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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

Commission file number 000-25717



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PETROHAWK ENERGY CORPORATION

(Exact name of registrant as specified in its
charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 86-0876964                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

1000 Louisiana, Suite 5600, Houston, Texas 77002

(Address of principal executive offices including ZIP code)

(832) 204-2700

(Registrants telephone number)

Securities registered pursuant to Section 12(b) of the Act:



|                                        |  |                                          
|--------------------------------------- |  | -----------------------------------------
|Title of each class                     |  | Name of each exchange on which registered
|Common Stock, par value $.001 per share |  | New York Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act: None



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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. (Check one):



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | 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

As of November 2, 2007 the Registrant had 170,427,073 shares of Common Stock, $.001 par value, outstanding.



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TABLE OF CONTENTS



|                              |  |                                                                                                       |  |     
|----------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                                      
|                              |  |                                                                                                      
|ITEM 1.                       |  | Condensed consolidated financial statements (unaudited)                                               |  | 4   
|                              |  |                                                                                                      
|                              |  | Consolidated statements of operations for the three and nine months ended September 30, 2007 and 2006 |  | 4   
|                              |  |                                                                                                      
|                              |  | Consolidated balance sheets as of September 30, 2007 and December 31, 2006                            |  | 5   
|                              |  |                                                                                                      
|                              |  | Consolidated statements of cash flows for the nine months ended September 30, 2007 and 2006           |  | 6   
|                              |  |                                                                                                      
|                              |  | Notes to condensed consolidated financial statements                                                  |  | 7   
|                              |  |                                                                                                      
|ITEM 2.                       |  | Managements discussion and analysis of financial condition and results of operations                 |  | 22  
|                              |  |                                                                                                      
|ITEM 3.                       |  | Quantitative and qualitative disclosures about market risk                                            |  | 31  
|                              |  |                                                                                                      
|ITEM 4.                       |  | Controls and procedures                                                                               |  | 32  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                      
|                              |  |                                                                                                      
|ITEM 1.                       |  | Legal proceedings                                                                                     |  | 33  
|                              |  |                                                                                                      
|ITEM 1A.                      |  | Risk factors                                                                                          |  | 33  
|                              |  |                                                                                                      
|ITEM 2.                       |  | Unregistered sales of equity securities and use of proceeds                                           |  | 33  
|                              |  |                                                                                                      
|ITEM 3.                       |  | Defaults upon senior securities                                                                       |  | 33  
|                              |  |                                                                                                      
|ITEM 4.                       |  | Submission of matters to a vote of security holders                                                   |  | 33  
|                              |  |                                                                                                      
|ITEM 5.                       |  | Other information                                                                                     |  | 33  
|                              |  |                                                                                                      
|ITEM 6.                       |  | Exhibits                                                                                              |  | 34  

Special note regarding forward-looking statements

This report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements may
include, among others, statements reflecting the following:



| |  |  | our growth strategies;
| | - |  | ----------------------



| |  |  | anticipated trends in our business;
| | - |  | -----------------------------------



| |  |  | our future results of operations;
| | - |  | ---------------------------------



| |  |  | our ability to make or integrate acquisitions;
| | - |  | ----------------------------------------------



| |  |  | our liquidity and ability to finance our exploration, acquisition and development activities;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | our ability to successfully and economically explore for and develop oil and natural gas resources;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | market conditions in the oil and natural gas industry;
| | - |  | ------------------------------------------------------



| |  |  | the impact of government regulation;
| | - |  | ------------------------------------



| |  |  | planned capital expenditures;
| | - |  | -----------------------------



| |  |  | increases in oil and natural gas production;
| | - |  | --------------------------------------------



| |  |  | our financial position, business strategy and other plans and objectives for future operations;
| | - |  | -----------------------------------------------------------------------------------------------



2



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| |  |  | reserve and production estimates;
| | - |  | ---------------------------------



| |  |  | future financial performance; and
| | - |  | ---------------------------------



| |  |  | other matters that are discussed in our filings with the United States Securities and Exchange Commission.
| | - |  | ----------------------------------------------------------------------------------------------------------

We identify forward-looking statements by use of terms such as expect, anticipate, estimate, plan,
believe, intend, will, continue, potential, should, could and similar words and expressions, although some forward-looking statements may be expressed differently.
You should be aware that our actual results could differ materially from those contained in the forward-looking statements. You should consider carefully the statements under the Risk Factors section of this report and other sections of
this report, as well as those described in our Form 10-K for the year ended December 31, 2006, as amended, which describe factors that could cause our actual results to differ from those set forth in the forward-looking statements, including,
but not limited to, the following factors:



| |  |  | the possibility that the industry may be subject to future regulatory or legislative actions (including any additional taxes);
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the volatility in commodity prices, supply of, and demand for, oil and natural gas;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | risks associated with derivative positions;
| | - |  | -------------------------------------------



| |  |  | the difficulty of estimating the presence or recoverability of oil and natural gas reserves and future production rates and associated costs;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the need for us to continually replace oil and natural gas reserves;
| | - |  | --------------------------------------------------------------------



| |  |  | environmental risks;
| | - |  | --------------------



| |  |  | drilling and operating risks and expense cost escalations;
| | - |  | ----------------------------------------------------------



| |  |  | exploration and development risks;
| | - |  | ----------------------------------



| |  |  | the ability of the our management to execute its plans to meet its goals;
| | - |  | -------------------------------------------------------------------------



| |  |  | our ability to retain key members of senior management and key employees;
| | - |  | -------------------------------------------------------------------------



| |  |  | general economic conditions, whether internationally, nationally or in the regional and local market areas in which we are doing business, may be less favorable
than expected;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continued hostilities in the Middle East and other sustained military campaigns or acts of terrorism or sabotage; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | other economic, competitive, governmental, legislative, regulatory, geopolitical and technological factors that may negatively impact our businesses, operations or
pricing.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in
their entirety by the cautionary statements in this paragraph and elsewhere in this document. Other than as required under the securities laws, we do not assume a duty to update these forward-looking statements, whether as a result of new
information, subsequent events or circumstances, changes in expectations or otherwise.



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PART I. FINANCIAL INFORMATION



|Item 1. | Condensed Consolidated Financial Statements (unaudited)
|------- | -------------------------------------------------------

PETROHAWK ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)



|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | -------- | - |  | - | ------- | -
|                                            |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                            |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006     |  
|Operating revenues:                         |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Oil and gas                                 |  | $                               | 213,337 |   |                                | $ | 196,439 |      |  | $ | 656,062  |   |  | $ | 385,859 |  
|Operating expenses:                         |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Production:                                 |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Lease operating                             |  |                                 | 17,236  |   |                                |   | 17,594  |      |  |   | 50,528   |   |  |   | 40,460  |  
|Workover and other                          |  |                                 | 2,110   |   |                                |   | 2,720   |      |  |   | 6,132    |   |  |   | 5,210   |  
|Taxes other than income                     |  |                                 | 12,844  |   |                                |   | 15,739  |      |  |   | 43,122   |   |  |   | 30,346  |  
|Gathering, transportation and other         |  |                                 | 8,265   |   |                                |   | 5,178   |      |  |   | 23,288   |   |  |   | 9,314   |  
|General and administrative                  |  |                                 | 15,839  |   |                                |   | 15,305  |      |  |   | 48,420   |   |  |   | 30,924  |  
|Depletion, depreciation and amortization    |  |                                 | 101,112 |   |                                |   | 89,212  |      |  |   | 297,160  |   |  |   | 164,120 |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total operating expenses                    |  |                                 | 157,406 |   |                                |   | 145,748 |      |  |   | 468,650  |   |  |   | 280,374 |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Income from operations                      |  |                                 | 55,931  |   |                                |   | 50,691  |      |  |   | 187,412  |   |  |   | 105,485 |  
|Other (expenses) income:                    |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net gain (loss) on derivative contracts     |  |                                 | 20,337  |   |                                |   | 68,048  |      |  |   | (7,005   | ) |  |   | 94,495  |  
|Interest expense and other                  |  |                                 | (34,308 | ) |                                |   | (35,870 | )    |  |   | (96,847  | ) |  |   | (55,865 | )
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Total other (expenses) income               |  |                                 | (13,971 | ) |                                |   | 32,178  |      |  |   | (103,852 | ) |  |   | 38,630  |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Income before income taxes                  |  |                                 | 41,960  |   |                                |   | 82,869  |      |  |   | 83,560   |   |  |   | 144,115 |  
|Income tax provision                        |  |                                 | (15,165 | ) |                                |   | (30,213 | )    |  |   | (30,549  | ) |  |   | (53,667 | )
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net income                                  |  |                                 | 26,795  |   |                                |   | 52,656  |      |  |   | 53,011   |   |  |   | 90,448  |  
|Preferred dividends                         |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   | (217    | )
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Net income available to common stockholders |  | $                               | 26,795  |   |                                | $ | 52,656  |      |  | $ | 53,011   |   |  | $ | 90,231  |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Earnings per share of common stock:         |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Basic                                       |  | $                               | 0.16    |   |                                | $ | 0.34    |      |  | $ | 0.32     |   |  | $ | 0.84    |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Diluted                                     |  | $                               | 0.16    |   |                                | $ | 0.33    |      |  | $ | 0.31     |   |  | $ | 0.82    |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Weighted average shares outstanding:        |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Basic                                       |  |                                 | 167,920 |   |                                |   | 157,135 |      |  |   | 167,671  |   |  |   | 107,908 |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  
|Diluted                                     |  |                                 | 172,273 |   |                                |   | 159,647 |      |  |   | 171,779  |   |  |   | 110,706 |  
|                                            |  |                                 |         |   |                                |   |         |      |  |   |          |   |  |   |         |  

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



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PETROHAWK ENERGY CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)



|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                          |  | September 30,2007 |           |   | December 31,2006 |  
|Current assets:                                                                                                                                                                           |  |                   |           |   |                  |   |           |  
|Cash                                                                                                                                                                                      |  | $                 | 9,801     |   |                  | $ | 5,593     |  
|Accounts receivable                                                                                                                                                                       |  |                   | 137,533   |   |                  |   | 155,582   |  
|Receivables from derivative contracts                                                                                                                                                     |  |                   | 23,168    |   |                  |   | 68,234    |  
|Prepaid expenses and other                                                                                                                                                                |  |                   | 17,659    |   |                  |   | 17,303    |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Total current assets                                                                                                                                                                      |  |                   | 188,161   |   |                  |   | 246,712   |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Oil and gas properties(full cost method):                                                                                                                                                 |  |                   |           |   |                  |   |           |  
|Evaluated                                                                                                                                                                                 |  |                   | 3,647,045 |   |                  |   | 2,901,649 |  
|Unevaluated                                                                                                                                                                               |  |                   | 532,200   |   |                  |   | 537,611   |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Gross oil and gas properties                                                                                                                                                              |  |                   | 4,179,245 |   |                  |   | 3,439,260 |  
|Lessaccumulated depletion                                                                                                                                                                |  |                   | (672,527  | ) |                  |   | (379,017  | )
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Net oil and gas properties                                                                                                                                                                |  |                   | 3,506,718 |   |                  |   | 3,060,243 |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Other operating property and equipment:                                                                                                                                                   |  |                   |           |   |                  |   |           |  
|Gross other operating property and equipment                                                                                                                                              |  |                   | 18,452    |   |                  |   | 9,542     |  
|Lessaccumulated depreciation                                                                                                                                                             |  |                   | (6,042    | ) |                  |   | (3,742    | )
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Net other operating property and equipment                                                                                                                                                |  |                   | 12,410    |   |                  |   | 5,800     |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Other noncurrent assets:                                                                                                                                                                  |  |                   |           |   |                  |   |           |  
|Goodwill                                                                                                                                                                                  |  |                   | 938,002   |   |                  |   | 938,584   |  
|Debt issuance costs, net of amortization                                                                                                                                                  |  |                   | 12,899    |   |                  |   | 14,987    |  
|Receivables from derivative contracts                                                                                                                                                     |  |                   | 1,257     |   |                  |   | 6,995     |  
|Other                                                                                                                                                                                     |  |                   | 6,357     |   |                  |   | 6,335     |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Total assets                                                                                                                                                                              |  | $                 | 4,665,804 |   |                  | $ | 4,279,656 |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Current liabilities:                                                                                                                                                                      |  |                   |           |   |                  |   |           |  
|Accounts payable and accrued liabilities                                                                                                                                                  |  | $                 | 305,797   |   |                  | $ | 295,951   |  
|Current portion of deferred income taxes                                                                                                                                                  |  |                   | 3,593     |   |                  |   | 22,382    |  
|Liabilities from derivative contracts                                                                                                                                                     |  |                   | 13,419    |   |                  |   | 7,986     |  
|Current portion of long-term debt                                                                                                                                                         |  |                   | 1,431     |   |                  |   | 5,700     |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Total current liabilities                                                                                                                                                                 |  |                   | 324,240   |   |                  |   | 332,019   |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Long-term debt                                                                                                                                                                            |  |                   | 1,613,422 |   |                  |   | 1,326,239 |  
|Liabilities from derivative contracts                                                                                                                                                     |  |                   | 3,628     |   |                  |   | 11,803    |  
|Asset retirement obligations                                                                                                                                                              |  |                   | 45,910    |   |                  |   | 45,326    |  
|Deferred income taxes                                                                                                                                                                     |  |                   | 681,107   |   |                  |   | 633,883   |  
|Other noncurrent liabilities                                                                                                                                                              |  |                   | 2,658     |   |                  |   | 2,042     |  
|Commitments and contingencies (Note 6)                                                                                                                                                    |  |                   |           |   |                  |   |           |  
|Stockholders equity:                                                                                                                                                                     |  |                   |           |   |                  |   |           |  
|Common stock: 300,000,000 shares of $.001 par value value authorized; 169,861,192 and 168,486,732 shares issued and outstanding at
September 30, 2007 and December 31, 2006, respectively |  |                   | 170       |   |                  |   | 169       |  
|Additional paid-in capital                                                                                                                                                                |  |                   | 1,857,345 |   |                  |   | 1,843,862 |  
|Retained earnings                                                                                                                                                                         |  |                   | 137,324   |   |                  |   | 84,313    |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Total stockholders equity                                                                                                                                                                |  |                   | 1,994,839 |   |                  |   | 1,928,344 |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  
|Total liabilities and stockholders equity                                                                                                                                                |  | $                 | 4,665,804 |   |                  | $ | 4,279,656 |  
|                                                                                                                                                                                          |  |                   |           |   |                  |   |           |  

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



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PETROHAWK ENERGY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



|                                                                                  |  |                                |          |   |      |   |           |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | --------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         
|                                                                                  |  | 2007                           |          |   | 2006 |  
|Cash flows from operating activities:                                             |  |                                |          |   |      |   |           |  
|Net income                                                                        |  | $                              | 53,011   |   |      | $ | 90,448    |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                                |          |   |      |   |           |  
|Depletion, depreciation and amortization                                          |  |                                | 297,160  |   |      |   | 164,120   |  
|Income tax provision                                                              |  |                                | 30,549   |   |      |   | 53,667    |  
|Stock-based compensation                                                          |  |                                | 9,866    |   |      |   | 5,041     |  
|Net unrealized gain (loss) on derivative contracts                                |  |                                | 48,062   |   |      |   | (106,304  | )
|Net realized (gain) loss on derivative contracts acquired                         |  |                                | (3,113   | ) |      |   | 14,597    |  
|Other                                                                             |  |                                | 4,258    |   |      |   | 88        |  
|Change in assets and liabilities, net of acquisitions:                            |  |                                |          |   |      |   |           |  
|Accounts receivable                                                               |  |                                | 16,877   |   |      |   | (530      | )
|Prepaid expenses and other                                                        |  |                                | (11      | ) |      |   | (4,918    | )
|Accounts payable and accrued liabilities                                          |  |                                | (3,861   | ) |      |   | (29,921   | )
|Other                                                                             |  |                                | 190      |   |      |   | (3,964    | )
|                                                                                  |  |                                |          |   |      |   |           |  
|Net cash provided by operating activities                                         |  |                                | 452,988  |   |      |   | 182,324   |  
|                                                                                  |  |                                |          |   |      |   |           |  
|Cash flows from investing activities:                                             |  |                                |          |   |      |   |           |  
|Oil and gas capital expenditures                                                  |  |                                | (566,773 | ) |      |   | (222,696  | )
|Acquisition of One Tec, LLC, net of cash acquired of $2,145                       |  |                                | (39,910  | ) |      |   |          |  
|Acquisition of KCS Energy, Inc., net of cash acquired of $8,260                   |  |                                |         |   |      |   | (512,152  | )
|Acquisition of Winwell Resources, Inc., net of cash acquired of $14,965           |  |                                |         |   |      |   | (175,037  | )
|Acquisition of oil and gas properties                                             |  |                                | (133,111 | ) |      |   | (87,893   | )
|Proceeds received from sale of oil and gas properties                             |  |                                | 8,063    |   |      |   | 62,083    |  
|Other                                                                             |  |                                | (2,502   | ) |      |   | 10,117    |  
|                                                                                  |  |                                |          |   |      |   |           |  
|Net cash used in investing activities                                             |  |                                | (734,233 | ) |      |   | (925,578  | )
|                                                                                  |  |                                |          |   |      |   |           |  
|Cash flows from financing activities:                                             |  |                                |          |   |      |   |           |  
|Proceeds from exercise of common stock options                                    |  |                                | 2,962    |   |      |   | 2,466     |  
|Proceeds from issuance of common stock                                            |  |                                |         |   |      |   | 188,500   |  
|Acquisition of common stock                                                       |  |                                |         |   |      |   | (46,200   | )
|Proceeds from borrowings                                                          |  |                                | 782,000  |   |      |   | 1,466,183 |  
|Repayment of borrowings                                                           |  |                                | (501,170 | ) |      |   | (828,319  | )
|Debt issue costs                                                                  |  |                                |         |   |      |   | (14,374   | )
|Net realized gain (loss) on derivative contracts acquired                         |  |                                | 3,113    |   |      |   | (14,597   | )
|Offering costs                                                                    |  |                                |         |   |      |   | (10,725   | )
|Buyback of preferred stock                                                        |  |                                |         |   |      |   | (5,339    | )
|Other                                                                             |  |                                | (1,452   | ) |      |   | (968      | )
|                                                                                  |  |                                |          |   |      |   |           |  
|Net cash provided by financing activities                                         |  |                                | 285,453  |   |      |   | 736,627   |  
|                                                                                  |  |                                |          |   |      |   |           |  
|Net increase (decrease) in cash                                                   |  |                                | 4,208    |   |      |   | (6,627    | )
|                                                                                  |  |                               
|Cash at beginning of period                                                       |  |                                | 5,593    |   |      |   | 12,911    |  
|                                                                                  |  |                                |          |   |      |   |           |  
|Cash at end of period                                                             |  | $                              | 9,801    |   |      | $ | 6,284     |  
|                                                                                  |  |                                |          |   |      |   |           |  

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



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PETROHAWK ENERGY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. FINANCIAL STATEMENT PRESENTATION

During
interim periods, Petrohawk Energy Corporation (referred to as Petrohawk or the Company) follows the same accounting policies disclosed in its 2006 Report on Form 10-K, as amended, for the preceding fiscal year with the exception of the adoption of
Financial Accounting Standards Board (FASB) Financial Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB 109(FIN 48) as described in Recently Issued Accounting
Pronouncements below. Please refer to the footnotes in the 2006 Form 10-K, as amended, when reviewing interim financial results.

These unaudited condensed consolidated financial statements reflect, in the opinion of the Companys management, all adjustments, consisting only of normal and recurring adjustments, necessary to present fairly the financial position
as of, and results of operations for, the periods presented. Interim period results are not necessarily indicative of results of operations or cash flows for the full year.

On July 12, 2006, the Company completed its merger with KCS Energy, Inc. (KCS). Refer to Note 2, Acquisitions and Divestitures, for more
details on the Companys merger with KCS.

Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 159, The Fair Value Option
for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115(SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value (the Fair Value
Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would
be reported as a cumulative adjustment to beginning retained earnings. If the Company elects the Fair Value Option for certain financial assets and liabilities, the Company will report unrealized gains and losses due to changes in fair value in
earnings at each subsequent reporting date. The provisions of SFAS 159 are effective January 1, 2008. The Company is currently assessing the impact, if any, that the adoption of this pronouncement will have on the Companys operating
results, financial position or cash flows.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements (SFAS 157), which
defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This pronouncement applies to other standards that require or permit fair value measurements. Accordingly, this statement
does not require any new fair value measurement. The provisions of SFAS 157 are effective for the Company on January 1, 2008. The Company is currently assessing the impact, if any, that the adoption of this pronouncement will have on the
Companys operating results, financial position or cash flows.

In April 2007, the FASB issued Staff Position (FSP) No. FIN 39-1,
Amendment of FASB Interpretation No. 39, (FIN 39-1) to amend FIN 39, Offsetting of Amounts Related to Certain Contracts (FIN 39). The terms conditional contracts and exchange contracts used in FIN 39 have
been replaced with the more general term derivative contracts. In addition, FIN 39-1 permits the offsetting of recognized fair values for the right to reclaim cash collateral or the obligation to return cash collateral against fair
values of derivatives under certain circumstances, such as under master netting arrangements. Additional disclosure is also required regarding a Companys accounting policy with respect to offsetting fair value amounts. The guidance in FIN 39-1
is effective for fiscal years beginning after November 15, 2007, with early application allowed. The effects of initial adoption should be recognized as a change in accounting principle through retrospective application for all periods
presented. The Company is currently assessing the impact, if any, that the adoption of this pronouncement will have on the Companys operating results financial position or cash flows.



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During July 2006, the FASB issued FIN 48, which addresses the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes specific criteria for the financial statement recognition and measurement of the tax effects of
a position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition of previously recognized tax benefits, classification of tax liabilities on the balance sheet, recording interest and penalties on
tax underpayments, accounting in interim periods, and disclosure requirements. FIN 48 is effective for fiscal periods beginning after December 15, 2006. As a result, the Company adopted FIN 48 effective January 1, 2007. The adoption of
this pronouncement did not materially impact the Companys operating results, financial position or cash flows. See Income Taxes below for further information.

In May 2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, (FIN 48-1) which amends FIN 48 and
provides guidance concerning how an entity should determine whether a tax position is effectively, rather than the previously required ultimately, settled for the purpose of recognizing previously unrecognized tax benefits.
In addition, FIN 48-1 provides guidance on determining whether a tax position has been effectively settled. The guidance in FIN 48-1 is effective upon the initial January 1, 2007 adoption of FIN 48. Companies that have not applied this guidance
must retroactively apply the provisions of this FSP to the date of the initial adoption of FIN 48. The Company has adopted FIN 48-1 and no retroactive adjustments are necessary.

Stock-Based Compensation

In January 2006, the Company adopted SFAS No. 123(R), Share-Based
Payment(SFAS 123(R)). SFAS 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, and focuses on accounting for share-based payments for services provided by employee to employer. The statement requires companies
to expense the fair value of employee stock options and other equity-based compensation at the grant date. The statement does not require a certain type of valuation model, and either a binomial or Black-Scholes model may be used. The Company used
the modified prospective application method as detailed in SFAS 123(R).

As allowed by SFAS 123(R), the Company utilizes the Black-Scholes
option pricing model to measure the fair value of stock options and stock settled stock appreciation rights.

The assumptions used in the
fair value method calculation for the nine months ended September 30, 2007 and 2006 are disclosed in the following table:



|                                                                |  |                                |      |   |      |   |      |  
|--------------------------------------------------------------- |  | ------------------------------ | ---- | - | ---- | - | ---- | -
|                                                                |  | Nine Months EndedSeptember 30, |     
|                                                                |  | 2007(1)                        |      |   | 2006 |  
|Weighted average value per option granted during the period (2) |  | $                              | 3.59 |   |      | $ | 6.96 |  
|Assumptions (3):                                                |  |                                |      |   |      |   |      |  
|Stock price volatility                                          |  |                                | 38.0 | % |      |   | 39.0 | %
|Risk free rate of return                                        |  |                                | 4.4  | % |      |   | 4.9  | %

|              |  |           |  |          
|------------- |  | --------- |  | ---------
|Expected term |  | 3.0 years |  | 2.9 years

---

|(1) | The Companys estimated future forfeiture rate is 5%.
|--- | -----------------------------------------------------

|(2) | Calculated using the Black-Scholes fair value based method.
|--- | -----------------------------------------------------------

|(3) | The Company does not pay dividends on its common stock.
|--- | -------------------------------------------------------

Income Taxes

In July 2006, the FASB issued FIN 48, which creates a single model to address accounting for the uncertainty in income tax positions
and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements.



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The evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is a
recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more likely than not recognition threshold, it is presumed that the position will be examined by the appropriate taxing authority with full knowledge of all relevant information. The second step is a
measurement process whereby a tax position that meets the more likely than not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest
amount of benefit/expense that is more likely than not of being realized upon ultimate settlement.

FIN 48 allows the Company to
prospectively change its accounting policy as to where interest expense and penalties on income tax liabilities are classified. The Company includes interest and penalties relating to uncertain tax positions within interest expense and other on the
Companys consolidated statement of operations.

The Company adopted the provisions of FIN 48 effective January 1, 2007 which did
not have a material impact on the Companys operating results, financial position or cash flows. The Company did not record a cumulative effect adjustment related to the adoption of FIN 48.

Included in the Companys consolidated balance sheet at January 1, 2007 was approximately $2.1 million of liabilities associated with uncertain
tax positions in the jurisdictions in which it conducts business offset by reductions to existing deferred tax liabilities. This amount included $0.1 million of accrued interest and penalties. No material amounts have been identified to date that
would impact the Companys effective tax rate. The Company does not anticipate material changes to liabilities related to such uncertain tax positions within the next twelve months.

Generally, the Companys tax years 2003 through 2006 are either currently under audit or remain open and subject to examination by federal tax
authorities or the tax authorities in Arkansas, Louisiana, New Mexico, Oklahoma and Texas, which are the jurisdictions in which the Company has its principal operations. In certain of these jurisdictions, the Company operates through more than one
legal entity, each of which may have different open years subject to examination. Additionally, it is important to note that years are technically open for examination until the statute of limitations in each respective jurisdiction expires.

Tax audits may be ongoing at any point in time. Tax liabilities are recorded based on estimates of additional taxes which may be due upon
the conclusion of these audits. Estimates of these tax liabilities are made based upon prior experience and are updated for changes in facts and circumstances. However, due to the uncertain and complex application of tax regulations, it is possible
that the ultimate resolution of audits may result in liabilities which could be materially different from these estimates.

2. ACQUISITIONS AND
DIVESTITURES

Acquisitions

KCS Energy,
Inc.

On April 21, 2006, the Company and KCS announced they had entered into a definitive agreement to merge the companies and this
merger was consummated on July 12, 2006.

Upon the closing of the merger, KCS stockholders became entitled to receive a combination of
$9.00 cash and 1.65 shares of Petrohawk common stock for each share of KCS common stock. At the time of the merger, there were approximately 50.0 million shares of KCS common stock outstanding that converted into approximately 82.6 million
shares of Petrohawk common stock. Total consideration for the shares of KCS common stock was comprised of approximately $1.1 billion of Petrohawk common stock, calculated based on the five day trading average of Petrohawks common stock
bracketing the merger announcement date, or $13.44, approximately $450 million of cash and the assumption of $275 million of KCS debt. In addition, all outstanding



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options to purchase KCS common stock and restricted shares of KCS common stock were converted into options to purchase the Companys common stock or
into restricted shares of the Companys common stock, in each case, using an exchange ratio of approximately 2.3706 shares of Petrohawk common stock to one share of KCS common stock.

The merger was accounted for using the purchase method of accounting under the accounting standards established in SFAS No. 141, Business
Combinations (SFAS 141) and No. 142, Goodwill and Other Intangible Assets (SFAS 142). As a result, the assets and liabilities of KCS were first reported in the Companys September 30, 2006 consolidated balance sheet.
The Company reflected the results of operations of KCS beginning July 12, 2006. The Company recorded the estimated fair values of the assets acquired and liabilities assumed at July 12, 2006, which primarily consisted of oil and natural
gas properties of $1.6 billion, asset retirement obligations of $15.1 million, a deferred income tax liability of $421.6 million, a deferred income tax asset of $49.1 million and goodwill of $767.1 million. The deferred income tax liability
recognizes the difference between the tax basis and the fair value of the acquired oil and natural gas properties. The recorded book value of the oil and natural gas properties was increased and goodwill was recorded to recognize this tax basis
differential, none of which is deductible for tax purposes. The deferred income tax asset pertains to net operating loss carry-forwards and alternative minimum tax credits in the amounts of $44 million, net of tax, and $5.1 million, respectively.

Goodwill represents the excess of the purchase price over the estimated fair value of the assets acquired net of the fair value of
liabilities assumed in the acquisition. SFAS 142 requires that intangible assets with indefinite lives, including goodwill, be evaluated on an annual basis for impairment or more frequently if an event occurs or circumstances change that could
potentially result in an impairment.

Pro Forma Results of Operations for the Companys Merger with KCS

The Companys unaudited pro forma results of operations for the three and nine months ended September 30, 2006 are presented below to illustrate
the approximate pro forma effects on the Companys results of operations under the purchase method of accounting as if the Company had completed its merger with KCS on January 1, 2006. The unaudited pro forma results of operations do not
purport to represent what the results of operations would actually have been if the merger had in fact occurred on such date or to project the Companys results of operations for any future date or period.



|                                            |  |                                          |         |                                     |   |        
|------------------------------------------- |  | ---------------------------------------- | ------- | ----------------------------------- | - | -------
|                                            |  | Three Months EndedSeptember 30, 2006     |         | Nine Months EndedSeptember 30, 2006
|                                            |  | (In thousands, except per share amounts)
|Pro forma:                                  |  |                                          |         |                                     |   |        
|Oil and gas revenues                        |  | $                                        | 208,612 |                                     | $ | 611,234
|Net income available to common stockholders |  | $                                        | 63,102  |                                     | $ | 160,489
|                                            |  |                                         
|Basic earnings per share                    |  | $                                        | 0.38    |                                     | $ | 0.96   
|Diluted earnings per share                  |  | $                                        | 0.37    |                                     | $ | 0.95   

One Tec, LLC.

On August 3, 2007 the Company completed the acquisition of all of the membership interests of One Tec, LLC (One Tec). The aggregate cash consideration paid at closing was approximately $42.0 million after certain
closing adjustments. The One Tec acquisition was accounted for using the purchase method of accounting under the accounting standards established in SFAS 141 and SFAS 142. As a result, the assets and liabilities of One Tec were first
reported in the Companys consolidated balance sheet as of September 30, 2007. The Company reflected the results of operations of One Tec beginning August 3, 2007. The Company recorded the estimated fair values of the assets acquired
and liabilities assumed at August 3, 2007, which primarily consisted of oil and natural gas properties of $35.0 million.



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North Louisiana Acquisitions

On January 27, 2006, the Company completed the acquisition of all of the issued and outstanding common stock of Winwell Resources, Inc. (Winwell). The aggregate consideration paid was approximately $208 million
in cash after certain closing adjustments.

The Winwell acquisition was accounted for using the purchase method of accounting under the
accounting standards established in SFAS 141 and SFAS 142. As a result, the assets and liabilities of Winwell were first reported in the Companys March 31, 2006 consolidated balance sheet. The Company reflected the results of
operations of Winwell beginning January 27, 2006. The Company recorded the estimated fair values of the assets acquired and liabilities assumed at January 27, 2006, which primarily consisted of oil and natural gas properties of $219.8
million, asset retirement obligations of $0.5 million, a net deferred tax liability of $78.9 million, and goodwill of $33.5 million. The deferred income tax liability recognizes the difference between the tax basis and the fair value of the acquired
oil and natural gas properties. The recorded book value of the oil and natural gas properties was increased and goodwill was recorded to recognize this tax basis differential, none of which is deductible for tax purposes.

Also on January 27, 2006, the Company completed the acquisition of certain oil and natural gas assets from Redley Company (together with the Winwell
acquisition, the North Louisiana Acquisitions). The aggregate consideration paid in this asset acquisition was approximately $86.1 million ($86.2 million after certain closing adjustments). The Company reflected the results of operations of the
acquired assets beginning January 27, 2006. The Company deposited $15 million in earnest money in connection with the Winwell acquisition, and $7.5 million in connection with the asset acquisition. The $22.5 million in deposits were included in
other non-current assets at December 31, 2005 and applied to the overall purchase price in January 2006.

Divestitures

Michigan, Wyoming and California

During the fourth quarter of 2006 the Company sold certain oil and natural gas assets in Michigan, Wyoming and California. The majority of these assets were acquired in the Companys merger with KCS. Proceeds from these transactions
were approximately $135 million, before adjustments, and were recorded as a decrease to the Companys full cost pool.

Gulf of
Mexico

On March 21, 2006, the Company completed the sale of substantially all of its Gulf of Mexico properties for $52.5 million
($43.2 million after certain closing adjustments). These proceeds were recorded as a decrease to the Companys full cost pool.

3. OIL AND GAS
PROPERTIES

The Company uses the full cost method of accounting for its investment in oil and gas properties. Under this method of
accounting, all costs of acquisition, exploration and development of oil and gas reserves (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal
costs) are capitalized as the cost of oil and gas properties when incurred. To the extent that capitalized costs of oil and gas properties, net of accumulated depletion exceed the discounted future net revenues of proved oil and gas reserves net of
deferred taxes, such excess capitalized costs would be charged to expense. Full cost companies must use the prices in effect at the end of each accounting quarter to calculate the ceiling test value of their reserves. However, subsequent commodity
price increases may be utilized to calculate the ceiling value and reserves prior to the issuance of the financial statements. Decreases in product price levels, as well as changes in production rates, levels of reserves, the evaluation of costs
excluded from amortization, future development costs, and service costs and other factors could result in significant future ceiling test impairments.



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The Company assesses all items classified as unevaluated property on a quarterly basis for possible
impairment or reduction in value. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill;
remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors
indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to amortization.

4. LONG-TERM DEBT

Long-term debt as of
September 30, 2007 and December 31, 2006 consisted of the following:



|                                    |  |                   |           |                  |   |          
|----------------------------------- |  | ----------------- | --------- | ---------------- | - | ---------
|                                    |  | September 30,2007 |           | December 31,2006
|                                    |  | (In thousands)   
|Senior revolving credit facility    |  | $                 | 589,000   |                  | $ | 295,000  
|91/8%
$775 million senior notes (1) |  |                   | 762,737   |                  |   | 768,514  
|71/8%
$275 million senior notes (2) |  |                   | 261,431   |                  |   | 262,471  
|97/8%
senior notes                  |  |                   | 254       |                  |   | 254      
|                                    |  |                   |           |                  |   |          
|                                    |  | $                 | 1,613,422 |                  | $ | 1,326,239
|                                    |  |                   |           |                  |   |          

---

|(1) | This amount is comprised of the $650.0 million and $125.0 million private placements consummated in July 2006. These
amounts include a $7.1 million and $7.8 million discount at September 30, 2007 and December 31, 2006, respectively, recorded by the Company in conjunction with the issuance of the $650.0 million notes. Additionally, these amounts
include a $1.2 million and $1.3 million premium at September 30, 2007 and December 31, 2006, recorded by the Company in conjunction with the issuance of the $125.0 million notes. See 91/8% Senior Notes below for more details.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Amount includes a $10.9 million and $12.5 million discount at September 30, 2007 and December 31, 2006,
respectively, recorded by the Company in conjunction with the assumption of the notes. See 71/8% Senior
Notes below for more details.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Senior Revolving Credit Facility

In connection with the Companys merger with KCS, the Company amended and restated its senior
revolving credit facility. The facility provides for a $1 billion commitment with a borrowing base that will be redetermined on a semi-annual basis. The Company and the lenders each have the right to one annual interim unscheduled
redetermination to adjust the borrowing base based on the Companys oil and natural gas properties, reserves, other indebtedness and other relevant factors. At September 30, 2007, the borrowing base was $750 million. On October 15,
2007, the Company entered into an amendment to its senior revolving credit facility to increase the borrowing base to $900 million until the earlier of (a) the closing of the Gulf Coast property sale or (b) the next borrowing base
redetermination date. See Note 12, Subsequent Events for additional information. On July 25, 2007 the Company executed an amendment to its senior revolving credit facility that permits it to purchase in the open market a maximum of
$375 million on the 71/8% Senior Notes due 2012, also referred to as the 2012 Notes and 91/8% Senior Notes due 2013, also referred to as the 2013 Notes. Amounts outstanding bear interest at specified margins
over LIBOR of 1.00% to 1.75% for Eurodollar loans or at specified margins over ABR of 0.00% to 0.50% for ABR loans. Such margins fluctuate based on the utilization of the facility. Borrowings are secured by first priority liens on substantially all
of the Companys assets and all of the assets of, and equity interest in, the Companys subsidiaries. Amounts drawn on the facility will mature on July 12, 2010.

The senior revolving credit facility contains customary financial and other covenants, including minimum working capital levels, minimum coverage of
interest expense, and a maximum leverage ratio. In addition, the



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Company is subject to covenants limiting dividends and other restricted payments, transactions with affiliates, incurrence of debt, changes of control, asset
sales, and liens on properties. At September 30, 2007, the Company was in compliance with all of its debt covenants under the senior revolving credit facility.

71/8% Senior Notes

Upon effectiveness of the Companys merger with KCS, the
Company assumed (pursuant to the Second Supplemental Indenture relating to the 2012 Notes), and subsidiaries of the Company guaranteed (pursuant to the Third Supplemental Indenture relating to such notes), all the obligations (approximately $275
million) of KCS under the 2012 Notes and the Indenture dated April 1, 2004 (the 2012 Indenture) among KCS, U.S. Bank National Association, as trustee, and the subsidiary guarantors named therein, which governs the terms of the 2012 Notes.
Interest on the 2012 Notes is payable semi-annually, on each April 1 and October 1. On or after April 1, 2008, the Company may redeem all or a portion of the 2012 Notes. If the notes are redeemed during any 12-month period beginning
on April 1 of the year indicated below, the Company must pay 100% of the principal price, plus a specified premium (expressed as percentages of principal amount) plus accrued and unpaid interest thereon, if any, to the applicable redemption
date:



|     |  |           
|---- |  | ----------
|Year |  | Percentage
|2008 |  | 103.568   
|2009 |  | 101.784   
|2010 |  | 100.000   
|2011 |  | 100.000   
|2012 |  | 100.000   

The 2012 Indenture contains a provision requiring the Company to offer to purchase the 2012 Notes
at 101% of face value in the event of a change of control (as defined in the 2012 Indenture). At September 30, 2007, the Company was in compliance with all of its debt covenants under the 2012 Notes.

In conjunction with the assumption of the 2012 Notes, the Company recorded a discount of $13.6 million to be amortized over the remaining life of the
notes utilizing the effective interest rate method. The remaining unamortized discount is $10.9 million at September 30, 2007.

The
2012 Notes are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by all of the Companys subsidiaries. Petrohawk Energy Corporation, the issuer of the 2012 Notes, has no material independent assets or
operations apart from the assets and operations of its subsidiaries.

91/8% Senior Notes

On July 12, 2006 and July 27, 2006, the Company consummated private placements of $650
million and $125 million, respectively, of the 2013 Notes, pursuant to an Indenture dated as of July 12, 2006 (2013 Indenture) and First Supplemental Indenture to the 2013 Notes (the 2013 First Supplemental Indenture), among the Company, the
Companys subsidiaries named therein as guarantors, and U.S. Bank National Association, as trustee. The first tranche of $650 million in 2013 Notes were issued at 98.735% of the face amount for gross proceeds of approximately
$642.0 million, before estimated offering expenses and the initial purchasers discount. The Company applied a portion of the net proceeds from the initial sale to fund the cash consideration paid by the Company to the KCS stockholders in
connection with the Companys merger with KCS and the Companys repurchase of the 97/8% Senior Notes
due 2011 pursuant to a tender offer the Company concluded in July 2006. The additional $125 million in 2013 Notes were issued pursuant to the same Indenture at 101.125% of the face amount. The Company applied the net proceeds from the sale of the
additional 2013 Notes to repay indebtedness outstanding under its senior revolving credit facility.

The 2013 Notes bear interest at
the rate of 9.125% per annum, payable semi-annually on January 15 and July 15 of each year, commencing January 15, 2007. The 2013 Notes mature on July 15, 2013. The 2013 Notes are senior unsecured obligations of the Company
and rank equally with all of its current and future senior



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indebtedness, including the 2012 Notes. The 2013 Notes rank effectively subordinate to the Companys secured debt to the extent of the collateral,
including secured debt under the revolving credit facility, and senior to any future subordinated indebtedness. The 2013 Notes are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by all of the
Companys subsidiaries. Petrohawk Energy Corporation, the issuer of the Notes, has no material independent assets or operations apart from the assets and operations of its subsidiaries.

On or before July 15, 2009, the Company may redeem up to 35% of the aggregate principal amount of the 2013 Notes with the net cash proceeds of
certain equity offerings at a redemption price of 109.13% of the principal amount plus accrued interest and unpaid interest to the redemption date provided that: (i) at least 65% in aggregate principal amount of the 2013 Notes remain
outstanding immediately after the redemption; and (ii) each redemption must occur within 90 days of the date of the closing of the related equity offering.

In addition, on or before July 15, 2010, the Company may redeem all or part of the 2013 Notes, at a redemption price equal to the sum of (i) the principal amount, plus (ii) accrued and unpaid interest,
if any, to the redemption date, plus (iii) the make whole premium at the redemption date.

On or after July 15, 2010, the Company
may redeem all or part of the 2013 Notes at any time. If any of the 2013 Notes are redeemed during any 12-month period beginning on July 15 of the year indicated below, the Company must pay the following redemption prices (expressed as
percentages of principal amount) plus accrued and unpaid interest thereon, if any, to the applicable redemption date:



|     |  |           
|---- |  | ----------
|Year |  | Percentage
|2010 |  | 104.563   
|2011 |  | 102.281   
|2012 |  | 100.000   

The Company may be required to offer to repurchase the 2013 Notes at a purchase price of 101% of
the principal amount, plus accrued and unpaid interest, if any, to the redemption date, in the event of a change of control as defined in the 2013 Indenture. Additionally, the Company may be required to offer to repurchase the 2013 Notes and, to the
extent required by the terms thereof, all other indebtedness (as defined in the 2013 Indenture) that is pari passu with the 2013 Notes at a purchase price of 100% of the principal amount (or accreted value in the case of any such other pari passu
indebtedness issued with a significant original issue discount) plus accrued and unpaid interest, if any, to the date of purchase, in the event net proceeds from assets sales are not applied as required by the 2013 Indenture.

The 2013 Indenture contains covenants that, among other things, restrict or limit the ability of the Company and its subsidiaries to: (i) borrow
money; (ii) pay dividends on stock; (iii) purchase or redeem stock or subordinated indebtedness; (iv) make investments; (v) create liens; (vi) enter into transactions with affiliates; (vii) sell assets; and
(viii) merge with or into other companies or transfer all or substantially all of the Companys assets.

At September 30
2007, the Company was in compliance with all of its debt covenants relating to the 2013 Notes.

In conjunction with the issuance of the
$650 million 2013 Notes, the Company recorded a discount of $8.2 million to be amortized over the remaining life of the notes utilizing the effective interest rate method. The remaining unamortized discount was $7.1 million at September 30,
2007. In conjunction with the issuance of the $125 million 2013 Notes, the Company recorded a premium of $1.4 million to be amortized over the remaining life of the notes utilizing the effective interest rate method. The remaining unamortized
premium was $1.2 million at September 30, 2007.



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97/8% Senior Notes

On April 8, 2004, Mission Resources Corporation issued $130.0 million of its 97/8% senior notes due 2011 (the 2011 Notes). The Company assumed these notes upon the closing of the Companys
merger with Mission. In conjunction with the Companys merger with KCS, the Company extinguished substantially all of its 2011 Notes for a premium of $14.9 million plus accrued interest of $3.5 million. There were approximately $0.3 million of
the notes which were not redeemed and were still outstanding as of September 30, 2007. In connection with the extinguishment of substantially all of the 2011 Notes, the Company requested and received from the noteholders consent to eliminate
most significant debt covenants associated with the 2011 Notes.

Debt Issuance Costs

The Company capitalizes certain direct costs associated with the issuance of long-term debt. At September 30, 2007, the Company had approximately
$12.9 million of net debt issuance costs being amortized over the lives of the respective debt.

5. ASSET RETIREMENT OBLIGATIONS

If a reasonable estimate of the fair value of an obligation to perform site reclamation, dismantle facilities or plug and abandon wells can be made, the
Company records a liability (an asset retirement obligation or ARO) on the consolidated balance sheet and capitalizes the asset retirement cost in oil and natural gas properties in the period in which the retirement obligation is incurred. In
general, the amount of an ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date,
which is then discounted back to the date that the abandonment obligation was incurred using an assumed cost of funds for the Company. After recording these amounts, the ARO is accreted to its future estimated value using the same assumed cost of
funds and the additional capitalized costs are depreciated on a unit-of-production basis.

The Company recorded the following activity
related to the ARO liability for the nine months ended September 30, 2007:



|                                                                   |  |                |        |  
|------------------------------------------------------------------ |  | -------------- | ------ | -
|                                                                   |  | (In thousands) |       
|Liability for asset retirement obligation as of December 31, 2006  |  | $              | 45,326 |  
|Liabilities settled and divested                                   |  |                | (3,059 | )
|Additions                                                          |  |                | 2,293  |  
|Accretion expense                                                  |  |                | 1,350  |  
|                                                                   |  |                |        |  
|Liability for asset retirement obligation as of September 30, 2007 |  | $              | 45,910 |  
|                                                                   |  |                |        |  

6. COMMITMENTS AND CONTINGENCIES

Contingencies

From time to time the Company may be a plaintiff or defendant in a pending or
threatened legal proceeding arising in the normal course of its business. All known liabilities are accrued based on the Companys best estimate of the potential loss. While the outcome and impact of currently pending legal proceedings cannot
be predicted with certainty, the Companys management and legal counsel believe that the resolution of these proceedings through settlement or adverse judgment will not have a material adverse effect on the Companys consolidated operating
results, financial position or cash flows.

Rig Commitments

In its Form 10-K, as amended, for the year ended December 31, 2006, the Company disclosed that it had nine drilling rigs under contract for a total commitment over four years of $78.9 million. As of
September 30,



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2007, the Company has seven drilling rigs under contract for a total commitment over four years of $45.8 million of which $35.7 million relates to two rigs
located in North Louisiana.

7. DERIVATIVE ACTIVITIES

Periodically, the Company enters into derivative commodity instruments to hedge its exposure to price fluctuations on anticipated oil and natural gas production. Under collar arrangements, if the index price rises
above the ceiling price, the Company pays the counterparty. If the index price falls below the floor price, the counterparty pays the Company. Under price swaps, the Company is required to make payments to, or receive payments from, the
counterparties based upon the differential between a specified fixed price and a price related to those quoted on the New York Mercantile Exchange for each respective period. Under put options, the Company pays a fixed premium to lock in a specified
floor price. If the index price falls below the floor price, the counterparty pays the Company net of the fixed premium. If the index price rises above floor price, the Company pays the fixed premium. The Company does not elect hedge accounting for
accounting purposes, and accordingly, recorded the net change in the mark-to-market valuation of these derivative contracts in the consolidated statement of operations.

At September 30, 2007, the Company had a $24.4 million derivative asset, $23.2 million of which is classified as current, and a $17.0 million derivative liability, $13.4 million of which is classified as current.
The weighted average of the forward strip prices used to value the derivative assets and liabilities was $78.73 per barrel of oil (Bbl) and $7.70 per million British thermal unit (Mmbtu) of natural gas. The Company recorded a net derivative gain of
$20.3 million ($3.0 million unrealized loss and a $23.3 million gain for cash received on settled contracts) for the three months ended September 30, 2007 and a $7.0 million net derivative loss ($48.1 million unrealized loss and a $41.1 million
gain for cash received on settled contracts) for the nine months ended September 30, 2007.

At December 31, 2006, the Company had
a $75.2 million derivative asset, $68.2 million of which is classified as current, and a $19.8 million derivative liability, $8.0 million of which is classified as current. The weighted average of the forward strip prices used to value the
derivative assets and liabilities was $65.40 per Bbl and $7.29 per Mmbtu of natural gas. The Company recorded a net derivative gain of $68.0 million and $94.5 million for the three and nine months ended September 30, 2006, respectively.

Natural Gas

At September 30,
2007, the Company had the following natural gas costless collar positions:



|                             |  |                  |  |                    |              |                      |   |                    |  |                      |               |  |   |      
|---------------------------- |  | ---------------- |  | ------------------ | ------------ | -------------------- | - | ------------------ |  | -------------------- | ------------- |  | - | -----
|                             |  | Collars         
|                             |  |                  |  | Floors             |              | Ceilings            
|Period                       |  | Volume inMmbtus |  | Price / PriceRange |              | WeightedAveragePrice |   | Price / PriceRange |  | WeightedAveragePrice
|October 2007  December 2007 |  | 15,440,000       |  | $                  | 5.30 - $8.00 |                      | $ | 7.10               |  | $                    | 7.12 - $15.35 |  | $ | 12.29
|January 2008  December 2008 |  | 36,490,000       |  |                    | 5.00 - 8.00  |                      |   | 7.06               |  |                      | 6.45 - 19.15  |  |   | 10.88

At September 30, 2007, the Company had the following natural gas swap positions:



|                             |  |                  |  |                    |              |                      |   |     
|---------------------------- |  | ---------------- |  | ------------------ | ------------ | -------------------- | - | ----
|                             |  | Swaps           
|Period                       |  | Volume inMmbtus |  | Price / PriceRange |              | WeightedAveragePrice
|October 2007  December 2007 |  | 1,200,000        |  | $                  | 6.06 - $8.80 |                      | $ | 8.12
|January 2008  December 2008 |  | 9,140,000        |  |                    | 7.71 - 8.06  |                      |   | 7.85



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At September 30, 2007, the Company had the following natural gas put options:



|                             |  |                  |  |                      |     
|---------------------------- |  | ---------------- |  | -------------------- | ----
|                             |  | Floors          
|Period                       |  | Volume inMmbtus |  | WeightedAveragePrice
|October 2007  December 2007 |  | 1,820,000        |  | $                    | 8.00

The Company has recorded a deferred premium liability of $1.4 million of long-term debt which has
been classified as current at September 30, 2007 based on a weighted average deferred premium of $0.79 per Mmbtu in 2007. The natural gas put option contracts contain deferred premiums that will be paid as the contracts expire.

Crude Oil

At September 30, 2007, the Company
had the following crude oil costless collar positions:



|                             |  |                    |  |                       |                |                    |   |                      |  |   |                |  |   |      
|---------------------------- |  | ------------------ |  | --------------------- | -------------- | ------------------ | - | -------------------- |  | - | -------------- |  | - | -----
|                             |  | Collars           
|Period                       |  | Volume inBbls      |  | Floors                |                | Ceilings          
|                             |  | Price / PriceRange |  | WeightedAverage Price |                | Price / PriceRange |   | WeightedAveragePrice
|October 2007  December 2007 |  | 658,000            |  | $                     | 35.00 - $70.00 |                    | $ | 63.69                |  | $ | 43.20 - $90.10 |  | $ | 82.93
|January 2008  December 2008 |  | 792,000            |  |                       | 34.00 - 70.00  |                    |   | 64.96                |  |   | 45.30 - 85.05  |  |   | 80.26

At September 30, 2007, the Company had the following crude oil swap positions:



|                             |  |               |  |                    |       |                      |   |      
|---------------------------- |  | ------------- |  | ------------------ | ----- | -------------------- | - | -----
|                             |  | Swaps        
|Period                       |  | Volume inBbls |  | Price / PriceRange |       | WeightedAveragePrice
|October 2007  December 2007 |  | 9,000         |  | $                  | 63.85 |                      | $ | 63.85
|January 2008  December 2008 |  | 144,000       |  |                    | 38.10 |                      |   | 38.10

8. STOCKHOLDERS EQUITY

In conjunction with the Companys merger with KCS on July 12, 2006, the Company issued approximately 83.8 million shares of its common stock as consideration to the former stockholders of KCS.

In connection with the North Louisiana Acquisitions, on February 1, 2006, the Company issued and sold 13.0 million shares of its
common stock for $14.50 per share, for an aggregate offering amount of approximately $188.5 million. The Company received approximately $180.4 million in net proceeds from the offering. Contemporaneously with the offering, the Company agreed to
repurchase, and EnCap Investments, L.P., and certain of its affiliates, agreed to sell, approximately 3.3 million shares for $46.2 million, which represents a price equal to the net proceeds received for those 3.3 million shares by the
Company from the offering. The common stock was offered and sold pursuant to private placement exemptions from registration provided by Rule 506 of Regulation D, under Section 4(2) of the Act, Regulation S of the Act and similar exemptions
under state law. Shares of the common stock were offered and sold only to accredited investors (as defined in Rule 501(a) of the Act) and non-United States persons pursuant to the offers and sales outside the United States within
the meaning of Regulation S under the Act. The placement agents received a cash payment of approximately $7.7 million as compensation for services provided in connection with the offering and to reimburse them for certain expenses.

Stock Appreciation Rights

Though not utilized during
2006, the Companys 2004 Employee Incentive Plan (the 2004 Plan) permits awards of stock appreciation rights. A stock appreciation right is similar to a stock option, in that it represents the



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right to realize the increase in market price, if any, of a fixed number of shares over the grant value of the right, which is equal to the market price of
the Companys common stock on the date of grant. However, to realize the value of a stock option the holder must pay the exercise price in exchange for shares of stock underlying the option, the value embodied by the stock appreciation right,
if any, are settled in exchange for shares of common stock valued on the date of settlement. Stock appreciation rights vest one-third annually after the original grant date. The term is ten years from the date of grant, which is the maximum term
permitted under the 2004 Plan. At the end of the term, the right to receive the value of the stock appreciation right expires.

During the
nine months ended September 30, 2007, the Company granted stock appreciation rights covering 1.5 million shares of common stock to employees of the Company. The stock appreciation rights have exercise prices ranging from $11.64 to $14.89
and vest over a three year period at a rate of one-third on the annual anniversary date of the grant and expire ten years from the grant date. At September 30, 2007, the unrecognized compensation expense related to non-vested stock appreciation
rights totaled $3.1 million and will be recognized on a straight line basis over the weighted average remaining vesting period of 2.4 years.

Stock
Options

The Company did not award any stock options to employees during the nine months ended September, 2007.

During the first nine months of 2006, the Company granted stock options covering 1.9 million shares of common stock to employees of the Company. The
options have exercises prices ranging from $9.80 to $16.04 with a weighted average price of $11.93. These options vest over a three year period at a rate of one-third on the annual anniversary date of the grant and expire ten years from the grant
date. At September 30, 2007, the unrecognized compensation expense related to non-vested stock options totaled $2.1 million and will be recognized on a straight line basis over the weighted average remaining vesting period of 1.5 years.

Restricted Stock

During the nine
months ended September 30, 2007, the Company granted 0.8 million shares of restricted stock to employees of the Company. These restricted shares were granted at prices ranging from $11.64 to $16.23 with a weighted average price of $12.33.

During the first nine months of 2006, the Company granted 0.9 million shares of restricted common stock to employees and non-employee
directors of the Company. These restricted shares were granted at prices ranging from $9.80 to $16.04 with a weighted average price of $11.71.

Employee shares vest over a three-year period at a rate of one-third on the annual anniversary date of the grant and the non-employee directors shares vest six-months from the date of grant. At September 30, 2007, the
unrecognized compensation expense related to non-vested restricted stock totaled $12.5 million and will be recognized on a straight line basis over the weighted average remaining vesting period of 1.8 years.

Performance Shares

In conjunction with the
Companys merger with KCS, the Company adopted a plan under which performance share awards are granted under the KCS Energy, Inc. 2005 Employee and Directors Stock Plan. Performance awards contain a contingent right to receive shares of common
stock. The grantee would earn between 0% and 200% of the target amount of performance shares upon the achievement of pre-determined objectives over a three-year performance period. The objectives relate to the Companys total stockholder return
(as defined in the form of performance share agreement) as compared to the total stockholder return of a group of peer companies during the performance period. The Company does not anticipate the issuance of any additional performance share awards
in future periods. The fair value of the awards using a Monte Carlo technique was $10.89 per share.



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9. RELATED PARTY TRANSACTIONS

In February 2006, the Company repurchased approximately 3.3 million shares of its common stock held by EnCap Investments, L.P., and certain of its affiliates (EnCap), at a price per share equal to the net
proceeds per share that the Company received from a private offering of 13.0 million of its common shares that closed on the same day as the EnCap purchase. The 3.3 million shares were repurchased for $46.2 million.

10. NET EARNINGS PER COMMON SHARE

The following
represents the calculation of net earnings per common share:



|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | ------------------------------ | - | ------- |  | ---- | ------- |  | - | ------- | -
|                                                                                           |  | Three Months EndedSeptember 30,          |         | Nine Months EndedSeptember 30, |  
|                                                                                           |  | 2007                                     |         | 2006                           |   | 2007    |  | 2006 |        
|                                                                                           |  | (In thousands, except per share amounts) |        
|Basic                                                                                      |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Net income                                                                                 |  | $                                        | 26,795  |                                | $ | 52,656  |  | $    | 53,011  |  | $ | 90,448  |  
|Less: preferred dividends                                                                  |  |                                          |        |                                |   |        |  |      |        |  |   | (217    | )
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Net (loss) income available to common stockholders                                         |  | $                                        | 26,795  |                                | $ | 52,656  |  | $    | 53,011  |  | $ | 90,231  |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Weighted average number of shares                                                          |  |                                          | 167,920 |                                |   | 157,135 |  |      | 167,671 |  |   | 107,908 |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Basic earnings per common share                                                            |  | $                                        | 0.16    |                                | $ | 0.34    |  | $    | 0.32    |  | $ | 0.84    |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Diluted                                                                                    |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Net income                                                                                 |  | $                                        | 26,795  |                                | $ | 52,656  |  | $    | 53,011  |  | $ | 90,231  |  
|Plus: preferred dividends                                                                  |  |                                          |        |                                |   |        |  |      |        |  |   | 217     |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Net (loss) income available to common stockholders                                         |  | $                                        | 26,795  |                                | $ | 52,656  |  | $    | 53,011  |  | $ | 90,448  |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Weighted average number of shares                                                          |  |                                          | 167,920 |                                |   | 157,135 |  |      | 167,671 |  |   | 107,908 |  
|Common stock equivalent shares representing shares issuable upon exercise of stock options |  |                                          | 2,993   |                                |   | 1,299   |  |      | 2,781   |  |   | 1,531   |  
|Common stock equivalent shares representing shares issuable upon exercise of warrants      |  |                                          | 1,360   |                                |   | 1,213   |  |      | 1,327   |  |   | 1,267   |  
|Common stock equivalent shares representing shares as-if conversion of preferred shares  |  |                                          |        |                                |   |        |  |      |        |  |   |        |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Weighted average number of shares used in calculation of diluted income per common share   |  |                                          | 172,273 |                                |   | 159,647 |  |      | 171,779 |  |   | 110,706 |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  
|Diluted earnings per common share                                                          |  | $                                        | 0.16    |                                | $ | 0.33    |  | $    | 0.31    |  | $ | 0.82    |  
|                                                                                           |  |                                          |         |                                |   |         |  |      |         |  |   |         |  

The following common stock equivalents were not included in the computation for diluted net
earnings per common share because the exercise price exceeds fair market value:



|                                      |  |                                 |  |                                |  |      |  |     
|------------------------------------- |  | ------------------------------- |  | ------------------------------ |  | ---- |  | ----
|                                      |  | Three Months EndedSeptember 30, |  | Nine Months EndedSeptember 30,
|Common Stock Equivalents:             |  | 2007                            |  | 2006                           |  | 2007 |  | 2006
|                                      |  | (In thousands)                 
|Options and stock appreciation rights |  | 15                              |  | 959                            |  | 34   |  | 804 
|Warrants                              |  |                                |  | 18                             |  | 8    |  | 18  
|                                      |  |                                 |  |                                |  |      |  |     
|                                      |  | 15                              |  | 977                            |  | 42   |  | 822 
|                                      |  |                                 |  |                                |  |      |  |     



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11. ADDITIONAL FINANCIAL STATEMENT INFORMATION

Certain balance sheet amounts are comprised of the following:



|                                          |  |                   |         |                  |   |        
|----------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                          |  | September 30,2007 |         | December 31,2006
|                                          |  | (In thousands)   
|Accounts receivable:                      |  |                   |         |                  |   |        
|Oil and gas sales                         |  | $                 | 89,579  |                  | $ | 107,003
|Joint interest accounts                   |  |                   | 40,105  |                  |   | 37,056 
|Income taxes receivable                   |  |                   | 7,107   |                  |   | 5,453  
|Other                                     |  |                   | 742     |                  |   | 6,070  
|                                          |  |                   |         |                  |   |        
|                                          |  | $                 | 137,533 |                  | $ | 155,582
|                                          |  |                   |         |                  |   |        
|Accounts payable and accrued liabilities: |  |                   |         |                  |   |        
|Trade payables                            |  | $                 | 34,369  |                  | $ | 31,565 
|Revenues and royalties payable            |  |                   | 87,797  |                  |   | 69,383 
|Accrued capital costs                     |  |                   | 117,983 |                  |   | 111,252
|Accrued interest expense                  |  |                   | 24,946  |                  |   | 40,906 
|Operator prepayment liability             |  |                   | 12,757  |                  |   | 5,839  
|Accrued lease operating expenses          |  |                   | 7,939   |                  |   | 10,601 
|Accrued ad valorem taxes payable          |  |                   | 7,054   |                  |   | 7,086  
|Accrued employee compensation             |  |                   | 7,200   |                  |   | 2,649  
|Other                                     |  |                   | 5,752   |                  |   | 16,670 
|                                          |  |                   |         |                  |   |        
|                                          |  | $                 | 305,797 |                  | $ | 295,951
|                                          |  |                   |         |                  |   |        

12. SUBSEQUENT EVENTS

In June 2007, Petrohawk announced its intention to form a publicly-traded master limited partnership, HK Energy Partners LP, or the MLP, which would initially acquire certain of Petrohawks oil and natural gas
properties located in West Texas, New Mexico and Oklahoma. On October 30, 2007, the Company filed a Form S-1 with the Securities and Exchange Commission to form this MLP. The Company anticipates that the MLP will offer approximately $150
million to $225 million of partnership units to the public during the first quarter of 2008, subject to regulatory processes and market conditions. At the closing of the initial public offering, Petrohawk will be the general partner of the MLP
and hold a majority ownership in the units of the MLP. Petrohawk will continue to operate and own a working interest in certain of the assets that will form the MLP. This Report on Form 10-Q shall not constitute an offer to sell or the solicitation
of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities will only be made in accordance with the registration requirements of the Securities Act of 1933 or an exemption therefrom.

On October 15, 2007, Petrohawk Energy Corporation along with certain of its wholly-owned subsidiaries, entered into a definitive agreement with
Milagro Development I, LP (Milagro), relating to the sale to Milagro of oil and natural gas properties and related assets comprising Petrohawks Gulf Coast division for $825 million, subject to customary purchase price adjustments.
The purchase price consists of $700 million in cash and a $125 million note. The note will mature five years and ninety-one days from the closing date and will bear interest at 12 percent per annum, payable in kind at Milagros option. The
note will be a senior unsecured obligation of Milagro. Milagro may redeem the note at any time prior to one year after Closing for $100 million plus accrued and unpaid interest. If the redemption occurs prior to 150 days after the closing date,
accrued interest will be waived. The transaction is expected to close in the fourth quarter of 2007. The economic effective date for the sale is July 1, 2007.

The definitive agreement contains customary closing conditions for transactions of this type. The agreement also contains customary representations and warranties and indemnity obligations with respect to losses
relating



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to, among other things, breaches of representations or warranties, failure to perform covenants, certain environmental obligations and other assumed
obligations. Certain of these indemnification obligations are subject to minimum claim amounts and there is an overall deductible equal to 11/2% of the purchase price. The cap on indemnification is equal to 10% of the purchase price.

Also effective as of October 15, 2007, Petrohawk Energy Corporation entered into the Fourth
Amendment (the Fourth Amendment) to Second Amended and Restated Senior Revolving Credit Agreement dated as of July 12, 2006 among Petrohawk Energy Corporation, each of the lenders from time to time party thereto (the
Lenders), BNP Paribas, as administrative agent for the Lenders, Bank of America, N.A. and BMO Capital Markets Financing, Inc., as co-syndication agents for the Lenders, and JPMorgan Chase Bank, N.A., Wells Fargo Bank, N.A. and Fortis
Capital Corp., as co-documentation agents for the Lenders. Pursuant to the Fourth Amendment, the facility borrowing base was increased to $900,000,000 until the earlier of (a) the consummation of the sale of the Gulf Coast division or
(b) the next borrowing base redetermination date. Upon the consummation of the sale of the Gulf Coast division, the borrowing base shall automatically be decreased to $675,000,000, until the next borrowing base redetermination date. Also
pursuant to the Fourth Amendment, until the closing of the sale of the Gulf Coast division, the borrowing base shall not be increased pursuant to Petrohawks redemption or repurchase of Petrohawks 91/8% senior notes due 2013 and Petrohawks 71/8% senior notes due 2012, as had been previously provided. After the sale of the Gulf Coast division, Petrohawk may, at its option, request the borrowing base be increased by $100
for every $275 of the 91/8% senior notes due 2013 and the 71/8% senior notes due 2012 redeemed or repurchased.



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|Item  2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|-------- | -------------------------------------------------------------------------------------

The following review of operations for the three and nine months ended September 30, 2007 and 2006 should be read in conjunction with our condensed
consolidated financial statements and the notes thereto included in this Form 10-Q and with the consolidated financial statements, notes and managements discussion and analysis included in our Form 10-K, as amended, for the year ended
December 31, 2006.

Overview

We
are an independent oil and natural gas company engaged in the acquisition, development, production and exploration of oil and natural gas properties located onshore in North America. Our properties are concentrated in East Texas/North Louisiana,
onshore Gulf Coast, and in the Permian, Anadarko and Arkoma basins. We have increased our proved reserves and production through acquisitions and the exploitation of acquired properties. In 2006 we acquired approximately 537 billion cubic feet of
natural gas equivalent (Bcfe) of proved reserves for approximately $2.2 billion in conjunction with our acquisitions in North Louisiana and our merger with KCS Energy, Inc. (KCS). In addition, we sold an estimated 80 Bcfe of proved reserves for
approximately $200 million.

In June 2007, we announced our intention to form a publicly-traded master limited partnership, HK Energy
Partners LP, or the MLP, which would initially acquire certain of our oil and natural gas properties located in West Texas, New Mexico and Oklahoma. On October 30, 2007, we filed a Form S-1 with the Securities and Exchange Commission to form
this MLP. We anticipate that the MLP will offer approximately $150 million to $225 million of partnership units to the public during the first quarter of 2008, subject to regulatory processes and market conditions. At the closing of the initial
public offering, We will be the general partner of the MLP and hold a majority ownership in the units of the MLP. We will continue to operate and own a working interest in certain of the assets that will form the MLP. This Report on Form 10-Q shall
not constitute an offer to sell or the solicitation of an offer to buy any securities. Any offers, solicitations of offers to buy, or any sales of securities will only be made in accordance with the registration requirements of the Securities Act of
1933 or an exemption therefrom.

On October 15, 2007, Petrohawk Energy Corporation along with certain of our wholly-owned
subsidiaries, entered into a definitive agreement with Milagro Development I, LP (Milagro), relating to the sale to Milagro of oil and natural gas properties and related assets comprising our Gulf Coast division for $825 million, subject
to customary purchase price adjustments. The purchase price consists of $700 million in cash and a $125 million note. The note will mature five years and ninety-one days from the closing date and will bear interest at 12% per annum payable in
kind at Milagros option. The note will be a senior unsecured obligation of Milagro. Milagro may redeem the note at any time prior to one year after Closing for $100 million plus accrued and unpaid interest. If the redemption occurs prior to
150 days after the closing date, accrued interest will be waived. The transaction is expected to close in the fourth quarter of 2007. The economic effective date for the sale is July 1, 2007.

In the first nine months of 2007, we produced 88.5 Bcfe compared to production of 50.6 Bcfe for the comparable period of the prior year. Natural gas
production was 75.2 billion cubic feet (Bcf) and oil production was 2,221 thousand barrels of oil (Mbbls) for the first nine months of 2007. Natural gas equivalent production increased 37.9 Bcfe from the same period in 2006. This increase was
primarily attributable to the completion of our merger with KCS in July 2006, the completion of certain acquisitions in North Louisiana, which we refer to collectively as the North Louisiana Acquisitions, in January of 2006, as well as our continued
drilling success. We drilled 268 (87 during the third quarter) gross wells during the first nine months of 2007, 258 (85 during the third quarter) of which were successful for a success rate of 96% (98% during the third quarter). We reported oil and
gas revenues for the nine months ended September 30, 2007 of $656.1 million. This represents an increase of $270.2 million as compared to the prior year.



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Our financial results depend upon many factors, particularly the price of oil and natural gas and our
ability to market our production. Commodity prices are affected by changes in market demands, which are impacted by overall economic activity, weather, pipeline capacity constraints, inventory storage levels, basis differentials and other factors.
As a result, we cannot accurately predict future oil and natural gas prices, and therefore, we cannot determine the effect increases or decreases in future prices will have on our capital program, production volumes and future revenues. Finding and
developing oil and natural gas reserves at economical costs are also critical to our long-term success.

Capital Resources and Liquidity

Our sources of cash for the nine months ended September 30, 2007 and 2006 were from operating and financing activities. Proceeds from the issuance
of long-term debt and cash received from operations were offset by cash used in investing activities to fund our drilling program and acquisition activities, net of any divestiture activities. Operating cash flow fluctuations were substantially
driven by changes in commodity prices and changes in our production volumes. Prices for oil and natural gas have historically been subject to seasonal influences characterized by peak demand and higher prices in the winter heating season; however,
the impact of other risks and uncertainties have influenced prices throughout recent years. Working capital was substantially influenced by these variables. Fluctuation in cash flow may result in an increase or decrease in our capital and
exploration expenditures. See Results of Operations below for a review of the impact of prices and volumes on sales. The formation of the MLP and our pending Gulf Coast division sale, when completed, will also have impact on our cash
flows, capital resources and liquidity.

Net increase (decrease) in cash is summarized as follows:



|                                            |  |                                 |          |   |      |   |          |  
|------------------------------------------- |  | ------------------------------- | -------- | - | ---- | - | -------- | -
|                                            |  | Nine Months Ended September 30, |         
|                                            |  | 2007                            |          |   | 2006 |  
|                                            |  | (In thousands)                  |         
|Cash flows provided by operating activities |  | $                               | 452,988  |   |      | $ | 182,324  |  
|Cash flows used in investing activities     |  |                                 | (734,233 | ) |      |   | (925,578 | )
|Cash flows provided by financing activities |  |                                 | 285,453  |   |      |   | 736,627  |  
|                                            |  |                                 |          |   |      |   |          |  
|Net increase (decrease) in cash             |  | $                               | 4,208    |   |      | $ | (6,627   | )
|                                            |  |                                 |          |   |      |   |          |  

Operating Activities. Net cash provided by operating activities for the nine months ended
September 30, 2007 and 2006 were $453.0 million and $182.3 million, respectively. Net cash flows provided by operating activities increased in 2007 primarily due to our 74.9% increase in production volumes as a result of our recent acquisition
activities as well as our continued drilling success. Also contributing to this increase was our continued success in reducing our operating costs on a per unit basis. These reductions in operating costs were partially offset by a 2.8% decrease in
our realized natural gas equivalent price compared to the same period in the prior year. We are unable to predict future production levels or future commodity prices. As a result, we cannot provide any assurance about future levels of net cash
provided by operating activities. We expect that our pending Gulf Coast division sale, when completed, will reduce our production levels in future periods.

Investing Activities. The primary driver of cash used in investing activities is capital spending, inclusive of acquisitions and net of dispositions. Cash used in investing activities was $734.2 million and
$925.6 million for the nine months ended September 30, 2007 and 2006, respectively.

During the first nine months of 2007, we spent
$566.8 million on capital expenditures in conjunction with our drilling program. We participated in the drilling of 268 wells in 2007. In 2006, we spent $222.7 million on capital expenditures in conjunction with our participation in the drilling of
235 wells.



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During the third quarter of 2007, we closed our acquisition of One Tec, L.L.C. with properties in
Arkansas, Indiana and Texas for $39.9 million, net of $2.1 million cash acquired.

During the first nine months of 2007, we spent $133.1
million primarily to acquire additional interests in the Fayetteville Shale in Arkansas, in the New Albany Shale in Indiana and in both the Elm Grove and Terryville fields in Louisiana. Our program to acquire additional interests and acreage in
these key fields is ongoing.

On April 21, 2006, we announced that we entered into definitive agreement to merge with KCS and this
transaction was consummated on July 12, 2006. Total consideration for the shares of KCS common stock was comprised of approximately $1.1 billion of our common stock, approximately $450 million of cash and the assumption of $275 million of KCS
debt. In addition, all outstanding options to purchase KCS common stock were converted into options to purchase our common stock.

During
the first quarter of 2006, we completed the acquisition of Winwell for $208 million in cash after closing adjustments, as well as the acquisition of certain oil and gas properties for $86 million in cash after closing adjustments.

We closed the previously announced $52.5 million divestment of substantially all of our properties in the Gulf of Mexico on March 21, 2006. The net
proceeds received in this transaction were used to pay down a portion of our debt facilities.

Our capital budget for the remainder of 2007
and 2008 is expected to be funded from cash flows from operations and additional borrowings under our senior revolving credit facility. We establish the budget for these amounts based on our current estimate of future commodity prices. Due to the
volatility of commodity prices, our budget may be periodically adjusted.

Financing Activities. Net cash flows provided by financing
activities were $285.5 million and $736.6 million for the nine months ended September 30, 2007 and 2006, respectively. Cash flows provided by financing activities in 2007 were the result of increased borrowings, primarily to fund our drilling
and acquisition activities.

In connection with the North Louisiana Acquisitions, on February 1, 2006, we issued and sold
13 million shares of our common stock for $14.50 per share, for an aggregate offering amount of approximately $188.5 million. Additionally, we repurchased approximately 3.3 million shares of common stock for $46.2 million from EnCap
Investments, L.P. and certain of its affiliates. We incurred a total of $10.7 million of offering costs during the nine months ended September 30, 2006.

We strive to maintain excess availability under our debt facilities. Excess cash flow and non-core asset sales are used to repay debt to the extent available. During the first nine months of 2007, we had net
borrowings of $280.8 million primarily due to the cash requirements of our drilling program as well as to fund our acquisition activities in 2007. During the first nine months of 2006, we had net borrowings of $637.9 million primarily due to the
funding requirements to close the merger with KCS and the North Louisiana Acquisitions.

Financing activities in 2007 and 2006 included
$3.1 million of cash received and $14.6 million of cash paid on settled derivative contracts that were acquired in conjunction with our acquisition activities.

During the first nine months of 2006, we paid out previously accrued fourth quarter of 2005 dividends of $0.1 million on our 8% cumulative preferred stock as well as our first and second quarter 2006 dividends of $0.1
million each. In April 2006, we initiated a buyback of this preferred stock for $9.25 per unit, resulting in a $5.3 million use of cash from financing activities.



24



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##### Table of Contents

Contractual Obligations

We have no material long-term commitments associated with our capital expenditure plans or operating agreements. Consequently, we believe we have a significant degree of flexibility to adjust the level of such
expenditures as circumstances warrant. Our level of capital expenditures will vary in future periods depending on the success we experience in our acquisition, developmental and exploration activities, oil and natural gas price conditions and
other related economic factors. Currently no sources of liquidity or financing are provided by off-balance sheet arrangements or transactions with unconsolidated, limited-purpose entities.

In our Form 10-K, as amended, for the year ended December 31, 2006, we disclosed that we had nine drilling rigs under contract for a total
commitment over four years of $78.9 million. As of September 30, 2007, we have seven drilling rigs under contract for a total commitment over four years of $45.8 million of which $35.7 million relates to two rigs located in North
Louisiana.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operation are based upon the condensed consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. Preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. There have been no changes to
our critical accounting policies from those described in the 2006 Form 10-K, as amended.



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##### Table of Contents

Results of Operations

Quarters ended September 30, 2007 and 2006

We reported net income of $26.8 million for the three months ended
September 30, 2007 compared to net income of $52.7 million for the comparable period in 2006. The decrease in net income of $25.9 million from the three months ended September 30, 2006, was primarily driven by the change in fair value of
derivative instruments due to the change in our weighted average forward strip pricing which resulted in a net decrease of $47.7 million on derivative contracts. Also contributing to this decrease was a decrease in our average equivalent sales price
of $0.27 per Mcfe offset by an increase in production volumes of 3.7 Bcfe primarily due to our successful drilling program.



|                                                    |  |                                 |         |   |                     |   |         |   |  |   |         |  
|--------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------- | - | ------- | - |  | - | ------- | -
|                                                    |  | Three Months EndedSeptember 30, |         |   | Increase (Decrease) |  
|In thousands (except per unit and per Mcfe amounts) |  | 2007                            |         |   | 2006                |   |        
|Net income                                          |  | $                               | 26,795  |   |                     | $ | 52,656  |   |  | $ | (25,861 | )
|Oil and gas revenues                                |  |                                 | 213,337 |   |                     |   | 196,439 |   |  |   | 16,898  |  
|Expenses:                                           |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Production:                                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Lease operating                                     |  |                                 | 17,236  |   |                     |   | 17,594  |   |  |   | (358    | )
|Workover and other                                  |  |                                 | 2,110   |   |                     |   | 2,720   |   |  |   | (610    | )
|Taxes other than income                             |  |                                 | 12,844  |   |                     |   | 15,739  |   |  |   | (2,895  | )
|Gathering, transportation and other                 |  |                                 | 8,265   |   |                     |   | 5,178   |   |  |   | 3,087   |  
|General and administrative:                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|General and administrative                          |  |                                 | 12,258  |   |                     |   | 12,132  |   |  |   | 126     |  
|Stock-based compensation                            |  |                                 | 3,581   |   |                     |   | 3,173   |   |  |   | 408     |  
|Depletion, depreciation and amortization:           |  |                                 |         |   |                     |   |         |   |  |   |         |  
|DepletionFull cost                                 |  |                                 | 99,802  |   |                     |   | 88,468  |   |  |   | 11,334  |  
|DepreciationOther                                  |  |                                 | 854     |   |                     |   | 331     |   |  |   | 523     |  
|Accretion expense                                   |  |                                 | 456     |   |                     |   | 413     |   |  |   | 43      |  
|Net gain on derivative contracts                    |  |                                 | 20,337  |   |                     |   | 68,048  |   |  |   | (47,711 | )
|Interest expense and other                          |  |                                 | (34,308 | ) |                     |   | (35,870 | ) |  |   | 1,562   |  
|Income tax provision                                |  |                                 | (15,165 | ) |                     |   | (30,213 | ) |  |   | 15,048  |  
|                                                    |  |                                 |        
|Production:                                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Natural GasMmcf                                    |  |                                 | 25,601  |   |                     |   | 21,871  |   |  |   | 3,730   |  
|Crude OilMbbl                                      |  |                                 | 742     |   |                     |   | 797     |   |  |   | (55     | )
|Natural Gas EquivalentMmcfe                        |  |                                 | 30,052  |   |                     |   | 26,652  |   |  |   | 3,400   |  
|Average Daily ProductionMmcfe                      |  |                                 | 327     |   |                     |   | 290     |   |  |   | 37      |  
|                                                    |  |                                 |        
|Average price per unit (1):                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Gas price per Mcf                                   |  | $                               | 6.22    |   |                     | $ | 6.52    |   |  | $ | (0.30   | )
|Oil price per Bbl                                   |  |                                 | 73.04   |   |                     |   | 67.42   |   |  |   | 5.62    |  
|Equivalent per Mcfe                                 |  |                                 | 7.10    |   |                     |   | 7.37    |   |  |   | (0.27   | )
|                                                    |  |                                 |        
|Average cost per Mcfe:                              |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Production:                                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|Lease operating                                     |  |                                 | 0.57    |   |                     |   | 0.66    |   |  |   | (0.09   | )
|Workover and other                                  |  |                                 | 0.07    |   |                     |   | 0.10    |   |  |   | (0.03   | )
|Taxes other than income                             |  |                                 | 0.43    |   |                     |   | 0.59    |   |  |   | (0.16   | )
|Gathering, transportation and other                 |  |                                 | 0.28    |   |                     |   | 0.19    |   |  |   | 0.09    |  
|General and administrative:                         |  |                                 |         |   |                     |   |         |   |  |   |         |  
|General and administrative                          |  |                                 | 0.41    |   |                     |   | 0.46    |   |  |   | (0.05   | )
|Stock-based compensation                            |  |                                 | 0.12    |   |                     |   | 0.12    |   |  |   |        |  
|Depletion                                           |  |                                 | 3.32    |   |                     |   | 3.32    |   |  |   |        |  

---

|(1) | Amounts exclude the impact of cash paid on settled contracts as we did not elect to apply hedge accounting.
|--- | -----------------------------------------------------------------------------------------------------------



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For the three months ended September 30, 2007, oil and natural gas sales increased $16.9 million,
from the same period in 2006, to $213.3 million. The increase was primarily due to the increase in production of 3,400 Mmcfe primarily related to our successful drilling program. Increased production led to a $25.1 million increase in revenues
for the three months ended September 30, 2007. The increase in production was offset by a decrease in our realized average price per Mcfe of $0.27 per Mcfe to $7.10, which reduced our revenues by $8.2 million.

Lease operating expenses decreased $0.4 million for the three months ended September 30, 2007. The decrease was due to our continued cost
control efforts offset by an increase in production volumes as a result of our successful drilling activities in 2007. We drilled 87 wells during the three months ended September 30, 2007 compared to 105 wells in 2006. On a per unit basis,
lease operating expenses decreased from $0.66 per Mcfe in 2006 to $0.57 per Mcfe in 2007. We continue to identify divestment prospects in outlying, higher operating cost properties. Also contributing to the decrease on a per unit basis was our
acquisition of lower cost properties in conjunction with our merger with KCS and properties acquired in the North Louisiana Acquisitions.

Taxes other than income decreased $2.9 million for the three months ended September 30, 2007 as compared to the same period in 2006. The largest components of taxes other than income are production and severance taxes which are
generally assessed as a percentage of gross oil and natural gas sales. As a percentage of oil and gas sales, taxes other than income decreased from 8% in 2006 to 6% in 2007 primarily due to the timing of various refunds received in 2007 and
reassessments that occurred in 2007.

Gathering, transportation and other expense increased $3.1 million, or $0.09 per Mcfe, for the three
months ended September 30, 2007 as compared to the same period in 2006. This increase was due to our recent acquisition activities including the completion of our merger with KCS as well as the North Louisiana Acquisitions.

General and administrative expense for the three months ended September 30, 2007 remained relatively flat at $12.2 million compared to $12.1 million
in the prior year. In 2006, we completed the North Louisiana Acquisitions as well as our merger with KCS which increased compensation and other costs associated with increased staffing levels to meet the demands of our expanding operations.
Offsetting these increases were decreased legal and contracting fees from 2006 to 2007 as a result of streamlining costs after the merger with KCS. General and administrative expense has decreased on a per Mcfe basis from $0.46 per Mcfe in 2006 to
$0.41 per Mcfe in 2007 as production increases have exceeded our administrative expense increases.

Stock-based compensation increased $0.4
million for the three months ended September 30, 2007 as compared to the same period in the prior year. This increase was primarily related to additional stock options and restricted stock grants assumed as part of our merger with KCS in July
2006, as well as stock appreciation rights and restricted stock grants to employees during 2007.

Depletion expense increased $11.3 million
for the three months ended September 30, 2007 from the same period in 2006 to $99.8 million. Depletion for oil and natural gas properties is calculated using the unit of production method, which essentially depletes the capitalized costs
associated with the evaluated properties plus future development costs based on the ratio of production volume for the current period to total remaining reserve volume for the evaluated properties. On a per unit basis, depletion expense
remained flat at $3.32 per Mcfe.

We enter into derivative commodity instruments to hedge our exposure to price fluctuations on our
anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the mark-to-market valuation of
these derivative contracts in the consolidated statement of operations. The Company



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recorded a net derivative gain of $20.3 million ($3.0 million unrealized loss and a $23.3 million gain for cash received on settled contracts) for the three
months ended September 30, 2007 compared to a net derivative gain of $68.0 million in the prior year.

Interest expense and other
decreased $1.6 million for the three months ended September 30, 2007 compared to the same period in 2006. This decrease was primarily due to the extinguishment of substantially all of our 2011 Notes in conjunction with our merger with KCS,
offset by a full quarter of expense associated with the additional debt we incurred in conjunction with our merger with KCS as well as the increase in our senior revolving credit facility in 2007 that has been used to fund our drilling and
acquisition activities.

Income tax expense for the three months ended September 30, 2007 decreased $15.1 million from the prior year.
The decrease in income tax expense from prior year was primarily due to our pre-tax income of $42.0 million for the three months ended September 30, 2007 compared to pre-tax income of $82.9 million in 2006. The effective tax rates for the three
months ended September 30, 2007 and 2006 were 36.1% and 36.5%, respectively. The decrease in our effective rate was primarily due to an increase in the disqualifying dispositions of exercised incentive stock options.



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##### Table of Contents

Results of Operations

Nine months ended September 30, 2007 and 2006

We reported net income of $53.0 million for the nine months ended
September 30, 2007 compared to net income of $90.4 million for the comparable period in 2006. The decrease in net income of $37.4 million from the nine months ended September 30, 2006, was primarily driven by the change in fair value of
derivative instruments due to the change in our weighted average forward strip pricing which resulted in a net decrease of $101.5 million on derivative contracts and a decrease in our average equivalent sales price of $0.21 per Mcfe which led to a
decrease of $18.6 million in our oil and gas revenues. Also contributing to this decrease was an increase in our interest expense and other of $41.0 million and depletion expense of $131.3 million. These decreases were partially offset by an
increase in production of 37.9 Bcfe due to our acquisitions and successful drilling which led to an increase of $288.8 million in our oil and gas revenues.



|                                                    |  |                                |         |   |                     |   |         |   |  |   |          |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------- | - | ------- | - |  | - | -------- | -
|                                                    |  | Nine Months EndedSeptember 30, |         |   | Increase (Decrease) |  
|In thousands (except per unit and per Mcfe amounts) |  | 2007                           |         |   | 2006                |   |        
|Net income                                          |  | $                              | 53,011  |   |                     | $ | 90,448  |   |  | $ | (37,437  | )
|Oil and gas revenues                                |  |                                | 656,062 |   |                     |   | 385,859 |   |  |   | 270,203  |  
|Expenses:                                           |  |                                |         |   |                     |   |         |   |  |   |          |  
|Production:                                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|Lease operating                                     |  |                                | 50,528  |   |                     |   | 40,460  |   |  |   | 10,068   |  
|Workover and other                                  |  |                                | 6,132   |   |                     |   | 5,210   |   |  |   | 922      |  
|Taxes other than income                             |  |                                | 43,122  |   |                     |   | 30,346  |   |  |   | 12,776   |  
|Gathering, transportation and other                 |  |                                | 23,288  |   |                     |   | 9,314   |   |  |   | 13,974   |  
|General and administrative:                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|General and administrative                          |  |                                | 38,554  |   |                     |   | 25,883  |   |  |   | 12,671   |  
|Stock-based compensation                            |  |                                | 9,866   |   |                     |   | 5,041   |   |  |   | 4,825    |  
|Depletion, depreciation and amortization:           |  |                                |         |   |                     |   |         |   |  |   |          |  
|DepletionFull cost                                 |  |                                | 293,510 |   |                     |   | 162,161 |   |  |   | 131,349  |  
|DepreciationOther                                  |  |                                | 2,300   |   |                     |   | 869     |   |  |   | 1,431    |  
|Accretion expense                                   |  |                                | 1,350   |   |                     |   | 1,090   |   |  |   | 260      |  
|Net (loss) gain on derivative contracts             |  |                                | (7,005  | ) |                     |   | 94,495  |   |  |   | (101,500 | )
|Interest expense and other                          |  |                                | (96,847 | ) |                     |   | (55,865 | ) |  |   | (40,982  | )
|Income tax provision                                |  |                                | (30,549 | ) |                     |   | (53,667 | ) |  |   | 23,118   |  
|                                                    |  |                                |        
|Production:                                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|Natural GasMmcf                                    |  |                                | 75,196  |   |                     |   | 38,850  |   |  |   | 36,346   |  
|Crude OilMbbl                                      |  |                                | 2,221   |   |                     |   | 1,962   |   |  |   | 259      |  
|Natural Gas EquivalentMmcfe                        |  |                                | 88,522  |   |                     |   | 50,622  |   |  |   | 37,900   |  
|Average Daily ProductionMmcfe                      |  |                                | 324     |   |                     |   | 185     |   |  |   | 139      |  
|                                                    |  |                                |        
|Average price per unit (1):                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|Gas price per Mcf                                   |  | $                              | 6.85    |   |                     | $ | 6.64    |   |  | $ | 0.21     |  
|Oil price per Bbl                                   |  |                                | 63.73   |   |                     |   | 64.96   |   |  |   | (1.23    | )
|Equivalent per Mcfe                                 |  |                                | 7.41    |   |                     |   | 7.62    |   |  |   | (0.21    | )
|                                                    |  |                                |        
|Average cost per Mcfe:                              |  |                                |         |   |                     |   |         |   |  |   |          |  
|Production:                                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|Lease operating                                     |  |                                | 0.57    |   |                     |   | 0.80    |   |  |   | (0.23    | )
|Workover and other                                  |  |                                | 0.07    |   |                     |   | 0.10    |   |  |   | (0.03    | )
|Taxes other than income                             |  |                                | 0.49    |   |                     |   | 0.60    |   |  |   | (0.11    | )
|Gathering, transportation and other                 |  |                                | 0.26    |   |                     |   | 0.18    |   |  |   | 0.08     |  
|General and administrative:                         |  |                                |         |   |                     |   |         |   |  |   |          |  
|General and administrative                          |  |                                | 0.44    |   |                     |   | 0.51    |   |  |   | (0.07    | )
|Stock-based compensation                            |  |                                | 0.11    |   |                     |   | 0.10    |   |  |   | 0.01     |  
|Depletion                                           |  |                                | 3.32    |   |                     |   | 3.20    |   |  |   | 0.12     |  

---

|(1) | Amounts exclude the impact of cash paid on, or received from, settled contracts.
|--- | --------------------------------------------------------------------------------



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For the nine months ended September 30, 2007, oil and natural gas sales increased $270.2 million,
from the same period in 2006, to $656.1 million. The increase was primarily due to the increase in production of 37,900 Mmcfe primarily related to our merger with KCS and our successful drilling program. Increased production led to a $288.8
million increase in oil and gas revenues for the nine months ended September 30, 2007. This was partially offset by a $0.21 per Mcfe decrease in our realized average price which resulted in a reduction of $18.6 million in our oil and gas
revenues.

Lease operating expenses increased $10.1 million for the nine months ended September 30, 2007. The increase was
primarily due to an increase in production volumes as a result of our acquisition activities, as well as our successful drilling activities in 2007. We drilled 268 wells during the nine months ended September 30, 2007 compared to 235 wells in
2006. On a per unit basis, lease operating expenses decreased from $0.80 per Mcfe in 2006 to $0.57 per Mcfe in 2007. The decrease on a per unit basis is primarily due to our continued cost control efforts. Additionally, we continue to identify
divestment prospects in outlying, higher operating cost properties. Also contributing to the decrease on a per unit basis was our acquisition of lower cost properties in conjunction with our merger with KCS and properties acquired in the North
Louisiana Acquisitions.

Taxes other than income increased $12.8 million for the nine months ended September 30, 2007 as compared to
the same period in 2006. The largest components of taxes other than income are production and severance taxes which are generally assessed as a percentage of gross oil and natural gas sales. As a percentage of oil and gas sales, taxes other
than income decreased from 8% in 2006 to 7% in 2007 primarily due to the timing of various refunds received in 2007 and reassessments that occurred in 2007.

Gathering, transportation and other expense increased $14.0 million, or $0.08 per Mcfe, for the nine months ended September 30, 2007 as compared to the same period in 2006. This increase was due to our recent
acquisition activities including the completion of our merger with KCS as well as the North Louisiana Acquisitions.

General and
administrative expense for the nine months ended September 30, 2007 increased $12.7 million to $38.6 million compared to $25.9 million in the same period in 2006. This increase was due to our continued growth over the past two years. In 2006,
we completed the North Louisiana Acquisitions as well as our merger with KCS which increased compensation and other costs associated with increased staffing levels to meet the demands of our expanding operations. General and administrative expense
has decreased on a per Mcfe basis from $0.51 per Mcfe in 2006 to $0.44 per Mcfe in 2007 as production increases have exceeded our administrative expense increases.

Stock-based compensation increased $4.8 million for the nine months ended September 30, 2007 as compared to the same period in the prior year. This increase was primarily related to additional stock options and
restricted stock grants assumed as part of our merger with KCS in July 2006, as well as stock appreciation rights and restricted stock grants to employees during 2007.

Depletion expense increased $131.3 million for the nine months ended September 30, 2007 from the same period in 2006 to $293.5 million. Depletion for oil and natural gas properties is calculated using the
unit of production method, which essentially depletes the capitalized costs associated with the evaluated properties plus future development costs based on the ratio of production volume for the current period to total remaining reserve volume for
the evaluated properties. On a per unit basis, depletion expense increased $0.12 per Mcfe to $3.32 per Mcfe from $3.20 per Mcfe. This increase was due to our merger with KCS in July 2006 and the North Louisiana Acquisitions in January 2006
which substantially increased our future development costs.

We enter into derivative commodity instruments to hedge our exposure to price
fluctuations on our anticipated oil and natural gas production. Consistent with the prior year, we have elected not to designate any positions as cash flow hedges for accounting purposes, and accordingly, we recorded the net change in the
mark-to-market valuation of these derivative contracts in the consolidated statement of operations. The Company



30



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##### Table of Contents

recorded a net derivative loss of $7.0 million ($48.1 million unrealized loss and a $41.1 million gain for cash received on settled contracts) for the nine
months ended September 30, 2007 compared to a net derivative gain of $94.5 million in the prior year.

Interest expense and other
increased $41.0 million for the nine months ended September 30, 2007 compared to the same period in 2006. This increase was due to additional debt we incurred in conjunction with our merger with KCS in July 2006 and, to a lesser extent, the
North Louisiana Acquisitions in January 2006. Also contributing to this increase was the increase of $294.0 million in our senior revolving credit facility in 2007 which was used to fund our acquisition and drilling activities as well as other
general corporate purposes.

Income tax expense for the nine months ended September 30, 2007 decreased $23.1 million from the prior
year. The decrease in income tax expense from prior year was primarily due to our pre-tax income of $83.6 million for the nine months ended September 30, 2007 compared to pre-tax income of $144.1 million in 2006. The effective tax rates for the
nine months ended September 30, 2007 and 2006 were 36.6% and 37.2%, respectively. The decrease in our effective rate was due primarily to an increase in disqualifying dispositions of exercised incentive stock options during the current quarter.

Recently Issued Accounting Pronouncements

We discuss recently adopted and issued accounting standards in Item 1. Condensed Consolidated Financial StatementsNote 1, Financial Statement Presentation.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Derivative Instruments and Hedging Activity

We are exposed to various risks including energy commodity price risk. We
expect energy prices to remain volatile and unpredictable. If energy prices were to decline significantly, revenues and cash flow would significantly decline, and our ability to borrow to finance our operations could be adversely impacted. We have
designed our risk management policy to reduce the risk of price volatility for our production in the natural gas and crude oil markets. Our risk management policy provides for the use of derivative instruments to manage these risks. The types of
derivative instruments that we utilize include futures, swaps and options. The volume of derivative instruments that we may utilize is governed by the risk management policy and can vary from year to year, but under most circumstances will apply to
only a portion of our current and anticipated production and provide only partial price protection against declines in oil and natural gas prices. We are exposed to market risk on our open contracts, to the extent of changes in market prices of oil
and natural gas. However, the market risk exposure on these hedged contracts is generally offset by the gain or loss recognized upon the ultimate sale of the commodity that is hedged. Further, if our counterparties defaulted, this protection might
be limited as we might not receive the benefits of the hedges. Please refer to Item 1. Condensed Consolidated Financial StatementsNote 7, Derivative Activities for additional information.

Interest Sensitivity

We are also exposed to market
risk related to adverse changes in interest rates. Our interest rate risk exposure results primarily from fluctuations in short-term rates, which are LIBOR and ABR based and may result in reductions of earnings or cash flows due to increases in
the interest rates we pay on these obligations.

At September 30, 2007, total debt excluding related discounts and premiums was $1.6
billion, of which approximately 63.9%, or $1.0 billion, bears interest at a weighted average fixed interest rate of 8.6% per year. The remaining 36.1% of our total debt balance at September 30, 2007, or $589.0 million, bears interest at
floating or market interest rates that at our option are tied to the prime interest rate or LIBOR. Fluctuations in market interest rates will cause our annual interest costs to fluctuate. At September 30, 2007, the interest rate on our variable
rate debt was 6.1% per year. If the balance of our bank debt at September 30, 2007 were to remain constant, a 10% change in market interest rates would impact our cash flow by approximately $0.9 million per quarter.



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

In accordance with
Exchange Act Rule 13a-15 and 15d-15, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls
and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2007
to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Companys internal control over financial reporting that occurred during the most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



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##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

A description of our legal
proceedings is included in Item 1. Condensed Consolidated Financial StatementsNote6, Commitments and Contingencies, and is incorporated herein by reference.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no changes to the
Companys identified risk factors from those described in the 2006 Form 10-K, as amended.



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

None.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



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

Our annual meeting of stockholders was held on July 18, 2007 in Houston, Texas for the purpose of voting on three proposals, all of which were approved. The first of those proposals related to the election of individuals to serve as
Class III directors of Petrohawk for three-year terms expiring in 2010.

1. The three directors elected and the tabulation of votes (both
in person and by proxy) was as follows:



|                        |  |             |  |          
|----------------------- |  | ----------- |  | ---------
|Nominees for Directors  |  | Votes For   |  | Withheld 
|Thomas R. Fuller        |  | 143,428,194 |  | 6,977,896
|Robert G. Raynolds      |  | 149,323,609 |  | 1,082,481
|Christopher A. Viggiano |  | 148,859,781 |  | 1,546,309

Continuing directors for Petrohawk after the annual meeting include: Floyd C. Wilson, James L.
Irish III, Robert C. Stone, Jr., Tucker S. Bridwell, James W. Christmas and Gary A. Merriman.

2. The second proposal upon which
Petrohawks stockholders voted was to approve and ratify an amendment to the Petrohawk Energy Corporation Third Amended and Restated 2004 Employee Incentive Plan to increase the number of shares of the Companys common stock that may be
issued under the plan from 7.05 million to 12.55 million shares. The tabulation of votes (both in person and by proxy) on the second proposal was a follows:



|            |  |           |  |           |  |                 
|----------- |  | --------- |  | --------- |  | ----------------
|For         |  | Against   |  | Abstain   |  | Broker Non-Votes
|114,389,045 |  | 5,576,386 |  | 1,135,095 |  | 29,309,722      

3. The third proposal upon which our stockholders voted was to ratify the appointment of
Deloitte & Touche LLP as the Companys independent auditor for the year ending December 31, 2007. The tabulation of votes (both in person and by proxy) on the third proposal was a follows:



|            |  |         |  |         |  |                 
|----------- |  | ------- |  | ------- |  | ----------------
|For         |  | Against |  | Abstain |  | Broker Non-Votes
|149,311,313 |  | 901,024 |  | 193,752 |  | 4,159           



|Item 5. | Other Information
|------- | -----------------

None.



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##### Table of Contents

|Item 6. | Exhibits
|------- | --------

The following documents are included as
exhibits to this Form 10-Q. Those exhibits incorporated by reference are so indicated by the information supplied with respect thereto. Those exhibits which are not incorporated by reference are attached hereto.



|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|3.1        |  | Certificate of Incorporation for Petrohawk Energy Corporation (Incorporated by reference to Exhibit 3.1 to our Form S-8 filed on July 29, 2004).                                                                                                                                                                                                                                                                                                                                         
|           | 
|3.2        |  | Certificate of Amendment to Certificate of Incorporation for Petrohawk Energy Corporation (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on
November 24, 2004).                                                                                                                                                                                                                                                                                       
|           | 
|3.3        |  | Certificate of Amendment of Certificate of Incorporation of Petrohawk Energy Corporation (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on August 3, 2005).                                                                                                                                                                                                                                                                                           
|           | 
|3.4        |  | Amended and Restated Bylaws of Petrohawk Energy Corporation effective as of July 12, 2006 (Incorporated by reference to Exhibit 3.2 of our Current Report on Form 8-K filed on July 17,
2006).                                                                                                                                                                                                                                                                                           
|           | 
|3.5        |  | Certificate of Amendment to Certificate of Incorporation of Petrohawk Energy Corporation (Incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed on July 17,
2006).                                                                                                                                                                                                                                                                                            
|           | 
|4.1        |  | Indenture dated as of April 8, 2004, among Mission Resources Corporation, the Guarantors named therein and The Bank of New York, as Trustee, relating to Petrohawk Energy Corporations
97/8% Senior Notes due 2011 (Incorporated by reference to Exhibit 4.1 to Mission Resources
Corporations Current Report on Form 8-K/A filed on April 15, 2004).                                                                                                                                  
|           | 
|4.2        |  | First Supplemental Indenture dated as of July 28, 2005, among Petrohawk Energy Corporation, the successor by way of merger to Mission Resources Corporation, the parties named therein as
Existing Subsidiary Guarantors, the parties named therein as Additional Subsidiary Guarantors, and The Bank of New York Trust Company, N.A., as successor trustee to The Bank of New York (Incorporated by reference to Exhibit 4.2 to our Current
Report on Form 8-K filed on August 3, 2005).
|           | 
|4.3        |  | Second Supplemental Indenture dated as of July 12, 2006, among Petrohawk Energy Corporation, as successor by merger to Mission Resources Corporation, the parties named therein as subsidiary
guarantors, and The Bank of New York Trust Company, N.A., as trustee (Incorporated by reference to Exhibit 4.2 of our Current Report on Form 8-K filed on July 17, 2006).                                                                                                                  
|           | 
|4.4        |  | Indenture dated April 1, 2004 among KCS Energy, Inc., U.S. Bank National Association, as trustee, and the subsidiary guarantors named therein, relating to KCS Energy, Inc.s 71/8% senior notes due 2012 (Incorporated by reference to Exhibit 4.1 to KCS Energy, Inc.s Quarterly Report on
Form 10-Q filed on May 10, 2004).                                                                                                                                                          
|           | 
|4.5        |  | First Supplemental Indenture, dated as of April 8, 2005, to Indenture dated as of April 1, 2004, among KCS Energy, Inc., certain of its subsidiaries and U.S. Bank National Association
(Incorporated by reference to Exhibit 4.1 of KCS Energy, Inc.s Form 8-K filed on April 11, 2005).                                                                                                                                                                                               
|           | 
|4.6        |  | Second Supplemental Indenture dated July 12, 2006 among Petrohawk Energy Corporation, the successor by way of merger to KCS Energy, Inc., the parties named therein as guarantors, and U.S.
Bank National Association, as trustee (Incorporated by reference to Exhibit 4.4 to our Current Report on Form 8-K filed July 17, 2006).                                                                                                                                                      



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##### Table of Contents

|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|4.7        |  | Third Supplemental Indenture dated as of July 12, 2006 among Petrohawk Energy Corporation, the successor by way of merger to KCS Energy, Inc., the parties named therein as existing guarantors,
the parties named therein as new guarantors, and U.S. Bank National Association, as trustee (Incorporated by reference to Exhibit 4.5 to our Current Report on Form 8-K filed July 17, 2006).                                                                                                                                                                                   
|           | 
|4.8        |  | Indenture dated July 12, 2006 among Petrohawk Energy Corporation, U.S. Bank National Association, as trustee, and the subsidiary guarantors named therein, relating to Petrohawk Energy
Corporations 91/8% senior notes due 2013 (Incorporated by reference to Exhibit 4.6 to our Current Report
on Form 8-K filed July 17, 2006).                                                                                                                                                                                                                                              
|           | 
|4.9        |  | First Supplemental Indenture dated July 12, 2006 among Petrohawk Energy Corporation, U.S. Bank National Association, as trustee, and the subsidiary guarantors named therein (Incorporated by
reference to Exhibit 4.7 to our Current Report on Form 8-K filed July 17, 2006).                                                                                                                                                                                                                                                                                                   
|           | 
|4.10*      |  | Second Supplemental Indenture dated August 3, 2007 among Petrohawk Energy Corporation, One TEC, LLC, One TEC Operating, LLC, Bison Ranch, LLC, the parties named therein as existing
guarantors and U.S. Bank National Association, as trustee.                                                                                                                                                                                                                                                                                                                                  
|           | 
|10.1       |  | Third Amendment to Second Amended and Restated Senior Revolving Credit Agreement dated as of July 12, 2006 among the Company, each of the lenders from time to time party thereto, BNP Paribas, as
administrative agent for the lenders, Bank of America, N.A. and BMO Capital Markets Financing, Inc., as co-syndication agents for the lenders, and JPMorgan Chase Bank, N.A, Wells Fargo Bank, N.A and Fortis Capital Corp., as co-documentation agents
for the lenders (Incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed August 8, 2007).
|           | 
|10.2*      |  | Fourth Amendment to Second Amended and Restated Senior Revolving Credit Agreement dated as of July 12, 2006 among the Company, each of the lenders from time to time party thereto, BNP Paribas,
as administrative agent for the lenders, Bank of America, N.A. and BMO Capital Markets Financing, Inc., as co-syndication agents for the lenders, and JPMorgan Chase Bank, N.A, Wells Fargo Bank, N.A. and Fortis Capital Corp., as co-documentation
agents for the lenders.                                                                                                    
|           | 
|10.3       |  | Form Amendment to Employment Agreement entered into on September 1, 2007 with Floyd C. Wilson, Larry L. Helm, Mark J. Mize, Stephen W. Herod and Richard K. Stoneburner (Incorporated by reference
to Exhibit 10.1 to our Current Report on Form 8-K filed September 7, 2007).                                                                                                                                                                                                                                                                                                   
|           | 
|10.4*      |  | Employment Agreement entered into August 14, 2007 effective August 1, 2007 by and between Petrohawk Energy Corporation and David S. Elkouri.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | 
|10.5*      |  | Agreement of Sale and Purchase by and among Petrohawk Properties, LP, Petrohawk Energy Corporation, KCS Resources, Inc., and One TEC, LLC, and Milagro Development I, LP dated October 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                 
|           | 
|11.1*      |  | Statement re Computation of Per Share Earnings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|31.1*      |  | Certificate of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|31.2*      |  | Certificate of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           | 
|32.1*      |  | Certificate of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                           



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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.



|                       |  |                              |  |                                                                
|---------------------- |  | ---------------------------- |  | ---------------------------------------------------------------
|                       |  | PETROHAWK ENERGY CORPORATION
|                       |  |                             
|Date: November 7, 2007 |  | By:                          |  | /s/    FLOYD C.
WILSON                                         
|                       |  |                              |  | Floyd C. Wilson                                                
|                       |  |                              |  | Chairman of the Board, President and Chief Executive Officer   
|                       |  |                             
|                       |  | By:                          |  | /s/    MARK J.
MIZE                                            
|                       |  |                              |  | Mark J. Mize                                                   
|                       |  |                              |  | Executive Vice President, Chief Financial Officer and Treasurer



36