UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington, D.C.
20549




Form 10-Q/A




(Mark One)x
              
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2008ORo
              
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period
      from          toCommission
      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.  Yesx  Noo




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




Large
      accelerated filero
            Accelerated
      fileroNon-accelerated
      filerx
            Smaller
      reporting companyo(Do
      not check if a smaller reporting company)




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




Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Common
units outstanding on May 13, 2008: 10,795,000.











EXPLANATORY
NOTE





On
November 10, 2008, in connection with preparing its quarterly report for third
quarter 2008 and discussion with BDO Seidman, LLP, the Company’s new independent
registered public accounting firm, management of the Company and the Audit
Committee of its Board of Directors concluded that the contemporaneous formal
documentation it had prepared to support its initial hedge designations and
subsequent assessments for ineffectiveness in connection with the Company’s
natural gas and oil hedging program in 2008 did not meet the technical
requirements to qualify for cash flow hedge accounting treatment in accordance
with Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”).  The
primary reasons for this determination were that the formal hedge documentation
lacked specificity of the hedged cash flow and the quantitative subsequent
assessments for ineffectiveness were insufficient. Therefore, the cash flow
designations failed to meet hedge documentation requirements for cash flow hedge
accounting treatment. In addition, the natural gas derivative swap contracts
entered into in 2007 were de-designated as cash flow hedges in the first quarter
of 2008 due to an overhedged position in natural gas in the first quarter of
2008 which made them ineffective.




Under
SFAS No. 133, the fair value of derivative contracts is recognized in the
Consolidated Balance Sheets as an asset or liability, and the amounts received
or paid under the contracts are reflected in earnings during the period in which
the underlying production occurs.  If the derivative contracts qualify
for hedge accounting treatment, the fair value of the hedge contract is recorded
in “accumulated other comprehensive income”, and changes in the fair value do
not affect net income in the period.  If the derivative contract does
not qualify for hedge accounting treatment, the change in the fair value of the
contract is reflected in earnings during the period as unrealized gain or loss
on commodity derivatives.  Under the cash flow hedge accounting
treatment used by the Company previously, the fair values of the hedge contracts
were recognized in the consolidated balance sheets with the resulting unrealized
gain or loss recorded initially in accumulated other comprehensive income and
later reclassified through earnings when the hedged production affected
earnings. As a result of the determination that the documentation failed to meet
cash flow hedge accounting treatment, the unrealized gain or loss should have
been recorded in the consolidated statements of operations as a component of
earnings in 2008. In addition, the net derivative loss at December 31, 2007
related to the de-designated natural gas derivative contracts entered into in
2007 will continue to be reported in accumulated other comprehensive income
until the month in which the transactions settle.




The
Company has restated its consolidated unaudited quarterly financial statements
for March 31, 2008 and June 30, 2008 to reflect the inability to qualify for
hedge accounting treatment. The effect of the restatement is to recognize a
non-cash mark to market unrealized loss on commodity derivatives of $20.2
million in the first quarter of 2008 and a non-cash mark to market unrealized
loss on commodity derivatives of $52.2 in the second quarter of 2008. The
restatement does not impact the economics of the hedge transactions nor does it
affect the Company’s cash flow, liquidity, total assets, total liabilities, or
members’ equity in any historical or future period. The restatement did not have
any impact on any of the Company’s financial covenants under its reserve-based
credit facility. Details of the restatement are indicated in Note 1 to the
Consolidated Financial Statements.











VANGUARD
NATURAL RESOURCES, LLC


TABLE
OF CONTENTS




PageGLOSSARY
      OF TERMSPART
      I - FINANCIAL INFORMATIONItem
      1.
                    Unaudited
      Financial StatementsConsolidated
      Statements of Operations
                    3Consolidated
      Balance Sheets
                    4Consolidated
      Statements of Cash Flows
                    5Consolidated
      Statements of Comprehensive Income (Loss)
                    6Notes
      to Consolidated Financial Statements
                    7Item
      2.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    17Item
      3.
                    Quantitative
      and Qualitative Disclosures about Market Risk
                    28Item
      4.
                    Controls
      and Procedures
                    30PART
      II – OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    32Item
      1A.
                    Risk
      Factors
                    32Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    34Item
      3.
                    Default
      in Senior Securities
                    35Item
      4.
                    Submission
      of Matters to a Vote of Securities Holders
                    35Item
      5.
                    Other
      Information
                    35Item
      6.
                    Exhibits
                    35










GLOSSARY
OF TERMS





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




/day
            
            =
      per day
            
            Mcf
            
            =
      thousand cubic feetBbls
            
            =
      barrels
            
            Mcfe
            
            =
      thousand cubic feet of natural gas equivalentsBtu
            
            =
      British thermal unit
            
            MMBtu
            
            =
      million British thermal unitsMMcf
            
            =
      million cubic feet




When we
refer to natural gas and oil in “equivalents,” we are doing so to compare
quantities of oil with quantities of natural gas or to express these different
commodities in a common unit. In calculating equivalents, we use a generally
recognized standard in which one Bbl of oil is equal to six Mcf of natural gas.
Also, when we refer to cubic feet measurements, all measurements are at a
pressure of 14.73 pounds per square inch.




References
in this report to (1) “us,” “we,” “our,” “the Company,” “Vanguard” or “VNR” are
to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
Natural Gas, LLC, Trust Energy Company, LLC (“TEC”), VNR Holdings, Inc.
(“VNRH”), Ariana Energy, LLC (“Ariana Energy”) and Vanguard Permian, LLC
(“Vanguard Permian”) and (2) “Vanguard Predecessor,” “Predecessor,” “our
operating subsidiary” or “VNG” are to Vanguard Natural Gas, LLC.











PART
I – FINANCIAL INFORMATION




Item
1. Financial Statements




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)




Three Months Ended
                                          March 31,2008
                                        
                                        
                                        2007RestatedRevenues:Natural
      gas and oil sales
                                        
                                        $
                                        14,001,598
                                        
                                        
                                        $
                                        8,961,616Realized
      loss on commodity cash flow hedges
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (747,808
                                        )Total revenues
                                        
                                        
                                        14,001,598
                                        
                                        
                                        
                                        8,213,808Costs and expenses:Lease
      operating expenses
                                        
                                        
                                        2,015,677
                                        
                                        
                                        
                                        1,146,379Depreciation,
      depletion, amortization and accretion
                                        
                                        
                                        2,823,978
                                        
                                        
                                        
                                        2,028,863Selling,
      general and administrative expenses
                                        
                                        
                                        1,645,791
                                        
                                        
                                        
                                        434,288Bad
      debt expense
                                        
                                        
                                        —
                                        
                                        
                                        
                                        1,007,461Taxes
      other than income
                                        
                                        
                                        966,113
                                        
                                        
                                        
                                        510,882Total costs and expenses
                                        
                                        
                                        7,451,559
                                        
                                        
                                        
                                        5,127,873Income from operations
                                        
                                        
                                        6,550,039
                                        
                                        
                                        
                                        3,085,935Other income and
      (expense):Interest
      income
                                        
                                        
                                        7,614
                                        
                                        
                                        
                                        12,967Interest
      expense
                                        
                                        
                                        (1,129,660
                                        )
                                        
                                        
                                        (2,223,123
                                        )Realized
      loss on commodity derivative contracts
                                        
                                        
                                        (1,145,616
                                        )
                                        
                                        
                                        —Unrealized
      loss on commodity derivative contracts
                                        
                                        
                                        (20,209,757
                                        )
                                        
                                        
                                        —Realized
      loss on interest rate derivative contracts
                                        
                                        
                                        (4,856
                                        )
                                        
                                        
                                        —Loss
      on extinguishment of debt
                                        
                                        
                                        —
                                        
                                        
                                        
                                        (2,501,528
                                        )Total other expense, net
                                        
                                        
                                        (22,482,275
                                        )
                                        
                                        
                                        (4,711,684
                                        )Net loss
                                        
                                        $
                                        (15,932,236
                                        )
                                        
                                        $
                                        (1,625,749
                                        )Net loss per unit:Common
      & Class B units – basic
                                        
                                        $
                                        (1.42
                                        )
                                        
                                        $
                                        (0.29
                                        )Common
      & Class B units – diluted
                                        
                                        $
                                        (1.42
                                        )
                                        
                                        $
                                        (0.29
                                        )Weighted average units
      outstanding:Common
      units – basic & diluted
                                        
                                        
                                        10,795,000
                                        
                                        
                                        
                                        5,540,000Class
      B units – basic & diluted
                                        
                                        
                                        420,000
                                        
                                        
                                        
                                        —




See
accompanying notes to consolidated financial statements





3





VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS





March 31,
                                                                                      2008
                                                                                    
                                                                                    
                                                                                    December 31,
                                                                                      2007Restated
                                                                                      (unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                                                                                    
                                                                                    $
                                                                                    757,408
                                                                                    
                                                                                    
                                                                                    $
                                                                                    3,109,563Trade
      accounts receivable, net
                                                                                    
                                                                                    
                                                                                    9,987,429
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,372,731Derivative
      assets
                                                                                    
                                                                                    
                                                                                    —
                                                                                    
                                                                                    
                                                                                    
                                                                                    4,017,085Other
      currents assets
                                                                                    
                                                                                    
                                                                                    741,969
                                                                                    
                                                                                    
                                                                                    
                                                                                    453,198Total
      current assets
                                                                                    
                                                                                    
                                                                                    11,486,806
                                                                                    
                                                                                    
                                                                                    
                                                                                    11,952,577Property
      and equipment, net of accumulated depreciation
                                                                                    
                                                                                    
                                                                                    187,462
                                                                                    
                                                                                    
                                                                                    
                                                                                    166,455Natural
      gas and oil properties, at cost
                                                                                    
                                                                                    
                                                                                    214,581,688
                                                                                    
                                                                                    
                                                                                    
                                                                                    135,435,240Accumulated
      depletion
                                                                                    
                                                                                    
                                                                                    (31,235,090
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (28,451,891
                                                                                    )Natural
      gas and oil properties, net – full cost method
                                                                                    
                                                                                    
                                                                                    183,346,598
                                                                                    
                                                                                    
                                                                                    
                                                                                    106,983,349Other
      assetsDerivative
      assets
                                                                                    
                                                                                    
                                                                                    203,945
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,329,511Deferred
      financing costs
                                                                                    
                                                                                    
                                                                                    1,035,187
                                                                                    
                                                                                    
                                                                                    
                                                                                    941,833Non-current
      deposits
                                                                                    
                                                                                    
                                                                                    45,963
                                                                                    
                                                                                    
                                                                                    
                                                                                    8,285,883Other
      assets
                                                                                    
                                                                                    
                                                                                    569,142
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,519,577Total
      assets
                                                                                    
                                                                                    $
                                                                                    196,875,103
                                                                                    
                                                                                    
                                                                                    $
                                                                                    131,179,185Liabilities
      and members’ equityCurrent
      liabilitiesAccounts
      payable – trade
                                                                                    
                                                                                    $
                                                                                    849,410
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,056,627Accounts
      payable – natural gas and oil
                                                                                    
                                                                                    
                                                                                    717,618
                                                                                    
                                                                                    
                                                                                    
                                                                                    257,073Payables
      to affiliates
                                                                                    
                                                                                    
                                                                                    3,278,376
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,838,328Derivative
      liabilities
                                                                                    
                                                                                    
                                                                                    8,894,489
                                                                                    
                                                                                    
                                                                                    
                                                                                    —Accrued
      expenses
                                                                                    
                                                                                    
                                                                                    5,791,912
                                                                                    
                                                                                    
                                                                                    
                                                                                    203,159Total
      current liabilities
                                                                                    
                                                                                    
                                                                                    19,531,805
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,355,187Long-term
      debt
                                                                                    
                                                                                    
                                                                                    102,500,000
                                                                                    
                                                                                    
                                                                                    
                                                                                    37,400,000Derivative
      liabilities
                                                                                    
                                                                                    
                                                                                    13,246,161
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,903,384Asset
      retirement obligations
                                                                                    
                                                                                    
                                                                                    1,463,924
                                                                                    
                                                                                    
                                                                                    
                                                                                    189,711Total
      liabilities
                                                                                    
                                                                                    
                                                                                    136,741,890
                                                                                    
                                                                                    
                                                                                    
                                                                                    48,848,282Commitments
      and contingenciesMembers’
      equityMembers’
      capital, 10,795,000 common units issued and outstanding at March 31, 2008
      and December 31, 2007
                                                                                    
                                                                                    
                                                                                    66,422,128
                                                                                    
                                                                                    
                                                                                    
                                                                                    90,257,856Class
      B units, 420,000 issued and outstanding at March 31, 2008 and December 31,
      2007
                                                                                    
                                                                                    
                                                                                    2,695,812
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,131,995Accumulated
      other comprehensive loss
                                                                                    
                                                                                    
                                                                                    (8,984,727
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (10,058,948
                                                                                    )Total
      members’ equity
                                                                                    
                                                                                    
                                                                                    60,133,213
                                                                                    
                                                                                    
                                                                                    
                                                                                    82,330,903Total
      liabilities and members’ equity
                                                                                    
                                                                                    $
                                                                                    196,875,103
                                                                                    
                                                                                    
                                                                                    $
                                                                                    131,179,185




See
accompanying notes to consolidated financial statements





4





VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)




Three Months Ended
                                                      March 31,2008
                                                    
                                                    
                                                    2007RestatedOperating
      activitiesNet
      loss
                                                    
                                                    $
                                                    (15,932,236
                                                    )
                                                    
                                                    $
                                                    (1,625,749
                                                    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation,
      depletion, amortization and accretion
                                                    
                                                    
                                                    2,823,978
                                                    
                                                    
                                                    
                                                    2,028,863Amortization
      of deferred financing costs
                                                    
                                                    
                                                    84,410
                                                    
                                                    
                                                    
                                                    62,838Bad
      debt expense
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    1,007,461Unit-based
      compensation
                                                    
                                                    
                                                    914,564
                                                    
                                                    
                                                    
                                                    —Amortization
      of premiums prepaid on derivative contracts
                                                    
                                                    
                                                    1,300,609
                                                    
                                                    
                                                    
                                                    —Unrealized
      loss on commodity derivative contracts
                                                    
                                                    
                                                    20,209,757
                                                    
                                                    
                                                    
                                                    —Changes
      in operating assets and liabilities:Trade
      accounts receivable
                                                    
                                                    
                                                    (5,614,698
                                                    )
                                                    
                                                    
                                                    (1,618,379
                                                    )Payables
      to affiliates
                                                    
                                                    
                                                    (107,452
                                                    )
                                                    
                                                    
                                                    (11,874,522
                                                    )Other
      current assets
                                                    
                                                    
                                                    (306,389
                                                    )
                                                    
                                                    
                                                    (1,334,387
                                                    )Price
      risk management activities, net
                                                    
                                                    
                                                    (182,840
                                                    )
                                                    
                                                    
                                                    (8,475,675
                                                    )Other
      non-current assets
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    (3,384
                                                    )Accounts
      payable
                                                    
                                                    
                                                    253,328
                                                    
                                                    
                                                    
                                                    2,757,409Accrued
      expenses
                                                    
                                                    
                                                    598,078
                                                    
                                                    
                                                    
                                                    (223,809
                                                    )Net
      cash provided by (used in) operating activities
                                                    
                                                    
                                                    4,041,109
                                                    
                                                    
                                                    
                                                    (19,299,334
                                                    )Investing
      activitiesAdditions
      to property and equipment
                                                    
                                                    
                                                    (32,000
                                                    )
                                                    
                                                    
                                                    —Additions
      to natural gas and oil properties
                                                    
                                                    
                                                    (1,238,379
                                                    )
                                                    
                                                    
                                                    (1,723,031
                                                    )Acquisitions
      of natural gas and oil properties
                                                    
                                                    
                                                    (65,661,575
                                                    )
                                                    
                                                    
                                                    —Deposits
      and prepayments of natural gas and oil properties
                                                    
                                                    
                                                    (1,119,981
                                                    )
                                                    
                                                    
                                                    —Net
      cash used in investing activities
                                                    
                                                    
                                                    (68,051,935
                                                    )
                                                    
                                                    
                                                    (1,723,031
                                                    )Financing
      activitiesProceeds
      from borrowings
                                                    
                                                    
                                                    71,400,000
                                                    
                                                    
                                                    
                                                    114,600,000Repayment
      of debt
                                                    
                                                    
                                                    (6,300,000
                                                    )
                                                    
                                                    
                                                    (94,067,500
                                                    )Contributions
      from members
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    
                                                    1,000Distribution
      to members
                                                    
                                                    
                                                    (3,263,565
                                                    )
                                                    
                                                    
                                                    —Financing
      costs
                                                    
                                                    
                                                    (177,764
                                                    )
                                                    
                                                    
                                                    (1,139,311
                                                    )Net
      cash provided by financing activities
                                                    
                                                    
                                                    61,658,671
                                                    
                                                    
                                                    
                                                    19,394,189Net
      decrease in cash and cash equivalents
                                                    
                                                    
                                                    (2,352,155
                                                    )
                                                    
                                                    
                                                    (1,628,176
                                                    )Cash and cash
      equivalents, beginning of period
                                                    
                                                    
                                                    3,109,563
                                                    
                                                    
                                                    
                                                    1,730,956Cash and cash
      equivalents, end of period
                                                    
                                                    $
                                                    757,408
                                                    
                                                    
                                                    $
                                                    102,780Supplemental
      cash flow information:Cash
      paid for interest
                                                    
                                                    $
                                                    1,105,980
                                                    
                                                    
                                                    $
                                                    1,230,654Non-cash
      financing and investing activities:Asset
      retirement obligations
                                                    
                                                    $
                                                    1,260,544
                                                    
                                                    
                                                    $
                                                    150,628Accrued
      dividends declared
                                                    
                                                    $
                                                    4,990,675
                                                    
                                                    
                                                    
                                                    —Assumption
      of fixed-price oil swaps
                                                    
                                                    $
                                                    1,128,114
                                                    
                                                    
                                                    
                                                    —Initial
      contribution of assets
                                                    
                                                    $
                                                    —
                                                    
                                                    
                                                    $
                                                    3,289,055Transfer
      of deposit for acquisition of natural gas and oil
    properties
                                                    
                                                    $
                                                    7,830,000
                                                    
                                                    
                                                    
                                                    —




See
accompanying notes to consolidated financial statements





5




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(Unaudited)





Three Months Ended
                                                    March 31,2008
                                                  
                                                  
                                                  2007RestatedNet loss
                                                  
                                                  $
                                                  (15,932,236
                                                  )
                                                  
                                                  $
                                                  (1,625,749
                                                  )Net
      gains (losses) from cash flow hedging activities:Unrealized
      mark-to-market losses arising during the period
                                                  
                                                  
                                                  1,490,649
                                                  
                                                  
                                                  
                                                  (11,664,967
                                                  )Reclassification
      adjustments for settlements
                                                  
                                                  
                                                  (416,428
                                                  )
                                                  
                                                  
                                                  (404,147
                                                  )Other
      comprehensive income (loss)
                                                  
                                                  
                                                  1,074,221
                                                  
                                                  
                                                  
                                                  (12,069,114
                                                  )Comprehensive loss
                                                  
                                                  $
                                                  (14,858,015
                                                  )
                                                  
                                                  $
                                                  (13,694,863
                                                  )




See
accompanying notes to consolidated financial statements





6





VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




Description
of the Business:




Vanguard
Natural Resources, LLC is a publicly-traded limited liability company focused on
the acquisition and development of mature, long-lived natural gas and oil
properties in the United States. Through our operating subsidiaries, we own
properties in the southern portion of the Appalachian Basin, primarily in
southeast Kentucky and northeast Tennessee and the Permian Basin, primarily in
West Texas and Southeastern New Mexico.




References
in this report to (1) “us,” “we,” “our,” “the Company,” “Vanguard” or “VNR” are
to Vanguard Natural Resources, LLC and its subsidiaries, including Vanguard
Natural Gas, LLC, Trust Energy Company, LLC (“TEC”), VNR Holdings, Inc.
(“VNRH”), Ariana Energy, LLC (“Ariana Energy”) and Vanguard Permian, LLC
(“Vanguard Permian”) and (2) “Vanguard Predecessor,” “Predecessor,” “our
operating subsidiary” or “VNG” are to Vanguard Natural Gas, LLC.




We were
formed in October 2006 but effective January 5, 2007, Vanguard Natural Gas, LLC
(formerly Nami Holding Company, LLC) was separated into our operating subsidiary
and Vinland Energy Eastern, LLC ("Vinland"). As part of the separation, we
retained all of our Predecessor’s proved producing wells and associated
reserves. We also retained 40% of our Predecessor’s working interest in the
known producing horizons in approximately 95,000 gross undeveloped acres and a
contract right to receive approximately 99% of the net proceeds from the sale of
production from certain producing gas and oil wells. In the separation, Vinland
was conveyed the remaining 60% of our Predecessor’s working interest in the
known producing horizons in this acreage, 100% of our Predecessor’s working
interest in depths above and 100 feet below our known producing horizons, all of
our gathering and compression assets, and all employees other than our President
and Chief Executive Officer and our Executive Vice President and Chief Financial
Officer. Vinland acts as the operator of our existing wells and all of the wells
that we drill in Appalachia. We refer to these events as the
"Restructuring."




In
October 2007, we completed our initial public offering (“IPO”) of 5.25 million
units representing limited liability interests in VNR at $19.00 per unit for net
proceeds of $92.8 million after deducting underwriting discounts and fees of
$7.0 million. The proceeds were used to reduce indebtedness under our
reserve-based credit facility by $80.0 million and the balance was used for the
payment of accrued distributions to pre-IPO unitholders and the payment of a
deferred swap obligation.




1.
            Summary
      of Significant Accounting Policies





The
accompanying financial statements, other than the consolidated balance sheet
data as of December 31, 2007, are unaudited and were prepared from the Company’s
records. We derived the consolidated balance sheet as of December 31, 2007,
from the audited financial statements filed in our 2007 Annual Report on
Form 10-K/A. 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 (“GAAP”). You should read
this Quarterly Report on Form 10-Q/A along with our 2007 Annual Report on
Form 10-K/A, which contains a summary of our significant accounting policies and
other disclosures. In our opinion, we have made all adjustments which, except
for the restatement discussed in note (b) below, are of a normal, recurring
nature to fairly present our interim period results. 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, members’ equity,
or net cash flows.





As of
March 31, 2008, the Company’s significant accounting policies are consistent
with those discussed in Note 1 of the Company’s consolidated financial
statements contained in the Company’s 2007 Annual Report on Form 10-K/A with the
exception noted in (b) below.





(a)
            Basis of
      Presentation and Principles of
  Consolidation:





The
consolidated financial statements as of March 31, 2008 and December 31, 2007 and
for the three months ended March 31, 2008 and 2007 include the accounts of VNR
and its wholly owned subsidiaries.  The Company presents its financial
statements in accordance with GAAP.  All intercompany transactions and
balances have been eliminated upon consolidation.




7





VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




(b)
            Financial
      Statement Restatement:





On
November 10, 2008, in connection with preparing its quarterly report for third
quarter 2008 and discussion with BDO Seidman, LLP, the Company’s new independent
registered public accounting firm, management of the Company and the Audit
Committee of its Board of Directors concluded that the contemporaneous formal
documentation it had prepared to support its initial hedge designations and
subsequent assessments for ineffectiveness in connection with the Company’s
natural gas and oil hedging program in 2008 did not meet the technical
requirements to qualify for cash flow hedge accounting treatment in accordance
with Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The primary
reasons for this determination were that the formal hedge documentation lacked
specificity of the hedged cash flow and the quantitative subsequent assessments
for ineffectiveness were insufficient. Therefore, the cash flow designations
failed to meet hedge documentation requirements for cash flow hedge accounting
treatment. In addition, the natural gas derivative swap contracts entered into
in 2007 were de-designated as cash flow hedges in the first quarter of 2008 due
to an overhedged position in natural gas in the first quarter of 2008 which made
them ineffective.




Under
SFAS No. 133, the fair value of derivative contracts is recognized in the
Consolidated Balance Sheets as an asset or liability, and the amounts received
or paid under the contracts are reflected in earnings during the period in which
the underlying production occurs.  If the derivative contracts qualify
for hedge accounting treatment, the fair value of the hedge contract is recorded
in “accumulated other comprehensive income”, and changes in the fair value do
not affect net income in the period.  If the derivative contract does
not qualify for hedge accounting treatment, the change in the fair value of the
contract is reflected in earnings during the period as unrealized gain or loss
on commodity derivatives. Under the cash flow hedge accounting treatment used by
the Company previously, the fair values of the hedge contracts were recognized
in the consolidated balance sheets with the resulting unrealized gain or loss
recorded initially in accumulated other comprehensive income and later
reclassified through earnings when the hedged production affected earnings. As a
result of the determination that the documentation failed to meet cash flow
hedge accounting treatment, the unrealized gain or loss should have been
recorded in the consolidated statements of operations as a component of earnings
in 2008. In addition, the net derivative loss at December 31, 2007 related to
the de-designated natural gas derivative contracts entered into in 2007 will
continue to be reported in accumulated other comprehensive income until the
month in which the transactions settle.




In this
Form 10-Q/A, the Company is restating the Consolidated Financial Statements for
the three months ended March 31, 2008. A non-cash mark to market unrealized loss
on commodity derivatives of $20.2 million has been reclassified from other
comprehensive loss to a separate line on the Consolidated Statements of
Operations. The effect of the reclassification on our financial statements is as
follows:





For
      the Three Months Ended
                                  March
      31, 2008Previously
                                  Reported
                                
                                
                                As RestatedConsolidated
      Statements of OperationsUnrealized
      loss on commodity derivative contracts
                                
                                $
                                —
                                
                                
                                $
                                (20,209,757
                                )Net
      income (loss)
                                
                                $
                                4,276,020
                                
                                
                                $
                                (15,932,236
                                )Basic
      and diluted net income (loss) per unit
                                
                                $
                                0.38
                                
                                
                                $
                                (1.42
                                )




March
      31, 2008Previously
                                        Reported
                                      
                                      
                                      As
                                        RestatedConsolidated
      Balance SheetsAccumulated
      other comprehensive loss
                                      
                                      $
                                      (29,192,982
                                      )
                                      
                                      $
                                      (8,984,727
                                      )




8




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




For
      the Three Months Ended
                                      March 31, 2008Previously
                                      Reported
                                    
                                    
                                    As
                                      RestatedConsolidated
      Statements of Cash FlowsCash
      Flows from Operating Activities:Net
      income (loss)
                                    
                                    $
                                    4,276,020
                                    
                                    
                                    $
                                    (15,932,236
                                    )Unrealized
      loss on commodity derivative contracts
                                    
                                    $
                                    —
                                    
                                    
                                    $
                                    20,209,757




(c)
            Recently
      Adopted Accounting
Pronouncements:





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157 “Fair Value Measurements”
(“SFAS 157”). SFAS 157 introduces a framework for measuring fair value and
expands required disclosure about fair value measurements of assets and
liabilities. On February 6, 2008, the FASB issued a final FASB Staff Position
(“FSP”) No. FAS 157-b, “Effective Date of FASB Statement No.
157.” This FSP delays the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis. In addition, the FSP removes certain leasing transactions from the scope
of SFAS 157. The effective date of SFAS 157 for non-financial assets and
non-financial liabilities has been delayed by one year to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. SFAS 157
for financial assets and liabilities is effective for fiscal years beginning
after November 15, 2007, and the Company prospectively adopted the standard for
those assets and liabilities as of January 1, 2008. SeeNote 6. Fair Value Measurements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115”  (“SFAS 159”), which permits companies to choose, at
specified dates, to measure certain eligible financial instruments at fair
value. The objective of SFAS 159 is to reduce volatility in preparer reporting
that may be caused as a result of measuring related financial assets and
liabilities differently and to expand the use of fair value measurements. The
provisions of SFAS 159 apply only to entities that elect to use the fair value
option and to all entities with available-for-sale and trading securities.
Additional disclosures are also required for instruments for which the fair
value option is elected. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. No retrospective application is allowed, except for companies
that choose to adopt early. At the effective date, companies may elect the fair
value option for eligible items that exist at that date, and the effect of the
first remeasurement to fair value must be reported as a cumulative-effect
adjustment to the opening balance of retained earnings. Effective January 1,
2008, the Company adopted SFAS 159. Because the Company did not elect to apply
the provisions of SFAS 159 to any eligible financial instrument, the adoption
did not affect the consolidated financial statements.





(d)
            New
      Pronouncements Issued But Not Yet
  Adopted:





In
December 2007, the FASB issued SFAS No. 141 (revised 2007),“Business Combinations”
(“SFAS 141(R)”), which replaces FASB Statement No. 141. SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements that will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for acquisitions that occur in an entity’s fiscal year that
begins after December 15, 2008, which will be our fiscal year 2009. The impact,
if any, on the consolidated financial statements will depend on the nature and
size of business combinations that we consummate after the effective
date.





In
December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority interests
will be recharacterized as non-controlling interests and classified as a
component of equity. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective as
of the beginning of an entity’s first fiscal year beginning after December 15,
2008, which will be our fiscal year 2009. Based upon the March 31, 2008 balance
sheet, SFAS 160 would have no impact on the consolidated financial
statements.








9




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. SFAS 161 achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a tabular format.
It also provides more information about an entity’s liquidity by requiring
disclosure of derivative features that are credit risk-related. Finally, it
requires cross-referencing within footnotes to enable financial statement users
to locate important information about derivative instruments. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application encouraged. We are
currently evaluating the impact of adopting SFAS 161on our consolidated
financial statements.





(e)
            Use of
      Estimates:





The
preparation of financial statements in conformity with GAAP 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, accrued natural gas and oil revenues and
expenses, as well as estimates of expenses related to depreciation, depletion,
amortization and accretion. Actual results could differ from those
estimates.





2.    
Acquisition





On
December 21, 2007, we entered in to a Purchase and Sale Agreement with the
Apache Corporation for the purchase of certain oil and natural gas properties
located in ten separate fields in the Permian Basin of West Texas and
Southeastern New Mexico. The purchase price for said assets was $78.3 million
with an effective date of October 1, 2007. We completed this acquisition on
January 31, 2008 for an adjusted purchase price of $73.4 million, subject to
customary post closing adjustments. The adjusted purchase price included a
preliminary purchase price adjustment of $4.9 million which represents the cash
flow from the acquired properties for the period between the effective date,
October 1, 2007, and the closing date, January 31, 2008. The purchase price
includes a payment of $7.8 million paid by us to the seller in December 2007 and
this amount is reported in non-current deposits in our consolidated balance
sheet at December 31, 2007. As part of this acquisition, we assumed fixed-price
oil swaps covering approximately 90% of the estimated proved developed producing
oil reserves through 2011 at a weighted average price of $87.29. The fair value
of these fixed-price oil swaps was a liability of $1,128,114 at January 31,
2008. This acquisition was funded with borrowings under our existing
reserve-based credit facility. At this time, we do not have the information
available to provide pro-forma results of operations for the three months ended
March 31, 2007. In lieu of the pro-forma information, the table below reflects
the audited statement of combined revenues and direct operating expenses of the
oil and gas properties purchased from Apache for the year ended December 31,
2007.





Year
      Ended
                          December
      31, 2007(In
      thousands)Revenues
                        
                        $
                        18,205Direct
      operating expenses
                        
                        
                        (6,624
                        )Excess
      of revenues over direct operating expenses
                        
                        $
                        11,581





3.    
Accounts Receivable and Allowance for Doubtful Accounts





We
established an approximate $1 million provision for a loss on the entire amount
due from a customer which filed for protection under Chapter 11 of the
Bankruptcy Code in May 2007. The account receivable was due from oil sales
through December 2006 at which time we ceased selling oil to the customer. As
the amount of any potential recovery is uncertain, we elected to reserve the
entire balance and it is reflected as bad debt expense on our consolidated
statement of operations for the three months ended March 31, 2007. We began
selling the oil production we formerly sold to this customer to a new customer
beginning in March 2007.




4.   
Credit Facilities and Long-Term Debt





Our
credit facility and long-term debt consisted of the following:





10




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Amount OutstandingDescription
                                                        
                                                        InterestRate
                                                        
                                                        MaturityDate<
/font>
                                                        
                                                        March31,
                                                          2008
                                                        
                                                        December31,
                                                          2007$400 million senior secured revolver facility
                                                        
                                                        Variable
                                                        
                                                        March 31, 2011
                                                        
                                                        
                                                        
                                                        102,500,000
                                                        
                                                        
                                                        
                                                        37,400,000Total
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        102,500,000
                                                        
                                                        
                                                        $
                                                        37,400,000




$400
Million Senior Secured Revolver Facility




In
January 2007, the Company entered into a four-year $200 million revolving credit
facility (“reserve-based credit facility”) with Citibank, N.A. and BNP Paribas.
All of our Predecessor’s outstanding debt was repaid with borrowings under this
reserve-based credit facility, including an early prepayment penalty of $2.5
million. The available credit line (“Borrowing Base”) is subject to adjustment
from time to time but not less than on a semi-annual basis based on the
projected discounted present value (as determined by independent petroleum
engineers) of estimated future net cash flows from certain proved natural gas
and oil reserves of the Company. The initial Borrowing Base was set at $115.5
million and is secured by a first lien security interest in all of the Company’s
natural gas and oil properties. However, the borrowing base was subject to $1
million reductions per month starting on July 1, 2007 through November 1, 2007,
which resulted in a borrowing base of $110.5 million as reaffirmed in November
2007 pursuant to the semi-annual borrowing base redetermination . We applied
$80.0 million of the net proceeds from our IPO in October 2007 to reduce our
indebtedness under the reserve-based credit facility. In February 2008, our
reserve-based credit facility was amended and restated to extend the maturity
from January 3, 2011 to March 31, 2011, increase the facility amount from $200.0
million to $400.0 million, increase our borrowing base from $110.5 million to
$150.0 million and add two financial institutions as lenders, Wachovia Bank,
N.A. and The Bank of Nova Scotia. Additional borrowings were made pursuant to
the acquisition of natural gas and oil properties in the Permian Basin and
indebtedness under the reserve-based credit facility totaled $102.5 million at
March 31, 2008.





Interest
rates under the reserve-based credit facility are based on Euro-Dollars (LIBOR)
or ABR (Prime) indications, plus a margin. At March 31, 2008, the applicable
margin and other fees increase as the utilization of the borrowing base
increases as follows:





Borrowing
Base Utilization Grid


Borrowing
      Base Utilization Percentage
                      
                      <25%
                      
                      
                      >25%<50%
                      
                      
                      >50%<75%
                      
                      
                      >75%Eurodollar
      Loans
                      
                      
                      1.000
                      %
                      
                      
                      1.250
                      %
                      
                      
                      1.500
                      %
                      
                      
                      1.750
                      %ABR
      Loans
                      
                      
                      0.000
                      %
                      
                      
                      0.250
                      %
                      
                      
                      0.500
                      %
                      
                      
                      0.750
                      %Commitment
      Fee Rate
                      
                      
                      0.250
                      %
                      
                      
                      0.300
                      %
                      
                      
                      0.375
                      %
                      
                      
                      0.375
                      %Letter
      of Credit Fee
                      
                      
                      1.000
                      %
                      
                      
                      1.250
                      %
                      
                      
                      1.500
                      %
                      
                      
                      1.750
                      %




The
Credit Agreement contains a number of customary covenants that require the
Company to maintain certain financial ratios, limit the Company’s ability to
incur additional debt, sell assets, create liens, or make certain distributions.
At March 31, 2008, we were in compliance with our debt covenants.





The
Credit Agreement required the Company to enter into a commodity price hedge
position establishing certain minimum fixed prices for anticipated future
production equal to approximately 84% of the projected production from proved
developed producing reserves from the second half of 2007 through 2011. Also,
the Credit Agreement required that certain production put option contracts for
the years 2007, 2008 and 2009 be put in place to create a price floor for
anticipated production from new wells drilled. SeeNote5. Price Risk Management
Activities for further discussion.





5.    
Price Risk Management Activities





We have
entered into derivative contracts with counterparties that are lenders under our
reserve-based credit facility, Citibank N.A., BNP Paribas, The Bank of Nova
Scotia and Wachovia Bank, N.A., to hedge price risk associated with a portion of
our natural gas and oil production. While it is never management’s intention to
hold or issue derivative instruments for speculative trading purposes,
conditions sometimes arise where actual production is less than estimated which
has, and could, result in overhedged volumes. Under fixed-priced commodity swap
agreements, the Company receives a fixed price on a notional quantity in
exchange for paying a variable price based on a market index, such as the
Columbia Gas Appalachian Index (‘TECO Index”) or Henry Hub for natural gas
production and the West Texas Intermediate Light Sweet for oil production. Under
put option agreements, we pay the counterparty the fair value at the purchase
date. At settlement date we receive the excess, if any, of the fixed floor over
floating rate. Under collar contracts, we pay the counterparty if the market
price is above the ceiling price and the counterparty pays us if the market
price is below the floor price on a notional quantity. The collars and put
options for natural gas are settled based on the NYMEX price for natural gas at
Henry Hub.





11




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


Under
SFAS No. 133, all derivative instruments are recorded on the consolidated
balance sheets at fair value as either short-term or long-term assets or
liabilities based on their anticipated settlement date.  We net
derivative assets and liabilities for counterparties where we have a legal right
of offset.  Changes in the derivative’s fair value are recognized
currently in earnings unless specific hedge accounting criteria are
met.  For qualifying cash flow hedges, the unrealized gain or loss on
the derivative is deferred in accumulated other comprehensive income (loss) in
the equity section of the consolidated balance sheets to the extent the hedge is
effective.  Gains and losses on cash flow hedges included in
accumulated other comprehensive income (loss) are reclassified to realized gains
(losses) on derivative contracts in the period that the related production is
delivered.  The unrealized gains (losses) on derivative contracts that
do not qualify for hedge accounting treatment are recorded as current income or
expense in the Consolidated Statements of Operations.





On
January 3, 2007, our Predecessor’s natural gas price swaps were terminated,
which resulted in the Company incurring swap termination fees of $2.8 million
and an additional loss on derivative contracts of approximately $0.8 million
included in our consolidated statement of operations for the three months ended
March 31, 2007. New natural gas derivative contracts were put in place in
conjunction with entering into the reserve-based credit facility as described
inNote 4. Credit Facility and Long-Term
Debt. The Company paid $6.5 million for the put option contracts and
payments for the put option contracts and the swap termination fee were funded
with borrowings under the reserve-based credit facility. At our election, also
in January 2007, we entered into a NYMEX natural gas collar contract. In May
2007, we reset our 2007, 2008 and 2009 natural gas swaps at higher prices and
incurred a $7.3 million deferred swap payment obligation with the derivative
counterparty which accrued interest daily at 7.36% and was payable at the
earlier of five days after the closing of an equity issuance or November 1,
2007. The deferred swap obligation was paid in October 2007 using proceeds from
our IPO.





In
February 2008, as part of the Permian Basin acquisition, we assumed fixed-price
oil swaps covering approximately 90% of the estimated proved developed producing
oil production through 2011 at a weighted average price of $87.29. Also, in
February 2008, we sold calls (or set a ceiling price) which effectively collared
2,000,000 MMBtu of gas production in 2008 through 2009 which was previously only
subject to a put (or price floor), we reset the price on 2,387,640 MMBtu of
natural gas swaps settling in 2010 from $7.53 to $8.76 per MMBtu and we entered
into a 2012 fixed-price oil swap at $80.00 for 87% of our estimated proved
developed production.




At March
31, 2008, the Company had open derivative contracts covering our anticipated
future production as follows:




Swap
Agreements




Gas
                                      
                                      OilContract
      Period
                                      
                                      MMBtu
                                      
                                      Weighted
                                        Average
                                        Fixed
    Price
                                      
                                      Bbls
                                      
                                      Price2008
                                      
                                      2,218,686
                                      
                                      $
                                      9.00
                                      
                                      148,000
                                      
                                      $
                                      90.302009
                                      
                                      2,657,046
                                      
                                      $
                                      8.85
                                      
                                      181,500
                                      
                                      $
                                      87.232010
                                      
                                      2,387,640
                                      
                                      $
                                      8.76
                                      
                                      164,250
                                      
                                      $
                                      85.652011
                                      
                                      2,196,012
                                      
                                      $
                                      7.15
                                      
                                      151,250
                                      
                                      $
                                      85.502012
                                      
                                      —
                                      
                                      $
                                      —
                                      
                                      144,000
                                      
                                      $
                                      80.00





12




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)




Put Option
Contracts





Contract Period
                            
                            Volume in MMBtu
                            
                            Purchased NYMEX
                              Price Floor2008
                            
                            754,629
                            
                            $
                            7.502009
                            
                            840,139
                            
                            $
                            7.50





Collars




GasMMBtu
                      
                      
                      Floor
                      
                      
                      CeilingProduction
      Period:May –
      September 2008
                      
                      
                      500,000
                      
                      
                      $
                      7.50
                      
                      
                      $
                      9.00October
      – December 2008
                      
                      
                      300,000
                      
                      
                      $
                      7.50
                      
                      
                      $
                      9.25January
      2009 – December 2009
                      
                      
                      1,000,000
                      
                      
                      $
                      7.50
                      
                      
                      $
                      9.00January
      2010 – December 2010
                      
                      
                      730,000
                      
                      
                      $
                      8.00
                      
                      
                      $
                      9.30




Interest Rate
Swaps





We enter
into interest rate swap agreements, which require exchanges of cash flows that
serve to synthetically convert a portion of our variable interest rate exposures
to fixed interest rates.





From
December 2007 through March 2008, we entered into interest rate swap agreements
which effectively fixed the LIBOR rate at 2.66 % to 3.88% on $60.0 million of
borrowings. At March 31, 2008, the Company had open interest rate derivative
contracts as follows:





Principal
                                      
                                      Fixed
                                        LiborBalance
                                      
                                      RatesPeriod:April
      1, 2008 to December 10, 2010
                                      
                                      $
                                      20,000,000
                                      
                                      3.88
                                      %April
      1, 2008 to January 31, 2011
                                      
                                      $
                                      30,000,000
                                      
                                      3.00
                                      %April
      1, 2008 to March 31, 2011
                                      
                                      $
                                      10,000,000
                                      
                                      2.66
                                      %





6.    
Fair Value Measurements





As
discussed inNote 1.Summary of Significant
Accounting Policies (c), we prospectively adopted SFAS 157 for financial assets
and financial liabilities. SFAS 157 does not expand the use of fair value
measurements, but rather, provides a framework for consistent measurement of
fair value for those assets and liabilities already measured at fair value under
other accounting pronouncements. Certain specific fair value measurements, such
as those related to share-based compensation, are not included in the scope of
SFAS 157. Primarily, SFAS 157 is applicable to assets and liabilities related to
financial instruments, to some long-term investments and liabilities, to initial
valuations of assets and liabilities acquired in a business combination, and to
long-lived assets carried at fair value subsequent to an impairment write-down.
It does not apply to oil and natural gas properties accounted for under the full
cost method, which are subject to impairment based on SEC rules. SFAS 157
applies to assets and liabilities carried at fair value on the consolidated
balance sheet, as well as to supplemental fair value information about financial
instruments not carried at fair value.





Certain
provisions of SFAS 157 have been deferred by the FASB. Accordingly, the Company
has not applied the provisions of SFAS 157 to those non-financial assets and
liabilities which are measured at fair value on a non-recurring basis. This
includes asset retirement obligations, and any assets other than oil and natural
gas properties, for which an impairment write-down is recorded during the
period. There have been no such asset impairments in the current
period.








13




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  The
Company has applied the provisions of SFAS 157 to assets and liabilities
measured at fair value on a recurring basis. This includes oil and natural gas
and interest rate derivatives contracts. SFAS 157 provides a definition of fair
value and a framework for measuring fair value, as well as expanding disclosures
regarding fair value measurements. The framework requires fair value measurement
techniques to include all significant assumptions that would be made by willing
participants in a market transaction. These assumptions include certain factors
not consistently provided for previously by those companies utilizing fair value
measurement; examples of such factors would include the company’s own credit
standing (when valuing liabilities) and the buyer’s risk premium. In adopting
SFAS 157, the Company determined that the impact of these additional assumptions
on fair value measurements did not have a material effect on financial position
or results of operations. The Company is still assessing the potential impact of
implementation in 2009 of those portions of the guidance for which the effective
date has been deferred by the FASB.





SFAS 157
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 provides a hierarchy of
fair value measurements, based on the inputs to the fair value estimation
process. It requires disclosure of fair values classified according to the
“levels” described below. The hierarchy is based on the reliability of the
inputs used in estimating fair value and requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. The framework for fair value measurement assumes that transparent
“observable” (Level 1) inputs generally provide the most reliable evidence of
fair value and should be used to measure fair value whenever available. The
classification of a fair value measurement is determined based on the lowest
level (with Level 3 as lowest) of significant input to the fair value estimation
process.





The
standard describes three levels of inputs that may be used to measure fair
value:


Level
      1
            
            Quoted
      prices for identical instruments in active markets. Level 1 assets include
      short-term investments (such as Money Market Funds and Treasury
      Bills).Level 
      2
            
            Quoted
      market prices for similar instruments in active markets; quoted priced for
      identical or similar instruments in markets that are not active; and
      model-derived valuations in which all significant inputs and significant
      value drivers are observable in active markets.Level 3
            
            Valuations
      derived from valuation techniques in which one or more significant inputs
      or significant value drivers are unobservable. Level 3 assets and
      liabilities generally include financial instruments whose value is
      determined using pricing models, discounted cash flow methodologies, or
      similar techniques, as well as instruments for which the determination of
      fair value requires significant management judgment or estimation or for
      which there is a lack of transparency as to the inputs
    used.





As
required by SFAS No. 157, financial assets and liabilities are classified
based on the lowest level of input that is significant to the fair value
measurement. Our assessment of the significance of a particular input to the
fair value measurement requires judgment, and may affect the valuation of the
fair value of assets and liabilities and their placement within the fair value
hierarchy levels. The Company has classified the fair values of all its
derivative contracts as Level 2.





Financial
assets and financial liabilities measured at fair value on a recurring basis are
summarized below:





March 31, 2008Fair Value Measurements Using
                            
                            Assets/LiabilitiesLevel
      1
                            
                            Level
      2
                            
                            Level 3
                            
                            at Fair valueAssets:Commodity
      price derivative contracts
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —
                            
                            
                            $
                            —Interest
      rate derivative contracts
                            
                            
                            —
                            
                            
                            
                            203,945
                            
                            
                            
                            —
                            
                            
                            
                            203,945Total
      derivative instruments
                            
                            $
                            —
                            
                            
                            $
                            203,945
                            
                            
                            $
                            —
                            
                            
                            $
                            203,945Liabilities:Commodity
      price derivative contracts
                            
                            $
                            —
                            
                            
                            $
                            (21,382,283
                            )
                            
                            
                            —
                            
                            
                            $
                            (21,382,283
                            )Interest
      rate derivative contracts
                            
                            
                            —
                            
                            
                            
                            (758,367
                            )
                            
                            
                            —
                            
                            
                            
                            (758,367
                            )Total
      derivative instruments
                            
                            $
                            —
                            
                            
                            $
                            (22,140,650
                            )
                            
                            $
                            —
                            
                            
                            $
                            (22,140,650
                            )




14




VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)


7. Asset
Retirement Obligations





The asset
retirement obligations as of March 31 reported on our consolidated balance
sheets and the changes in the asset retirement obligations for the three months
ended March 31 were as follows:





2008
                      
                      
                      2007Asset
      retirement obligations at January 1,
                      
                      $
                      189,711
                      
                      
                      $
                      —Liabilities
      added during the current period
                      
                      
                      1,260,544
                      
                      
                      
                      424,481Accretion
      expense
                      
                      
                      13,669
                      
                      
                      
                      8,371Asset
      retirement obligation at March 31,
                      
                      $
                      1,463,924
                      
                      
                      $
                      432,852





8.    
Related Party Transactions





Pursuant
to the Restructuring, in Appalachia, we rely on Vinland to execute our drilling
program, operate our wells and gather our natural gas. We reimburse Vinland $60
per well per month (in addition to normal third party operating costs) for
operating our current natural gas and oil properties in Appalachia under a
Management Services Agreement (“MSA”) which costs are reflected in our lease
operating expenses. Also, Vinland receives a $0.25 per Mcf transportation fee on
existing wells drilled at December 31, 2006 and $0.55 per Mcf transportation fee
on any new wells drilled after December 31, 2006 within the area of mutual
interest or “AMI.” This transportation fee only encompasses transporting the
natural gas to third party pipelines at which point additional transportation
fees to natural gas markets would apply. These transportation fees are outlined
under a Gathering and Compression Agreement (“GCA”) with Vinland and are
reflected in our lease operating expenses. For the three months ended March 31,
2008 and 2007, costs incurred under the MSA were $0.1 million in each period.
For the three months ended March 31, 2008 and 2007, costs incurred under the GCA
were $0.3 million and $0.4 million, respectively. A payable of $3.3 million and
$3.8 million is reflected on our March 31, 2008 and December 31, 2007
consolidated balance sheets 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.





9.   
 Common Units and Net Income per Unit





Basic
earnings per unit is computed in accordance with SFAS No. 128,“Earnings Per Share”
(“SFAS 128”) by dividing net income (loss) attributable to unitholders by
the weighted average number of units outstanding during the period. Diluted
earnings per unit is computed by adjusting the average number of units
outstanding for the dilutive effect, if any, of unit equivalents.  The
Company uses the treasury stock method to determine the dilutive effect. 
At March 31, 2008, the Company had two classes of units outstanding: 
(i) units representing limited liability company interests (“common units”)
listed on NYSE Arca under the symbol VNR and (ii) Class B units,
issued to management and an employee as discussed inNote 11.Unit-Based Compensation . The
Class B units participate in distributions and no forfeiture is expected;
therefore, all Class B units were considered in the computation of basic
earnings per unit. The 175,000 options and phantom units granted to officers
under our long-term incentive plan had no dilutive effect; therefore, have been
excluded from the computation of diluted earnings per unit.





In
accordance with SFAS 128, dual presentation of basic and diluted earnings
per unit has been presented in the consolidated statements of operations for the
three months ended March 31, 2008 and 2007 for each class of units issued and
outstanding at that date: common units and Class B units.  Net income
(loss) per unit is allocated to the common units and the Class B units on
an equal basis.





15


VANGUARD
NATURAL RESOURCES, LLC AND SUBSIDIARIES
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  10.  
Dividends Declared





On March
18, 2008, our board of directors declared a cash distribution attributable to
the first quarter of 2008 of $0.445 per unit, payable on May 15, 2008 to
unitholders of record on April 30, 2008. This distribution, totaling $4,990,675,
has been accrued at March 31, 2008 and is included in accrued expense in our
consolidated balance sheet





11.   Unit-Based
Compensation





In April
2007, the sole member at that time reserved 460,000 restricted Class B units in
VNR for issuance to employees. Certain members of management were granted
365,000 restricted Class B units in VNR in April 2007, which vest two years from
the date of grant. In addition, another 55,000 restricted VNR Class B units were
issued in August 2007 to two other employees that were hired in April and May of
2007, which will vest over three years. The remaining 40,000 restricted Class B
units are available to be awarded to new employees or members of our board of
directors as they are retained. In October 2007 and February 2008, four board
members were granted 5,000 common units each of which will vest over one year.
Additionally, two officers were granted options to purchase an aggregate of
175,000 units under our long-term incentive plan with an exercise price equal to
the initial public offering price of $19.00 which vested immediately upon being
granted and had a fair value of $0.1 million on the date of grant.





Furthermore,
on March 27, 2008, phantom units were granted to two officers in amounts equal
to 1.0% of our units outstanding at January 1, 2008 and the amount paid will
equal the appreciation in value of the units, if any, from the date of the grant
until the determination date (December 31, 2008), plus cash distributions paid
on the units, less an 8% hurdle rate. As of March 31, 2008, there has been no
appreciation in the value of these units; therefore, no liability or expense has
been recognized. These common units, Class B units, options and phantom units
were granted as partial consideration for services to be performed under
employment contracts and thus will be subject to accounting for these grants
under SFAS No. 123(R),Share-Based Payment.




The fair
value of restricted units issued is determined based on the fair market value of
common units on the date of the grant. This value is amortized over the vesting
period as referenced above. A summary of the status of the non-vested units as
of March 31, 2008 is presented below:





Number of
                                      Non-vested Units
                                    
                                    Weighted Average
                                      Grant Date Fair ValueNon-vested
      units at December 31, 2007
                                    425,000
                                    
                                    $
                                    18.14Granted
                                    15,000
                                    
                                    
                                    16.79Non-vested
      units at March 31, 2008
                                    440,000
                                    
                                    $
                                    18.10





At March
31, 2008, there was approximately $5.0 million of unrecognized compensation cost
related to non-vested restricted units. The cost is expected to be recognized
over an average period of approximately 1.6 years. Our consolidated statement of
operations reflects non-cash compensation of $0.9 million in the selling,
general and administrative line item for the three months ended March 31,
2008.





12.  Subsequent
Event





In April
2008, we reset the price on 800,000 MMBtu of natural gas puts settling from May
1, 2008 to December 31, 2008 from $7.50 to $9.00 per MMBtu at a cost to the
Company of $0.3 million which was funded with cash on hand.





16





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




The
following discussion and analysis should be read in conjunction with the
financial statements and related notes presented in Item 1 of this Quarterly
Report on Form 10-Q/A and information disclosed in our 2007 Annual Report
on Form 10-K/A.




Forward-Looking
Statements




This
report contains “forward-looking statements” intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1995. Statements included in this quarterly report that are not
historical facts (including any statements concerning plans and objectives of
management for future operations or economic performance, or assumptions or
forecasts related thereto), including, without limitation, the information set
forth in Management’s Discussion and Analysis of Financial Condition and Results
of Operations, are forward-looking statements. These statements can be
identified by the use of forward-looking terminology including “may,” “believe,”
“expect,” “intend,” “anticipate,” “estimate,” “continue,” or other similar
words. These statements discuss future expectations, contain projections of
results of operations or of financial condition, or state other
“forward-looking” information. We and our representatives may from time to time
make other oral or written statements that are also forward-looking
statements.




Such
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those anticipated as of the
date of this report. Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, no
assurance can be given that these expectations will prove to be correct.
Important factors that could cause our actual results to differ materially from
the expectations reflected in these forward-looking statements include, among
other things, those set forth in the Risk Factor section of the 2007 Annual
Report on Form 10-K/A and this Quarterly Report on Form 10-Q/A, and those set
forth from time to time in our filings with the SEC, which are available on our
website at www.vnrllc.com and through the SEC’s Electronic Data Gathering and
Retrieval System (“EDGAR”) at http://www.sec.gov.




All
forward-looking statements included in this report are based on information
available to us on the date of this report. We undertake no obligation to
publicly update or revise any forward-looking statement, whether as a result of
new information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
throughout this report.




Overview




We are a
publicly-traded limited liability company focused on the acquisition and
development of mature, long-lived natural gas and oil properties in the United
States. Our primary business objective is to generate stable cash flows allowing
us to make quarterly cash distributions to our unitholders and over time to
increase our quarterly cash distributions through the acquisition of new natural
gas and oil properties. Our properties are located in the southern portion of
the Appalachian Basin, primarily in southeast Kentucky and northeast Tennessee
and the Permian Basin, primarily in West Texas and Southeastern New
Mexico.




We owned
working interests in 1,357 gross (902 net) productive wells at March 31, 2008
and our average net production for the twelve months ended December 31,
2007 and for the three months ended March 31, 2008 was 11,610 Mcfe per day and
13,393 Mcfe per day, respectively. We also have an approximate 40% working
interest in the known producing horizons in approximately 104,000 gross
undeveloped acres surrounding or adjacent to our existing wells located in
southeast Kentucky and northeast Tennessee. Vinland Energy Operations, LLC
(“Vinland”) acts as the operator of our existing wells in Appalachia and all of
the wells that we will drill in this area.





Financial
Statement Restatement




On
November 10, 2008, in connection with preparing its quarterly report for third
quarter 2008 and discussion with BDO Seidman, LLP, the Company’s new independent
registered public accounting firm, management of the Company and the Audit
Committee of its Board of Directors concluded that the contemporaneous formal
documentation it had prepared to support its initial hedge designations and
subsequent assessments for ineffectiveness in connection with the Company’s
natural gas and oil hedging program in 2008 did not meet the technical
requirements to qualify for cash flow hedge accounting treatment in accordance
with Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The primary
reasons for this determination were that the formal hedge documentation lacked
specificity of the hedged cash flow and the quantitative subsequent assessments
for ineffectiveness were insufficient. Therefore, the cash flow designations
failed to meet hedge documentation requirements for cash flow hedge accounting
treatment. In addition, the natural gas derivative swap contracts entered into
in 2007 were de-designated as cash flow hedges in the first quarter of 2008 due
to an overhedged position in natural gas in the first quarter of 2008 which made
them ineffective.





17




The
Company has restated its consolidated unaudited quarterly financial statements
for March 31, 2008 and June 30, 2008 to reflect the inability to qualify for
hedge accounting treatment. The effect of the restatement is to recognize a
non-cash mark to market unrealized loss on commodity derivatives of $20.2
million in the first quarter of 2008 and a non-cash mark to market unrealized
loss on commodity derivatives of $52.2 in the second quarter of
2008.  The restatement does not impact the economics of the hedge
transactions nor does it affect the Company’s cash flow, liquidity, total
assets, total liabilities, or members’ equity in any historical or future
period.  The restatement did not have any impact on any of the
Company’s financial covenants under its reserve-based credit facility. Details
of the restatement are indicated in Note 1 to the Consolidated Financial
Statements.




Initial
Public Offering




In
October 2007, we completed our initial public offering (“IPO”) of 5.25 million
units representing limited liability interests in VNR at $19.00 per unit for net
proceeds of $92.8 million after deducting underwriting discounts and fees of
$7.0 million. The proceeds were used to reduce indebtedness under our
reserve-based credit facility by $80.0 million and the balance was used for the
payment of accrued distributions to pre-IPO unitholders and the payment of a
deferred swap obligation.




Permian
Basin Acquisition





On
December 21, 2007, we entered in to a Purchase and Sale Agreement with the
Apache Corporation for the purchase of certain oil and natural gas properties
located in ten separate fields in the Permian Basin of West Texas and
Southeastern New Mexico. The purchase price for said assets was $78.3 million
with an effective date of October 1, 2007. We completed this acquisition on
January 31, 2008 for an adjusted purchase price of $73.4 million, subject to
customary post closing adjustments. The adjusted purchase price included a
preliminary purchase price adjustment of $4.9 million which represents the cash
flow from the acquired properties for the period between the effective date,
October 1, 2007, and the closing date, January 31, 2008. This acquisition was
funded with borrowings under our reserve-based credit facility. In this
purchase, we acquired working interests in 390 gross wells (67 net wells), 49 of
which we operate. With respect to operations, we have established two district
offices, one in Lovington, New Mexico and the other in Christoval, Texas to
manage these assets. Our operating focus will be on maximizing existing
production and looking for complementary acquisitions that we can add to this
operating platform. With this acquisition, based on internal reserve estimates,
we acquired 4.4 million barrels of oil equivalent, 83% of which is oil and 90%
of which is proved developed producing.





Our
Relationship with Vinland




On
April 18, 2007 but effective as of January 5, 2007, we entered into
various agreements with Vinland, under which we rely on Vinland to operate our
existing producing wells in Appalachia and coordinate our development drilling
program in this area. We expect to benefit from the substantial development and
operational expertise of Vinland management in the Appalachian Basin. Under a
management services agreement, Vinland advises and consults with us regarding
all aspects of our production and development operations in Appalachia and
provides us with administrative support services as necessary for the operation
of our business. In addition, Vinland may, but does not have any obligation to,
provide us with acquisition services under the management services agreement.
While Vinland is not obligated to provide us with acquisition services, we
expect that due to significant common ownership Vinland has an incentive to grow
our business by helping us to identify, evaluate and complete acquisitions that
will be accretive to our distributable cash. In addition, under a gathering and
compression agreement that we entered into with Vinland Energy Gathering, LLC
(“VEG”), VEG gathers, compresses, delivers and provides the services necessary
for us to market our natural gas production in the area of mutual interest, or
“AMI.” VEG delivers our natural gas production to certain designated
interconnects with third-party transporters. Since the various agreements were
executed on April 18, 2007 but were effective as of January 5, 2007,
Vinland reimbursed us for the drilling costs and expenses that we incurred on
their behalf associated with their interest in the wells drilled between
January 5, 2007 and April 18, 2007. In addition, Vinland reimbursed us
for selling, general and administrative expenses that we incurred on their
behalf between January 5, 2007 and April 18, 2007. We reimbursed
Vinland for certain transaction costs and expenses relating to entering into
these agreements.




Restructuring
Plan




Prior to
the separation, our Predecessor owned all of the assets that are currently owned
by us and Vinland in Appalachia. As part of the separation of our operating
company and Vinland, effective January 5, 2007, we conveyed to Vinland 60%
of our Predecessor’s working interest in the known producing horizons in
approximately 95,000 gross undeveloped acres in the AMI, 100% of our
Predecessor’s interest in an additional 125,000 undeveloped acres and certain
coalbed methane rights located in the Appalachian Basin, the rights to any
natural gas and oil located on our acreage at depths above and 100 feet below
our known producing horizons, all of our gathering and compression assets, and
all employees other than our President and Chief Executive Officer and our
Executive Vice President and Chief Financial Officer. We retained all of our
Predecessor’s proved producing wells and associated reserves. We also retained
40% of our Predecessor’s working interest in the known producing horizons in
approximately 95,000 gross undeveloped acres in the AMI and a contract right to
receive approximately 99% of the net proceeds, after deducting royalties paid to
other parties, severance taxes, third-party transportation costs, costs incurred
in the operation of wells and overhead costs, from the sale of production from
certain producing natural gas and oil wells, which accounted for approximately
4.5% of our estimated proved reserves as of December 31, 2007. In addition,
we changed the name of our operating company from Nami Holding Company, LLC to
Vanguard Natural Gas, LLC. Collectively, we refer to these events as the
“Restructuring.”





18




Private
      Offering




In
April 2007, we completed a private equity offering pursuant to which we
issued 2,290,000units 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.





Reserve-Based
Credit Facility




On
January 3, 2007, our operating company entered into a reserve-based credit
facility which is available for our general limited liability company purposes,
including, without limitation, capital expenditures and acquisitions. Our
obligations under the reserve-based credit facility are secured by substantially
all of our assets. Our initial borrowing base under the reserve-based credit
facility was set at $115.5 million. However, the borrowing base was subject to
$1.0 million reductions per month starting on July 1, 2007 through November 1,
2007, which resulted in a borrowing base of $110.5 million as reaffirmed in
November 2007 pursuant to a semi-annual borrowing base redetermination. We
applied $80.0 million of the net proceeds from our IPO in October 2007 to reduce
our indebtedness under the reserve-based credit facility. In February 2008, our
reserve-based credit facility was amended and restated to extended the maturity
from January 3, 2011 to March 31, 2011, increase the facility amount from $200.0
million to $400.0 million, increase our borrowing base from $110.5 million to
$150.0 million and add two financial institutions as lenders. Additional
borrowings were made pursuant to the acquisition of natural gas and oil
properties in the Permian Basin and indebtedness under the reserve-based credit
facility totaled $102.5 million at March 31, 2008. At March 31, 2008, the
applicable margin and other fees increase as the utilization of the borrowing
base increases as follows:




Borrowing
      Base Utilization GridBorrowing
      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
2012 by implementing a hedging program on our proved producing and total
anticipated production during this time frame.




We face
the challenge of natural gas and oil production declines. As a given well’s
initial reservoir pressures are depleted, natural gas and oil production
decreases, thus reducing our total reserves. We attempt to overcome this natural
decline both by drilling on our properties and acquiring additional reserves. We
will maintain our focus on controlling costs to add reserves through drilling
and acquisitions, as well as controlling the corresponding costs necessary to
produce such reserves. Our ability to add reserves through drilling is dependent
on our capital resources and can be limited by many factors, including the
ability to timely obtain drilling permits and regulatory approvals. Any delays
in drilling, completion or connection to gathering lines of our new wells will
negatively impact the rate of our production, which may have an adverse effect
on our revenues and as a result, cash available for distribution. In accordance
with our business plan, we intend to invest the capital necessary to maintain
our production at existing levels over the long-term.





19




Results
of Operations




The
following table sets forth selected financial and operating data for the periods
ended March 31:





Three Months Ended
                                                                  March
      31,2008(a)
                                                                
                                                                
                                                                2007RestatedRevenues:Natural
      gas and oil sales
                                                                
                                                                $
                                                                14,001,598
                                                                
                                                                
                                                                $
                                                                8,961,616Realized
      loss on commodity cash flow hedges
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (747,808
                                                                )Total revenues
                                                                
                                                                
                                                                14,001,598
                                                                
                                                                
                                                                $
                                                                8,213,808Costs and expenses:Lease
      operating expenses
                                                                
                                                                $
                                                                2,015,677
                                                                
                                                                
                                                                $
                                                                1,146,379Depreciation,
      depletion, amortization and accretion
                                                                
                                                                
                                                                2,823,978
                                                                
                                                                
                                                                
                                                                2,028,863Selling,
      general and administrative expenses
                                                                
                                                                
                                                                1,645,791
                                                                
                                                                
                                                                
                                                                434,288Bad
      debt expense
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                1,007,461Taxes
      other than income
                                                                
                                                                
                                                                966,113
                                                                
                                                                
                                                                
                                                                510,882Total costs and expenses
                                                                
                                                                $
                                                                7,451,559
                                                                
                                                                
                                                                $
                                                                5,127,873Other income and
      (expense):Interest
      expense, net
                                                                
                                                                $
                                                                (1,122,046
                                                                )
                                                                
                                                                $
                                                                (2,210,156
                                                                )Realized
      loss on commodity derivative contracts
                                                                
                                                                $
                                                                (1,145,616
                                                                )
                                                                
                                                                $
                                                                —Unrealized
      loss on commodity derivative contracts
                                                                
                                                                $
                                                                (20,209,757
                                                                )
                                                                
                                                                $
                                                                —Realized
      loss on interest rate derivative contracts
                                                                
                                                                $
                                                                (4,856
                                                                )
                                                                
                                                                $
                                                                —Loss
      on extinguishment of debt
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                (2,501,528
                                                                )




(a)
              The
      Permian acquisition closed on January 31, 2008 and as such only two months
      of operations are included in the three month period ending March 31,
      2008.




Three
Months Ended March 31, 2008 Compared to Three Months Ended March 31,
2007




Revenues




Natural
gas and oil sales increased $5.0 million to $14.0 million during the three
months ended March 31, 2008 as compared to the same period in 2007. The key
revenue measurements were as follows:




20




Three Months Ended
                                  March 31,
                                
                                Percentage
                                  Increase2008
                                
                                2007Net
      Natural Gas Production:Appalachian
      gas (MMcf)
                                
                                
                                867
                                
                                1,068
                                
                                
                                (19)
                                %Permian
      gas (MMcf)
                                
                                
                                42
                                (a)
                                —
                                
                                
                                N/ATotal
      natural gas production (MMcf)
                                
                                
                                909
                                
                                1,068
                                
                                
                                (15)
                                %Average
      Appalachian daily gas production (Mcf/day)
                                
                                
                                9,527
                                
                                11,868
                                
                                
                                (20)
                                %Average
      Permian daily gas production (Mcf/day)
                                
                                
                                693
                                (a)
                                —
                                
                                
                                N/AAverage
      Vanguard daily gas production (Mcf/day)
                                
                                
                                10,220
                                
                                11,868Average
      Natural Gas Sales Price per Mcf:Net
      realized gas price, including realized gains (losses) on commodity
      derivative contracts
                                
                                $
                                10.47
                                (b)
                                $                                 7.69
                                
                                
                                36
                                %Net
      realized gas price, excluding realized gains (losses) on commodity
      derivative contracts
                                
                                $
                                9.93
                                
                                $                                 8.39
                                
                                
                                18
                                %Net
      Oil Production:Appalachian
      oil (Bbls)
                                
                                
                                10,991
                                
                                —
                                
                                
                                N/APermian
      oil (Bbls)
                                
                                
                                40,722
                                (a)
                                —
                                
                                
                                N/ATotal
      oil (Bbls)
                                
                                
                                51,713
                                
                                —
                                
                                
                                N/AAverage
      Appalachian daily oil production (Bbls/day)
                                
                                
                                121
                                
                                —
                                
                                
                                N/AAverage
      Permian daily oil production (Bbls/day)
                                
                                
                                679
                                (a)
                                —
                                
                                
                                N/AAverage
      Vanguard daily oil production (Bbls/day)
                                
                                
                                800
                                
                                —Average
      Oil Sales Price per Bbl:Net
      realized oil price, including realized gains (losses) on commodity
      derivative contracts
                                
                                $
                                89.65
                                
                                —
                                
                                
                                N/ANet
      realized oil price, excluding realized gains (losses) on commodity
      derivative contracts
                                
                                $
                                96.33
                                
                                —
                                
                                
                                N/A




(a)
            The
      Permian acquisition closed on January 31, 2008 and as such only two months
      of operations are included in the three month period ending March 31,
      2008.





(b)
            Excludes
      amortization of premiums prepaid on derivative
  contracts.




The
increase in natural gas and oil sales was due primarily to the impact of the
Permian Basin acquisition completed on January 31, 2008. Two months of
production from this recently completed acquisition contributed $4.3 million of
natural gas and oil sales for the three month period ended March 31, 2008. In
Appalachia, a decline in natural gas production was partially offset by an
increase in oil production for a net production decline of 13% on an Mcfe basis.
However, the negative impact of the production decline was offset by an 18%
increase in the average realized natural gas sales price received (excluding
realized gains (losses) on commodity derivative contracts).




Costs
and Expenses




Production
costs consist of the lease operating expenses and taxes other than income taxes
(severance and ad valorem taxes). Lease operating expenses include third-party
transportation costs, gathering and compression fees, field personnel and other
customary charges. Lease operating expenses in Appalachia also include a $60 per
month per well administrative charge pursuant to a management services agreement
with Vinland, a $0.25 per Mcf and $0.55 per Mcf gathering and compression charge
for production from wells drilled pre and post January 1, 2007, respectively,
paid to Vinland pursuant to a gathering and compression agreement with Vinland.
Lease operating expenses increased by $0.9 million to $2.0 million for the three
months ended March 31, 2008 as compared to the three months ended March 31, 2007
of which $0.6 million related to the recently closed Permian Basin acquisition.
Severance taxes are a function of volumes and revenues generated from
production. Ad valorem taxes vary by state/county and are based on the value of
our reserves. Taxes other than income increased by $0.5 million for the three
months ended March 31, 2008 as compared to the same period in 2007, of which
$0.3 million, related to the recently closed Permian Basin
acquisition.




Depreciation,
depletion and amortization increased to approximately $2.8 million for the three
months ended March 31, 2008 from approximately $2.0 million for the three months
ended March 31, 2007 due entirely to the additional depletion recorded on the
recently completed Permian Basin acquisition.





21





Selling,
general and administrative expenses include the costs of our administrative
employees and executive officers, related benefits, office leases, professional
fees and other costs not directly associated with field operations. These
expenses for the three months ended March 31, 2008 increased $1.2 million as
compared to the three months ended March 31, 2007 primarily resulting from a
$0.9 million non-cash compensation charge related to the grant of restricted
Class B units to management and an employee, the grant of unit options to
management and the grant of common units to board members during 2007 and 2008.
All other selling, general and administrative expenses were $0.7 million for the
three months ended March 31, 2008 representing a $0.3 million increase from the
same period in 2007 principally due to costs associated with additional
employees and being a public company.




Interest
expense declined to $1.1 million for the three months ended March 31, 2008
compared to $2.2 million for the three months ended March 31, 2007 primarily due
to a reduction in the weighted average outstanding borrowings and lower interest
rates. All of our Predecessor’s outstanding debt was repaid with borrowings
under our reserve-based credit facility in January 2007, including an early
prepayment penalty of $2.5 million.





During
the quarter ended March 31, 2008, the Company recognized a $1.1 million
realized loss on commodity derivatives and a $20.2 million unrealized loss
on commodity derivatives, respectively. These amounts relate to derivative
contracts that the Company entered into in order to mitigate commodity price
exposure on a portion of our expected production. On November 10, 2008, the
Company concluded that the contemporaneous formal documentation it had prepared
to support its initial hedge designations and subsequent assessments for
ineffectiveness in connection with the Company’s natural gas and oil hedging
program in 2008 did not meet the technical requirements to qualify for cash flow
hedge accounting treatment in accordance with SFAS No. 133.  The
realized loss on commodity derivatives relates to actual amounts received less
premiums previously paid under these derivative contracts while the unrealized
loss on commodity derivatives represents the change in the fair value of these
derivative instruments.




Critical
Accounting Policies and Estimates





The
preparation of financial statements in accordance with GAAP requires management
to select and apply accounting policies that best provide the framework to
report its results of operations and financial position. The selection and
application of those policies requires management to make difficult subjective
or complex judgments concerning reported amounts of revenue and expenses during
the reporting period and the reported amounts of assets and liabilities at the
date of the financial statements. As a result, there exists the likelihood
that materially different amounts would be reported under different conditions
or using different assumptions.




As of
March 31, 2008, the Company’s critical accounting policies are consistent with
those discussed in the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2007 with the exception noted below in Financial Statement
Restatement.





Financial
Statement Restatement





On
November 10, 2008, in connection with preparing its quarterly report for third
quarter 2008 and discussion with BDO Seidman, LLP, the Company’s new independent
registered public accounting firm, management of the Company and the Audit
Committee of its Board of Directors concluded that the contemporaneous formal
documentation it had prepared to support its initial hedge designations and
subsequent assessments for ineffectiveness in connection with the Company’s
natural gas and oil hedging program in 2008 did not meet the technical
requirements to qualify for cash flow hedge accounting treatment in accordance
with Statement of Financial Accounting Standard No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (“SFAS No. 133”).  The
primary reasons for this determination were that the formal hedge documentation
lacked specificity of the hedged cash flow and the quantitative subsequent
assessments for ineffectiveness were insufficient.  Therefore, the
cash flow designations failed to meet hedge documentation requirements for cash
flow hedge accounting treatment. In addition, the natural gas derivative swap
contracts entered into in 2007 were de-designated as cash flow hedges in the
first quarter of 2008 due to an overhedged position in natural gas in the first
quarter of 2008 which made them ineffective.




Under
SFAS No. 133, the fair value of derivative contracts is recognized in the
Consolidated Balance Sheet as an asset or liability, and the amounts received or
paid under the contracts are reflected in earnings during the period in which
the underlying production occurs.  If the derivative contracts qualify
for hedge accounting treatment, the fair value of the hedge contract is recorded
in “accumulated other comprehensive income”, and changes in the fair value do
not affect net income in the period.  If the derivative contract does
not qualify for hedge accounting treatment, the change in the fair value of the
contract is reflected in earnings during the period as unrealized gain or loss
on commodity derivatives.  Under the cash flow hedge accounting
treatment used by the Company previously, the fair values of the hedge contracts
were recognized in the consolidated balance sheets with the resulting unrealized
gain or loss recorded initially in accumulated other comprehensive income and
later reclassified through earnings when the hedged production affected
earnings.  As a result of the determination that the documentation
failed to meet cash flow hedge accounting treatment, the unrealized gain or loss
should have been recorded in the consolidated statements of operations as a
component of earnings in 2008. In addition, the net derivative loss at December
31, 2007 related to the de-designated natural gas derivative contracts entered
into in 2007 will continue to be reported in accumulated other comprehensive
income until the month in which the transactions settle.





22





The
Company has restated its consolidated unaudited quarterly financial statements
for March 31, 2008 and June 30, 2008 to reflect the inability to qualify for
hedge accounting treatment. The effect of the restatement is to recognize a
non-cash mark to market unrealized loss on commodity derivatives of $20.2
million in the first quarter of 2008 and a non-cash mark to market unrealized
loss on commodity derivatives of $52.2 in the second quarter of
2008.  The restatement does not impact the economics of the hedge
transactions nor does it affect the Company’s cash flow, liquidity, total
assets, total liabilities, or members’ equity in any historical or future
period.  The restatement did not have any impact on any of the
Company’s financial covenants under its reserve-based credit
facility.




Recently
Adopted Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157 “FairValue
Measurements ” (“SFAS 157”). SFAS 157 introduces a framework for
measuring fair value and expands required disclosure about fair value
measurements of assets and liabilities. On February 6, 2008, the FASB issued a
final FASB Staff Position (“FSP”) No. FAS 157-b, “Effective Date of FASB Statement
No. 157 .” This FSP delays the effective date of SFAS 157for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. In
addition, the FSP removes certain leasing transactions from the scope of
SFAS 157. The effective date of SFAS 157 for non-financial assets and
non-financial liabilities has been delayed by one year to fiscal years beginning
after November 15, 2008 and interim periods within those fiscal years. SFAS 157
for financial assets and liabilities is effective for fiscal years beginning
after November 15, 2007, and the Company prospectively adopted the standard for
those assets and liabilities as of January 1, 2008. See Note 6 in Notes to
Consolidated Financial Statements and Part 1—Item 1—Fair Value
Measurements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115”  (“SFAS 159”), which permits companies to choose, at
specified dates, to measure certain eligible financial instruments at fair
value. The objective of SFAS 159 is to reduce volatility in preparer reporting
that may be caused as a result of measuring related financial assets and
liabilities differently and to expand the use of fair value measurements. The
provisions of SFAS 159 apply only to entities that elect to use the fair value
option and to all entities with available-for-sale and trading securities.
Additional disclosures are also required for instruments for which the fair
value option is elected. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. No retrospective application is allowed, except for companies
that choose to adopt early. At the effective date, companies may elect the fair
value option for eligible items that exist at that date, and the effect of the
first remeasurement to fair value must be reported as a cumulative-effect
adjustment to the opening balance of retained earnings. Effective January 1,
2008. Because the Company did not elect to apply the provisions of SFAS 159 to
any eligible financial instruments, the adoption did not affect the consolidated
financial statements.





New
Pronouncements Issued But Not Yet Adopted





In
December 2007, the FASB issued SFAS No. 141 (revised 2007),“Business Combinations”
(“SFAS 141(R)”), which replaces FASB Statement No. 141. SFAS 141(R) establishes
principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements that will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for acquisitions that occur in an entity’s fiscal year that
begins after December 15, 2008, which will be our fiscal year 2009. The impact,
if any, on the consolidated financial statements will depend on the nature and
size of business combinations that we consummate after the effective
date.





In
December 2007, the FASB issued SFAS No. 160,“Non-controlling Interests in
Consolidated Financial statements—an amendment of ARB No. 51” (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority interests
will be recharacterized as non-controlling interests and classified as a
component of equity. SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. SFAS 160 applies to all entities that prepare consolidated
financial statements, except not-for-profit organizations, but will affect only
those entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. This statement is effective as
of the beginning of an entity’s first fiscal year beginning after December 15,
2008, which will be our fiscal year 2009. Based upon the March 31, 2008 balance
sheet, SFAS 160 would have no impact on the consolidated financial
statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“ SFAS 161”). SFAS 161 is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position, financial
performance, and cash flows. SFAS 161 achieves these improvements by requiring
disclosure of the fair values of derivative instruments and their gains and
losses in a tabular format. It also provides more information about an entity’s
liquidity by requiring disclosure of derivative features that are credit
risk-related. Finally, it requires cross-referencing within footnotes to enable
financial statement users to locate important information about derivative
instruments. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. We are evaluating the impact of SFAS 161 on our
consolidated financial statements.





23




Use
of Estimates





The
preparation of financial statements in conformity with GAAP 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, accrued natural gas and oil revenues and
expenses, as well as estimates of expenses related to depreciation, depletion,
amortization and accretion. Actual results could differ from those
estimates.





Liquidity
and Capital Resources





Overview


We have
utilized private equity, proceeds from bank borrowings, cash flow from
operations and, with our recent IPO, the public equity markets for capital
resources and liquidity. To date, the primary use of capital has been for
the acquisition and development of natural gas and oil properties; however, as a
result of our IPO, we expect to distribute to unitholders a significant portion
of our free cash flow.  As we execute our business strategy, we will
continually monitor the capital resources available to us to meet future
financial obligations, planned capital expenditures, acquisition capital and
distributions to our unitholders. Our future success in growing reserves,
production and cash flow will be highly dependent on the capital resources
available to us and our success in drilling for or acquiring additional
reserves. We expect to fund our maintenance capital expenditures and
distributions to unitholders with cash flow from operations, while funding any
acquisition capital expenditures that we might incur with borrowings under our
reserve-based credit facility and publicly offered equity, depending on market
conditions. As of May 13, 2008, we have $47.5 million available to be borrowed
under our reserve-based credit facility. Based upon current expectations, we
believe existing liquidity and capital resources will be sufficient for the
conduct of our business and operations for the foreseeable future.




Cash
Flow from Operations




Net cash
provided by operating activities for the three months ended March 31, 2008 was
$4.0 million, compared to cash used in operating activities of $19.3 million for
the three months ended March 31, 2007. The increase in cash provided by
operating activities during the three months ended March 31, 2008 was
substantially due to increased income, a reduction in payables to affiliates and
a decrease in cash used in price risk management activities. The cash used in
operating activities in the first quarter 2007 included the termination of
existing natural gas swaps at a cost of approximately $2.8 million, cash paid on
early extinguishment of debt of approximately $2.5 million and the payment of
$6.5 million for put option derivative contracts.




Cash flow
from operations is subject to many variables, the most significant of which is
the volatility of natural gas and oil prices. Natural gas and oil prices
are determined primarily by prevailing market conditions, which are dependent on
regional and worldwide economic activity, weather and other factors beyond our
control. Future cash flow from operations will depend on our ability to
maintain and increase production through our drilling program and acquisitions,
as well as the prices received for production. We enter into derivative
arrangements to reduce the impact of commodity price volatility on
operations. Currently, we use a combination of fixed-price swaps and NYMEX
collars and put options to reduce our exposure to the volatility in natural gas
and oil prices. See Note 5 in Notes to Consolidated Financial
Statements and Part 1—Item 3—Quantitative and Qualitative Disclosures About
Market Risk—Commodity Price Risk for details about derivatives in place through
2012.




Cash
Flow from Investing Activities





Cash used
in investing activities was approximately $68.1 million for the three months
ended March 31, 2008, compared to $1.7 million for the three months ended
March 31, 2007. The increase in cash used in investing activities was
primarily attributable to $65.6 million used for the acquisition of natural gas
and oil properties in the Permian Basin. In addition, the total for the three
months ended March 31, 2008 includes $1.2 million for the drilling and
development of natural gas and oil properties as compared to $1.7 million for
the three months ended March 31, 2007.




Cash Flow from
Financing Activities





Cash
provided by financing activities was approximately $61.6 million for the three
months ended March 31, 2008, compared to $19.4 million for the three months
ended March 31, 2007. During the three months ended March 31, 2008, total
proceeds from borrowings under our reserve-based credit facility were $71.4
million which were principally used to fund the Permian Basin acquisition.
During the three months ended March 31, 2007, total proceeds from borrowings
under our reserve-based credit facility were $114.6 million, which was
principally used to pay off our Predecessor’s outstanding
borrowings.





24





Reserve-Based
Credit Facility





On
January 3, 2007, our operating company, Vanguard Natural Gas, LLC (formerly Nami
Holding Company, LLC), entered into a reserve-based credit facility under which
our initial borrowing base was set at $115.5 million. Our reserve-based credit
facility was amended and restated in February 2008 to extend the maturity date
from January 2011 to March 2011, increase the facility amount from $200.0
million to $400.0 million, increase our borrowing base from $110.5 million to
$150.0 million and add two financial institutions as lenders, Wachovia Bank,
N.A. and The Bank of Nova Scotia. The increase in the borrowing base was
principally the result of inclusion of the reserves related to the Permian Basin
acquisition. As a result, as of March 31, 2008, we had $102.5 million
outstanding under our reserve-based credit facility and as of May 13, 2008, we
have $47.5 million available to be borrowed. Borrowings under the reserve-based
credit facility are available for development and acquisition of natural gas and
oil properties, working capital and general limited liability company purposes.
Our obligations under the reserve-based credit facility are secured by
substantially all of our assets.




At our
election, interest is determined by reference to:




·
            the
      London interbank offered rate, or LIBOR, plus an applicable margin between
      1.00% and 1.75% per annum; or





·
            a
      domestic bank rate plus an applicable margin between 0.00% and 0.75% per
      annum.




Interest
is generally payable quarterly for domestic bank rate loans and at the
applicable maturity date for LIBOR loans, but not less frequently than
quarterly.




The
reserve-based credit facility contains various covenants that limit our ability
to:




·
            incur
      indebtedness;




·
            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, accretion, 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;




25




·
            consolidated
      current assets, including the unused amount of the total commitments, to
      consolidated current liabilities of not less than 1.0 to 1.0, excluding
      non-cash assets and liabilities under SFAS No. 133, which includes the
      current portion of derivative
contracts;




·
            consolidated
      debt to consolidated net income plus interest expense, income taxes,
      depreciation, depletion, amortization, changes in fair value of derivative
      instruments and other similar charges, minus all non-cash income added to
      consolidated net income, and giving pro forma effect to any acquisitions
      or capital expenditures of not more than 4.0 to
  1.0.





We
have the ability to borrow under the reserve-based credit facility to pay
distributions to unitholders as long as there has not been a default or event of
default and if the amount of borrowings outstanding under our reserve-based
credit facility is less than 90% of the borrowing base.





We
believe that we are in compliance with the terms of our reserve-based credit
facility. If an event of default exists under the reserve-based credit
agreement, the lenders will be able to accelerate the maturity of the credit
agreement and exercise other rights and remedies. Each of the following will be
an event of default:




·
            failure
      to pay any principal when due or any interest, fees or other amount within
      certain grace periods;




·
            a
      representation or warranty is proven to be incorrect when
      made;





·
            failure
      to perform or otherwise comply with the covenants in the credit agreement
      or other loan documents, subject, in certain instances, to certain grace
      periods;





·
            default
      by us on the payment of any other indebtedness in excess of $2.0 million,
      or any event occurs that permits or causes the acceleration of the
      indebtedness;





·
            bankruptcy
      or insolvency events involving us or our
  subsidiaries;





·
            the
      entry of, and failure to pay, one or more adverse judgments in excess of
      $1.0 million or one or more non-monetary judgments that could reasonably
      be expected to have a material adverse effect and for which enforcement
      proceedings are brought or that are not stayed pending
    appeal;





·
            specified
      events relating to our employee benefit plans that could reasonably be
      expected to result in liabilities in excess of $1.0 million in any year;
      and





·
            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.




26




Off-Balance
Sheet Arrangements




At March
31, 2008, the Company did not have any off-balance sheet arrangements that have,
or are reasonably likely to have, a material effect on our financial position or
results of operations.




Contingencies




The
Company regularly analyzes current information and accrues for probable
liabilities on the disposition of certain matters, as necessary. Liabilities for
loss contingencies arising from claims, assessments, litigation and other
sources are recorded when it is probable that a liability has been incurred and
the amount can be reasonably estimated. As of March 31, 2008, there were no loss
contingencies.




Commitments
and Contractual Obligations




A summary
of our contractual obligations as of March 31, 2008 is provided in the following
table:




Payments Due by Year (in thousands)2008
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2011
                        
                        
                        2012
                        
                        
                        After 2012
                        
                        
                        TotalManagement
      compensation
                        
                        $
                        450
                        
                        
                        $
                        600
                        
                        
                        $
                        100
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        1,150Asset
      retirement obligations
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        164
                        
                        
                        
                        8
                        
                        
                        
                        1,292
                        
                        
                        
                        1,464Derivative
      liabilities
                        
                        
                        6,307
                        
                        
                        
                        6,325
                        
                        
                        
                        7,619
                        
                        
                        
                        4,888
                        
                        
                        
                        1,704
                        
                        
                        
                        —
                        
                        
                        
                        26,843Long-term
      debt (1)
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        102,500
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        102,500Operating
      leases
                        
                        
                        30
                        
                        
                        
                        41
                        
                        
                        
                        10
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        81Total
                        
                        $
                        6,787
                        
                        
                        $
                        6,966
                        
                        
                        $
                        7,729
                        
                        
                        $
                        107,552
                        
                        
                        $
                        1,712
                        
                        
                        $
                        1,292
                        
                        
                        $
                        132,038




(1)
            This
      table does not include interest to be paid on the principal balances shown
      as the interest rates on the reserve-based credit facility are
      variable.





Non-GAAP
Financial Measure





Adjusted
EBITDA





We define
Adjusted EBITDA as net income (loss) plus:





•
                    Net
      interest expense (including write-off of deferred financing
      fees);





•
                Loss
      on extinguishment of
debt;





•
              Depreciation,
      depletion and amortization (including accretion of asset retirement
      obligations);





•
              Bad
      debt expenses;





•
              Amortization
      of premiums prepaid on derivative
contracts;





•
              Unrealized
      gains and losses on commodity and interest rate derivative
      contracts;





•
              Unit-based
      compensation expense; and





•
              Realized
      gains and losses on cancelled
derivatives.


27




Adjusted
EBITDA is a significant performance metric used by our management to measure
(prior to the establishment of any cash reserves by our board of directors) the
cash distributions we could pay our unitholders. Specifically, this financial
measure indicates to investors whether or not we are generating cash flow at a
level that can sustain or support an increase in our quarterly distribution
rates. Adjusted EBITDA is also a quantitative standard used throughout the
investment community with respect to publicly-traded partnerships and limited
liability companies.




Our
EBITDA should not be considered as an alternative to net income, operating
income, cash flow from operating activities or any other measure of financial
performance or liquidity presented in accordance with GAAP. Our Adjusted EBITDA
excludes some, but not all, items that affect net income and operating income
and these measures may vary among other companies. Therefore, our Adjusted
EBITDA may not be comparable to similarly titled measures of other
companies.




For the
three months ended March 31, 2008 as compared to the three months ended March
31, 2007, Adjusted EBITDA increased 51%, from $6.9 million to $10.4 million. The
following table presents a reconciliation of consolidated net income to adjusted
EBITDA:




Three Months Ended
                          March 31,2008
                        
                        
                        2007Net loss
                        
                        $
                        (15,932,236
                        )
                        
                        $
                        (1,625,749
                        )Plus:Interest
      expense
                        
                        
                        1,129,660
                        
                        
                        
                        2,223,123Loss
      on extinguishment of debt
                        
                        
                        —
                        
                        
                        
                        2,501,528Depreciation,
      depletion, amortization and accretion
                        
                        
                        2,823,978
                        
                        
                        
                        2,028,863Bad
      debt expense
                        
                        
                        —
                        
                        
                        
                        1,007,461Amortization
      of premiums prepaid on derivative contracts
                        
                        
                        1,300,609
                        
                        
                        
                        —Unrealized
      loss on commodity derivative contracts
                        
                        
                        20,209,757
                        
                        
                        
                        —Unit-based
      compensation expense
                        
                        
                        915,346
                        
                        
                        
                        —Realized
      loss on cancelled derivatives
                        
                        
                        —
                        
                        
                        
                        776,633Less:Interest
      income
                        
                        
                        7,614
                        
                        
                        
                        12,967Adjusted
      EBITDA
                        
                        $
                        10,439,500
                        
                        
                        $
                        6,898,892





Item 3. Quantitative and Qualitative
Disclosures About Market Risk





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




Commodity
Price Risk




Our major
market risk exposure is in the pricing applicable to our natural gas and oil
production. Realized pricing is primarily driven by the Columbia Gas Appalachian
Index (“TECO Index”) for natural gas production and West Texas Intermediate
light sweet for oil. Pricing for natural gas production has been volatile and
unpredictable for several years, and we expect this volatility to continue in
the future. The prices we receive for production depend on many factors outside
our control. In addition, the potential exists that if commodity prices decline
to a certain level, the borrowing base can be decreased at the borrowing base
determination date to an amount lower than the amount of debt currently
outstanding.




28





We enter
into derivative contracts with respect to a portion of our projected natural gas
and oil production through various transactions that hedge the future prices
received. These transactions may include price swaps whereby we will receive a
fixed-price for our production and pay a variable market price to the contract
counterparty. Additionally, we have put options for which we pay the
counterparty the fair value at the purchase date. At the settlement date we
receive the excess, if any, of the fixed floor over the floating rate.
Furthermore, we may enter into collars where we pay the counterparty if the
market price is above the ceiling and the counterparty pays us if the market
price is below the floor on a notional quantity. These hedging activities are
intended to support our realized commodity prices at targeted levels and to
manage our exposure to natural gas and oil price fluctuations. It is never
management’s intention to hold or issue derivative instruments for speculative
trading purposes.




At March
31, 2008, the fair value of commodity derivative contracts that settle during
the next twelve months was a liability of approximately $8.9 million, which we
will owe our counterparties.





The
following table summarizes commodity derivative contracts in place applicable to
periods subsequent to March 31, 2008.




April 1, -
                            September 30,
                            2008
                          
                          
                          October 1, -
                            December 31,
                            2008
                          
                          
                          Year
                            2009
                          
                          
                          Year
                            2010
                          
                          
                          Year
                            2011
                          
                          
                          Year
                            2012Gas
      Positions:Fixed
      Price Swaps:Notional
      Volume (MMBtu)
                          
                          
                          1,504,855
                          
                          
                          
                          713,831
                          
                          
                          
                          2,657,046
                          
                          
                          
                          2,387,640
                          
                          
                          
                          2,196,012
                          
                          
                          
                          —Fixed
      Price ($/MMBtu)
                          
                          $
                          9.00
                          
                          
                          $
                          9.00
                          
                          
                          $
                          8.85
                          
                          
                          $
                          8.76
                          
                          
                          $
                          7.15
                          
                          
                          $
                          —Puts:Notional
      Volume (MMBtu)
                          
                          
                          507,709
                          
                          
                          
                          246,920
                          
                          
                          
                          840,139
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Floor
      Price ($/MMBtu)
                          
                          $
                          7.50
                          
                          
                          $
                          7.50
                          
                          
                          $
                          7.50
                          
                          
                          $
                          —
                          
                          
                          $
                          —
                          
                          
                          $
                          —Collars:Notional
      Volume (MMBtu)
                          
                          
                          500,000
                          
                          
                          
                          300,000
                          
                          
                          
                          1,000,000
                          
                          
                          
                          730,000
                          
                          
                          
                          —
                          
                          
                          
                          —Floor
      Price ($/MMBtu)
                          
                          $
                          7.50
                          
                          
                          $
                          7.50
                          
                          
                          $
                          7.50
                          
                          
                          $
                          8.00
                          
                          
                          $
                          —
                          
                          
                          $
                          —Ceiling
      Price ($/MMBtu)
                          
                          $
                          9.00
                          
                          
                          $
                          9.25
                          
                          
                          $
                          9.00
                          
                          
                          $
                          9.30
                          
                          
                          $
                          —
                          
                          
                          $
                          —Total:Notional
      Volume (MMBtu)
                          
                          
                          2,512,564
                          
                          
                          
                          1,260,751
                          
                          
                          
                          4,497,185
                          
                          
                          
                          3,117,640
                          
                          
                          
                          2,196,012
                          
                          
                          
                          —Oil
      Positions:Fixed
      Price Swaps:Notional
      Volume (Bbls)
                          
                          
                          100,000
                          
                          
                          
                          48,000
                          
                          
                          
                          181,500
                          
                          
                          
                          164,250
                          
                          
                          
                          151,250
                          
                          
                          
                          144,000Fixed
      Price ($/Bbl)
                          
                          $
                          90.30
                          
                          
                          $
                          90.30
                          
                          
                          $
                          87.23
                          
                          
                          $
                          85.65
                          
                          
                          $
                          85.50
                          
                          
                          $
                          80.00





29





Interest
Rate Risks





At March
31, 2008, we had debt outstanding of $102.5 million, which incurred interest at
floating rates based on LIBOR in accordance with our reserve-based credit
facility and if the debt remains the same, a 1% increase in LIBOR would result
in an estimated $0.4 million increase in annual interest expense after
consideration of the interest hedges discussed below. In December 2007 and
during the three months ended March 31, 2008, we entered into interest rate
swaps, which require exchanges of cash flows that serve to synthetically convert
a portion of our variable interest rate exposures to fixed interest
rates.





The
following summarizes information concerning our positions in open interest rate
swaps applicable to periods subsequent to


March 31,
2008.





Principal
                            Balance
                          
                          
                          Fixed
                            Libor
                            RatesPeriod:April
      1, 2008 to December 10, 2010
                          
                          $
                          20,000,000
                          
                          
                          
                          3.88
                          %April
      1, 2008 to January 31, 2011
                          
                          $
                          30,000,000
                          
                          
                          
                          3.00
                          %April
      1, 2008 to March 31, 2011
                          
                          $
                          10,000,000
                          
                          
                          
                          2.66
                          %




Item 4.  Controls
and Procedures




Evaluation
of Disclosure Controls and Procedures




Our
management has established and maintains a system of disclosure controls and
procedures to provide reasonable assurances that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.




As part
of the preparation of our financial statements for the quarters ended March 31,
2008 and June 30, 2008, we undertook a review of our accounting for natural gas
and oil and interest rate derivatives. We use derivative instruments as a means
of reducing financial exposure to fluctuating natural gas and oil prices and
interest rates. We included changes from period to period in the fair value of
derivatives classified as cash flow hedges (“Hedges”) as increases or decreases
to Accumulated Other Comprehensive Income (“AOCI”) as allowed by Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“FAS 133”). This Hedge accounting
treatment is allowed for certain derivatives, including the types of derivatives
used by us to reduce exposure to changes in natural gas and oil prices
associated with the sale of natural gas and oil production and fluctuations in
interest rates. In order to qualify for Hedge accounting treatment, specific
standards and documentation requirements must be met. We believed that we met
those requirements and that our derivative accounting treatment was permitted
under FAS 133. However, in connection with preparing our quarterly report for
third quarter of 2008 and discussion with BDO Seidman, LLP, the Company’s new
independent registered public accounting firm, we determined that our commodity
derivative instruments did not qualify for Hedge accounting treatment under FAS
133 in 2008. Specifically, we determined that the formal hedge documentation
lacked specificity of the hedged cash flow and the quantitative subsequent
assessments for ineffectiveness were insufficient.  Therefore, the
cash flow designations failed to meet hedge documentation requirements for cash
flow hedge accounting treatment for commodity derivative contracts entered into
during periods subsequent to December 31, 2007; and, that accounting for
commodity derivative instruments entered into during periods subsequent to
December 31, 2007 as cash flow Hedges was, therefore,
inappropriate.  In addition, the natural gas derivative swap contracts
entered into in 2007 were de-designated as cash flow hedges in the first quarter
of 2008 due to an overhedged position in natural gas during that quarter which
made them ineffective.  Accordingly, we are restating the consolidated
financial statements for the three months ended March 31, 2008 as reflected in
this Form 10-Q/A which reflects the appropriate changes.  Management
has concluded, based on the circumstances involving the restatement of the
aforementioned financial statements that since March 31, 2008, a material
weakness in internal control over financial reporting has existed with respect
to the design of the Company’s controls over the proper recording and disclosure
of derivative instruments in accordance with FAS 133.




30





We
carried out an evaluation in accordance with Exchange Act Rules 13a-15
under the supervision and with the participation of management, including our
Chief Executive Officer and our Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, due to the aforementioned material weakness,
our disclosure controls and procedures were not effective as of March 31,
2008.  The Company is evaluating the necessary changes in control
procedures required to remediate this material weakness such that the Company’s
internal controls over financial reporting will be effective at the reasonable
assurance level at December 31, 2008.




Changes
in Internal Control over Financial Reporting




The
following items that occurred subsequent to December 31, 2007 have affected our
internal control over financial reporting:





(1)
            Permian
      Basin acquisition - On January 31, 2008, we completed the acquisition of
      certain oil and gas properties in the Permian Basin of West Texas and
      Southeastern New Mexico. Pursuant to this transaction, we have outsourced
      our production accounting for the Permian Basin properties to a third
      party and have begun operating our own wells. As a result, we are
      implementing new processes and modifying existing processes to ensure
      adequate internal controls over financial
  reporting.





(2)
            Restatement
      of 2007 Annual Report on Form 10-K - By error we calculated the earnings
      per unit for the year ended December 31, 2007 using the common units
      outstanding as of that date instead of the weighted average units for the
      year. The Company has restated the weighted average common units and Class
      B units outstanding and earnings per unit. In addition, in the unaudited
      Supplemental Selected Quarterly Financial Information, we have corrected a
      rounding error in the “Quarter Ended December 31” basic and diluted Net
      income (loss) per Common & Class B unit. We do not believe this error
      represents a material weakness in our internal controls; however, we are
      implementing new processes to verify the accuracy of computed numbers
      within the financial statements.




31





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




Our
business faces many risks. Any of the risks discussed below or elsewhere in this
Form 10-Q/A or our other SEC filings, could have a material impact on our
business, financial position or results of operations. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial may also impair our business operations. For a detailed discussion of
the risk factors that should be understood by any investor contemplating
investment in our units, please refer to the section entitled “Item 1A. Risk
Factors” in our Annual Report on Form 10-K/A for the year ended December 31,
2007 as supplemented by the risk factors set forth below. There has been no
material change in the risk factors set forth in our Annual Report on Form
10-K/A for the year ended December 31, 2007 other than those set forth below.
For further information, see Part I, Item 1A, Risk Factors in our Annual Report
on Form 10-K/A for the year ended December 31, 2007.





Crude
oil and natural gas prices are volatile.  A decline in crude oil and
natural gas prices could adversely affect our financial position, financial
results, cash flow, access to capital and ability to grow.





Our
future financial condition, revenues, results of operations, rate of growth and
the carrying value of our oil and gas properties depend primarily upon the
prices we receive for our crude oil and natural gas production and the prices
prevailing from time to time for crude oil and natural gas.  Crude oil
and natural gas prices historically have been volatile and are likely to
continue to be volatile in the future, especially given current geopolitical
conditions.  This price volatility also affects the amount of our cash
flow we have available for capital expenditures and our ability to borrow money
or raise additional capital.  The prices for crude oil and natural gas
are subject to a variety of factors, including:





·
            the
      level of consumer demand for crude oil and natural
  gas;





·
            the
      domestic and foreign supply of crude oil and natural
  gas;





·
            Commodity
      processing, gathering and transportation availability, and the
      availability of refining capacity;





·
            the
      price and level of imports of foreign crude oil and natural
      gas;





·
            the
      ability of the members of the Organization of Petroleum Exporting
      Countries to agree to maintain crude oil price and production
      controls;





·
            domestic
      and foreign governmental regulations and
taxes;





·
            the
      price and availability of alternative fuel
  sources;





·
            weather
      conditions;





·
            political
      conditions or hostilities in oil and gas producing regions, including the
      Middle East, Africa and South
America;





·
            technological
      advances affecting energy consumption;
and





·
            worldwide
      economic conditions.





Declines
in crude oil and natural gas prices would not only reduce our revenue, but could
reduce the amount of crude oil and natural gas that we can produce economically
and, as a result, could have a material adverse effect on our financial
condition, results of operations and reserves.  If the oil and gas
industry experiences significant price declines, we may, among other things, be
unable to maintain or increase our borrowing capacity, repay current or future
indebtedness or obtain additional capital on attractive terms, all of which can
affect the value of our units.





32





We
may not have sufficient cash from operations to pay quarterly distributions on
our common units following establishment of cash reserves and payment of
operating costs.




We may
not have sufficient cash flow from operations each quarter to pay
distributions.  Under the terms of our limited liability company
agreement, the amount of cash otherwise available for distribution will be
reduced by our operating expenses and the amount of any cash reserve amounts
that our board of directors establishes to provide for future operations, future
capital expenditures, future debt service requirements and future cash
distributions to our unitholders. The amount of cash we can distribute on our
common units principally depends upon the amount of cash we generate from our
operations, which will fluctuate from quarter to quarter based on, among other
things:




·
            the
      amount of natural gas and oil we
produce;




·
            the
      price at which we are able to sell our natural gas and oil
      production;




·
            the
      level of our operating costs;




·
            the
      level of our interest expense which depends on the amount of our
      indebtedness and the interest payable thereon;
  and




·
            the
      level of our capital expenditures.




In
addition, the actual amount of cash we will have available for distribution will
depend on other factors, some of which are beyond our control,
including:




·
            the
      level of our capital expenditures;




·
            our
      ability to make working capital borrowings under our credit facility to
      pay distributions;




·
            the
      cost of acquisitions, if any;




·
            our
      debt service requirements;




·
            fluctuations
      in our working capital needs;




·
            timing
      and collectibility of receivables;




·
            restrictions
      on distributions contained in our credit
  facility;




·
            prevailing
      economic conditions; and




·
            the
      amount of cash reserves established by our board of directors for the
      proper conduct of our business.




As a
result of these factors, the amount of cash we distribute in any quarter to our
unitholders may fluctuate significantly from quarter to quarter.





We
may not be able to obtain funding, obtain funding on acceptable terms or obtain
funding under our current credit facility because of the deterioration of the
credit and capital markets. This may hinder or prevent us from meeting our
future capital needs.





Global
financial markets and economic conditions have been, and continue to be,
disrupted and volatile. The debt and equity capital markets have been
exceedingly distressed. These issues, along with significant write-offs in the
financial services sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make, it difficult to
obtain funding.





In
particular, the cost of raising money in the debt and equity capital markets has
increased substantially while the availability of funds from those markets
generally has diminished significantly. Also, as a result of concerns about the
stability of financial markets generally and the solvency of counterparties
specifically, the cost of obtaining money from the credit markets generally has
increased as many lenders and institutional investors have increased interest
rates, enacted tighter lending standards, refused to refinance existing debt at
maturity at all or on terms similar to our current debt and reduced and, in some
cases, ceased to provide funding to borrowers.




33





In
addition, we may be unable to obtain adequate funding under our current credit
facility because our lending counterparties may be unwilling or unable to meet
their funding obligations.





Due to
these factors, we cannot be certain that funding will be available if needed and
to the extent required, on acceptable terms. If funding is not available when
needed, or is available only on unfavorable terms, we may be unable to grow our
existing business, complete acquisitions or otherwise take advantage of business
opportunities or respond to competitive pressures any of which could have a
material adverse effect on our revenues and results of operations.





Growing
the Company will require significant amounts of debt and equity financing which
may not be available to us on acceptable terms, or at all.





We plan
to fund our growth through acquisitions with proceeds from sales of our debt and
equity securities and borrowings under our reserve-based credit facility;
however, we cannot be certain that we will be able to issue our debt and equity
securities on terms or in the proportions that we expect, or at all, and we may
be unable refinance our reserve-based credit facility when it
expires.   In addition, we may be unable to obtain adequate
funding under our current reserve-based credit facility because our lending
counterparties may be unwilling or unable to meet their funding
obligations.





Global
financial markets and economic conditions have been, and continue to be,
disrupted and volatile. The debt and equity capital markets have been
exceedingly distressed. These issues, along with significant write-offs in the
financial services sector, the re-pricing of credit risk and the current weak
economic conditions have made, and will likely continue to make, it difficult to
obtain funding.





The cost
of raising money in the debt and equity capital markets has increased
substantially while the availability of funds from those markets generally has
diminished significantly. Also, as a result of concerns about the stability of
financial markets generally and the solvency of counterparties specifically, the
cost of obtaining money from the credit markets generally has increased as many
lenders and institutional investors have increased interest rates, enacted
tighter lending standards, refused to refinance existing debt at maturity at all
or on terms similar to our current debt and reduced and, in some cases, ceased
to provide funding to borrowers.





A
significant increase in our indebtedness, or an increase in our indebtedness
that is proportionately greater than our issuances of equity, as well as the
credit market and debt and equity capital market conditions discussed above
could negatively impact our ability to remain in compliance with the financial
covenants under our reserve-based credit facility which could have a material
adverse effect on our financial condition, results of operations and cash flows.
If we are unable to finance our growth as expected, we could be required to seek
alternative financing, the terms of which may not be attractive to us, or not
purse growth opportunities.





We
are exposed to trade credit risk in the ordinary course of our business
activities.





We are
exposed to risks of loss in the event of nonperformance by our vendors,
customers and by counterparties to our hedging arrangements. Some of our
vendors, customers and counterparties may be highly leveraged and subject to
their own operating and regulatory risks. Many of our vendors, customers and
counterparties finance their activities through cash flow from operations, the
incurrence of debt or the issuance of equity. Recently, there has been a
significant decline in the credit markets and the availability of credit.
Additionally, many of our vendors’, customers’ and counterparties' equity values
have substantially declined.  The combination of reduction of cash
flow resulting from declines in commodity prices and the lack of availability of
debt or equity financing may result in a significant reduction in our vendors’,
customers’ and counterparties' liquidity and ability to make payments or perform
on their obligations to us.  Even if our credit review and analysis
mechanisms work properly, we may experience financial losses in our dealings
with other parties. Any increase in the nonpayment or nonperformance by our
vendors, customers and/or counterparties could reduce our ability to make
distributions to our unitholders.




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




During
the three months ended March 31, 2008, one of our wholly-owned subsidiaries
purchased 15,300 of our common units on the open market at the then
prevailing market price. 15,000 of these units were subsequently granted
to three of our independent directors, with Loren Singletary, John R.
McGoldrick and Bruce W. McCullough each receiving 5,000 units. The grants
were made by our Board of Directors upon the appointment of these independent
directors on February 28, 2008. The following table summarizes the unit
purchases that occurred during the three months ended March 31,
2008:





34




Period
                        
                        Number of common
                          units repurchased
                        
                        
                        Weighted average
                          price paid per
                          common unitJanuary
      1, 2008 to January 31, 2008
                        
                        
                        5,000
                        
                        
                        $
                        14.50February
      1, 2008 to February 29, 2008
                        
                        
                        10,000
                        
                        
                        $
                        16.28March
      1, 2008 to March 31, 2008
                        
                        
                        300
                        
                        
                        $
                        14.70Total
      common units purchased
                        
                        
                        15,300
                        
                        
                        $
                        15.67




Item 3.  Defaults Upon
Senior Securities




None.




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




None.





Item 5.  Other
Information




None.




Item 6. 
Exhibits




EXHIBIT
INDEX


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





Exhibit
                  No.
                
                Exhibit Title
                
                Incorporated by Reference to the
      Following3.1
                
                Certificate
      of Formation of Vanguard Natural Resources, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)3.2
                
                Second
      Amended and Restated Limited Liability Company Agreement of Vanguard
      Natural Resources, LLC (including specimen unit certificate for the
      units)
                
                Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.1
                
                Amended
      and Restated Credit Agreement, dated February 14, 2008, by and between
      Nami Holding Company, LLC, Citibank, N.A., as administrative agent and L/C
      issuer and the lenders party thereto
                
                Previously
      filed with our Form 10-K on March 31, 200810.2
                
                Vanguard
      Natural Resources, LLC Long-Term Incentive Plan
                
                Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.3
                
                Form of
      Vanguard Natural Resources, LLC Long-Term Incentive Plan Phantom Options
      Grant Agreement
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.4
                
                Vanguard
      Natural Resources, LLC Class B Unit Plan
                
                Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.5
                
                Form of
      Vanguard Natural Resources, LLC Class B Unit Plan Restricted
      Class B Unit Grant
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.6
                
                Management
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC, Trust Energy Company,
      LLC and Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.7
                
                Participation
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Eastern, LLC, Vanguard Natural Gas, LLC, Trust Energy Company, LLC and
      Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.8
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.9
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Trust Energy Company
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.10
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC and Nami Resources Company,
      L.L.C.
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.11
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Ariana Energy,
      LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.12
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Trust Energy
      Company, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No.
  333-142363)  35
  10.13
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC and Nami Resources Company, L.L.C.
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.14
                
                Amended
      and Restated Operating Agreement by and between Vinland Energy Operations,
      LLC, Vinland Energy Eastern, LLC and Ariana Energy, LLC, dated October 2,
      2007 and effective as of January 5, 2007
                
                Form
      S-1/A, filed October 22, 2007 (File No. 333-142363)10.15
                
                Operating
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Operations, LLC, Vinland Energy Eastern, LLC and Trust Energy Company,
      LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.16
                
                Amended
      and Restated Indemnity Agreement by and between Nami Resources Company,
      L.L.C., Vinland Energy Eastern, LLC, Trust Energy Company, LLC, Vanguard
      Natural Gas, LLC and Vanguard Natural Resources, LLC, dated September 11,
      2007
                
                Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.17
                
                Revenue
      Payment Agreement by and between Nami Resources Company, L.L.C. and Trust
      Energy Company, dated April 18, 2007 and effective as of January 5,
      2007
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.18
                
                Gas
      Supply Agreement, dated April 18, 2007, by and between Nami Resources
      Company, L.L.C. and Trust Energy Company
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.19
                
                Amended
      Employment Agreement, dated April 18, 2007, by and between Scott W.
      Smith, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.20
                
                Amended
      Employment Agreement, dated April 18, 2007, by and between Richard A.
      Robert, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.21
                
                Registration
      Rights Agreement, dated April 18, 2007, between Vanguard Natural
      Resources, LLC and the private investors named therein
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.22
                
                Purchase
      Agreement, dated April 18, 2007, between Vanguard Natural Resources,
      LLC, Majeed S. Nami and the private investors named
therein
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.23
                
                Omnibus
      Agreement, dated October 29, 2007, among Majeed S. Nami, Vanguard Natural
      Resources, LLC, Vanguard Natural Gas, LLC, Ariana Energy, LLC and Trust
      Energy Company, LLC.
                
                Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.24
                
                Employment
      Agreement, dated May 15, 2007, by and between Britt Pence, VNR Holdings,
      LLC and Vanguard Natural Resources, LLC
                
                Form
      S-1/A, filed July 5, 2007 (File No. 333-142363)10.25
                
                Natural
      Gas Contract, dated May 26, 2003, between Nami Resources Company,
      Inc. and Osram Sylvania Products, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.26
                
                Natural
      Gas Purchase Contract, dated December 16, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.27
                
                Natural
      Gas Purchase Contract, dated December 28, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.28
                
                Director
      Compensation Agreement
                
                Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.29
                
                Purchase
      and Sale Agreement, dated December 21, 2007, among Vanguard Permian, LLC
      and Apache Corporation
                
                Form
      8-K/A, filed February 13, 2008 (File No. 001-33756)10.30
                
                Amended
      Purchase and Sale Agreement, dated January 31, 2008, among Vanguard
      Permian, LLC and Apache Corporation
                
                Form
      8-K/A, filed February 4, 2008 (File No. 001-33756)31.1
                
                Certification
      of Chief Executive Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                
                Filed
      herewith31.2
                
                Certification
      of Chief Financial Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                
                Filed
      herewith32.1
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                
                Filed
      herewith32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                
                Filed
      herewith




36





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 19, 2008/s/ Richard A.
  RobertRichard
      A. RobertExecutive
      Vice President andChief
      Financial Officer(Principal
      Financial Officer and Principal Accounting
  Officer)




37




Vanguard
Natural Resources, LLC


EXHIBIT
INDEX


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





Exhibit
                  No.
                
                Exhibit Title
                
                Incorporated by Reference to the
      Following3.1
                
                Certificate
      of Formation of Vanguard Natural Resources, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)3.2
                
                Second
      Amended and Restated Limited Liability Company Agreement of Vanguard
      Natural Resources, LLC (including specimen unit certificate for the
      units)
                
                Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.1
                
                Amended
      and Restated Credit Agreement, dated February 14, 2008, by and between
      Nami Holding Company, LLC, Citibank, N.A., as administrative agent and L/C
      issuer and the lenders party thereto
                
                Previously
      filed with our Form 10-K on March 31, 200810.2
                
                Vanguard
      Natural Resources, LLC Long-Term Incentive Plan
                
                Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.3
                
                Form of
      Vanguard Natural Resources, LLC Long-Term Incentive Plan Phantom Options
      Grant Agreement
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.4
                
                Vanguard
      Natural Resources, LLC Class B Unit Plan
                
                Form
      8-K, filed October 24, 2007 (File No. 001-33756)10.5
                
                Form of
      Vanguard Natural Resources, LLC Class B Unit Plan Restricted
      Class B Unit Grant
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.6
                
                Management
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC, Trust Energy Company,
      LLC and Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.7
                
                Participation
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Eastern, LLC, Vanguard Natural Gas, LLC, Trust Energy Company, LLC and
      Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.8
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Ariana Energy, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.9
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC, Vinland Energy Eastern, LLC, Vanguard
      Natural Gas, LLC and Trust Energy Company
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.10
                
                Gathering
      and Compression Agreement, effective January 5, 2007, by and between
      Vinland Energy Gathering, LLC and Nami Resources Company,
      L.L.C.
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.11
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Ariana Energy,
      LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.12
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC, Vanguard Natural Gas, LLC and Trust Energy
      Company, LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.13
                
                Well
      Services Agreement, effective January 5, 2007, by and between Vinland
      Energy Operations, LLC and Nami Resources Company, L.L.C.
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.14
                
                Amended
      and Restated Operating Agreement by and between Vinland Energy Operations,
      LLC, Vinland Energy Eastern, LLC and Ariana Energy, LLC, dated October 2,
      2007 and effective as of January 5, 2007
                
                Form
      S-1/A, filed October 22, 2007 (File No. 333-142363)10.15
                
                Operating
      Agreement, effective January 5, 2007, by and between Vinland Energy
      Operations, LLC, Vinland Energy Eastern, LLC and Trust Energy Company,
      LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.16
                
                Amended
      and Restated Indemnity Agreement by and between Nami Resources Company,
      L.L.C., Vinland Energy Eastern, LLC, Trust Energy Company, LLC, Vanguard
      Natural Gas, LLC and Vanguard Natural Resources, LLC, dated September 11,
      2007
                
                Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.17
                
                Revenue
      Payment Agreement by and between Nami Resources Company, L.L.C. and Trust
      Energy Company, dated April 18, 2007 and effective as of January 5,
      2007
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.18
                
                Gas
      Supply Agreement, dated April 18, 2007, by and between Nami Resources
      Company, L.L.C. and Trust Energy Company
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.19
                
                Amended
      Employment Agreement, dated April 18, 2007, by and between Scott W.
      Smith, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.20
                
                Amended
      Employment Agreement, dated April 18, 2007, by and between Richard A.
      Robert, VNR Holdings, LLC and Vanguard Natural Resources,
    LLC
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.21
                
                Registration
      Rights Agreement, dated April 18, 2007, between Vanguard Natural
      Resources, LLC and the private investors named therein
                
                Form
      S-1/A, filed April 25, 2007 (File No.
  333-142363)  38
  10.22
                
                Purchase
      Agreement, dated April 18, 2007, between Vanguard Natural Resources,
      LLC, Majeed S. Nami and the private investors named
therein
                
                Form
      S-1/A, filed April 25, 2007 (File No. 333-142363)10.23
                
                Omnibus
      Agreement, dated October 29, 2007, among Majeed S. Nami, Vanguard Natural
      Resources, LLC, Vanguard Natural Gas, LLC, Ariana Energy, LLC and Trust
      Energy Company, LLC.
                
                Form
      8-K, filed November 2, 2007 (File No. 001-33756)10.24
                
                Employment
      Agreement, dated May 15, 2007, by and between Britt Pence, VNR Holdings,
      LLC and Vanguard Natural Resources, LLC
                
                Form
      S-1/A, filed July 5, 2007 (File No. 333-142363)10.25
                
                Natural
      Gas Contract, dated May 26, 2003, between Nami Resources Company,
      Inc. and Osram Sylvania Products, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.26
                
                Natural
      Gas Purchase Contract, dated December 16, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.27
                
                Natural
      Gas Purchase Contract, dated December 28, 2004, between Nami
      Resources Company, LLC and Dominion Field Services, Inc.
                
                Form
      S-1/A, filed August 21, 2007 (File No. 333-142363)10.28
                
                Director
      Compensation Agreement
                
                Form
      S-1/A, filed September 18, 2007 (File No. 333-142363)10.29
                
                Purchase
      and Sale Agreement, dated December 21, 2007, among Vanguard Permian, LLC
      and Apache Corporation
                
                Form
      8-K/A, filed February 13, 2008 (File No. 001-33756)10.30
                
                Amended
      Purchase and Sale Agreement, dated January 31, 2008, among Vanguard
      Permian, LLC and Apache Corporation
                
                Form
      8-K/A, filed February 4, 2008 (File No. 001-33756)31.1
                
                Certification
      of Chief Executive Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                
                Filed
      herewith31.2
                
                Certification
      of Chief Financial Officer Pursuant to Rule 13a — 14 of the
      Securities and Exchange Act of 1934, as Adopted Pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002
                
                Filed
      herewith32.1
                
                Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                
                Filed
      herewith32.2
                
                Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
      as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
                
                Filed
      herewith




39