**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C.
      20549**




**Form 10-Q**




**(Mark
                One)****x**
            
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934****For
                the quarterly period ended September 30, 2007****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 o No x




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




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




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 November 29, 2007: 10,795,000


Class
      B
      Units outstanding on November 29, 2007: 420,000









**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
            16Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            27Item
                4.
            Controls
                and Procedures
            28**PART
                II – OTHER INFORMATION**Item
                1.
            Legal
                Proceedings
            29Item
                1A.
            Risk
                Factors
            29Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            29Item
                3.
            Default
                in Senior Securities
            29Item
                4.
            Submission
                of Matters to a Vote of Securities Holders
            29Item
                5.
            Other
                Information
            29Item
                6.
            Exhibits
            30**SIGNATURE**
            31




1




**GLOSSARY
      OF TERMS**





Below
      is
      a list of terms that are common to our industry and used throughout this
      document:




/d
            
            =
                per day
            
            MBtu
            
            =
                thousand British thermal unitsBbls
            
            =
                barrels
            
            Mcf
            
            =
                thousand cubic feetBBtu
            
            =
                billion British thermal units
            
            Mcfe
            
            =
                thousand cubic feet of natural gas equivalentsBcf
            
            =
                billion cubic feet
            
            MMBbls
            
            =
                million barrelsBcfe
            
            =
                billion cubic feet equivalents
            
            MMBtu
            
            =
                million British thermal unitsBtu
            
            =
                British thermal unit
            
            MMcf
            
            =
                million cubic feetMBbls
            
            =
                thousand barrels
            
            MMcfe
            
            =
                million cubic feet of natural gas
                equivalents




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, unless we indicate otherwise, to (1) “us”, “we”, “our”, “ours”,
“the Company”, “Vanguard” or “VNR”, are to Vanguard Natural Resources, LLC and
      our subsidiaries and (2)”Vanguard Predecessor”, “Predecessor”, “our operating
      subsidiary” and “VNG” are to Vanguard Natural Gas, LLC.




2


PART
      I – FINANCIAL INFORMATION




**Item
      1. Financial Statements**




VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS


(Unaudited)




**Vanguard**
              **Three Months**
              **Ended**
              **September 30,**
              **2007**
            
            
            
            
            **Vanguard
                Predecessor**
              **Three Months**
              **Ended**
              **September 30,**
              **2006**
            
            **Vanguard**
              **Nine Months**
              **Ended**
              **September 30,**
              **2007**
            
            
            
            
            **Vanguard
                Predecessor**
              **Nine Months**
              **Ended**
              **September 30,**
              **2006****Revenues:**Natural
                gas and oil sales
            
            $
            7,641,064
            
            
            
            
            $
            9,574,502
            
            $
            26,709,417
            
            
            
            
            $
            28,990,485Realized
                gains (losses) on derivative contracts
            
            
            940,566
            
            
            
            
            
            (161,375
            )
            
            (725,286
            )
            
            
            
            
            (2,502,849
            )Change
                in fair value of derivative contracts
            
            
            -
            
            
            
            
            
            4,427,600
            
            
            -
            
            
            
            
            
            15,851,907**Total
                revenues**
            
            
            8,581,630
            
            
            
            
            
            13,840,727
            
            
            25,984,131
            
            
            
            
            
            42,339,543**Costs
                and expenses:**Lease
                operating expenses
            
            
            1,347,565
            
            
            
            
            
            1,233,948
            
            
            3,807,985
            
            
            
            
            
            3,608,748Depreciation,
                depletion and amortization
            
            
            2,267,050
            
            
            
            
            
            2,164,854
            
            
            6,587,339
            
            
            
            
            
            6,211,920Selling,
                general and administrative expenses
            
            
            1,084,995
            
            
            
            
            
            492,958
            
            
            2,300,484
            
            
            
            
            
            1,452,856Bad
                debt expense
            
            
            -
            
            
            
            
            
            -
            
            
            1,007,458
            
            
            
            
            
            -Taxes
                other than income
            
            
            326,175
            
            
            
            
            
            269,975
            
            
            1,217,167
            
            
            
            
            
            921,014**Total
                costs and expenses**
            
            
            5,025,785
            
            
            
            
            
            4,161,735
            
            
            14,920,433
            
            
            
            
            
            12,194,538**Income
                from operations**
            
            
            3,555,845
            
            
            
            
            
            9,678,992
            
            
            11,063,698
            
            
            
            
            
            30,145,005**Other
                income and (expense):**Interest
                income
            
            
            19,793
            
            
            
            
            
            15,735
            
            
            47,439
            
            
            
            
            
            33,988Interest
                expense
            
            
            (2,524,427
            )
            
            
            
            
            (2,029,042
            )
            
            (6,944,241
            )
            
            
            
            
            (5,812,876
            )Loss
                on extinguishment of debt
            
            
            -
            
            
            
            
            
            -
            
            
            (2,501,528
            )
            
            
            
            
            -**Total
                other expense, net**
            
            
            (2,504,634
            )
            
            
            
            
            (2,013,307
            )
            
            (9,398,330
            )
            
            
            
            
            (5,778,888
            )**Net
                income**
            
            $
            1,051,211
            
            
            
            
            $
            7,665,685
            
            $
            1,665,368
            
            
            
            
            $
            24,366,117**Pro
                forma net income per unit (Note 6):**Pro
                forma net income per unit
            
            $
            0.09
            
            
            
            
            
            
            
            $
            0.15Pro
                forma units outstanding
            
            
            11,215,000
            
            
            
            
            
            
            
            
            11,215,000




*See
      accompanying notes to consolidated financial statements*




3




VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS





**Vanguard**
              **September 30,**
              **2007**
            
            
            
            **Vanguard
                Predecessor**
              **December 31,**
              **2006****(unaudited)****Assets****Current
                assets**Cash
                and cash equivalents
            
            $
            3,182,434
            
            
            
            $
            1,730,956Trade
                accounts receivable, net
            
            
            4,679,707
            
            
            
            
            5,269,067Receivables
                due from affiliates
            
            
            -
            
            
            
            
            14,650,936Other
                receivables
            
            
            -
            
            
            
            
            234,456Derivative
                assets
            
            
            4,984,261
            
            
            
            
            -Deferred
                offering costs
            
            
            2,021,898
            
            
            
            
            -Other
                currents assets
            
            
            187,373
            
            
            
            
            283,884**Total
                current assets**
            
            
            15,055,673
            
            
            
            
            22,169,299**Property
                and equipment**Land
            
            
            -
            
            
            
            
            46,350Buildings
            
            
            -
            
            
            
            
            10,850Furniture
                and fixtures
            
            
            45,760
            
            
            
            
            846,580Machinery
                and equipment
            
            
            -
            
            
            
            
            12,681,363Less:
                accumulated depreciation
            
            
            (3,022
            )
            
            
            
            (1,712,535
            )**Total
                property and equipment**
            
            
            42,738
            
            
            
            
            11,872,608**Natural
                gas and oil properties, net – full cost
                method**
            
            
            102,389,295
            
            
            
            
            104,683,610**Other
                assets**Derivative
                assets
            
            
            2,920,217
            
            
            
            
            -Deferred
                financing costs
            
            
            985,227
            
            
            
            
            -Other
                assets
            
            
            1,225,273
            
            
            
            
            -**Total
                assets**
            
            $
            122,618,423
            
            
            
            $
            138,725,517**Liabilities
                and members’ equity (deficit)****Current
                liabilities**Accounts
                payable - trade
            
            $
            634,442
            
            
            
            $
            8,756,937Accounts
                payable - natural gas and oil
            
            
            996,651
            
            
            
            
            1,441,941Payables
                to affiliates
            
            
            3,065,945
            
            
            
            
            -Derivative
                liabilities
            
            
            -
            
            
            
            
            2,022,079Deferred
                swap liability
            
            
            7,322,685
            
            
            
            
            -Accrued
                expenses
            
            
            758,319
            
            
            
            
            1,230,686Due
                to member
            
            
            -
            
            
            
            
            75,000**Total
                current liabilities**
            
            
            12,778,042
            
            
            
            
            13,526,643Long-term
                debt
            
            
            106,800,000
            
            
            
            
            94,067,500Derivative
                liabilities
            
            
            3,493,109
            
            
            
            
            -Asset
                retirement obligations
            
            
            166,607
            
            
            
            
            418,533**Total
                liabilities**
            
            
            123,237,758
            
            
            
            
            108,012,676**Commitments
                and contingencies**
            
            
            -
            
            
            
            
            -**Members’
                equity (deficit)**Members
                capital
            
            
            6,198,579
            
            
            
            
            30,712,841Other
                comprehensive loss
            
            
            (6,817,914
            )
            
            
            
            -**Total
                members’ equity (deficit)**
            
            
            (619,335
            )
            
            
            
            30,712,841**Total
                liabilities and members’ equity (deficit)**
            
            $
            122,618,423
            
            
            
            $
            138,725,517




*See
      accompanying notes to consolidated financial statements*




4


VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


(Unaudited)




**Vanguard**
              **Nine Months Ended
                September 30,**
              **2007**
            
            
            
            
            **Vanguard
                Predecessor**
              **Nine Months Ended**
              **September 30,**
              **2006****Operating
                activities**Net
                income
            
            $
            1,665,368
            
            
            
            
            $
            24,366,117Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation,
                depletion and amortization
            
            
            6,587,339
            
            
            
            
            
            6,211,920Amortization
                of deferred financing costs
            
            
            217,739
            
            
            
            
            
            -Bad
                debt expense
            
            
            1,007,458
            
            
            
            
            
            -Change
                in fair value of derivative contracts
            
            
            -
            
            
            
            
            
            (15,851,907
            )Non-cash
                unit compensation
            
            
            1,314,778
            
            
            
            
            
            -Changes
                in operating assets and liabilities:Trade
                accounts receivable
            
            
            (811,658
            )
            
            
            
            
            1,178,683Receivable
                due from affiliates
            
            
            (1,303,192
            )
            
            
            
            
            (2,397,617
            )Other
                receivables
            
            
            -
            
            
            
            
            
            44,424Price
                risk management activities, net
            
            
            (5,928,677
            )
            
            
            
            
            -Other
                current assets
            
            
            (187,373
            )
            
            
            
            
            (6,152,638
            )Accounts
                payable
            
            
            1,561,210
            
            
            
            
            
            (2,161,615
            )Accrued
                expenses
            
            
            (1,482,634
            )
            
            
            
            
            3,052,504**Net
                cash provided by operating activities**
            
            
            2,640,358
            
            
            
            
            
            8,289,871**Investing
                activities**Additions
                to property and equipment
            
            
            (45,760
            )
            
            
            
            
            (5,141,782
            )Additions
                to natural gas and oil properties
            
            
            (9,426,483
            )
            
            
            
            
            (17,596,775
            )Deposits
            
            
            (1,225,273
            )
            
            
            
            
            -**Net
                cash used in investing activities**
            
            
            (10,697,516
            )
            
            
            
            
            (22,738,557
            )**Financing
                activities**Proceeds
                from borrowings
            
            
            114,600,000
            
            
            
            
            
            15,000,000Repayment
                of debt
            
            
            (101,867,500
            )
            
            
            
            
            -Contributions
                from members
            
            
            41,221,000
            
            
            
            
            
            -Distribution
                to member
            
            
            (41,220,000
            )
            
            
            
            
            (1,052,035
            )Financing
                costs
            
            
            (1,202,966
            )
            
            
            
            
            -Offering
                costs
            
            
            (2,021,898
            )
            
            
            
            
            -**Net
                cash provided by financing activities**
            
            
            9,508,636
            
            
            
            
            
            13,947,965**Net
                increase (decrease) in cash and cash equivalents**
            
            
            1,451,478
            
            
            
            
            
            (500,721
            )**Cash
                and cash equivalents,**beginning of period
            
            
            1,730,956
            
            
            
            
            
            3,041,468**Cash
                and cash equivalents,**end of period
            
            $
            3,182,434
            
            
            
            
            $
            2,540,747**Supplemental
                cash flow information:**Cash
                paid for interest
            
            $
            7,055,565
            
            
            
            
            $
            5,692,723**Non-cash
                financing and investing activities:**Accumulated
                other comprehensive loss
            
            $
            6,817,914
            
            
            
            
            $
            -Deferred
                swap liability
            
            $
            7,322,685
            
            
            
            
            $
            -Asset
                retirement obligations
            
            $
            261,020
            
            
            
            
            $
            142,659




*See
      accompanying notes to consolidated financial statements*




5




VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(Unaudited)




**Vanguard**
              **Three Months**
              **Ended**
              **September 30,**
              **2007**
            
            
            
            
            **Vanguard
                Predecessor**
              **Three Months Ended
                September 30,**
              **2006**
            
            **Vanguard**
              **Nine Months**
              **Ended**
              **September 30,**
              **2007**
            
            
            
            
            **Vanguard
                Predecessor**
              **Nine Months Ended
                September 30,**
              **2006****Net
                income**
            
            $
            1,051,211
            
            
            
            
            $
            7,665,685
            
            $
            1,665,368
            
            
            
            
            $
            24,366,117Net
                gains (losses) from cash flow hedging activities:Unrealized
                mark-to-market gains (losses) arising during the period
            
            
            4,584,832
            
            
            
            
            
            -
            
            
            (6,381,176
            )
            
            
            
            
            -Reclassification
                adjustments for changes in initial value to settlement
                date
            
            
            (944,481
            )
            
            
            
            
            -
            
            
            (436,738
            )
            
            
            
            
            -Other
                comprehensive income (loss)
            
            
            3,640,351
            
            
            
            
            
            -
            
            
            (6,817,914
            )
            
            
            
            
            -**Comprehensive
                income (loss)**
            
            $
            4,691,562
            
            
            
            
            $
            7,665,685
            
            $
            (5,152,546
            )
            
            
            
            $
            24,366,117




*See
      accompanying notes to consolidated financial statements*




6


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**




**1.** **Basis
      of Presentation and Significant Accounting Policies**





**Basis
      of Presentation**




Vanguard
      Natural Resources, LLC is an independent natural gas and oil company focused
      on
      the acquisition, development and exploitation of mature, long-lived natural
      gas
      and oil properties. Through our operating subsidiaries, we own properties in
      the
      southern portion of the Appalachian Basin, primarily in southeast Kentucky
      and
      northeast Tennessee.




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”)
      and Ariana Energy, LLC, (“Ariana Energy”) and (2) “Vanguard Predecessor”,
“Predecessor”, “our operating subsidiary” or “VNG” are to Vanguard Natural Gas,
      LLC.




We
      were
      formed in October 2006 and on April 18, 2007 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, and 100%
      of
      our predecessor’s working interest in depths above and 100 feet below our known
      producing horizons. Vinland acts as the operator of our existing wells and
      all
      of the wells that we drill in this area. 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 of $7.0
      million. The proceeds were used to reduce indebtedness under our Credit Facility
      by $80 million and the balance was used for the payment of accrued distributions
      to pre-IPO unitholders and the payment of the deferred swap
      obligation.




VNG
      was
      formed in Kentucky on December 15, 2004 and its principal business is to hold
      interests in TEC, VNRH and Ariana Energy. TEC was formed in Kentucky on December
      15, 2004. 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. Its principal business it to provide general employment related services,
      including payroll and employment administration, as well as information
      technology and communication services to VNR. 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.




The
      consolidated financial statements as of and for the three months and nine months
      ended September 30, 2007 include the accounts of VNR, TEC, VNRH and Ariana
      Energy. In conjunction with the Restructuring, Nami Resources Company, LLC
      conveyed its assets to Vinland or TEC as appropriate and is no longer a
      wholly-owned subsidiary of VNG and therefore is no longer consolidated in these
      consolidated financial statements. The consolidated financial statements as
      of
      December 31, 2006 and for the three months and nine months ended September
      30,
      2006 are based on the annual audited and interim period unaudited historical
      financial statements of VNG prior to the Restructuring. As such, these periods
      are labeled Vanguard Predecessor and are separated from VNR financial data
      by a
      bold black line.




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 Registration Statement on Form S-1 (File
      No.
      333-142363), which is incorporated by reference herein ,
      which
      contains a summary of our significant accounting policies and other disclosures.
      The financial statements as of September 30, 2007, and for the three months
      and
      nine months ended September 30, 2007 and 2006, are unaudited. We derived
      the consolidated balance sheet as of December 31, 2006, from the audited
      balance sheet filed in our Registration Statement on Form S-1 (File
      No.
      333-142363), which is incorporated by reference herein .
      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 member’s equity. Furthermore, all significant 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
      September 30, 2007, 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 Registration Statement on Form S-1 (File
      No. 333-142363), which is incorporated by reference herein.




**New
      Accounting Pronouncements Issued But Not Yet Adopted**





In
      September 2006, the financial Accounting Standards Board (“FASB) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
      Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to
      measure assets and liabilities and requires additional disclosure about the
      use
      of fair value measures, the information used to measure fair value, and the
      effect fair-value measurements have on earnings. The primary areas in which
      we
      utilize fair value measures are valuing derivative financial instruments and
      asset retirement obligations. SFAS 157 does not require any new fair value
      measurements. SFAS 157 is effective January 1, 2008. We are in the process
      of
      evaluating the impact that SFAS 157 will have on our consolidated financial
      statements.




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. The Company is currently evaluating
      what impact, if adopted, SFAS 159 may have on its results of operations or
      financial position.





**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.** **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 nine months ended September 30, 2007. We began
      selling our oil production to a new customer beginning in March
      2007.




8




**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**





**3.** **Credit
      Facilities and Long-Term Debt**





Our
      credit facilities and long-term debt consisted of the following (in
      millions):




***Amount
                Outstanding*****Description**
            
            **Interest
                Rate**
            
            **Maturity
                Date**
            
            **September 30,**
              **2007**
            
            **December 31,**
              **2006**$75
                million Senior Secured Revolver
            
            
            Variable
            
            
            January 31, 2007
            
            $
            -
            
            $
            63.1$40
                million TCW Senior Secured Notes
            
            
            13%
            
            
            December 29, 2011
            
            
            -
            
            
            31.0$200
              million SeniorSecured
              Revolver
            
            
            Variable
            
            
            January 3,
                2011
            
            
            106.8
            
            
            -Total
            
            
            
            
            
            
            
            $
            106.8
            
            $
            94.1




***$75
      million Senior Secured Revolver***





On
      June
      30, 2003, we entered into a $75 million senior secured revolving credit facility
      with the Bank of Texas (“Senior Revolver”) which amended and restated in its
      entirety a loan agreement dated March 23, 2001. The Senior Revolver had an
      original maturity date of June 30, 2006 but was extended through amendments
      to
      January 31, 2007. The available credit line (“Borrowing Base”) was 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. At December 31, 2006, the Borrowing Base was
      $65 million. The Senior Revolver was secured by a mortgage lien on certain
      natural gas and oil properties, field equipment and accounts receivable, among
      other assets held by the Company. Interest rates under this credit facility
      were
      at the election of the Company based on Euro-Dollars (LIBOR) or Stated Rate
      (Prime) indications, plus a margin. The margin could range from Prime minus
      0.25% to Prime plus 0.25% or LIBOR plus 1.875% to LIBOR plus 2.625% depending
      on
      borrowing base utilization. At December 31, 2006, our interest rate was 8.5%.
      The availability of borrowings was subject to various conditions, which included
      compliance with the financial covenants and ratios required by the facility,
      absence of default under the facility and the continued accuracy of the
      representations and warranties contained in the facility. At December 31, 2006,
      the financial coverage ratios under the facility required that our debt to
      EBITDA (as defined in the loan agreement) ratio not exceed 4.0 to 1.0 and our
      current ratio (as defined in the loan agreement) not be less than 1.0 to 1.0.
      In
      addition, affiliate investments (as defined in the loan agreement) could not
      exceed $10 million.




Since
      the
      inception of the Senior Revolver, seven amendments were entered into which
      amended certain terms of the loan agreement including increasing the number
      of
      participating lenders, changing the maximum borrowing base, extending the
      maturity date, reducing the interest costs, adding a new financial covenant
      and
      adding new reporting requirements. In addition, on December 30, 2004, our second
      amendment reduced the amount of natural gas and oil properties pledged under
      the
      Senior Revolver. Certain pledged natural gas and oil properties were released
      so
      that they could be pledged under a new $40 million note facility as described
      below. As consideration for releasing the pledged properties, indebtedness
      under
      the Senior Revolver was reduced by $16 million using proceeds from the new
      note
      facility.




On
      January 3, 2007, all amounts due under the Senior Revolver were repaid and
      a new
      long-term credit facility was established as discussed below, and therefore,
      amounts due under the Senior Revolver are reported on the balance sheet as
      a
      long-term obligation despite the maturity date falling within one year of
      December 31, 2006.




***$40
      million TCW Senior Secured Notes***




On
      December 30, 2004, we entered into a $40 million Senior Secured Notes facility
      due to TCW Asset Management Company (the “TCW Notes”). The TCW Notes original
      maturity was on December 29, 2011 and required quarterly interest payments
      at
      13% per annum. The TCW Notes were secured by a mortgage lien on certain natural
      gas and oil properties. Prior to December 30, 2006, the availability of
      borrowings was subject to various conditions, which included compliance with
      the
      financial covenants and ratios required by the facility, absence of default
      under the facility and the continued accuracy of the representations and
      warranties contained in the facility. After December 30, 2006, no new borrowings
      were available. At December 31, 2006, the financial coverage ratios under the
      facility required that our collateral coverage ratio (as defined in the loan
      agreement) not be less than 1.2 to 1.0 and our current ratio (as defined in
      the
      loan agreement) not be less than 1.0 to 1.0. We could not borrow, repay, and
      reborrow under the facility. Optional prepayments were not permitted prior
      to
      December 31, 2006 and were subject to a range of penalties thereafter until
      December 31, 2008 at which point no prepayment penalties applied.




9




**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**




On
      January 3, 2007, all amounts due under the TCW Notes were repaid and a new
      credit facility was established as discussed below. We recorded a $2.5 million
      loss on the extinguishment of this debt as the loan agreement required an early
      prepayment penalty.




***New*** ** ***$200
      Million Senior Secured Revolver***




In
      January 2007, the Company entered into a new four-year $200 million revolving
      credit facility (“Credit Facility”) with two banks. All outstanding debt under
      the TCW Notes (including an early payment penalty of $2.5 million) and the
      Senior Revolver were repaid with borrowings under the new Credit Facility.
      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 is subject to a $1 million reduction
      per
      month starting on July 1, 2007 through November 1, 2007. A new borrowing base
      redetermination was scheduled for November 1, 2007. See *Note
      8. Subsequent Events* for
      further discussion.




Interest
      rates under the Credit Facility are based on Euro-Dollars (LIBOR) or ABR (Prime)
      indications, plus a margin. 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
            1.375%
            1.500%
            1.750%
            2.00%ABR
                Loans
            0.250%
            0.500%
            0.750%
            1.00%Commitment
                Fee Rate
            0.250%
            0.375%
            0.375%
            0.50%Letter
                of Credit Fee
            1.375%
            1.500%
            1.750%
            2.00%





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 September 30, 2007, we were in compliance with our debt covenants. In
      addition, after consideration of the third amendment to the Credit Facility
      described below, the first $100 million of proceeds received from an equity
      infusion must be applied to the repayment of borrowings under the Credit
      Facility (“Equity Event”). Since borrowings under the Credit Facility were not
      reduced by $100 million by July 1, 2007, the applicable margin increased as
      follows:





Eurodollar
                Loans
            
            
            3.00
            %ABR
                Loans
            
            
            4.00
            %Commitment
                Fee Rate
            
            
            0.50
            %Letter
                of Credit Fee
            
            
            3.00
            %





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
      4. Price Risk Management Activities* for
      further discussion.


10


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**




In
      March
      2007, the first amendment to the Credit Facility was executed. The amendment
      redefined the method to calculate a financial covenant to include the impact
      of
      acquisitions and divestitures. In addition, it clarified that the increase
      in
      the applicable margin which commenced on July 1, 2007 will continue only until
      the Equity Event occurs.




In
      April
      2007, the second amendment to the Credit Facility was executed. The amendment
      redefined change of control to allow for the sale of common units to private
      investors more fully described below in *Note
      6. Capital Stock* ,
      recognized certain contract rights 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 the wells
      and overhead costs) from the sale of production from certain producing gas
      and
      oil wells located within the Asher lease.




In
      May
      2007, the third amendment to the Credit Facility was executed. The amendment
      increased the amount of proceeds from an equity infusion that must be applied
      to
      the repayment of borrowings under the Credit Facility from $80 million to $100
      million. A new Minimum Liquidity covenant was added which requires us to
      maintain unencumbered liquid assets of at least $2 million which includes unused
      availability under the borrowing base. Also, the amount of other debt we can
      incur was temporarily increased from $1 million to $7.5 million which allowed
      us
      to incur the debt necessary to reset our 2007, 2008 and 2009 natural gas swaps
      at higher prices more fully described in *Note
      4. Price Risk management Activities* .
      The
      other debt was required to be repaid at the earlier of five business days after
      closing of a public offering of equity securities or September 3, 2007. This
      date was extended to November 1, 2007 as discussed below.




In
      July
      2007, a new borrowing base notice was received pursuant to our Credit Facility
      agreement which reaffirmed our $115.5 million borrowing base but required $1
      million monthly reductions beginning on July 1, 2007 through the next
      redetermination date, which is October 1, 2007, at which time a new
      redetermination will be made. The October 1, 2007 redetermination date was
      subsequently moved to November 1, 2007 pursuant to the fifth amendment to the
      Credit Facility more fully described in *Note
      8. Subsequent Events.*




In
      August
      2007, the fourth amendment to the Credit Facility was executed. The amendment
      extended the date for which other debt outside the Credit Facility must be
      reduced below $1 million from September 3, 2007 to October 8, 2007. The October
      8, 2007 date was subsequently moved to November 1, 2007 pursuant to the fifth
      amendment to the Credit Facility more fully described in *Note
      8. Subsequent Events.*




In
      October 2007 and November 2007, the fifth amendment and sixth amendment to
      the
      Credit Facility, respectively, were executed. See *Note
      8. Subsequent Events* .




**4.**  **Price
      Risk Management Activities**





From
      time
      to time, the Company enters into natural gas swap agreements with counterparties
      to hedge price risk associated with a portion of its production. These
      derivatives are not held for trading purposes. Under these price swaps, the
      Company receives a fixed price on a notional quantity of natural gas in exchange
      for paying a variable price based on a market index, such as Columbia Gas
      Appalachian (‘TECO”) natural gas futures. During 2006, natural gas swaps covered
      2,673,000 MMBtu, fixing the sales price of this natural gas at an average of
      $6.29 per MMBtu.




The
      derivative contracts entered into in 2006 were not specifically designated
      as
      hedges under SFAS No. 133 *Accounting
      for Derivative Instruments and Hedging Activities* and
      therefore did not qualify for hedge accounting treatment. These derivative
      contracts are recorded at fair value on the consolidated balance sheet as
      short-term and long-term liabilities based upon their anticipated settlement
      date. The change in fair value of these derivative contracts is recorded in
      the
      consolidated statement of operations.




On
      January 3, 2007, the natural gas price swaps referred to above were terminated
      which resulted in the Company incurring swap termination fees of $2.8 million.
      New natural gas derivative contracts were put in place in conjunction with
      entering into a new credit facility as described in *Note
      3. Credit Facilities and Long-Term Debt* .
      A
      summary of the derivative contracts entered into in January 2007 is as
      follows:


11


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**





**Swap
      Agreements**




Contract
                Period
            
            Volume in MMBtu
            
            Weighted Average
              TECO Fixed PriceJuly –
                December 2007
            
            
            1,708,357
            
            $
            7.502008
            
            
            3,016,134
            
            $
            8.142009
            
            
            2,657,046
            
            $
            7.872010
            
            
            2,387,640
            
            $
            7.532011
            
            
            2,196,012
            
            $
            7.15





**Put
      Option Contracts**




Contract
                Period
            
            Volume in MMBtu
            
            Purchased NYMEX
              Price FloorFebruary –
                December 2007
            
            
            1,356,480
            
            $
            7.502008
            
            
            2,211,366
            
            $
            7.502009
            
            
            1,840,139
            
            $
            7.50





**Collar
      Contracts**




Contract
                Period
            
            Volume in MMBtu
            
            NYMEX
              Price Floor
            
            NYMEX
              Price CeilingFebruary –
                June 2007
            
            
            1,500,000
            
            $
            6.45
            
            $
            7.45




In
      January 2007, the Company paid $6.5 million for the put option contracts
      referenced above. Payments for the put option contracts and the swap termination
      fee were funded with borrowings under the Credit Facility.




In
      May
      2007, we reset our 2007, 2008 and 2009 natural gas swaps at higher prices as
      follows:




Contract Period
            
            Volume in
              MMBtu
            
            Original Weighted
              Average TECO
              Fixed Price
            
            New Weighted
              Average TECO
              Fixed PriceJuly –
                December 2007
            
            
            1,708,357
            
            $
            7.50
            
            $
            9.002008
            
            
            3,016,134
            
            $
            8.14
            
            $
            9.002009
            
            
            2,657,046
            
            $
            7.87
            
            $
            8.85




In
      May
      2007, we incurred a $7.3 million deferred swap payment obligation with the
      derivative counterparty which accrues interest daily at 7.36% and is 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 initial public offering. See *Note
      8. Subsequent Events* for
      further discussion.




The
      derivative contracts entered into in January 2007, and reset in May 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 liabilities based upon their anticipated settlement date. The change
      in fair value of these derivative contracts is recorded in Other Comprehensive
      Income.




At
      September 30, 2007, the Company had open natural gas derivative contracts
      covering its production as follows:




**Swap
      Agreements**




Contract
                Period
            
            Volume
                in MMBtu
            
            Weighted
                Average
              TECO
                Fixed PriceOctober –
                December 2007
            
            
            833,250
            
            $
            9.002008
            
            
            3,016,134
            
            $
            9.002009
            
            
            2,657,046
            
            $
            8.852010
            
            
            2,387,640
            
            $
            7.532011
            
            
            2,196,012
            
            $
            7.15




12


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)**


**(Unaudited)**





**Put
      Option Contracts**





Contract
                Period
            
            Volume
                in MMBtu
            
            Purchased
                NYMEX Price FloorOctober
                – December 2007
            
            
            396,750
            
            $
            7.502008
            
            
            2,211,366
            
            $
            7.502009
            
            
            1,840,139
            
            $
            7.50





**5.    
      Related Party Transactions**





At
      September 30, 2007 and December 31, 2006, amounts payable to our primary member
      were none and $75,000, respectively. Historically, we maintained relationships
      with several closely related companies that directly supported us through
      administrative and operational services. The total cost for services performed
      by these affiliates was none and $1.3 million for the nine months ended
      September 30, 2007 and the year ended December 31, 2006, respectively. The
      Company has also historically funded certain capital requirements of its
      affiliates. As of December 31, 2006, receivables due from these affiliates
      were
      $14.7 million. These companies are affiliated through common ownership with
      our
      largest unitholder. All of the related party balances at December 31, 2006,
      were
      conveyed to other entities pursuant to the Restructuring and therefore no
      receivable balances were outstanding from these affiliates at September 30,
      2007. In addition, as of the Restructuring no additional funding of these
      related parties will occur.




Pursuant
      to the Restructuring, we rely on Vinland to execute our drilling program,
      operate our wells and gather our natural gas in Appalachia. We will 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 will receive 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 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 and nine months ended
      September 30, 2007, costs incurred under the MSA were $0.1 million and $0.4
      million, respectively. For the three months and nine months ended September
      30,
      2007, costs incurred under the GCA were $0.2 million and $0.9 million,
      respectively. A payable of $3.1 million is reflected on our September 30, 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.




**6.   
      Common Units and Pro Forma Net Income per Unit**





In
      April
      2007, the sole member of VNG contributed all of the issued and outstanding
      common units in VNG to VNR for six million common units representing all of
      the
      issued and outstanding common units of VNR at such time. VNR then completed
      a
      private equity offering pursuant to which it sold 2.29 million common units
      to
      certain private investors for $41.2 million. The proceeds of this private equity
      offering were used to make a distribution to Majeed S. Nami, VNR’s largest
      unitholder. Mr. Nami used a portion of these funds to capitalize Vinland and
      Vinland paid us $3.9 million to reduce outstanding accounts receivable from
      Vinland.




In
      October 2007, we successfully completed our initial public offering of 5.25
      million common units. See *Note
      8. Subsequent Events* for
      further discussion.




The
      consolidated statement of operations reflects a pro forma net income per unit
      amount calculated using 11.215 million units. This assumes that all units,
      including the 5.25 million we issued in our IPO were outstanding from the
      beginning of 2007. No calculation was made for the Vanguard predecessor period.




13


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS**–**(CONTINUED)**


**(Unaudited)**




**7.  
      Unit-Based Compensation**





In
      April
      2007, the sole member reserved 460,000 restricted Class B units in VNR for
      issuance to employees of VNRH. 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,
      2007, which will vest over three years. The remaining 40,000 restricted Class
      B
      units will be awarded to new employees or members of our board of directors
      as
      they are retained. These Class B 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
      VNR 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 September 30, 2007 is presented below:





Number of Non-vested Units
            
            Weighted Average
              Grant Date Fair ValueNon-vested
                units at December 31, 2006
            
            
            -
            
            $
            -Granted
            
            
            420,000
            
            
            18.13Non-vested
                units at September 30, 2007
            
            
            420,000
            
            $
            18.13





At
      September 30, 2007, there was approximately $6.3 million of unrecognized
      compensation cost related to non-vested restricted units. The cost is expected
      to be recognized over an average period of approximately 2.3 years. Our
      consolidated statement of operations reflects non-cash compensation of $0.8
      million and $1.3 million in the selling, general and administrative line item
      for the three months and nine months ended September 30, 2007, respectively.





**8.   
      Subsequent Events**





In
      October 2007, the fifth amendment to the Credit Facility was executed. There
      were five items addressed in this amendment. First, the borrowing base
      redetermination date was adjusted from October 1, 2007 to November 1, 2007
      for
      purposes of this one redetermination. Second, the date at which our other debt
      outside of the Credit Facility must be reduced to under $1 million was extended
      from October 8, 2007 to November 1, 2007. Third, the amount of proceeds from
      an
      equity infusion that must be applied to the repayment of borrowings under the
      Credit Facility was reduced from $100 million to $80 million and the outstanding
      borrowings under the Credit Facility must be reduced to less that 50% of our
      then-specified borrowing base after any equity infusion before making any
      subsequent distributions. Fourth, the covenant which prohibited us from making
      distributions if our borrowings exceeded 50% of our borrowing base was revised
      to allow us to make distributions if our borrowings were less than 80% of our
      borrowing base. Fifth, the amendment allowed us to borrow under the Credit
      Facility to make distributions as long as there has not been a default or event
      of default under the Credit facility and any such distributions for any quarter
      do not exceed EBITDA (as defined in the Credit Facility) for such quarter.




In
      October 2007, we completed our 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 of $7.0 million. The proceeds were used
      to reduce indebtedness under our Credit Facility by $80 million and the balance
      was used for the payment of accrued distributions to pre-IPO unitholders and
      the
      payment of the deferred swap obligation.




In
      November 2007, we acquired an average 77% working interest in 31 producing
      natural gas wells in Knox and Bell counties, Kentucky for $3.6 million from
      a
      privately-owned company. These wells are adjacent to assets we currently own
      and
      will be operated by Vinland. Current net production from these wells is
      approximately 300 Mcfe per day and the estimated proved reserves are 2.4 Bcfe
      based on an internally generated reserve report. This acquisition was funded
      with borrowings under our Credit Facility.




14


**VANGUARD
      NATURAL RESOURCES, LLC AND SUBSIDIARIES**


**NOTES TO
      CONSOLIDATED FINANCIAL STATEMENTS**–**(CONTINUED)**


**(Unaudited)**





In
      November 2007, a sixth amendment to the Credit Facility was executed which
      set
      our borrowing base under our Credit Facility at $110.5 million pursuant to
      our
      semi-annual redetermination, revised the covenant governing borrowing funds
      to
      make distributions, and lowered our borrowing rates. The covenant which
      prohibited us from making distributions if our borrowings exceeded 80% of our
      borrowing base was revised to allow us to make distributions if our borrowings
      were less than 90% of our borrowing base. In addition, the applicable margins
      on
      our borrowing base utilization grid were lowered to reflect the following:





**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%





15




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




*The
      following discussion analyzes the historical financial condition and results
      of
      operations of our predecessor and should be read in conjunction with the
      financial statements and notes thereto presented in Item 1 of this report as
      well as with our predecessor’s financial statements and notes thereto, and
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations presented in our Registration Statement on Form S-1 (File No.
      333-142363) (the “S-1”) as declared effective by the Securities and Exchange
      Commission on October 23, 2007.*




**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 S-1, 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 an
      independent natural gas and oil company focused on the acquisition, development
      and exploitation of mature, long-lived natural gas and oil properties. 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.




We
      owned
      working interests in 906 gross (811 net) productive wells at September 30,
      2007
      and our average net production for the twelve months ended December 31,
      2006 and for the nine months ended September 30, 2007 was 11,995 Mcfe per day
      and 11,826 Mcfe per day, respectively. We also have 40% of our predecessor’s
      working interest in the known producing horizons in approximately 95,000 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 and all of the wells that
      we will drill in this area. In addition, we own 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
      natural gas and oil wells.




***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 of $7.0
      million. The proceeds were used to reduce indebtedness under our reserve-based
      credit facility by $80 million and the balance was used for the payment of
      accrued distributions to pre-IPO unitholders and the payment of the deferred
      swap obligation.




16




***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 will rely on Vinland to operate
      our existing producing wells and coordinate our development drilling program.
      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 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 will
      gather, compress, deliver and provide the services necessary for us to market
      our natural gas production in the area of mutual interest, or AMI. VEG will
      deliver 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. 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 5% of our pro
      forma
      estimated proved reserves as of March 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.




17




***Reserve-Based
      Credit Facility***




On
      January 3, 2007, our operating company entered into a reserve-based credit
      facility. Our initial borrowing base under the reserve-based credit facility
      was
      set at $115.5 million. However, the borrowing base was subject to $1 million
      reductions per month starting on July 1, 2007 through November 1, 2007, which
      resulted in our current borrowing base of $110.5 million as reaffirmed in
      November 2007 pursuant to a semi-annual borrowing base redetermination. As
      of
      September 30, 2007, our borrowings under the reserve-based credit facility
      totaled $106.8 million; however, we applied $80 million of our net proceeds
      from our initial public offering in October 2007 to reduce our indebtedness
      under our reserve-based credit facility which reduced our outstanding borrowings
      to $26.8 million. The reserve-based credit facility 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.




In
      November 2007, a sixth amendment to the Credit Facility was executed which
      set
      our borrowing base under our reserve-based credit facility at $110.5 million
      pursuant to our semi-annual redetermination, revised the covenant governing
      borrowing funds to make distributions, and lowered our borrowing rates. The
      covenant which prohibited us from making distributions if our borrowings
      exceeded 80% of our borrowing base was revised to allow us to make distributions
      if our borrowings were less than 90% of our borrowing base. In addition, the
      applicable margins on our borrowing base utilization grid were lowered to
      reflect the following:




**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 production declines. As a given well’s initial
      reservoir pressures are depleted, natural gas production decreases, thus
      reducing our total natural gas 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 of Vinland 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.




**Comparability
      of Financial Statements**




The
      historical financial statements of our predecessor included in this Quarterly
      Report on Form 10-Q may not be comparable to our results of operations for
      the
      following reasons:




·
            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
                and all of our gathering and compression assets. In addition, all
                of the
                employees except our President and Chief Executive Officer and Executive
                Vice-President and Chief Financial Officer were transferred to
                Vinland.




·
            We
                entered into a management services agreement and a gathering and
                compression agreement with Vinland which will fix a portion of our
                production costs for wells owned in the
                AMI.




18




·
            Our
                predecessor did not account for its derivative instruments as cash
                flow
                hedges under SFAS No. 133 until the first quarter of 2007.
                Accordingly, the changes in the fair value of its derivative instruments
                were reflected in earnings for all periods prior to 2007 and in Other
                Comprehensive Income for the nine months ended September 30,
                2007.




·
            We
                will incur additional selling, general and administrative expense
                estimated to be $1.9 million per year for costs associated with being
                a
                public company. Also, we will incur non-cash compensation charges
                for the
                420,000 Class B units granted to management prior to the completion
                of the offering, the 40,000 common units to be issued to future employees
                and/or directors following the completion of this offering, 175,000
                options granted to management under our Long-Term Incentive Plan
                and
                phantom units to be granted to management commencing in
                2008.




**Results
      of Operations**




The
      following table sets forth selected financial and operating data for the periods
      ended September 30:


**Three Months****Ended**
                **September 30,**
              
              **Nine Months Ended**
                **September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Revenues:**Natural
                  gas and oil sales
              
              $
              7,641,064
              
              $
              9,574,502
              
              $
              26,709,417
              
              $
              28,990,485Realized
                  gains (losses) on derivative contracts
              
              
              940,566
              
              
              (161,375
              )
              
              (725,286
              )
              
              (2,502,849
              )Change
                  in fair value of derivative contracts
              
              
              -
              
              
              4,427,600
              
              
              -
              
              
              15,851,907**Total
                  revenues**
              
              
              **8,581,630**
              
              **$**
              **13,840,727**
              
              
              **25,984,131**
              
              **$**
              **42,339,543****Costs
                  and expenses:**Lease
                  operating expenses
              
              $
              1,347,565
              
              $
              1,233,948
              
              $
              3,807,985
              
              $
              3,608,748Depreciation,
                  depletion and amortization
              
              
              2,267,050
              
              
              2,164,854
              
              
              6,587,339
              
              
              6,211,920Selling,
                  general and administrative expenses
              
              
              1,084,995
              
              
              492,958
              
              
              2,300,484
              
              
              1,452,856Bad
                  debt expense
              
              
              -
              
              
              -
              
              
              1,007,458
              
              
              -Taxes
                  other than income
              
              
              326,175
              
              
              269,975
              
              
              1,217,167
              
              
              921,014**Total
                  costs and expenses**
              
              **$**
              **5,025,785**
              
              **$**
              **4,161,735**
              
              **$**
              **14,920,433**
              
              **$**
              **12,194,538****Other
                  Income and (Expense):**Interest
                  expense, net
              
              $
              (2,504,634
              )
              $
              (2,013,307
              )
              $
              (6,896,802
              )
              $
              (5,778,888
              )Loss
                  on extinguishment of debt
              
              $
              -
              
              $
              -
              
              $
              (2,501,528
              )
              $
              -




**Three
      Months** **Ended
      September 30, 2007 Compared to Three Months Ended September 30,
      2006**




*Revenues*




Natural
      gas and oil sales decreased $1.9 million to $7.6 million during the three months
      ended September 30, 2007 as compared to the same period in 2006. The key revenue
      measurements were as follows:


**Three
                  Months Ended**
                **September
                  30,**
              
              **Percentage**
                **Increase****2007**
              
              **2006**
              
              **(Decrease)****Net
                  Production:**Total
                  Production (MMcfe)
              
              
              1,070
              
              
              1,172
              
              
              (9
              )%Average
                  Daily production (Mcfe/d)
              
              
              11,632
              
              
              12,739
              
              
              (9
              )%**Average
                  Sales Price per Mcfe:**Average
                  realized sales price (including hedges)
              
              $
              9.71
              (a)
              $
              7.99
              
              
              22
              %Average
                  realized sales price (excluding hedges)
              
              $
              7.14
              
              $
              8.13
              
              
              (12
              )%





(a) 
          Excludes premiums paid on settled derivatives


The
      decrease in natural gas and oil sales was due primarily to the 12% decrease
      in
      the average realized sales price received (excluding hedges) coupled with a
      9%
      decrease in the production for the three months ended September 30, 2007 over
      2006. The decrease in production can be attributed to our drilling 24 net wells
      during the first nine months of 2007 as compared to the predecessor drilling
      75
      net wells in the same period in 2006. Our current business strategy does not
      envision drilling the same number of net wells as our predecessor and therefore
      we anticipate having slightly lower levels of production than our predecessor.
      In addition, results for the three months ended September 30, 2007 were
      negatively impacted by a $0.7 million prior period adjustment related to
      measurement discrepancies with a third party pipeline company.




19




*Hedging
      Activities*




During
      the three months ended September 30, 2007, we had hedges in place for
      approximately 98% of our total production, which resulted in reported revenues
      that were $0.9 million higher than we would have achieved at unhedged prices.
      However, the actual cash impact of the hedges increased realizations by an
      additional $1.8 million for a total of $2.8 million for the three months ended
      September 30, 2007 after excluding the premiums paid on the settled derivatives.
      During the three months ended September 30, 2006, we hedged approximately 45%
      of
      our total production, which resulted in revenues that were $0.2 million lower
      than we would have achieved at unhedged prices. The derivative contracts entered
      into in 2006 were not specifically designated as hedges under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and
      therefore did not qualify for hedge accounting treatment. As a result, the
      change in the fair value of these natural gas derivative contracts are marked
      to
      market in our earnings each period in 2006 and resulted in a $4.4 million
      non-cash gain for the three months ended September 30, 2006.




*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 includes gathering
      and compression fees, operating and maintenance costs associated with our
      gathering systems (which were conveyed to Vinland in connection with the
      Restructuring) and other customary charges. As a result of the Restructuring,
      lease operating expenses for the three months ended September 30, 2007 includes
      third-party transportation costs, 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, as well as other customary
      charges. Lease operating expenses increased by $0.1 million to $1.3 million
      for
      the three months ended September 30, 2007 as compared to the three months ended
      September 30, 2006. On a per Mcfe basis, lease operating expenses increased
      20%
      to $1.26 in 2007 as compared to $1.05 in 2006 due principally to increased
      well
      tending costs. 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 slightly for the three
      months ended September 30, 2007 as compared to the same period in
      2006.




Depreciation,
      depletion and amortization increased to approximately $2.3 million for the
      three
      months ended September 30, 2007 from approximately $2.2 million for the three
      months ended September 30, 2006 despite the conveyance of certain assets to
      Vinland pursuant to the Restructuring effective in January 2007. This result
      occurred due to the conveyance of long-lived depreciable assets which generated
      little associated depreciation and the conveyed value of the 60% interest in
      proved undeveloped properties which was largely offset by the value of new
      wells
      drilled since September 30, 2006 and the revisions of future drilling costs
      in
      the 2007 reserve report which increased the full cost pool to be depleted.




Selling,
      general and administrative expenses include the costs of our 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 September 30, 2007 include the impact of the Restructuring
      which transferred all of the employees other than two of its officers to
      Vinland. Selling, general and administrative expenses increased $0.6 million
      during the three months ended September 30, 2007 as compared to the three months
      ended September 30, 2006. This represents a 120% increase for the three months
      ended September 30, 2007 over the same period in 2006 primarily resulting from
      a
      $0.8 million non-cash compensation charge related to the grant of Class B units
      to management and employees during 2007. Excluding the impact of the non-cash
      compensation, selling, general and administrative expenses were $0.3 million
      for
      the three months ended September 30, 2007 representing a $0.2 million or 32%
      decrease from the same period in 2006.




Interest
      and financing expenses were approximately $2.5 million for the three months
      ended September 30, 2007 compared to approximately $2.0 million for the three
      months ended September 30, 2006 primarily due to increased debt levels and
      rising interest rates. In addition, our interest rates during the three months
      ended September 30, 2007 were directly affected by the provision in our credit
      facility which increased our rates by 1% on LIBOR loans effective July 1, 2007
      until we completed our initial public offering in October 2007.




20




**Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006**




*Revenues*




Natural
      gas and oil sales decreased to approximately $26.7 million from approximately
      $29.0 million for the nine months ended September 30, 2007 as compared to the
      nine months ended September 30, 2006. The key revenue measurements were as
      follows:




**Nine
                  Months Ended**
                **September
                  30,**
              
              **Percentage**
                **Increase****2007**
              
              
              
              
              
              **2006**
              
              
              **(Decrease)****Net
                  Production:**Total
                  Production (MMcfe)
              
              
              3,229
              
              
              
              
              
              3,360
              
              
              (4
              )%Average
                  Daily production (Mcfe/d)
              
              
              11,826
              
              
              
              
              
              12,307
              
              
              (4
              )%**Average
                  Sales Price per Mcfe:**Average
                  realized sales price (including hedges)
              
              $
              8.84
              (a)
              
              
              
              $
              7.87
              
              
              12
              %Average
                  realized sales price (excluding hedges)
              
              $
              8.27
              
              
              
              
              $
              8.61
              
              
              (4
              )%




(a)  Excludes
      premiums paid on settled derivatives.




The
      decrease in natural gas and oil sales was primarily due to the 4% decrease
      in
      production coupled with a 4% decrease in the average realized sales price
      received (excluding hedges) during the nine months ended September 30, 2007
      over
      September 30, 2006. The decrease in production can be attributed to our drilling
      24 net wells during the first nine months of 2007 as compared to the predecessor
      drilling 75 net wells in the same period in 2006. Our current business strategy
      does not envision drilling the same number of net wells as our predecessor
      and
      therefore we anticipate having slightly lower levels of production than our
      predecessor. In addition, results were negatively impacted by a $0.7 million
      prior period adjustment recorded in the third quarter of 2007 related to
      measurement discrepancies with a third party pipeline company.




*Hedging
      Activities*




During
      the nine months ended September 30, 2007, we hedged approximately 84% of our
      natural gas production, which resulted in reported revenues that were
      approximately $0.7 million lower than we would have achieved at unhedged prices.
      However, the actual cash impact of the hedges increased realizations by $2.5
      million for the nine month period after excluding the premiums paid on the
      settled derivatives. In addition, in January 2007, we terminated existing
      natural gas swaps at a cost of approximately $2.8 million which resulted in
      an
      additional realized loss on derivative contracts of approximately $0.8 million
      during the nine months ended September 30, 2007. During the nine month ended
      September 30, 2006, we hedged approximately 51% of our natural gas production,
      which resulted in revenues that were approximately $2.5 million lower than
      we
      would have achieved at unhedged prices. The derivative contracts entered into
      in
      2006 were not specifically designated as hedges under SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and
      therefore did not qualify for hedge accounting treatment. As a result, the
      change in the fair value of these natural gas derivative contracts are marked
      to
      market in our earnings each period in 2006 and resulted in a $15.9 million
      non-cash gain for the nine months ended September 30, 2006.




*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 includes third-party
      transportation costs, operating and maintenance costs associated with our
      gathering systems (which were conveyed to Vinland in connection with the
      Restructuring ) and other customary charges. As a result of the Restructuring,
      lease operating expenses for the nine months ended September 30, 2007 includes
      third-party transportation costs, 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, as well as other customary
      charges. Lease operating expenses increased only slightly to $3.8 million
      for the nine months ended September 30, 2007 as compared to $3.6 million for
      the
      nine months ended September 30, 2006 due primarily to amounts paid to Vinland
      under the management services agreement and gathering and compression agreement
      being comparable to our actual costs incurred for the same period in 2006.
      On a
      per Mcfe basis, lease operating expenses increased by10% to $1.18 for the nine
      months ended September 30, 2007 compared to $1.07 for the same period in 2006.
      Severance taxes are a function of volumes and revenues generated from
      production. Ad valorem taxes vary by state and county and are based on the
      value
      of our reserves. Taxes other than income increased $0.3 million to $1.2 million
      or 41% on a per Mcfe basis, for the nine months ended September 30, 2007 as
      compared to the nine months ended September 30, 2006. This increase was
      principally due to a $0.2 million underaccrual of severance taxes in 2006,
      which
      were charged to expense in the first quarter of 2007.




21




Depreciation,
      depletion and amortization increased $0.4 million to $6.6 million for the nine
      months ended September 30, 2007 despite the conveyance of certain assets to
      Vinland pursuant to the Restructuring effective January 2007. This result
      occurred due to the conveyance of long-lived depreciable assets which generated
      little associated depreciation and the conveyed value of the 60% interest in
      proved undeveloped properties which was largely offset by the value of new
      wells
      drilled since September 30, 2006. In addition, the increase in depletion can
      be
      attributed to upward revisions of future drilling costs in the 2007 reserve
      report which increased the full cost pool to be depleted.




Selling,
      general and administrative expenses include the cost of our employees and
      executive officers, related benefits, office leases, professional fees and
      other
      costs not directly associated with field operations. These expenses for the
      nine
      months ended September 30, 2007 include the impact of the Restructuring which
      transferred all of the employees other than two of its officers to Vinland.
      Selling, general and administrative expenses increased $0.8 million to $2.3
      million for the nine months ended September 30, 2007 as compared to $1.5 million
      for the nine months ended September 30, 2006. The increase resulted from two
      principal factors. First, our predecessor capitalized $3.0 million of internal
      costs under the full cost method of accounting for natural gas and oil
      properties for the nine months ended September 30, 2006 whereas we have not
      capitalized any internal costs in 2007. Second, the nine months ended September
      30, 2007 includes a $1.3 million non-cash compensation charge related to the
      grant of Class B units to management and an employee in April and August 2007.
      Excluding the impact of the approximate $1.3 million non-cash compensation
      charge discussed above, selling, general and administrative expenses would
      have
      been $1.0 million for the nine months ended September 30, 2007 or 32% lower
      than
      the comparable 2006 period.




Bad
      debt
      expense of approximately $1.0 million was recorded during the nine months ended
      September 30, 2007 as a result of a 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. We began selling our oil production to a new customer beginning
      March 2007.




Interest
      and financing expenses were approximately $6.9 million for the nine months
      ended
      September 30, 2007 compared to approximately $5.8 million for the nine months
      ended September 30, 2006. The increase in 2007 is primarily due to increased
      debt levels associated with drilling additional wells and rising interest rates.
      In addition, our interest rates during the final three months of the nine months
      ended September 30, 2007 were directly affected by the provision in our credit
      facility which increased our rates by 1% on LIBOR loans effective July 1, 2007
      until we completed our initial public offering in October 2007.




**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.




**Summary
      of Significant Accounting Policies**





As
      of
      September 30, 2007, 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 Registration Statement on Form S-1 (File
      No. 333-142363), which is incorporated by reference herein.




22





**New
      Accounting Pronouncements Issued But Not Yet Adopted**





In
      September 2006, the financial Accounting Standards Board (“FASB) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value
      Measurements (“SFAS 157”). SFAS 157 provides guidance for using fair value to
      measure assets and liabilities and requires additional disclosure about the
      use
      of fair value measures, the information used to measure fair value, and the
      effect fair-value measurements have on earnings. The primary areas in which
      we
      utilize fair value measures are valuing derivative financial instruments and
      asset retirement obligations. SFAS 157 does not require any new fair value
      measurements. SFAS 157 is effective January 1, 2008. We are in the process
      of
      evaluating the impact that SFAS 157 will have on our consolidated financial
      statements.




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. The Company is currently evaluating
      what impact, if adopted, SFAS 159 may have on its results of operations or
      financial position.




**Liquidity
      and Capital Resources**





We
      have
      utilized private equity, proceeds from bank borrowings, cash flow from
      operations and, with our recent initial public offering, the public equity
      markets for capital resources and liquidity.  To date, the primary use of
      capital has been for the 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 a combination of private and public equity
      depending on market conditions. 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.




***Statements
      of Cash Flows – Operating Activities***




At
      September 30, 2007, we had cash and cash equivalents of approximately $3.2
      million compared to $1.7 million at December 31, 2006.




Cash
      provided by operating activities for the nine months ended September 30,
      2007 was approximately $2.6 million, compared to cash provided by operating
      activities of $8.3 million for the nine months ended September 30,
      2006.  The decrease in cash provided by operating activities was primarily
      due to 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 during
      the
      nine months ended September 30, 2007.




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 fixed price swaps and put options to reduce
      our exposure to the volatility in natural gas and oil prices.  See
      Note 4 in Notes to Condensed Consolidated Financial Statements for details
      about derivatives in place through 2011.




23




***Statements
      of Cash Flows – Investing Activities***





Cash
      used
      in investing activities was approximately $10.7 million for the nine months
      ended September 30, 2007, compared to $22.7 million for the nine months
      ended September 30, 2006.  The decrease in cash used in investing
      activities was primarily due to a reduction in the number of net wells drilled
      during 2007 as compared to our predecessor in 2006. As a result of the
      Restructuring, we only retained 40% of our predecessor’s working interest in
      undeveloped reserves and thus only incur 40% of what our predecessor would
      have
      incurred for the development of new wells. The total for the nine months ended
      September 30, 2007 includes $9.4 million for the drilling and development
      of natural gas and oil properties as compared to $17.6 million for the nine
      months ended September 30, 2006. In addition, the decrease in cash used in
      investing activities is attributable to the predecessor investing approximately
      $5.1 million during the nine months ended September 30, 2006 on property and
      equipment that was conveyed in the Restructuring.




***Statements
      of Cash Flows – Financing Activities***





Cash
      provided by financing activities was approximately $9.5 million for the nine
      months ended September 30, 2007, compared to $13.9 million for the nine
      months ended September 30, 2006. During the nine months ended
      September 30, 2007, total proceeds from borrowings under our reserve-based
      credit facility were $114.6 million and total payments on this credit facility
      and our predecessor’s borrowings were $101.9 million.




**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. As of November 15, 2007,
      our borrowing base was $110.5 million. The reserve-based credit facility 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.




As
      of
      September 30, 2007, we had $106.8 million outstanding under our reserve-based
      credit facility.




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.




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;


·
            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;






24




·
            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;
                and


·
            maintain
                unencumbered liquid assets of at least $2 million which includes
                unused
                availability under the borrowing
                base.




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 under our reserve-based credit facility and any such distributions
      for
      any quarter do not exceed EBITDA (as defined in our credit facility) for such
      quarter. If our outstanding borrowings equal or exceed 90% of the then-specified
      borrowing base (or will equal or exceed 90% as a result of a distribution),
      our
      reserve-based credit facility restricts our ability to pay distributions.
      Additionally, outstanding borrowings under our reserve-based credit facility
      must be reduced to less than 50% of our then-specified borrowing base after
      any
      equity offering before making any subsequent distributions.




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


·
            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
      September 30, 2007, 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 September 30, 2007, there were
      no
      loss contingencies.




25




**Commitments
      and Contractual Obligations**




A
      summary
      of our contractual obligations as of September 30, 2007 is provided in the
      following table.




**Payments
                Due by Year**
              **(in
                millions)****2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **2011**
            
            
            **After**
              **2011**
            
            
            **Total**Management
                compensation
            
            $
            0.1
            
            $
            0.6
            
            $
            0.6
            
            $
            0.1
            
            $
            -
            
            $
            -
            
            $
            1.4Asset
                retirement obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            0.2
            
            
            0.2Derivative
                liabilities
            
            
            -
            
            
            -
            
            
            -
            
            
            1.8
            
            
            1.7
            
            
            -
            
            
            3.5Long-term
                debt
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            106.8
            
            
            -
            
            
            106.8Total
            
            $
            0.1
            
            $
            0.6
            
            $
            0.6
            
            $
            1.9
            
            $
            108.5
            
            $
            0.2
            
            $
            111.9




**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;





•
            Premiums
                paid on settled derivatives;





•
            Change
                in fair value of derivative
                contracts;





•  Non-cash
      compensation expense; and





•  Realized
      (gain) loss on cancelled derivatives.




Adjusted
      EBITDA is a significant performance metric used by our management to indicate
      (prior to the establishment of any cash reserves by our board of directors)
      the
      cash distributions we expect to 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 September 30, 2007 as compared to the three months ended
      September 30, 2006, Adjusted EBITDA increased 13%, from $7.4 million to $8.4
      million. For the nine months ended September 30, 2007 as compared to the
      comparable period of the prior year, Adjusted EBITDA increased 14%, from $20.5
      million to $23.3 million.




26




The
      following table presents a reconciliation of consolidated net income to adjusted
      EBITDA:




**Vanguard**
              **Three Months
                Ended****September 30,**
              **2007**
            
            
            
            **Vanguard
                Predecessor Three Months Ended
                September 30,**
              **2006**
            
            **Vanguard**
              **Nine Months
                Ended September 30,**
              **2007**
            
            
            
            **Vanguard
                Predecessor**
              **Nine
                Months Ended**
              **September 30,**
              **2006****Net
                income**
            
            $
            1,051,211
            
            
            
            $
            7,665,685
            
            $
            1,665,368
            
            
            
            $
            24,366,117Plus:Interest
                expense
            
            
            2,524,427
            
            
            
            
            2,029,042
            
            
            6,944,241
            
            
            
            
            5,812,876Loss
                on extinguishment of debt
            
            
            -
            
            
            
            
            -
            
            
            2,501,528
            
            
            
            
            -Depreciation,
                depletion and amortization
            
            
            2,267,050
            
            
            
            
            2,164,854
            
            
            6,587,339
            
            
            
            
            6,211,920Bad
                debt expense
            
            
            -
            
            
            
            
            -
            
            
            1,007,458
            
            
            
            
            -Premiums
                paid on settled derivatives
            
            
            1,813,495
            
            
            
            
            -
            
            
            2,546,999
            
            
            
            
            -Change
                in fair value of derivative contracts(1)
            
            
            -
            
            
            
            
            (4,427,600
            )
            
            -
            
            
            
            
            (15,851,907
            )Non-cash
                compensation expense
            
            
            751,635
            
            
            
            
            -
            
            
            1,314,778
            
            
            
            
            -Realized
                loss on cancelled derivatives
            
            
            -
            
            
            
            
            -
            
            
            776,634
            
            
            
            
            -Less:Interest
                income
            
            
            19,793
            
            
            
            
            15,735
            
            
            47,439
            
            
            
            
            33,988**Adjusted
                EBITDA**
            
            $
            8,388,025
            
            
            
            $
            7,416,246
            
            $
            23,296,906
            
            
            
            $
            20,505,018





(1)
            Natural
                gas derivative contracts were used to reduce our exposure to changes
                in
                natural gas prices. They were not specifically designated as hedges
                under
                Statement of Financial Accounting Standards (SFAS) No. 133. Change
                in the
                fair value of these natural gas derivative contracts are marked to
                market
                in our earnings each period. Further, these amounts represent non-cash
                charges.





**Item
      3.**  **Quantitative
      and Qualitative Disclosure 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 production.
        Realized pricing is primarily driven by the TECO Inside FERC Index Price
        and the
        spot market prices applicable to our natural gas production. 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
        have
        entered into and anticipate entering into hedging arrangements with respect
        to a
        portion of our projected natural gas 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. These hedging activities are intended to support our realized
        natural gas prices at targeted levels and to manage our exposure to natural
        gas
        price fluctuations. We do not hold or issue derivative instruments for
        speculative trading purposes.
  27




***Interest
      Rate Risks***





At
      September 30, 2007, we had debt outstanding of $106.8 million, which incurred
      interest at floating rates based on LIBOR in accordance with our reserve-based
      credit facility. However, after application of proceeds from our IPO in October
      2007, our debt outstanding was reduced to $26.8 million and if the debt remains
      the same, a 1% increase in LIBOR would result in an estimated $0.3 million
      increase in annual interest expense.


**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.




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 September 30, 2007, and
      concluded that our disclosure controls and procedures were effective at the
      reasonable assurance level as of September 30, 2007.




**Changes
      in Internal Control over Financial Reporting**




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


28





**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 disclosed in our Registration
      Statement on Form S-1 (File No. 133-142363), which is incorporated by reference
      herein.


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




In April
      2007, the sole member reserved 460,000 restricted Class B units in VNR for
      issuance to employees of VNRH. 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,
      2007, which will vest over three years. The remaining 40,000 restricted Class
      B
      units will be awarded to new employees or members of our board of directors
      as
      they are retained. These Class B 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
      proceeds of our IPO were used to reduce indebtedness under our Credit Facility
      by $80 million and the balance was used for the payment of accrued distributions
      to pre-IPO unitholders and the payment of the deferred swap
      obligation.





**Item 3.** **Defaults
      Upon Senior Securities**




None.





**Item 4.** **Submission
      of Matters to a Vote of Security Holders**




None.




**Item 5.** **Other
      Information**




On
      November 30, 2007, we issued a press release announcing our results of
      operations for the three months and nine months ended September 30, 2007. This
      press release is filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q,
      and its contents are hereby incorporated by reference into this report.




On
      November 30, 2007, a sixth amendment to the Credit Facility was executed, to
      be
      effective November 15, 2007, which set our borrowing base under our Credit
      Facility at $110.5 million pursuant to our semi-annual redetermination, revised
      the covenant governing borrowing funds to make distributions, and lowered our
      borrowing rates. The covenant which prohibited us from making distributions
      if
      our borrowings exceeded 80% of our borrowing base was revised to allow us to
      make distributions if our borrowings were less than 90% of our borrowing base.
      In addition, the applicable margins on our borrowing base utilization grid
      were
      lowered to reflect the following:




29




**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
      sixth
      amendment to the Credit Facility is filed as Exhibit 10.1 to this Quarterly
      Report on Form 10-Q, and its contents are hereby incorporated by reference
      into
      this report.


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




The
      Exhibit Index is incorporated herein by reference and lists the exhibits
      required to be filed by this report by Item 601(b)(10)(iii) of
      Regulation S-K.




30


**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:
                December 6, 2007/s/ Richard
                A. RobertRichard
                A. RobertExecutive
                Vice President andChief
                Financial Officer(Principal
                Financial Officer and Principal Accounting
                Officer)





31


**Vanguard
      Natural Resources, LLC**


**EXHIBIT
        INDEX**





Each
      exhibit identified below is filed as a part of this Report.




**Exhibit****Number**
            **Description**10.1*
            Sixth
                Amendment to Credit Agreement, dated November 15, 2007, by and
                between Vanguard Natural Gas, LLC (formerly Nami Holding Company,
                LLC),
                Citibank, N.A., as administrative agent and L/C issuer, and the lenders
                party thereto31.1*
            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 2002.99.1*
            Press
                release issued on November 30, 2007.99.2**
            Registration
                Statement on Form S-1 (File No. 333-142363) filed by Vanguard Natural
                Resources, LLC on April 25, 2007.





*
              Filed
                  herewith
 **
              Incorporated
                  by reference


32