**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 **Washington, D.C.
        20549**
  **Form 10-Q**
  **(Mark One)****x**
              
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****For
                  the quarterly period ended March 31, 2008****OR****o**
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934****For
                  the transition period
                  from          to****Commission
                  File Number 001-33756**
  **Vanguard
        Natural Resources, LLC**
 *(Exact
        Name of Registrant as Specified in Its Charter)*
  **Delaware**
              
              **61-1521161***(State
                  or Other Jurisdiction of*
                *Incorporation
                  or Organization)*
              
              *(I.R.S.
                  Employer*
                *Identification
                  No.)*
  **7700
                  San Felipe, Suite 485**
                **Houston,
                  Texas**
              
              **77063***(Address
                  of Principal Executive Offices)*
              
              *(Zip
                  Code)*
  **Telephone
        Number: (832) 327-2255**
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
        during the preceding 12 months (or for such shorter period that the
        registrant was required to file such reports), and (2) has been subject to
        such filing requirements for the past 90 days.  Yes x No
o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definitions of “large
        accelerated filer,” “accelerated filer” and “smaller reporting company” in
        Rule 12b-2 of the Exchange Act. (Check one):
  Large
                  accelerated filer o
              Accelerated
                  filer oNon-accelerated
                  filer x
              Smaller
                  reporting company o(Do
                  not check if a smaller reporting company)
  Indicate
        by check mark whether the registrant is a shell company (as defined in
        Rule 12b-2 of the Exchange Act).  Yes o No
x
  **Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date.**
  Common
        units outstanding on May 13, 2008: 10,795,000
 
 
  **VANGUARD
        NATURAL RESOURCES, LLC**
 **TABLE
        OF CONTENTS**
 **Page****GLOSSARY
                  OF TERMS****PART
                  I - FINANCIAL INFORMATION**Item
                  1.
              Financial
                  Statements
              3Consolidated
                  Statements of Operations
              3Consolidated
                  Balance Sheets
              4Consolidated
                  Statements of Cash Flows
              5Consolidated
                  Statements of Comprehensive Income (Loss)
              6Notes
                  to Consolidated Financial Statements (Unaudited)
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              24Item
                  4.
              Controls
                  and Procedures
              25**PART
                  II – OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              27Item
                  1A.
              Risk
                  Factors
              27Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              27Item
                  3.
              Default
                  in Senior Securities
              27Item
                  4.
              Submission
                  of Matters to a Vote of Securities Holders
              27Item
                  5.
              Other
                  Information
              27Item
                  6.
              Exhibits
              27**SIGNATURE**
              28
  
  **GLOSSARY
        OF TERMS**
 
 Below
        is
        a list of terms that are common to our industry and used throughout this
        document:
 
 /day
              
              =
                  per day
              
              Mcf
              
              =
                    thousand cubic feetBbls
              
              =
                  barrels
              
              Mcfe
              
              =
                    thousand cubic feet of natural gas equivalentsBtu
              
              =
                  British thermal unit
              
              MMBtu
              
              =
                  million British thermal unitsMMcf
              
              =
                  million cubic feet
  When
        we
        refer to natural gas and oil in “equivalents,” we are doing so to compare
        quantities of oil with quantities of natural gas or to express these different
        commodities in a common unit. In calculating equivalents, we use a generally
        recognized standard in which one Bbl of oil is equal to six Mcf of natural
        gas.
        Also, when we refer to cubic feet measurements, all measurements are at a
        pressure of 14.73 pounds per square inch.
  References
        in this report to (1) “us”, “we”, “our”, “the Company”, “Vanguard” or “VNR” are
        to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
        Natural Gas, LLC, Trust Energy Company, LLC, (“TEC”), VNR Holdings, Inc.
        (“VNRH”), Ariana Energy, LLC, (“Ariana Energy”) and Vanguard Permian, LLC,
        (“Vanguard Permian”) and (2) “Vanguard Predecessor”, “Predecessor”, “our
        operating subsidiary” or “VNG” are to Vanguard Natural Gas,
        LLC.
  
 
 PART
        I – FINANCIAL INFORMATION
  **Item
        1. Financial Statements**
  VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 (Unaudited)
 
 **Three Months Ended**
                **March 31,****2008**
              
              **2007****Revenues:**Natural
                  gas and oil sales
              
              $
              14,000,097
              
              $
              8,961,616Realized
                  losses on derivative contracts
              
              
              (1,150,472
              )
              
              (747,808
              )**Total
                  revenues**
              
              
              12,849,625
              
              
              8,213,808**Costs
                  and expenses:**Lease
                  operating expenses
              
              
              2,015,677
              
              
              1,146,379Depreciation,
                  depletion and amortization
              
              
              2,823,978
              
              
              2,028,863Selling,
                  general and administrative expenses
              
              
              1,645,791
              
              
              434,288Bad
                  debt expense
              
              
              —
              
              
              1,007,461Taxes
                  other than income
              
              
              966,113
              
              
              510,882**Total
                  costs and expenses**
              
              
              7,451,559
              
              
              5,127,873**Income
                  from operations**
              
              
              5,398,066
              
              
              3,085,935**Other
                  income and (expense):**Interest
                  income
              
              
              7,614
              
              
              12,967Interest
                  expense
              
              
              (1,129,660
              )
              
              (2,223,123
              )Loss
                  on extinguishment of debt
              
              
              —
              
              
              (2,501,528
              )**Total
                  other expense, net**
              
              
              (1,122,046
              )
              
              (4,711,684
              )**Net
                  income (loss)**
              
              $
              4,276,020
              
              $
              (1,625,749
              )**Net
                  income (loss) per unit:**Common
                  & Class B units – basic
              
              $
              0.38
              
              $
              (0.29
              )Common
                  & Class B units – diluted
              
              $
              0.38
              
              $
              (0.29
              )**Weighted
                  average units outstanding:**Common
                  units – basic & diluted
              
              
              10,795,000
              
              
              5,540,000Class
                  B units – basic & diluted
              
              
              420,000
              
              
              —
  *See
        accompanying notes to consolidated financial statements*
  3
 
 VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED
        BALANCE SHEETS
 
 **March 31,**
                **2008**
              
              **December 31,**
                **2007****(unaudited)****Assets****Current
                  assets**Cash
                  and cash equivalents
              
              $
              757,408
              
              $
              3,109,563Trade
                  accounts receivable, net
              
              
              9,987,429
              
              
              4,372,731Derivative
                  assets
              
              
              —
              
              
              4,017,085Other
                  currents assets
              
              
              741,969
              
              
              453,198**Total
                  current assets**
              
              
              11,486,806
              
              
              11,952,577**Property
                  and equipment**Furniture
                  and fixtures
              
              
              79,847
              
              
              72,893Machinery
                  and equipment
              
              
              163,765
              
              
              138,719Less:
                  accumulated depreciation
              
              
              (56,150
              )
              
              (45,157
              )**Total
                  property and equipment**
              
              
              187,462
              
              
              166,455**Natural
                  gas and oil properties, net – full cost
                  method**
              
              
              183,346,598
              
              
              106,983,349**Other
                  assets**Derivative
                  assets
              
              
              203,945
              
              
              1,329,511Deferred
                  financing costs
              
              
              1,035,187
              
              
              941,833Non-current
                  deposits
              
              
              45,963
              
              
              8,285,883Other
                  assets
              
              
              569,142
              
              
              1,519,577**Total
                  assets**
              
              $
              196,875,103
              
              $
              131,179,185**Liabilities
                  and members’ equity****Current
                  liabilities**Accounts
                  payable – trade
              
              $
              849,410
              
              $
              1,056,627Accounts
                  payable – natural gas and oil
              
              
              717,618
              
              
              257,073Payables
                  to affiliates
              
              
              3,278,376
              
              
              3,838,328Derivative
                  liabilities
              
              
              8,894,489
              
              
              —Accrued
                  expenses
              
              
              5,791,912
              
              
              203,159**Total
                  current liabilities**
              
              
              19,531,805
              
              
              5,355,187Long-term
                  debt
              
              
              102,500,000
              
              
              37,400,000Derivative
                  liabilities
              
              
              13,246,161
              
              
              5,903,384Asset
                  retirement obligations
              
              
              1,463,924
              
              
              189,711**Total
                  liabilities**
              
              
              136,741,890
              
              
              48,848,282**Commitments
                  and contingencies****Members’
                  equity**Members’
                  capital, 10,795,000 common units issued and outstanding at March
                  31, 2008
                  and December 31, 2007
              
              
              86,321,263
              
              
              90,257,856Class
                  B units, 420,000 issued and outstanding at March 31, 2008 and December
                  31,
                  2007
              
              
              3,004,932
              
              
              2,131,995Other
                  comprehensive loss
              
              
              (29,192,982
              )
              
              (10,058,948
              )**Total
                  members’ equity**
              
              
              60,133,213
              
              
              82,330,903**Total
                  liabilities and members’ equity**
              
              $
              196,875,103
              
              $
              131,179,185
  *See
        accompanying notes to consolidated financial statements*
  4
  VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 (Unaudited)
  **Three Months Ended**
                **March 31,****2008**
              
              **2007****Operating
                  activities**Net
                  income (loss)
              
              $
              4,276,020
              
              $
              (1,625,748
              )Adjustments
                  to reconcile net income (loss) to net cash provided by (used in)
                  operating
                  activities:Depreciation,
                  depletion and amortization
              
              
              2,823,978
              
              
              2,028,863Amortization
                  of deferred financing costs
              
              
              84,410
              
              
              62,838Bad
                  debt expense
              
              
              —
              
              
              1,007,461Unit-based
                  compensation
              
              
              914,564
              
              
              —Amortization
                  of premiums prepaid on derivative contracts
              
              
              1,300,609
              
              
              —Changes
                  in operating assets and liabilities:Trade
                  accounts receivable
              
              
              (5,614,698
              )
              
              (1,618,379
              )Payables
                  to affiliates
              
              
              (107,452
              )
              
              (11,874,522
              )Other
                  current assets
              
              
              (304,888
              )
              
              (1,334,387
              )Price
                  risk management activities, net
              
              
              (182,840
              )
              
              (8,475,675
              )Other
                  non-current assets
              
              
              —
              
              
              (3,384
              )Accounts
                  payable
              
              
              253,328
              
              
              2,757,409Accrued
                  expenses
              
              
              598,078
              
              
              (223,810
              )**Net
                  cash provided by (used in) operating activities**
              
              
              4,041,109
              
              
              (19,299,334
              )**Investing
                  activities**Additions
                  to property and equipment
              
              
              (32,000
              )
              
              —Additions
                  to natural gas and oil properties
              
              
              (1,238,379
              )
              
              (1,723,031
              )Acquisitions
                  of natural gas and oil properties
              
              
              (65,661,575
              )
              
              —Deposits
                  and prepayments of natural gas and oil properties
              
              
              (1,119,981
              )
              
              —**Net
                  cash used in investing activities**
              
              
              (68,051,935
              )
              
              (1,723,031
              )**Financing
                  activities**Proceeds
                  from borrowings
              
              
              71,400,000
              
              
              114,600,000Repayment
                  of debt
              
              
              (6,300,000
              )
              
              (94,067,500
              )Contributions
                  from members
              
              
              —
              
              
              1,000Distribution
                  to members
              
              
              (3,263,565
              )
              
              —Financing
                  costs
              
              
              (177,764
              )
              
              (1,139,311
              )**Net
                  cash provided by financing activities**
              
              
              61,658,671
              
              
              19,394,189**Net
                  decrease in cash and cash equivalents**
              
              
              (2,352,155
              )
              
              (1,628,176
              )**Cash
                  and cash equivalents,**beginning of period
              
              
              3,109,563
              
              
              1,730,956**Cash
                  and cash equivalents,**end of period
              
              $
              757,408
              
              $
              102,780**Supplemental
                  cash flow information:**Cash
                  paid for interest
              
              $
              1,105,980
              
              $
              1,230,654**Non-cash
                  financing and investing activities:**Asset
                  retirement obligations
              
              $
              1,260,544
              
              $
              150,628Accrued
                  dividends declared
              
              $
              4,990,675
              
              
              —Assumption
                  of fixed-price oil swaps
              
              $
              1,128,114
              
              
              —Initial
                  contribution of assets
              
              $
              —
              
              $
              3,289,055
 *See
        accompanying notes to consolidated financial statements*
  5
  VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES
 CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Unaudited)
 
 **Three Months Ended**
                **March 31,****2008**
              
              **2007****Net
                  income (loss)**
              
              $
              4,276,020
              
              $
              (1,625,748
              )Net
                  gains (losses) from cash flow hedging activities:Unrealized
                  mark-to-market losses arising during the period
              
              
              (20,102,103
              )
              
              (11,664,967
              )Reclassification
                  adjustments for changes in initial value to settlement date
              
              
              968,069
              
              
              (404,147
              )Other
                  comprehensive loss
              
              
              (19,134,034
              )
              
              (12,069,114
              )**Comprehensive
                  loss**
              
              $
              (14,858,014
              )
              $
              (13,694,862
              )
  *See
        accompanying notes to consolidated financial statements*
  6
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
 **1.   
        Basis of Presentation and Significant Accounting Policies**
 
 **Basis
        of Presentation**
  Vanguard
        Natural Resources, LLC is a publicly-traded limited liability company focused
        on
        the acquisition, development and exploitation of mature, long-lived natural
        gas
        and oil properties in the United States. Through our operating subsidiaries,
        we
        own properties in the southern portion of the Appalachian Basin, primarily
        in
        southeast Kentucky and northeast Tennessee and the Permian Basin, primarily
        in
        West Texas and Southeastern New Mexico.
  References
        in this report to (1) “us”, “we”, “our”, “the Company”, “Vanguard” or “VNR” are
        to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
        Natural Gas, LLC, Trust Energy Company, LLC, (“TEC”), VNR Holdings, Inc.
        (“VNRH”), Ariana Energy, LLC, (“Ariana Energy”) and Vanguard Permian, LLC,
        (“Vanguard Permian”) and (2) “Vanguard Predecessor”, “Predecessor”, “our
        operating subsidiary” or “VNG” are to Vanguard Natural Gas, LLC.
  We
        were
        formed in October 2006 but effective January 5, 2007, Vanguard Natural Gas,
        LLC
        (formerly Nami Holding Company, LLC) was separated into our operating subsidiary
        and Vinland Energy Eastern, LLC ("Vinland"). As part of the separation, we
        retained all of our Predecessor’s proved producing wells and associated
        reserves. We also retained 40% of our Predecessor’s working interest in the
        known producing horizons in approximately 95,000 gross undeveloped acres
        and a
        contract right to receive approximately 99% of the net proceeds from the
        sale of
        production from certain producing gas and oil wells. In the separation, Vinland
        was conveyed the remaining 60% of our Predecessor’s working interest in the
        known producing horizons in this acreage, 100% of our Predecessor’s working
        interest in depths above and 100 feet below our known producing horizons,
        all of
        our gathering and compression assets and all employees other than our President
        and Chief Executive Officer and our Executive Vice President and Chief Financial
        Officer. Vinland acts as the operator of our existing wells and all of the
        wells
        that we drill in Appalachia. We refer to these events as the
        "Restructuring."
  In
        October 2007, we completed our initial public offering (“IPO”) of 5.25 million
        units representing limited liability interests in VNR at $19.00 per unit
        for net
        proceeds of $92.8 million after deducting underwriting discounts and fees
        of
        $7.0 million. The proceeds were used to reduce indebtedness under our Credit
        Facility by $80.0 million and the balance was used for the payment of accrued
        distributions to pre-IPO unitholders and the payment of a deferred swap
        obligation.
  VNG
        was
        formed in Kentucky on December 15, 2004 and its principal business is to
        hold
        interests in TEC, VNRH, Ariana Energy and Vanguard Permian. TEC was formed
        in
        Kentucky on December 15, 2004 and its principal business consists of natural
        gas
        and oil development and exploitation of mature, long-lived natural gas and
        oil
        properties in the Appalachian region of eastern Kentucky. VNRH was formed
        in
        Delaware on March 28, 2007 and its principal business was to provide general
        employment related services, including payroll and employment administration,
        as
        well as information technology and communication services to VNR. However,
        as of
        January 1, 2008, it no longer provides these services as they have been
        outsourced to a third party and has limited operating activity. Ariana Energy
        was formed in Tennessee on April 26, 2002 and its principal business consists
        of
        natural gas and oil development and exploitation of mature, long-lived natural
        gas and oil properties in Tennessee. Vanguard Permian was formed in Delaware
        on
        December 21, 2007 and its principal business consists of natural gas and
        oil
        development and exploitation of mature long-lived natural gas and oil properties
        in West Texas and Southeastern New Mexico.
  The
        consolidated financial statements as of and for the three months ended March
        31,
        2008 include the accounts of VNR, VNG, TEC, VNRH, Ariana Energy and Vanguard
        Permian.
  We
        prepared this Quarterly Report on Form 10-Q under the rules and regulations
        of the United States Securities and Exchange Commission (“SEC”). Because this is
        an interim period filing presented using a condensed format, it does not
        include
        all of the disclosures required by U.S. generally accepted accounting
        principles. You should read this Quarterly Report on Form 10-Q along with
        our 2007 Annual Report on Form 10-K, which contains a summary of our significant
        accounting policies and other disclosures. The financial statements as of
        March
        31, 2008, and for the three months ended March 31, 2008 and 2007, are unaudited.
        We derived the consolidated balance sheet as of December 31, 2007, from the
        audited balance sheet filed in our 2007 Annual Report on Form 10-K. In our
        opinion, we have made all adjustments which are of a normal, recurring nature
        to
        fairly present our interim period results. Due to the seasonal nature of
        our
        businesses, information for interim periods may not be indicative of our
        operating results for the entire year. Additionally, our financial statements
        for prior periods include reclassifications that were made to conform to
        the
        current period presentation. Those reclassifications did not impact our reported
        net income or members’ equity. Furthermore, all intercompany accounts and
        transactions have been eliminated in the consolidated financial
        statements.
  7
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
 
 **Summary
        of Significant Accounting Policies**
 
 As
        of
        March 31, 2008, the Company’s significant accounting policies are consistent
        with those discussed in Note 1 of the Company’s consolidated financial
        statements contained in the Company’s 2007 Annual Report on Form
        10-K.
  **Recently
        Adopted Accounting Pronouncements**
 
 In
        September 2006, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards No. 157 “Fair *Value
        Measurements* ”
(“SFAS
        157”). SFAS 157 introduces a framework for measuring fair value and expands
        required disclosure
        about fair value measurements of assets and liabilities. On February 6, 2008,
        the FASB issued a final FASB Staff Position (“FSP”)
        No. FAS 157-b, “ *Effective
        Date of FASB Statement No. 157* ”.
        This
        FSP delays the effective date of SFAS 157 for all non-financial assets and
        non-financial liabilities, except those that are recognized or disclosed
        at fair
        value in the financial statements on a recurring basis. In addition, the
        FSP
        removes certain leasing transactions from the scope of SFAS 157. The effective
        date of SFAS 157 for non-financial assets and non-financial liabilities has
        been
        delayed by one year to fiscal years beginning after November 15, 2008 and
        interim periods within those fiscal years. SFAS 157 for financial assets
        and
        liabilities is effective for fiscal years beginning after November 15, 2007,
        and
        the Company prospectively adopted the standard for those assets and liabilities
        as of January 1, 2008. See *Note
        6. Fair Value Disclosures.*
 In
          February 2007, the FASB issued SFAS No. 159, “ *The
          Fair Value Option for Financial Assets and Financial Liabilities, including
          an
          amendment of FASB Statement No. 115”* (“SFAS
          159”), which permits companies to choose, at specified dates, to measure certain
          eligible financial instruments at fair value. The objective of SFAS 159
          is to
          reduce volatility in preparer reporting that may be caused as a result
          of
          measuring related financial assets and liabilities differently and to expand
          the
          use of fair value measurements. The provisions of SFAS 159 apply only to
          entities that elect to use the fair value option and to all entities with
          available-for-sale and trading securities. Additional disclosures are also
          required for instruments for which the fair value option is elected. SFAS
          159 is
          effective for fiscal years beginning after November 15, 2007. No retrospective
          application is allowed, except for companies that choose to adopt early.
          At the
          effective date, companies may elect the fair value option for eligible
          items
          that exist at that date, and the effect of the first remeasurement to fair
          value
          must be reported as a cumulative-effect adjustment to the opening balance
          of
          retained earnings. Effective January 1, 2008, the Company adopted SFAS
          159 and
          the adoption did not have a material impact on its consolidated financial
          statements.
 
 **New
        Pronouncements Issued But Not Yet Adopted**
 
 In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), *“Business
        Combinations”* (“SFAS
        141(R)”), which replaces FASB
        Statement No. 141. SFAS 141(R) establishes principles and requirements for
        how
        an acquirer recognizes and measures in its financial
        statements the identifiable assets acquired, the liabilities assumed, any
        non-controlling interest in the acquiree and the goodwill
        acquired. The Statement also establishes disclosure requirements that will
        enable users to evaluate the nature and financial effects
        of the business combination. SFAS 141(R) is effective for acquisitions that
        occur in an entity’s fiscal year that begins after December
        15, 2008, which will be our fiscal year 2009. The impact, if any, on the
        consolidated financial statements will depend on the nature and size of business
        combinations that we consummate after the effective date.
 
 In
        December 2007, the FASB issued SFAS No. 160, *“Non-controlling
        Interests in Consolidated Financial statements—an* *amendment
        of ARB No. 51”* (“SFAS
        160”). SFAS 160 requires that accounting and reporting for minority interests
        will be recharacterized
        as non-controlling interests and classified as a component of equity. SFAS
        160
        also establishes reporting requirements that
        provide sufficient disclosures that clearly identify and distinguish between
        the
        interests of the parent and the interests of the non-controlling
        owners.  SFAS
        160
        applies to all entities that prepare consolidated financial statements, except
        not-for-profit organizations, but will affect only those entities that have
        an
        outstanding non-controlling interest in one or more subsidiaries or that
        deconsolidate a subsidiary. This statement is effective as of the beginning
        of
        an entity’s first fiscal year beginning after December 15, 2008, which will be
        our fiscal year 2009. Based upon the March 31, 2008 balance sheet, SFAS 160
        would have no impact on the consolidated financial statements.
 
 In
        March
        2008, the FASB issued SFAS No. 161, “ *Disclosures
        about Derivative Instruments and Hedging Activities” (“* SFAS 161”).
        SFAS 161 is intended to improve financial reporting about derivative instruments
        and hedging activities by requiring enhanced
        disclosures to enable investors to better understand their effects on an
        entity’s financial position, financial performance, and cash
        flows. SFAS 161 achieves these improvements by requiring disclosure of the
        fair
        values of derivative instruments and their gains
        and
        losses in a tabular format. It also provides more information about an entity’s
        liquidity by requiring disclosure of derivative features
        that are credit risk-related. Finally, it requires cross-referencing within
        footnotes to enable financial statement users to locate important
        information about derivative instruments. SFAS 161 is effective for financial
        statements issued for fiscal years and interim
        periods beginning after November 15, 2008, with early application encouraged.
        We
        are currently evaluating the impact of adopting SFAS 161 on our consolidated
        financial statements.
  8
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
 
 **Use
        of Estimates**
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the Unites States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. The most significant estimates pertain to proved
        natural gas and oil reserves and related cash flow estimates used in impairment
        tests of natural gas and oil properties, the fair value of derivative contracts
        and asset retirement obligations, natural gas and oil revenues and expenses,
        as
        well as estimates of expenses related to depreciation, depletion and
        amortization. Actual results could differ from those estimates.
 
 **2.    
        Acquisition**
 
 On
        December 21, 2007, we entered in to a Purchase and Sale Agreement with the
        Apache Corporation for the purchase of certain oil
        and
        natural gas properties located in ten separate fields in the Permian Basin
        of
        West Texas and Southeastern New Mexico. The purchase price for said assets
        was
        $78.3 million with an effective date of October 1, 2007. We completed this
        acquisition on January 31, 2008 for an adjusted purchase price of $73.4 million,
        subject to customary post closing adjustments. The adjusted purchase price
        included a preliminary purchase price adjustment of $4.9 million which
        represents the cash flow from the acquired properties for the period between
        the
        effective date, October 1, 2007, and the closing date, January 31, 2008.
        The
        purchase price includes a payment of $7.8 million paid by us to the seller
        in
        December 2007 and this amount is reported in non-current deposits in our
        consolidated balance sheet at December 31, 2007. In this acquisition, based
        on
        internal reserve forecasts, we acquired approximately 4.4 million barrels
        of oil
        equivalent, 83% of which are oil and 90% are proved developed producing.
        The
        current net production attributable to this purchase is estimated to be
        approximately 800 barrels of oil equivalent per day and the
        reserves-to-production ratio is 15 years. As part of this acquisition, we
        assumed fixed-price oil swaps covering approximately 90% of the estimated
        proved
        developed producing oil reserves through 2011 at a weighted average price
        of
        $87.29. The fair value of these fixed-price oil swaps was a liability of
        $1,128,114 at January 31, 2008. This acquisition was funded with borrowings
        under our existing Credit Facility.
 
 **3.    
        Accounts Receivable and Allowance for Doubtful Accounts**
 
 We
        established an approximate $1 million provision for a loss on the entire
        amount
        due from a customer which filed for protection under Chapter 11 of the
        Bankruptcy Code in May 2007. The account receivable was due from oil sales
        through December 2006 at which time we ceased selling oil to the customer.
        As
        the amount of any potential recovery is uncertain, we elected to reserve
        the
        entire balance and it is reflected as bad debt expense on our consolidated
        statement of operations for the three months ended March 31, 2007. We began
        selling our oil production to a new customer beginning in March
        2007.
  **4.   
        Credit Facilities and Long-Term Debt**
 
 Our
        credit facility and long-term debt consisted of the following:
  **Amount Outstanding****Description**
              
              **Interest**Rate**
              
              **Maturity**Date**
              
              **March**31,**
                **2008**
              
              **December**31,**
                **2007**$400
                  million Senior Secured Revolver
              
              
              Variable
              
              
              March 31, 2011
              
              
              102,500,000
              
              
              37,400,000Total
              
              
              
              
              
              
              
              $
              102,500,000
              
              $
              37,400,000
 
 ***$400
        Million Senior Secured Revolver***
  In
        January 2007, the Company entered into a four-year $200 million revolving
        credit
        facility (“Credit Facility”) with two banks. All of our Predecessor’s
        outstanding debt was repaid with borrowings under this Credit Facility,
        including an early prepayment penalty of $2.5 million. The available credit
        line
        (“Borrowing Base”) is subject to adjustment from time to time but not less than
        on a semi-annual basis based on the projected discounted present value (as
        determined by independent petroleum engineers) of estimated future net cash
        flows from certain proved natural gas and oil reserves of the Company. The
        initial Borrowing Base was set at $115.5 million and is secured by a first
        lien
        security interest in all of the Company’s natural gas and oil properties.
        However, the borrowing base was subject to $1 million reductions per month
        starting on July 1, 2007 through November 1, 2007, which resulted in a borrowing
        base of $110.5 million as reaffirmed in November 2007 pursuant to the
        semi-annual borrowing base redetermination . We applied $80.0 million of
        the net
        proceeds from our IPO in October 2007 to reduce our indebtedness under the
        Credit Facility. In February 2008, our Credit Facility was amended and restated
        to extend the maturity from January 3, 2011 to March 31, 2011, increase the
        facility amount from $200.0 million to $400.0 million, increase our borrowing
        base from $110.5 million to $150.0 million and add two financial institutions
        as
        lenders. Additional borrowings were made pursuant to the acquisition of natural
        gas and oil properties in the Permian Basin and indebtedness under the Credit
        Facility totaled $102.5 million at March 31, 2008.
  9
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
  Interest
        rates under the Credit Facility are based on Euro-Dollars (LIBOR) or ABR
        (Prime)
        indications, plus a margin. At March 31, 2008, the applicable margin and
        other
        fees increase as the utilization of the borrowing base increases as
        follows:


**Borrowing
                    Base Utilization Grid**Borrowing
                    Base Utilization Percentage
                *<**25%*
                *>25%**<**50%*
                *>50%**<**75%*
                *>75%*Eurodollar
                    Loans
                1.000%
                1.250%
                1.500%
                1.750%ABR
                    Loans
                0.000%
                0.250%
                0.500%
                0.750%Commitment
                    Fee Rate
                0.250%
                0.300%
                0.375%
                0.375%Letter
                    of Credit Fee
                1.000%
                1.250%
                1.500%
                1.750%
  The
        Credit Agreement contains a number of customary covenants that require the
        Company to maintain certain financial ratios, limit the Company’s ability to
        incur additional debt, sell assets, create liens, or make certain distributions.
        At March 31, 2008, we were in compliance with our debt covenants.
 
 The
        Credit Agreement required the Company to enter into a commodity price hedge
        position establishing certain minimum fixed prices for anticipated future
        production equal to approximately 84% of the projected production from proved
        developed producing reserves from the second half of 2007 through 2011. Also,
        the Credit Agreement required that certain production put option contracts
        for
        the years 2007, 2008 and 2009 be put in place to create a price floor for
        anticipated production from new wells drilled. See*Note
        5. Price Risk Management Activities*for
        further discussion.
 
 **5.** **Price
        Risk Management Activities**
 
 From
        time
        to time, the Company enters into derivative contracts with counterparties
        that
        are major, creditworthy financial institutions and lenders in our Credit
        Facility to hedge price risk associated with a portion of our natural gas
        and
        oil production. These derivatives are not held for trading purposes. Under
        fixed-priced commodity swap agreements, the Company receives a fixed price
        on a
        notional quantity in exchange for paying a variable price based on a market
        index, such as Columbia Gas Appalachian Index (‘TECO Index”) for natural gas
        production and West Texas Intermediate light sweet for oil. Under put option
        agreements, we pay the counterparty the fair value at the purchase date.
        At
        settlement date we receive the excess, if any, of the fixed floor over floating
        rate. Under collar contracts, we pay the counterparty if the market price
        is
        above the ceiling and the counterparty pays us if the market price is below
        the
        floor on a notional quantity. The collars and put options for natural gas
        are
        settled based on the NYMEX price for natural gas at Henry Hub.
 
 In
        addition, we enter into interest rate swap agreements, which require payment
        to
        or from the counterparty based upon the differential between two rates for
        a
        predetermined contractual amount. This hedging activity converts a floating
        interest rate to a fixed interest rate and is intended to manage our exposure
        to
        interest rate fluctuations.
 
 All
        of
        our derivative contracts entered into in 2008 and 2007, were specifically
        designated as hedges under SFAS No. 133 *Accounting for Derivative Instruments and Hedging Activities* and
        therefore qualify for hedge accounting treatment. These derivative contracts
        are
        recorded at fair value on the consolidated balance sheet as short-term and
        long-term assets or liabilities based upon their anticipated settlement date.
        The change in fair value of these derivative contracts is recorded in Other
        Comprehensive Income.
  10
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
 
 On
        January 3, 2007, our Predecessor’s natural gas price swaps were terminated,
        which resulted in the Company incurring swap termination fees of $2.8 million
        and an additional loss on derivative contracts of approximately $0.8 million
        included in our consolidated statement of operations for the three months
        ended
        March 31, 2007. New natural gas derivative contracts were put in place in
        conjunction with entering into the Credit Facility as described in *Note
        4. Credit Facility and Long-Term Debt* .
        The
        Company paid $6.5 million for the put option contracts and payments for the
        put
        option contracts and the swap termination fee were funded with borrowings
        under
        the Credit Facility. At our election, also in January 2007, we entered into
        a
        NYMEX natural gas collar contract. In May 2007, we reset our 2007, 2008 and
        2009
        natural gas swaps at higher prices and incurred a $7.3 million deferred swap
        payment obligation with the derivative counterparty which accrued interest
        daily
        at 7.36% and was payable at the earlier of five days after the closing of
        an
        equity issuance or November 1, 2007. The deferred swap obligation was paid
        in
        October 2007 using proceeds from our IPO.
 
 As
        part
        of the Permian Basin acquisition, in February 2008, we assumed fixed-price
        oil
        swaps covering approximately 90% of the estimated proved developed producing
        oil
        reserves through 2011 at a weighted average price of $87.29. In February
        and
        March 2008, we entered into interest rate swaps which effectively fix the
        LIBOR
        rate at 2.66% to 3.00% on $40.0 million of borrowings. Also, in February
        2008,
        we sold calls (or set a ceiling price) which effectively collared 2,000,000
        MMBtu of gas production in 2008 through 2009 which was previously only subject
        to a put or price floor, we reset the price on 2,387,640 MMBtu of natural
        gas
        swaps settling in 2010 from $7.53 to $8.76 per MMBtu and we entered into
        a 2012
        fixed-price oil swap at $80.00 for 87% of our estimated proved developed
        producing reserves.
  At
        March
        31, 2008, the Company had open derivative contracts covering our anticipated
        future production as follows:
  **Swap
        Agreements**
  **Gas**
              
              **Oil****Contract
                  Period**
              
              **MMBtu**
              
              **Weighted**
                **Average**
                **TECO
                  Fixed**
              
              **Bbls**
              
              **Price**2008
              
              
              2,218,686
              
              $
              9.00
              
              
              148,000
              
              $
              90.302009
              
              
              2,657,046
              
              $
              8.85
              
              
              181,500
              
              $
              87.232010
              
              
              2,387,640
              
              $
              8.76
              
              
              164,250
              
              $
              85.652011
              
              
              2,196,012
              
              $
              7.15
              
              
              151,250
              
              $
              85.502012
              
              
              —
              
              $
              —
              
              
              144,000
              
              $
              80.00
 
 **Put
        Option Contracts**
 
 **Contract
                  Period**
              
              **Volume in MMBtu**
              
              **Purchased NYMEX**
                **Price Floor**2008
              
              
              754,629
              
              $
              7.502009
              
              
              840,139
              
              $
              7.50
 
 **Collars**
  ****
              
              **Gas******
              
              **MMBtu**
              
              **Floor**
              
              **Ceiling**Production
                  Period:May –
                  September 2008
              
              
              500,000
              
              $
              7.50
              
              $
              9.00October
                  – December 2008
              
              
              300,000
              
              $
              7.50
              
              $
              9.25January
                  2009 – December 2009
              
              
              1,000,000
              
              $
              7.50
              
              $
              9.00January
                  2010 – December 2010
              
              
              730,000
              
              $
              8.00
              
              $
              9.30
  11
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
 
 **Interest
        Rate Swaps**
 
 ****  **Principal******
              
              **Fixed**
                **Libor********Balance**
              
              **Rates**Period:April
                  1, 2008 to December 10, 2010
              
              $
              20,000,000
              
              
              3.88
              %April
                  1, 2008 to January 31, 2011
              
              $
              30,000,000
              
              
              3.00
              %April
                  1, 2008 to March 31, 2011
              
              $
              10,000,000
              
              
              2.66
              %
 
 **6.** **Fair
        Value Disclosures**
 
 As
        discussed in *Note*  *1.
        Basis of Presentation and Significant Accounting Policies* ,
        we
        prospectively adopted SFAS 157 for financial assets and financial liabilities.
        SFAS 157 defines fair value as the exchange price that would be received
        for an
        asset or paid to transfer a liability (an exit price) in the principal or
        most
        advantageous market for the asset or liability in an orderly transaction
        between
        market participants on the measurement date. SFAS 157 also expands disclosure
        about fair value measurements and establishes a fair value hierarchy which
        requires an entity to maximize the use of observable inputs and minimize
        the use
        of unobservable inputs when measuring fair value. The standard describes
        three
        levels of inputs that may be used to measure fair value:
 Level
                  1
              
              Quoted
                  prices for identical instruments in active markets. Level 1 assets
                  include
                  short-term investments (such as Money Market Funds and Treasury
                  Bills).Level 
                  2
              
              Quoted
                  market prices for similar instruments in active markets; quoted
                  priced for
                  identical or similar instruments in markets that are not active;
                  and
                  model-derived valuations in which all significant inputs and significant
                  value drivers are observable in active markets.Level 3
              
              Valuations
                  derived from valuation techniques in which one or more significant
                  inputs
                  or significant value drivers are unobservable. Level 3 assets and
                  liabilities generally include financial instruments whose value
                  is
                  determined using pricing models, discounted cash flow methodologies,
                  or
                  similar techniques, as well as instruments for which the determination
                  of
                  fair value requires significant management judgment or estimation
                  or for
                  which there is a lack of transparency as to the inputs
                  used.
 
 Financial
        assets and financial liabilities measured at fair value on a recurring basis
        are
        summarized below:
 
 **March 31, 2008****Fair Value Measurements Using**
              
              **Assets/Liabilities****Level
                  1**
              
              **Level
                  2**
              
              **Level
                  3**
              
              **at Fair value****Assets:**Derivative
                  instruments
              
              $
              —
              
              $
              203,945
              
              $
              —
              
              $
              203,945**Liabilities:**Derivative
                  instruments
              
              $
              —
              
              $
              (22,140,650
              )
              $
              —
              
              $
              (22,140,650
              )
 
 **7.    
        Related Party Transactions**
 
 Pursuant
        to the Restructuring, we rely on Vinland to execute our drilling program,
        operate our wells and gather our natural gas in Appalachia. We reimburse
        Vinland
        $60 per well per month (in addition to normal third party operating costs)
        for
        operating our current natural gas and oil properties in Appalachia under
        a
        Management Services Agreement (“MSA”) which costs are reflected in our lease
        operating expenses. Also, Vinland receives a $0.25 per Mcf transportation
        fee on
        existing wells drilled at December 31, 2006 and $0.55 per Mcf transportation
        fee
        on any new wells drilled after December 31, 2006 within the area of mutual
        interest or “AMI”. This transportation fee only encompasses transporting the
        natural gas to third party pipelines at which point additional transportation
        fees to natural gas markets would apply. These transportation fees are outlined
        under a Gathering and Compression Agreement (“GCA”) with Vinland and are
        reflected in our lease operating expenses. For the three months ended March
        31,
        2008 and 2007, costs incurred under the MSA were $0.1 million in each period.
        For the three months ended March 31, 2008 and 2007, costs incurred under
        the GCA
        were $0.3 million and $0.4 million, respectively. A payable of $3.3 million
        and
        $3.8 million is reflected on our March 31, 2008 and December 31, 2007
        consolidated balance sheet in connection with these agreements and direct
        expenses incurred by Vinland related to the drilling of new wells and operations
        of all of our existing wells in Appalachia.
  12
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
  **8.   
        Common Units and Net Income per Unit**
 
 Basic
        earnings per unit is computed in accordance with SFAS No. 128, *“Earnings
        Per Share”* (“SFAS 128”) by dividing net income (loss) attributable to unitholders by
        the weighted average number of units outstanding during the period. Diluted
        earnings per unit is computed by adjusting the average number of units
        outstanding for the dilutive effect, if any, of unit equivalents.  The
        Company uses the treasury stock method to determine the dilutive effect. 
At March 31, 2008, the Company had two classes of units outstanding: 
(i) units representing limited liability company interests (“common units”)
        listed on NYSE Arca under the symbol VNR and (ii) Class B units,
        issued to management and an employee as discussed in *Note
        10.* *Unit-Based
        Compensation* .
        The
        Class B units participate in distributions and no forfeiture is expected;
        therefore, all Class B units were considered in the computation of basic
        earnings per unit.
 
 In
        accordance with SFAS 128, dual presentation of basic and diluted earnings
        per unit has been presented in the consolidated statements of operations
        for the
        three months ended March 31, 2008 and 2007 for each class of units issued
        and
        outstanding at that date: common units and Class B units.  Net income
        (loss) per unit is allocated to the common units and the Class B units on
        an equal basis.
 
 **9.    
        Dividends Declared**
 
 On
        March
        18, 2008, our board of directors declared a cash distribution attributable
        to
        the first quarter of 2008 of $0.445 per unit, payable on May 15, 2008 to
        unitholders of record on April 30, 2008. This distribution, totaling $4,990,675,
         has been accrued at March 31, 2008 and is included in accrued expense in
        our consolidated balance sheet
 
 **10.   Unit-Based
        Compensation**
 
 In
        April
        2007, the sole member reserved 460,000 restricted Class B units in VNR for
        issuance to employees. Certain members of management were granted 365,000
        restricted Class B units in VNR in April 2007, which vest two years from
        the
        date of grant. In addition, another 55,000 restricted VNR Class B units were
        issued in August 2007 to two other employees that were hired in April and
        May of
        2007, which will vest over three years. The remaining 40,000 restricted Class
        B
        units are available to be awarded to new employees or members of our board
        of
        directors as they are retained. In
        October 2007 and February 2008, four board members were granted 5,000 common
        units each which vest over one year. Additionally, two officers were granted
        options to purchase an aggregate of 175,000 units under our long-term incentive
        plan with an exercise price equal to the initial public offering price.
        Furthermore, on March 27, 2008, phantom units were granted to two officers
        in
        amounts equal to 1.0% of our units outstanding at January 1, 2008 and the
        amount
        paid will equal the appreciation in value of the units, if any, from the
        date of
        the grant until the determination date (December 31, 2008), plus cash
        distributions paid on the units, less an 8% hurdle rate. These
        common units, Class B units, options and phantom units were granted as partial
        consideration for services to be performed under employment contracts and
        thus
        will be subject to accounting for these grants under SFAS No.
        123(R), *Share-Based Payment.*
  The
        fair
        value of restricted units issued is determined based on the fair market value
        of
        common units on the date of the grant. This value is amortized over the vesting
        period as referenced above. A summary of the status of the non-vested units
        as
        of March 31, 2008 is presented below:
 
 **Number of**
                **Non-vested Units**
              
              **Weighted Average**
                **Grant Date Fair Value**Non-vested
                  units at December 31, 2007
              
              
              425,000
              
              $
              18.14Granted
              
              
              15,000
              
              
              16.79Non-vested
                  units at March 31, 2008
              
              
              440,000
              
              $
              18.10
 
 At
        March
        31, 2008, there was approximately $5.0 million of unrecognized compensation
        cost
        related to non-vested restricted units. The cost is expected to be recognized
        over an average period of approximately 1.6 years. Our consolidated statement
        of
        operations reflects non-cash compensation of $0.9 million in the selling,
        general and administrative line item for the three months ended March 31,
        2008.
  13
  **VANGUARD
        NATURAL RESOURCES, LLC AND SUBSIDIARIES**
 **NOTES TO
        CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**
 **(Unaudited)**
 
 **11.  Subsequent
        Event**
 
 In
        April
        2008, we reset the price on 800,000 MMBtu of natural gas puts settling from
        May
        1, 2008 to December 31, 2008 from $7.50 to $9.00 per MMBtu at a cost to the
        Company of $0.3 million which was funded with cash on hand.
  14
 
 **Item 2.  Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
  The
        following discussion and analysis should be read in conjunction with the
        financial statements and related notes presented in Item 1 of this Quarterly
        Report on Form 10-Q and information disclosed in our 2007 Annual Report on
        Form 10-K.
  **Forward-Looking
        Statements**
  This
        report contains “forward-looking statements” intended to qualify for the safe
        harbors from liability established by the Private Securities Litigation Reform
        Act of 1995. Statements included in this quarterly report that are not
        historical facts (including any statements concerning plans and objectives
        of
        management for future operations or economic performance, or assumptions
        or
        forecasts related thereto), including, without limitation, the information
        set
        forth in Management’s Discussion and Analysis of Financial Condition and Results
        of Operations, are forward-looking statements. These statements can be
        identified by the use of forward-looking terminology including “may,” “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “continue,” or other similar
        words. These statements discuss future expectations, contain projections
        of
        results of operations or of financial condition, or state other
“forward-looking” information. We and our representatives may from time to time
        make other oral or written statements that are also forward-looking
        statements.
  Such
        forward-looking statements are subject to various risks and uncertainties
        that
        could cause actual results to differ materially from those anticipated as
        of the
        date of this report. Although we believe that the expectations reflected
        in
        these forward-looking statements are based on reasonable assumptions, no
        assurance can be given that these expectations will prove to be correct.
        Important factors that could cause our actual results to differ materially
        from
        the expectations reflected in these forward-looking statements include, among
        other things, those set forth in the Risk Factor section of the 2007 Annual
        Report on Form 10-K, and those set forth from time to time in our filings
        with
        the SEC, which are available on our website at www.vnrllc.com and through
        the
        SEC’s Electronic Data Gathering and Retrieval System (“EDGAR”) at
        http://www.sec.gov.
  All
        forward-looking statements included in this report are based on information
        available to us on the date of this report. We undertake no obligation to
        publicly update or revise any forward-looking statement, whether as a result
        of
        new information, future events or otherwise. All subsequent written and oral
        forward-looking statements attributable to us or persons acting on our behalf
        are expressly qualified in their entirety by the cautionary statements contained
        throughout this report.
  **Overview**
  We
        are a
        publicly-traded limited liability company focused on the acquisition,
        development and exploitation of mature, long-lived natural gas and oil
        properties in the United States. Our primary business objective is to generate
        stable cash flows allowing us to make quarterly cash distributions to our
        unitholders and over time to increase our quarterly cash distributions through
        the acquisition of new natural gas and oil properties. Our properties are
        located in the southern portion of the Appalachian Basin, primarily in southeast
        Kentucky and northeast Tennessee and the Permian Basin, primarily in West
        Texas
        and Southeastern New Mexico.
  We
        owned
        working interests in 1,357 gross (902 net) productive wells at March 31,
        2008
        and our average net production for the twelve months ended December 31,
        2007 and for the three months ended March 31, 2008 was 11,610 Mcfe per day
        and
        13,393 Mcfe per day, respectively. We also have a 40% working interest in
        the
        known producing horizons in approximately 104,000 gross undeveloped acres
        surrounding or adjacent to our existing wells located in southeast Kentucky
        and
        northeast Tennessee. Vinland Energy Operations, LLC (“Vinland”) acts as the
        operator of our existing wells in Appalachia and all of the wells that we
        will
        drill in this area.
  ***Initial
        Public Offering***
  In
        October 2007, we completed our initial public offering (“IPO”) of 5.25 million
        units representing limited liability interests in VNR at $19.00 per unit
        for net
        proceeds of $92.8 million after deducting underwriting discounts and fees
        of
        $7.0 million. The proceeds were used to reduce indebtedness under our
        reserve-based credit facility by $80.0 million and the balance was used for
        the
        payment of accrued distributions to pre-IPO unitholders and the payment of
        a
        deferred swap obligation.
  ***Permian
        Basin Acquisition***
 
 On
        December 21, 2007, we entered in to a Purchase and Sale Agreement with the
        Apache Corporation for the purchase of certain oil
        and
        natural gas properties located in ten separate fields in the Permian Basin
        of
        West Texas and Southeastern New Mexico. The purchase
        price for said assets was $78.3 million with an effective date of October
        1,
        2007. We completed this acquisition on January 31, 2008 for an adjusted purchase
        price of $73.4 million, subject to customary post closing adjustments. The
        adjusted purchase price included a preliminary purchase price adjustment
        of $4.9
        million which represents the cash flow from the acquired properties for the
        period between the effective date, October 1, 2007, and the closing date,
        January 31, 2008. This acquisition was funded with borrowings under our
        reserve-based credit facility. In this purchase, we acquired working interests
        in 390 gross wells (67 net wells), 49 of which we operate. With respect to
        operations, we have established two district offices, one in Lovington, New
        Mexico and the other in Christoval, Texas to manage these assets. Our operating
        focus will be on maximizing existing production and looking for complementary
        acquisitions that we can add to this operating platform. With this acquisition,
        based on internal reserve estimates, we acquired 4.4 million barrels of oil
        equivalent, 83% of which is oil and 90% of which is proved developed producing.
        The current net production attributable to this purchase is approximately
        800
        barrels of oil equivalent per day and the reserves-to-production ratio is
        15
        years. With the closing of this acquisition, our daily production and total
        reserves increased approximately 40%.
  15
 
 ***Our
        Relationship with Vinland***
  On
        April 18, 2007 but effective as of January 5, 2007, we entered into
        various agreements with Vinland, under which we rely on Vinland to operate
        our
        existing producing wells in Appalachia and coordinate our development drilling
        program in this area. We expect to benefit from the substantial development
        and
        operational expertise of Vinland management in the Appalachian Basin. Under
        a
        management services agreement, Vinland advises and consults with us regarding
        all aspects of our production and development operations in Appalachia and
        provides us with administrative support services as necessary for the operation
        of our business. In addition, Vinland may, but does not have any obligation
        to,
        provide us with acquisition services under the management services agreement.
        While Vinland is not obligated to provide us with acquisition services, we
        expect that due to significant common ownership Vinland has an incentive
        to grow
        our business by helping us to identify, evaluate and complete acquisitions
        that
        will be accretive to our distributable cash. In addition, under a gathering
        and
        compression agreement that we entered into with Vinland Energy Gathering,
        LLC
        (“VEG”), VEG gathers, compresses, delivers and provides the services necessary
        for us to market our natural gas production in the area of mutual interest,
        or
        AMI. VEG delivers our natural gas production to certain designated interconnects
        with third-party transporters. Since the various agreements were executed
        on
        April 18, 2007 but were effective as of January 5, 2007, Vinland
        reimbursed us for the drilling costs and expenses that we incurred on their
        behalf associated with their interest in the wells drilled between
        January 5, 2007 and April 18, 2007. In addition, Vinland reimbursed us
        for selling, general and administrative expenses that we incurred on their
        behalf between January 5, 2007 and April 18, 2007. We reimbursed
        Vinland for certain transaction costs and expenses relating to entering into
        these agreements.
  ***Restructuring
        Plan***
  Prior
        to
        the separation, our Predecessor owned all of the assets that are currently
        owned
        by us and Vinland in Appalachia. As part of the separation of our operating
        company and Vinland, effective January 5, 2007, we conveyed to Vinland 60%
        of our Predecessor’s working interest in the known producing horizons in
        approximately 95,000 gross undeveloped acres in the AMI, 100% of our
        Predecessor’s interest in an additional 125,000 undeveloped acres and certain
        coalbed methane rights located in the Appalachian Basin, the rights to any
        natural gas and oil located on our acreage at depths above and 100 feet below
        our known producing horizons, all of our gathering and compression assets
        and
        all employees other than our President and Chief Executive Officer and our
        Executive Vice President and Chief Financial Officer. We retained all of
        our
        Predecessor’s proved producing wells and associated reserves. We also retained
        40% of our Predecessor’s working interest in the known producing horizons in
        approximately 95,000 gross undeveloped acres in the AMI and a contract right
        to
        receive approximately 99% of the net proceeds, after deducting royalties
        paid to
        other parties, severance taxes, third-party transportation costs, costs incurred
        in the operation of wells and overhead costs, from the sale of production
        from
        certain producing natural gas and oil wells, which accounted for approximately
        4.5% of our estimated proved reserves as of December 31, 2007. In addition,
        we changed the name of our operating company from Nami Holding Company, LLC
        to
        Vanguard Natural Gas, LLC. Collectively, we refer to these events as the
        “Restructuring.”
  ***Private
        Offering***
  In
        April 2007, we completed a private equity offering pursuant to which we
        issued 2,290,000 **** units
        to
        certain private investors, which we collectively refer to as the Private
        Investors, for $41.2 million. We used the net proceeds of this private equity
        offering to make a distribution to Majeed S. Nami, VNR’s largest unitholder, who
        used a portion of these funds to capitalize Vinland and also paid us
        $3.9 million to reduce outstanding accounts receivable from Vinland. We
        then used the $3.9 million to repay borrowings and interest under our
        reserve-based credit facility, and for general limited liability company
        purposes. Under the terms of the private offering, all outstanding units
        accrued
        distributions at $1.75 annually from the closing of the private offering
        to
        September 30, 2007 and then distributions payable to the Private Investors
        only
        increased to $2.40 until the completion of the initial public offering at
        which
        time all accrued distributions totaling $5.6 million were paid.
  16
 
 ***Reserve-Based
        Credit Facility***
  On
        January 3, 2007, our operating company entered into a reserve-based credit
        facility which is available for our general limited liability company purposes,
        including, without limitation, capital expenditures and acquisitions. Our
        obligations under the reserve-based credit facility are secured by substantially
        all of our assets. Our initial borrowing base under the reserve-based credit
        facility was set at $115.5 million. However, the borrowing base was subject
        to
        $1.0 million reductions per month starting on July 1, 2007 through November
        1,
        2007, which resulted in a borrowing base of $110.5 million as reaffirmed
        in
        November 2007 pursuant to a semi-annual borrowing base redetermination. We
        applied $80.0 million of the net proceeds from our IPO in October 2007 to
        reduce
        our indebtedness under the reserve-based credit facility. In February 2008,
        our
        reserve-based credit facility was amended and restated to extended the maturity
        from January 3, 2011 to March 31, 2011, increase the facility amount from
        $200.0
        million to $400.0 million, increase our borrowing base from $110.5 million
        to
        $150.0 million and add two financial institutions as lenders. Additional
        borrowings were made pursuant to the acquisition of natural gas and oil
        properties in the Permian Basin and indebtedness under the reserve-based
        credit
        facility totaled $102.5 million at March 31, 2008. At March 31, 2008, the
        applicable margin and other fees increase as the utilization of the borrowing
        base increases as follows:
  **Borrowing
                    Base Utilization Grid**Borrowing
                    Base Utilization Percentage
                *<**25%*
                *>25%**<**50%*
                *>50%**<**75%*
                *>75%*Eurodollar
                    Loans
                1.000%
                1.250%
                1.500%
                1.750%ABR
                    Loans
                0.000%
                0.250%
                0.500%
                0.750%Commitment
                    Fee Rate
                0.250%
                0.300%
                0.375%
                0.375%Letter
                    of Credit Fee
                1.000%
                1.250%
                1.500%
                1.750%
  **Outlook**
  Our
        revenue, cash flow from operations and future growth depend substantially
        on
        factors beyond our control, such as economic, political and regulatory
        developments, competition from other sources of energy, and access to capital.
        Natural gas and oil prices historically have been volatile and may fluctuate
        widely in the future. Sustained periods of low prices for natural gas or
        oil
        could materially and adversely affect our financial position, our results
        of
        operations, the quantities of natural gas and oil reserves that we can
        economically produce and our access to capital. As required by our reserve-based
        credit facility, we have mitigated this volatility for the years 2007 through
        2011 by implementing a hedging program on our proved producing and total
        anticipated production during this time frame.
  We
        face
        the challenge of natural gas and oil production declines. As a given well’s
        initial reservoir pressures are depleted, natural gas and oil production
        decreases, thus reducing our total reserves. We attempt to overcome this
        natural
        decline both by drilling on our properties and acquiring additional reserves.
        We
        will maintain our focus on controlling costs to add reserves through drilling
        and acquisitions, as well as controlling the corresponding costs necessary
        to
        produce such reserves. Our ability to add reserves through drilling is dependent
        on our capital resources and can be limited by many factors, including the
        ability to timely obtain drilling permits and regulatory approvals. Any delays
        in drilling, completion or connection to gathering lines of our new wells
        will
        negatively impact the rate of our production, which may have an adverse effect
        on our revenues and as a result, cash available for distribution. In accordance
        with our business plan, we intend to invest the capital necessary to maintain
        our production at existing levels over the long-term.
  **Results
        of Operations**
  The
        following table sets forth selected financial and operating data for the
        periods
        ended March 31:
 
 **Three Months Ended**
                **March
                  31,****2008(a)**
              
              **2007****Revenues:**Natural
                  gas and oil sales
              
              $
              14,000,097
              
              $
              8,961,616Realized
                  losses on derivative contracts
              
              
              (1,150,472
              )
              
              (747,808
              )**Total
                  revenues**
              
              
              **12,849,625**
              
              **$**
              **8,213,808****Costs
                  and expenses:**Lease
                  operating expenses
              
              $
              2,015,677
              
              $
              1,146,379Depreciation,
                  depletion and amortization
              
              
              2,823,978
              
              
              2,028,863Selling,
                  general and administrative expenses
              
              
              1,645,791
              
              
              434,288Bad
                  debt expense
              
              
              —
              
              
              1,007,461Taxes
                  other than income
              
              
              966,113
              
              
              510,882**Total
                  costs and expenses**
              
              **$**
              **7,451,559**
              
              **$**
              **5,127,873****Other
                  income and (expense):**Interest
                  expense, net
              
              $
              (1,122,046
              )
              $
              (2,210,156
              )Loss
                  on extinguishment of debt
              
              $
              —
              
              $
              (2,501,528
              )
  (a) 
The
                  Permian acquisition closed on
                  January 31, 2008 and as such only two months of operations are
                  included in
                  the three month period ending March 31,
                  2008.
  17
  **Three
        Months Ended March 31, 2008 Compared to Three Months Ended March 31,
        2007**
  *Revenues*
  Natural
        gas and oil sales increased $5.0 million to $14.0 million during the three
        months ended March 31, 2008 as compared to the same period in 2007. The key
        revenue measurements were as follows:
 **Three Months Ended**
                  **March 31,**
                
                **Percentage**
                  **Increase**
                  **(Decrease)****2008**
                
                **2007**Net
                    Natural Gas Production:Appalachian
                    gas (MMcf)
                
                
                867
                
                
                1,068
                
                
                (19)
                %Permian
                    gas (MMcf)
                
                
                42
                (a)
                
                —
                
                
                N/A**Total
                    natural gas production (MMcf)**
                
                
                909
                
                
                1,068
                
                
                (15)
                %Average
                    Appalachian daily gas production (Mcf/day)
                
                
                9,527
                
                
                11,868
                
                
                (20)
                %Average
                    Permian daily gas production (Mcf/day)
                
                
                693
                (a)
                
                —
                
                
                N/AAverage
                    Natural Gas Sales Price per Mcf:Net
                    realized gas price, including hedges
                
                
                $10.47
                (b)
                
                $7.69
                
                
                36
                %Net
                    realized gas price, excluding hedges
                
                
                $9.93
                
                
                $8.39
                
                
                18
                %Net
                    Oil Production:Appalachian
                    oil (Bbls)
                
                
                10,991
                
                
                —
                
                
                N/APermian
                    oil (Bbls)
                
                
                40,722
                (a)
                
                —
                
                
                N/A**Total
                    oil (Bbls)**
                
                
                51,713
                
                
                —
                
                
                N/AAverage
                    Appalachian daily oil production (Bbls/day)
                
                
                121
                
                
                —
                
                
                N/AAverage
                    Permian daily oil production (Bbls/day)
                
                
                679
                (a)
                
                —
                
                
                N/AAverage
                    Oil Sales Price per Bbls:Net
                    realized oil price, including hedges
                
                
                $89.65
                
                
                —
                
                
                N/ANet
                    realized oil price, excluding hedges
                
                
                $96.33
                
                
                —
                
                
                N/A
  (a)
              The
                  Permian acquisition closed on January 31, 2008 and as such only
                  two months
                  of operations are included in the three month period ending March
                  31,
                  2008.
 (b)
              Excludes
                  amortization of premiums prepaid on derivative
                  contracts.
  The
        increase in natural gas and oil sales was due primarily to the impact of
        the
        Permian Basin acquisition completed on January 31, 2008. Two months of
        production from this recently completed acquisition contributed $4.3 million
        of
        natural gas and oil sales for the three month period ended March 31, 2008.
        In
        Appalachia, a decline in natural gas production was partially offset by an
        increase in oil production for a net production decline of 13% on an Mcfe
        basis.
        However, the negative impact of the production decline was offset by an 18%
        increase in the average realized natural gas sales price received (excluding
        hedges).
  18
 
 *Hedging
        Activities*
  During
        the three months ended March 31, 2008, we had hedges in place for approximately
        98% of our total production, which resulted in reported revenues that were
        $1.2
        million lower than we would have achieved at unhedged prices. However, the
        actual cash impact of the hedges increased realizations by $0.2 million for
        the
        three months ended March 31, 2008 after excluding the amortization of premiums
        prepaid on derivative contracts. During the three months ended March 31,
        2007,
        we hedged approximately 58% of our total production and in January 2007,
        we
        terminated existing natural gas swaps at a cost of approximately $2.8 million
        which resulted in an additional loss on derivative contracts of approximately
        $0.8 million.
  *Costs
        and Expenses*
  Production
        costs consist of the lease operating expenses and taxes other than income
        taxes
        (severance and ad valorem taxes). Lease operating expenses include third-party
        transportation costs, gathering and compression fees, field personnel and
        other
        customary charges. Lease operating expenses in Appalachia also include a
        $60 per
        month per well administrative charge pursuant to a management services agreement
        with Vinland, a $0.25 per Mcf and $0.55 per Mcf gathering and compression
        charge
        for production from wells drilled pre and post January 1, 2007, respectively,
        paid to Vinland pursuant to a gathering and compression agreement with Vinland.
        Lease operating expenses increased by $0.9 million to $2.0 million for the
        three
        months ended March 31, 2008 as compared to the three months ended March 31,
        2007
        of which $0.6 million related to the recently closed Permian Basin acquisition.
        Severance taxes are a function of volumes and revenues generated from
        production. Ad valorem taxes vary by state/county and are based on the value
        of
        our reserves. Taxes other than income increased by $0.5 million for the three
        months ended March 31, 2008 as compared to the same period in 2007 of which
        $0.3
        million related to the recently closed Permian Basin acquisition.
  Depreciation,
        depletion and amortization increased to approximately $2.8 million for the
        three
        months ended March 31, 2008 from approximately $2.0 million for the three
        months
        ended March 31, 2007 due entirely to the additional depletion recorded on
        the
        recently completed Permian Basin acquisition.
  Selling,
        general and administrative expenses include the costs of our administrative
        employees and executive officers, related benefits, office leases, professional
        fees and other costs not directly associated with field operations. These
        expenses for the three months ended March 31, 2008 increased $1.2 million
        as
        compared to the three months ended March 31, 2007 primarily resulting from
        a
        $0.9 million non-cash compensation charge related to the grant of restricted
        Class B units to management and an employee, the grant of unit options to
        management and the grant of common units to board members during 2007 and
        2008.
        Excluding the impact of the non-cash compensation, selling, general and
        administrative expenses were $0.7 million for the three months ended March
        31,
        2008 representing a $0.3 million increase from the same period in 2007
        principally due to costs associated with additional employees.
  Interest
        expense declined to $1.1 million for the three months ended March 31, 2008
        compared to $2.2 million for the three months ended March 31, 2007 primarily
        due
        to a reduction in the weighted average outstanding borrowings and lower interest
        rates. All of our Predecessor’s outstanding debt was repaid with borrowings
        under our reserve-based credit facility in January 2007, including an early
        prepayment penalty of $2.5 million.
  **Critical
        Accounting Policies and Estimates**
 
 The
        preparation of financial statements in accordance with GAAP requires management
        to select and apply accounting policies that best provide the framework to
        report its results of operations and financial position. The selection and
        application of those policies requires management to make difficult subjective
        or complex judgments concerning reported amounts of revenue and expenses
        during
        the reporting period and the reported amounts of assets and liabilities at
        the
        date of the financial statements. As a result, there exists the likelihood
        that materially different amounts would be reported under different conditions
        or using different assumptions.
  As
        of
        March 31, 2008, the Company’s critical accounting policies are consistent with
        those discussed in the Company’s Annual Report on Form 10-K for the year ended
        December 31, 2007.
  **Recently
        Adopted Accounting Pronouncements**
 
 In
        September 2006, the Financial Accounting Standards Board (FASB) issued Statement
        of Financial Accounting Standards No. 157 “Fair *Value
        Measurements* ”
(“SFAS
        157”). SFAS 157 introduces a framework for measuring fair value and expands
        required disclosure
        about fair value measurements of assets and liabilities. On February 6, 2008,
        the FASB issued a final FASB Staff Position (“FSP”)
        No. FAS 157-b, “ *Effective
        Date of FASB Statement No. 157* ”.
        This
        FSP delays the effective date of SFAS 157 ** for
        all
        non-financial assets and non-financial liabilities, except those that are
        recognized or disclosed at fair value in the financial statements on a recurring
        basis. In addition, the FSP removes certain leasing  transactions from the
        scope of SFAS 157. The effective date of SFAS 157 for non-financial assets
        and
        non-financial liabilities has been delayed by one year to fiscal years beginning
        after November 15, 2008 and interim periods within those fiscal years. SFAS
        157
        for financial assets and liabilities is effective for fiscal years beginning
        after November 15, 2007, and the Company prospectively adopted the standard
        for
        those assets and liabilities as of January 1, 2008. See
        Note 6 in Notes to Consolidated Financial Statements and Part 1—Item 1—Fair
        Value Disclosures.
  19
 In
          February 2007, the FASB issued SFAS No. 159, “ *The
          Fair Value Option for Financial Assets and Financial Liabilities, including
          an
          amendment of FASB Statement No. 115”* (“SFAS
          159”), which permits companies to choose, at specified dates, to measure certain
          eligible financial instruments at fair value. The objective of SFAS 159
          is to
          reduce volatility in preparer reporting that may be caused as a result
          of
          measuring related financial assets and liabilities differently and to expand
          the
          use of fair value measurements. The provisions of SFAS 159 apply only to
          entities that elect to use the fair value option and to all entities with
          available-for-sale and trading securities. Additional disclosures are also
          required for instruments for which the fair value option is elected. SFAS
          159 is
          effective for fiscal years beginning after November 15, 2007. No retrospective
          application is allowed, except for companies that choose to adopt early.
          At the
          effective date, companies may elect the fair value option for eligible
          items
          that exist at that date, and the effect of the first remeasurement to fair
          value
          must be reported as a cumulative-effect adjustment to the opening balance
          of
          retained earnings. Effective January 1, 2008, the Company adopted SFAS
          159 and
          the adoption did not have a material impact on its consolidated financial
          statements.
 
 **New
          Pronouncements Issued But Not Yet Adopted**
 
 In
          December 2007, the FASB issued SFAS No. 141 (revised 2007), *“Business
          Combinations”* (“SFAS
          141(R)”), which replaces FASB Statement No. 141. SFAS 141(R) establishes
          principles and requirements for how an acquirer recognizes and measures
          in its
          financial statements the identifiable assets acquired, the liabilities
          assumed,
          any non-controlling interest in the acquiree and the goodwill acquired.
          The
          Statement also establishes disclosure requirements that will enable users
          to
          evaluate the nature and financial effects of the business combination.
          SFAS
          141(R) is effective for acquisitions that occur in an entity’s fiscal year that
          begins after December 15, 2008, which will be our fiscal year 2009. The
          impact,
          if any, on the consolidated financial statements will depend on the nature
          and
          size of business combinations that we consummate after the effective
          date.
 
 In
          December 2007, the FASB issued SFAS No. 160, *“Non-controlling
          Interests in Consolidated Financial statements—an amendment of ARB No. 51”* (“SFAS
          160”). SFAS 160 requires that accounting and reporting for minority interests
          will be recharacterized as non-controlling interests and classified as
          a
          component of equity. SFAS 160 also establishes reporting requirements that
          provide sufficient disclosures that clearly identify and distinguish between
          the
          interests of the parent and the interests of the non-controlling
          owners.  SFAS
          160
          applies to all entities that prepare consolidated financial statements,
          except
          not-for-profit organizations, but will affect only those entities that
          have an
          outstanding non-controlling interest in one or more subsidiaries or that
          deconsolidate a subsidiary. This statement is effective as of the beginning
          of
          an entity’s first fiscal year beginning after December 15, 2008, which will be
          our fiscal year 2009. Based upon the March 31, 2008 balance sheet, SFAS
          160
          would have no impact on the consolidated financial statements.
 
 In
          March
          2008, the FASB issued SFAS No. 161, “ *Disclosures
          about Derivative Instruments and Hedging Activities” (“* SFAS
          161”). SFAS 161 is intended to improve financial reporting about derivative
          instruments and hedging activities by requiring enhanced disclosures to
          enable
          investors to better understand their effects on an entity’s financial position,
          financial performance, and cash flows. SFAS 161 achieves these improvements
          by
          requiring disclosure of the fair values of derivative instruments and their
          gains and losses in a tabular format. It also provides more information
          about an
          entity’s liquidity by requiring disclosure of derivative features that are
          credit risk-related. Finally, it requires cross-referencing within footnotes
          to
          enable financial statement users to locate important information about
          derivative instruments. SFAS 161 is effective for financial statements
          issued
          for fiscal years and interim periods beginning after November 15, 2008,
          with
          early application encouraged. We are evaluating the impact of SFAS 161
          on our
          consolidated financial statements and do not expect the impact of implementation
          to be material.
  **Liquidity
        and Capital Resources**
 
 We
        have
        utilized private equity, proceeds from bank borrowings, cash flow from
        operations and, with our recent IPO, the public equity markets for capital
        resources and liquidity. To date, the primary use of capital has been for
        the acquisition and development of natural gas and oil properties; however,
        as a
        result of our IPO, we expect to distribute to unitholders a significant portion
        of our free cash flow.  As we execute our business strategy, we will
        continually monitor the capital resources available to us to meet future
        financial obligations, planned capital expenditures, acquisition capital
        and
        distributions to our unitholders. Our future success in growing reserves,
        production and cash flow will be highly dependent on the capital resources
        available to us and our success in drilling for or acquiring additional
        reserves. We expect to fund our maintenance capital expenditures and
        distributions to unitholders with cash flow from operations, while funding
        any
        acquisition capital expenditures that we might incur with borrowings under
        our
        reserve-based credit facility and publicly offered equity, depending on market
        conditions. As of May 13, 2008, we have $47.5 million available to be borrowed
        under our reserve-based credit facility. Based upon current expectations,
        we
        believe existing liquidity and capital resources will be sufficient for the
        conduct of our business and operations for the foreseeable future.
  20
  ***Cash
        Flow from Operations***
  Net
        cash
        provided by operating activities for the three months ended March 31, 2008
        was
        $4.0 million, compared to cash used in operating activities of $19.3 million
        for
        the three months ended March 31, 2007. The increase in cash provided by
        operating activities during the three months ended March 31, 2008 was
        substantially due to increased income, a reduction in payables to affiliates
        and
        a decrease in cash used in price risk management activities. The cash used
        in
        operating activities in the first quarter 2007 included the termination of
        existing natural gas swaps at a cost of approximately $2.8 million, cash
        paid on
        early extinguishment of debt of approximately $2.5 million and the payment
        of
        $6.5 million for put option derivative contracts.
  Cash
        flow
        from operations is subject to many variables, the most significant of which
        is
        the volatility of natural gas and oil prices. Natural gas and oil prices
        are determined primarily by prevailing market conditions, which are dependent
        on
        regional and worldwide economic activity, weather and other factors beyond
        our
        control. Future cash flow from operations will depend on our ability to
        maintain and increase production through our drilling program and acquisitions,
        as well as the prices received for production. We enter into derivative
        arrangements to reduce the impact of commodity price volatility on
        operations. Currently, we use a combination of fixed-price swaps and NYMEX
        collars and put options to reduce our exposure to the volatility in natural
        gas
        and oil prices. See Note 5 in Notes to Consolidated Financial
        Statements and Part 1—Item 3—Quantitative and Qualitative Disclosures About
        Market Risk—Commodity Price Risk for details about derivatives in place through
        2012.
  ***Cash
        Flow from Investing Activities***
 
 Cash
        used
        in investing activities was approximately $68.1 million for the three months
        ended March 31, 2008, compared to $1.7 million for the three months ended
        March 31, 2007. The increase in cash used in investing activities was
        primarily attributable to $65.6 million used for the acquisition of natural
        gas
        and oil properties in the Permian Basin. In addition, the total for the three
        months ended March 31, 2008 includes $1.2 million for the drilling and
        development of natural gas and oil properties as compared to $1.7 million
        for
        the three months ended March 31, 2007.
  ***Cash
        Flow from Financing Activities***
 
 Cash
        provided by financing activities was approximately $61.6 million for the
        three
        months ended March 31, 2008, compared to $19.4 million for the three months
        ended March 31, 2007. During the three months ended March 31, 2008, total
        proceeds from borrowings under our reserve-based credit facility were $71.4
        million which were principally used to fund the Permian Basin acquisition.
        During the three months ended March 31, 2007, total proceeds from borrowings
        under our reserve-based credit facility were $114.6 million, which was
        principally used to pay off our Predecessor’s outstanding borrowings.
  **Reserve-Based
        Credit Facility**
 
 On
        January 3, 2007, our operating company, Vanguard Natural Gas, LLC (formerly
        Nami
        Holding Company, LLC), entered into a reserve-based credit facility under
        which
        our initial borrowing base was set at $115.5 million. Our
        reserve-based credit facility was amended and restated in February 2008 to
        extend the maturity date from January 2011 to March 2011, increase the facility
        amount from $200.0 million to $400.0 million, increase our borrowing base
        from
        $110.5 million to $150.0 million and add two financial institutions as lenders.
        The increase in the borrowing base was principally the result of inclusion
        of
        the reserves related to the Permian Basin acquisition. As a result,
        a s
        of
        March 31, 2008, we had $102.5 million outstanding under our reserve-based
        credit
        facility and as
        of May 13, 2008, we have $47.5 million available to be borrowed. Borrowings
        under the reserve-based credit facility are available for development,
        exploitation and acquisition of natural gas and oil properties, working capital
        and general limited liability company purposes. Our obligations under the
        reserve-based credit facility are secured by substantially all of our
        assets.
  At
        our
        election, interest is determined by reference to:
  ·
              the
                  London interbank offered rate, or LIBOR, plus an applicable margin
                  between
                  1.00% and 1.75% per annum; or
 
 ·
              a
                  domestic bank rate plus an applicable margin between 0.00% and
                  0.75% per
                  annum.
  Interest
        is generally payable quarterly for domestic bank rate loans and at the
        applicable maturity date for LIBOR loans, but not less frequently than
        quarterly.
  The
        reserve-based credit facility contains various covenants that limit our ability
        to:
  ·
              incur
                  indebtedness;
  21
 
 ·
              grant
                  certain liens;
 
 ·
              make
                  certain loans, acquisitions, capital expenditures and
                  investments;
 
 ·
              make
                  distributions;
 
 ·
              merge
                  or consolidate; or
 
 ·
              engage
                  in certain asset dispositions, including a sale of all or substantially
                  all of our assets.
  The
        reserve-based credit facility also contains covenants that, among other things,
        require us to maintain specified ratios or conditions as follows:
  ·
              consolidated
                  net income plus interest expense, income taxes, depreciation, depletion,
                  amortization, changes in fair value of derivative instruments and
                  other
                  similar charges, minus all non-cash income added to consolidated
                  net
                  income, and giving pro forma effect to any acquisitions or capital
                  expenditures, to interest expense of not less than 2.5 to
                  1.0;
 
 ·
              consolidated
                  current assets, including the unused amount of the total commitments,
                  to
                  consolidated current liabilities of not less than 1.0 to 1.0, excluding
                  non-cash assets and liabilities under SFAS No. 133, which includes
                  the
                  current portion of derivative
                  contracts;
  ·
              consolidated
                  debt to consolidated net income plus interest expense, income taxes,
                  depreciation, depletion, amortization, changes in fair value of
                  derivative
                  instruments and other similar charges, minus all non-cash income
                  added to
                  consolidated net income, and giving pro forma effect to any acquisitions
                  or capital expenditures of not more than 4.0 to
                  1.0.
 
 We
        have
        the ability to borrow under the reserve-based credit facility to pay
        distributions to unitholders as long as there has not been
        a
        default or event of default and if the amount of borrowings outstanding under
        our reserve-based credit facility is less than 90% of
        the
        borrowing base.
 
 We
        believe that we are in compliance with the terms of our reserve-based credit
        facility. If an event of default exists under the reserve-based
        credit agreement, the lenders will be able to accelerate the maturity of
        the
        credit agreement and exercise other rights and remedies.
        Each of the following will be an event of default:
  ·
              failure
                  to pay any principal when due or any interest, fees or other amount
                  within
                  certain grace periods;
 
 ·
              a
                  representation or warranty is proven to be incorrect when
                  made;
 
 ·
              failure
                  to perform or otherwise comply with the covenants in the credit
                  agreement
                  or other loan documents, subject, in certain instances, to certain
                  grace
                  periods;
 
 ·
              default
                  by us on the payment of any other indebtedness in excess of $2.0
                  million,
                  or any event occurs that permits or causes the acceleration of
                  the
                  indebtedness;
 
 ·
              bankruptcy
                  or insolvency events involving us or our
                  subsidiaries;
 
 ·
              the
                  entry of, and failure to pay, one or more adverse judgments in
                  excess of
                  $1.0 million or one or more non-monetary judgments that could reasonably
                  be expected to have a material adverse effect and for which enforcement
                  proceedings are brought or that are not stayed pending
                  appeal;
 
 ·
              specified
                  events relating to our employee benefit plans that could reasonably
                  be
                  expected to result in liabilities in excess of $1.0 million in
                  any year;
                  and
  22
  ·
              a
                  change of control, which includes (1) an acquisition of ownership,
                  directly or indirectly, beneficially or of record, by any person
                  or group
                  (within the meaning of the Securities Exchange Act of 1934 and
                  the rules
                  of the Securities Exchange Commission) of equity interests representing
                  more than 25% of the aggregate ordinary voting power represented
                  by our
                  issued and outstanding equity interests other than by Majeed S.
                  Nami or
                  his affiliates, or (2) the replacement of a majority of our directors
                  by
                  persons not approved by our board of
                  directors.
  **Off-Balance
        Sheet Arrangements**
  At
        March
        31, 2008, the Company did not have any off-balance sheet arrangements that
        have,
        or are reasonably likely to have, a material effect on our financial position
        or
        results of operations.
  **Contingencies**
  The
        Company regularly analyzes current information and accrues for probable
        liabilities on the disposition of certain matters, as necessary. Liabilities
        for
        loss contingencies arising from claims, assessments, litigation and other
        sources are recorded when it is probable that a liability has been incurred
        and
        the amount can be reasonably estimated. As of March 31, 2008, there were
        no loss
        contingencies.
  **Commitments
        and Contractual Obligations**
  A
        summary
        of our contractual obligations as of March 31, 2008 is provided in the following
        table:
  **Payments Due by Year (in thousands)****2008**
              
              **2009**
              
              **2010**
              
              **2011**
              
              **2012**
              
              **After 2012**
              
              **Total**Management
                  compensation
              
              $
              450
              
              $
              600
              
              $
              100
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              1,150Long-term
                  debt
              
              
              —
              
              
              —
              
              
              —
              
              
              102,500
              
              
              —
              
              
              —
              
              
              102,500Operating
                  leases
              
              
              30
              
              
              41
              
              
              10
              
              
              —
              
              
              —
              
              
              —
              
              
              81Total
              
              $
              480
              
              $
              641
              
              $
              110
              
              $
              102,500
              
              $
              —
              
              $
              —
              
              $
              103,731
  **Non-GAAP
        Financial Measure**
 
 ***Adjusted
        EBITDA***
 
 We
        define
        Adjusted EBITDA as net income (loss) plus:
 
 •
              Net
                  interest expense (including write-off of deferred financing
                  fees);
 
 •
              Loss
                  on extinguishment of debt;
 
 •
              Depreciation,
                  depletion and amortization (including accretion of asset retirement
                  obligations);
 
 •
              Bad
                  debt expenses;
 
 •
              Amortization
                  of premiums prepaid on derivative
                  contracts;
 
 •
              Change
                  in fair value of derivative
                  contracts;
 
 •
              Unit-based
                  compensation expense; and
 
 •
              Realized
                  (gain) loss on cancelled
                  derivatives.
  23
  Adjusted
        EBITDA is a significant performance metric used by our management to measure
        (prior to the establishment of any cash reserves by our board of directors)
        the
        cash distributions we could pay our unitholders. Specifically, this financial
        measure indicates to investors whether or not we are generating cash flow
        at a
        level that can sustain or support an increase in our quarterly distribution
        rates. Adjusted EBITDA is also a quantitative standard used throughout the
        investment community with respect to publicly-traded partnerships and limited
        liability companies.
  Our
        EBITDA should not be considered as an alternative to net income, operating
        income, cash flow from operating activities or any other measure of financial
        performance or liquidity presented in accordance with GAAP. Our Adjusted
        EBITDA
        excludes some, but not all, items that affect net income and operating income
        and these measures may vary among other companies. Therefore, our Adjusted
        EBITDA may not be comparable to similarly titled measures of other
        companies.
  For
        the
        three months ended March 31, 2008 as compared to the three months ended March
        31, 2007, Adjusted EBITDA increased 51%, from $6.9 million to $10.4 million.
        The
        following table presents a reconciliation of consolidated net income to adjusted
        EBITDA:
  **Three Months Ended**
                **March 31,****2008**
              
              **2007****Net
                  income (loss)**
              
              $
              4,276,020
              
              $
              (1,625,749
              )Plus:Interest
                  expense
              
              
              1,129,660
              
              
              2,223,123Loss
                  on extinguishment of debt
              
              
              —
              
              
              2,501,528Depreciation,
                  depletion and amortization
              
              
              2,823,978
              
              
              2,028,863Bad
                  debt expense
              
              
              —
              
              
              1,007,461Amortization
                  of premiums prepaid on derivative contracts
              
              
              1,300,609
              
              
              —Non-cash
                  compensation expense
              
              
              915,346
              
              
              —Realized
                  loss on cancelled derivatives
              
              
              —
              
              
              776,633Less:Interest
                  income
              
              
              7,614
              
              
              12,967**Adjusted
                  EBITDA**
              
              $
              10,437,999
              
              $
              6,898,892
 
 **Item
        3.****Quantitative
        and Qualitative Disclosures About Market Risk**
 
 The
        primary objective of the following information is to provide forward-looking
        quantitative and qualitative information about our potential exposure to
        market
        risks. The term “market risk” refers to the risk of loss arising from adverse
        changes in natural gas prices and interest rates. The disclosures are not
        meant
        to be precise indicators of expected future losses, but rather indicators
        of
        reasonably possible losses. This forward-looking information provides indicators
        of how we view and manage our ongoing market risk exposures. All of our market
        risk sensitive instruments were entered into for purposes other than speculative
        trading.
  ***Commodity
        Price Risk***
  Our
        major
        market risk exposure is in the pricing applicable to our natural gas and
        oil
        production. Realized pricing is primarily driven by the Columbia gas Appalachian
        Index (“TECO Index”) for natural gas production and West Texas Intermediate
        light sweet for oil. Pricing for natural gas production has been volatile
        and
        unpredictable for several years, and we expect this volatility to continue
        in
        the future. The prices we receive for production depend on many factors outside
        our control.
  We
        enter
        into hedging arrangements with respect to a portion of our projected natural
        gas
        and oil production through various transactions that hedge the future prices
        received. These transactions may include price swaps whereby we will receive
        a
        fixed-price for our production and pay a variable market price to the contract
        counterparty. Additionally, we have put options for which we pay the
        counterparty the fair value at the purchase date. At the settlement date
        we
        receive the excess, if any, of the fixed floor over the floating rate.
        Furthermore, we may enter into collars where we pay the counterparty if the
        market price is above the ceiling and the counterparty pays us if the market
        price is below the floor on a notional quantity. These hedging activities
        are
        intended to support our realized commodity prices at targeted levels and
        to
        manage our exposure to natural gas and oil price fluctuations. We do not
        hold or
        issue derivative instruments for speculative trading purposes.
  24
  At
        March
        31, 2008, the fair value of hedges that settle during the next twelve months
        was
        a liability of approximately $8.9 million,
        which we will owe our counterparties.
 
 The
        following table summarizes derivatives in place applicable to periods subsequent
        to March 31, 2008.
 **April
                    1, -**
                  **September 30,**
                  **2008**
                
                **October 1,
                    -**
                  **December 31,**
                  **2008**
                
                **Year**
                  **2009**
                
                **Year**
                  **2010**
                
                **Year**
                  **2011**
                
                **Year**
                  **2012****Gas
                    Positions:**Fixed
                    Price Swaps:Hedged
                    Volume (MMBtu)
                
                
                1,504,855
                
                
                713,831
                
                
                2,657,046
                
                
                2,387,640
                
                
                2,196,012
                
                
                —Fixed
                    Price ($/MMBtu)
                
                
                $9.00
                
                
                $9.00
                
                
                $8.85
                
                
                $8.76
                
                
                $7.15
                
                
                $—Puts:Hedged
                    Volume (MMBtu)
                
                
                507,709
                
                
                246,920
                
                
                840,139
                
                
                —
                
                
                —
                
                
                —Floor
                    Price ($/MMBtu)
                
                
                $7.50
                
                
                $7.50
                
                
                $7.50
                
                
                $—
                
                
                $—
                
                
                $—Collars:Hedged
                    Volume (MMBtu)
                
                
                500,000
                
                
                300,000
                
                
                1,000,000
                
                
                730,000
                
                
                —
                
                
                —Floor
                    Price ($/MMBtu)
                
                
                $7.50
                
                
                $7.50
                
                
                $7.50
                
                
                $8.00
                
                
                $—
                
                
                $—Ceiling
                    Price ($/MMBtu)
                
                
                $9.00
                
                
                $9.25
                
                
                $9.00
                
                
                $9.30
                
                
                $—
                
                
                $—Total:Hedged
                    Volume (MMBtu)
                
                
                2,512,564
                
                
                1,260,751
                
                
                4,497,185
                
                
                3,117,640
                
                
                2,196,012
                
                
                —**Oil
                    Positions:**Fixed
                    Price Swaps:Hedged
                    Volume (Bbls)
                
                
                100,000
                
                
                48,000
                
                
                181,500
                
                
                164,250
                
                
                151,250
                
                
                144,000Fixed
                    Price ($/Bbl)
                
                
                $90.30
                
                
                $90.30
                
                
                $87.23
                
                
                $85.65
                
                
                $85.50
                
                
                $80.00
 
 ***Interest
        Rate Risks***
 
 At
        March
        31, 2008, we had debt outstanding of $102.5 million, which incurred interest
        at
        floating rates based on LIBOR in accordance with our reserve-based credit
        facility and if the debt remains the same, a 1% increase in LIBOR would result
        in an estimated $0.4 million increase in annual interest expense after
        consideration of the interest hedges discussed below. In December 2007 and
        during the three months ended March 31, 2008, we
        entered into interest rate swaps, which require payment to or from the
        counterparty based upon the differential between two rates for a predetermined
        contractual amount. This hedging activity converts a floating interest rate
        to a
        fixed interest rate and is intended to manage our exposure to interest rate
        fluctuations.
 
 The
        following summarizes information concerning our positions in open interest
        rate
        swaps applicable to periods subsequent to
 March
        31,
        2008.
 
 ******Principal**
                  ******Balance**
              
              **Fixed**
                **Libor**
                  **Rates**Period:April
                  1, 2008 to December 10, 2010
              
              $
              20,000,000
              
              
              3.88
              %April
                  1, 2008 to January 31, 2011
              
              $
              30,000,000
              
              
              3.00
              %April
                  1, 2008 to March 31, 2011
              
              $
              10,000,000
              
              
              2.66
              %
  **Item 4.  Controls
        and Procedures**
  **Evaluation
        of Disclosure Controls and Procedures**
  Our
        management has established and maintains a system of disclosure controls
        and
        procedures to provide reasonable assurances that information required to
        be
        disclosed by us in reports that we file or submit under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in the SEC’s rules and forms, and that such information is accumulated and
        communicated to our management, including our Chief Executive Officer and
        Chief
        Financial Officer, as appropriate to allow timely decisions regarding required
        disclosure.
  25
  We
        carried out an evaluation, under the supervision and with the participation
        of
        our management, including our Chief Executive Officer and Chief Financial
        Officer, of the effectiveness of our disclosure controls and procedures pursuant
        to Rule 13a-15 under the Exchange Act as of March 31, 2008, and concluded
        that
        our disclosure controls and procedures were effective at the reasonable
        assurance level as of March 31, 2008.
  **Changes
        in Internal Control over Financial Reporting**
  The
        following items that occurred subsequent to December 31, 2007 have affected
        our
        internal control over financial reporting:
 
 (1)
              Permian
                  Basin acquisition -On
                  January 31, 2008, we completed the acquisition of certain oil and
                  gas
                  properties in the Permian Basin of West Texas and Southeastern
                  New Mexico.
                  Pursuant to this transaction, we have outsourced our production
                  accounting
                  for the Permian Basin properties to a third party and have begun
                  operating
                  our own wells. As a result, we are implementing new processes and
                  modifying existing processes to ensure adequate internal controls
                  over
                  financial reporting.
 
 (2)
              Restatement
                  of 2007 Annual Report on Form 10-K - By
                  error we calculated the earnings per unit for the year ended December
                  31,
                  2007 using the common units outstanding as of that date instead
                  of the
                  weighted average units for the year. The Company has restated the
                  weighted
                  average common units and Class B units outstanding and earnings
                  per unit.
                  In addition, in the unaudited Supplemental Selected Quarterly Financial
                  Information, we have corrected a rounding error in the “Quarter Ended
                  December 31” basic and diluted Net income (loss) per Common & Class B
                  unit.We
                  do not believe this error represents a material weakness in our
                  internal
                  controls; however, we are implementing new processes to verify
                  the
                  accuracy of computed numbers within the financial statements.
  26
 
 **PART II —
        OTHER INFORMATION**
  **Item 1.  Legal
        Proceedings**
  Although
        we may, from time to time, be involved in litigation and claims arising out
        of
        our operations in the normal course of business, we are not currently a party
        to
        any material legal proceedings. In addition, we are not aware of any legal
        or
        government proceedings against us, or contemplated to be brought against
        us,
        under the various environmental statutes to which we are subject.
 
 **Item 1A. 
        Risk Factors**
 
 There
        have been no material changes to our risk factors as disclosed in our 2007
        Annual Report on Form 10-K .
  **Item 2.  Unregistered
        Sales of Equity Securities and Use of Proceeds**
  During
        the three months ended March 31, 2008, one of our wholly-owned subsidiaries
        purchased 15,300 of our common units on the open market at the then
        prevailing market price. 15,000 of these units were subsequently granted
        to three of our independent directors, with Loren Singletary, John R.
        McGoldrick and Bruce W. McCullough each receiving 5,000 units. The grants
        were made by our Board of Directors upon the appointment of these independent
        directors on February 28, 2008.The
        following table summarizes the unit purchases that occurred during the three
        months ended March 31, 2008:
 **Period**
                
                
                **Number
                    of common units repurchased**
                
                
                **Average
                    price paid per common unit**January
                    1, 2008 to January 31, 2008
                
                
                5,000
                
                $
                14.50February
                    1, 2008 to February 29, 2008
                
                
                10,000
                
                $
                16.28March
                    1, 2008 to March 31, 2008
                
                
                300
                
                $
                14.70Total
                    common units purchased
                
                
                15,300
                
                $
                15.67
  **Item 3.  Defaults
        Upon Senior Securities**
  None.
 
 **Item 4.  Submission
        of Matters to a Vote of Security Holders**
  None.
 
 **Item 5.  Other
        Information**
  None.
  **Item 6. 
        Exhibits**
  **EXHIBIT
        INDEX**
 Each
        exhibit identified below is filed as a part of this Report.
  **Exhibit****Number**
              **Description**31.1*
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2*
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1*
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2*
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
  *
              Filed
                  herewith
  27
 
 **SIGNATURE**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, Vanguard Natural
        Resources, LLC has duly caused this report to be signed on its behalf by
        the
        undersigned thereunto duly authorized.
  VANGUARD
                  NATURAL RESOURCES, LLC(Registrant)Date:
                  May 15, 2008/s/ Richard
                  A. RobertRichard
                  A. RobertExecutive
                  Vice President andChief
                  Financial Officer(Principal
                  Financial Officer and Principal Accounting
                  Officer)
  28
  **Vanguard
        Natural Resources, LLC**
 **EXHIBIT
        INDEX**
 Each
        exhibit identified below is filed as a part of this Report.
  **Exhibit****Number**
              **Description**31.1*
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2*
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32.1*
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2*
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
 *
              Filed
                  herewith




29