619
              )
 
 **Natural
        Gas Basis Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Fixed
                  Price
              
              Asset(3)Ended
                  March 31,
              
              (MMBTU)(2)
              
              (per
                  MMBTU)
              
              (in
                  thousands)2007
              
              
              3,870,000
              
              $
              (0.673
              )
              $
              (409
              )2008
              
              
              930,000
              
              
              (0.538
              )
              
              5412009
              
              
              120,000
              
              
              (0.555
              )
              
              45$
              177
 
 **Crude
        Oil Fixed - Price Swaps**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Strike
                  Price
              
              Liability(3)Ended
                  March 31,
              
              (barrels)
              
              (per
                  barrel)
              
              (in
                  thousands)2007
              
              
              76,100
              
              $
              53.149
              
              $
              (1,198
              )2008
              
              
              80,400
              
              
              56.759
              
              
              (1,029
              )2009
              
              
              51,300
              
              
              60.019
              
              
              (437
              )2010
              
              
              27,000
              
              
              62.700
              
              
              (130
              )$
              (2,794
              )
 
  40
  
 **Crude
        Oil Options**
 Production
              
              
              
              Average
              
              Fair
                  ValuePeriod
              
              Volumes
              
              Strike
                  Price
              
              Liability(3)Ended
                  March 31,
              
              
              (barrels)
              
              
              (per
                  barrel)
              
              
              (in
                  thousands)
              
              
              Option
                  Type2007
              
              
              9,900
              
              $
              60.000
              
              $
              -
              
              
              Puts
                  purchased2007
              
              
              9,900
              
              
              73.380
              
              
              -
              
              
              Calls
                  sold2008
              
              
              13,200
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2008
              
              
              13,200
              
              
              73.380
              
              
              -
              
              
              Calls
                  sold2009
              
              
              21,600
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2009
              
              
              21,600
              
              
              72.178
              
              
              -
              
              
              Calls
                  sold2010
              
              
              22,500
              
              
              60.000
              
              
              -
              
              
              Puts
                  purchased2010
              
              
              22,500
              
              
              71.250
              
              
              -
              
              
              Calls
                  sold$
              -Total
                  net liability
              $
              (30,274
              )
   (1)
              
              Fair
                  value based upon management estimates, including forecasted forward
                  NGL
                  prices as a function of forward NYMEX natural gas and light crude
                  prices.(2)
              
              MMBTU
                  represents million British Thermal Units.(3)
              
              Fair
                  value based on forward NYMEX natural gas and light crude prices,
                  as
                  applicable.(4)
              
              Represents
                  our hedged volumes. All others are related to Atlas
                  Pipeline.
 
 **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 March 31, 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.
 
 **PART
        II.  OTHER INFORMATION**
 
 **Item
        2.**   **Unregistered
        Sales of Equity Securities and Use of Proceeds**
 
 **Shares
                  Purchased As**
              
              **Maximum
                  Number of****Part
                  of Publicly**
              
              **Shares
                  that May Yet****Total
                  Number of**
              
              **Average
                  Price paid**
              
              **Announced
                  Plans or**
              
              **Be
                  Purchased Under****Shares
                  Purchased**
              
              **Per
                  Share**
              
              **Programs**
              
              **the
                  Plans or Programs**January
                  1 - 31, 2006
              
              
              -
              
              
              -
              
              
              **-**February
                  1 - 28, 2006
              
              
              7,500
              
              
              63.26
              
              
              7,500March
                  1 - 31, 2006
              
              
              -
              
              $
              -
              
              
              -Total
              
              
              7,500
              
              $
              63.26
              
              
              7,500
              
              
              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
        ($49.4 million remaining at March 31, 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.
  41
  
 
 **Item
        6.**   **Exhibits**
  Exhibit
        No.  Description
 3.1
              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,
                  2006.31.1
              Rule
                  13(a)-14(a)/15d-14(a) Certification.31.2
              Rule
                  13(a)-14(a)/15d-14(a) Certification.32.1
              Section
                  1350 Certification.32.2
              Section
                  1350 Certification.
  
 (1)
              
              Previously
                  filed as an exhibit to our Form 10-Q for the quarter ended March
                  31, 2004.(2)
              
              Previously
                  filed as an exhibit to our Form 8-K filed on May 16,
                  2005.
 
 
  42
   
 
  **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:
                  May 9, 2006
              By:*/s/
                  Matthew A. Jones*Matthew
                  A. JonesChief
                  Financial OfficerDate:
                  May 9, 2006
              By:/s/*Nancy
                  J. McGurk*Nancy
                  J. McGurk
                Senior
                  Vice President and Chief Accounting Officer
  43