**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C.  20549**




**FORM
      10-Q**




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




**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the quarterly period ended September 30, 2007**




**OR**




**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE**




**SECURITIES
      EXCHANGE ACT OF 1934**




**For
      the transition period
      from                       
to**




**Commission
      file number 1-33249**









**Legacy
      Reserves LP**


(Exact
      name of registrant as specified in its charter)




**Delaware**
            
            **16-1751069**(State
                or other jurisdiction of
              incorporation
                or organization)
            
            (I.R.S.
                Employer
              Identification
                No.)**303
                W. Wall, Suite 1400**
              **Midland,
                Texas**
            
            **79701**(Address
                of principal executive offices)
            
            (Zip
                code)






**(432)
      689-5200**


(Registrant’s
      telephone number, including area code)




Indicate
      by checkmark 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.




x Yes  o  No




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




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






Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). o Yes  x No




29,708,965 units
      representing limited partner interests in the registrant were outstanding as
      of
      November 9, 2007.















**TABLE
      OF CONTENTS**


Page**Glossary
                  of Terms**
              
              
              
              3**Part
                  I - Financial Information**Item
                  1.
              
              Financial
                  Statements.Condensed
                  Consolidated Balance Sheets as of December 31, 2006
                  and September 30, 2007 (Unaudited)
              
              
              
              6Condensed
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  September 30, 2006 and 2007 (Unaudited)
              
              
              
              8Condensed
                  Consolidated Statement of Unitholders' Equity for the nine months
                  ended
                  September 30, 2007 (Unaudited)
              
              
              
              9Condensed
                  Consolidated Statements of Cash Flows for the nine months ended
                  September
                  30, 2006 and 2007 (Unaudited)
              
              
              
              10Notes
                  to Condensed Consolidated Financial Statements (Unaudited)
              
              
              
              12Item
                  2.
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations.
              
              
              
              23Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk.
              
              
              
              33Item
                  4.
              
              Controls
                  and Procedures.
              
              
              
              
              34**Part
                  II - Other Information**Item
                  1.
              
              Legal
                  Proceedings.
              
              
              
              
              34Item
                  1A.
              
              Risk
                  Factors.
              
              
              
              
              34Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
              
              
              
              34Item
                  3.
              
              Defaults
                  Upon Senior Securities.
              
              
              
              35Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders.
              
              
              
              35Item
                  5.
              
              Other
                  Information.
              
              
              
              
              35Item
                  6.
              
              Exhibits.
              
              
              
              
              37






Page
          2




**GLOSSARY
      OF TERMS**




*Bbl.*  One
      stock tank barrel or 42 U.S. gallons liquid volume.




*Bcf.*  Billion
      cubic feet.




*Boe.*  One
      barrel of oil equivalent, determined using a ratio of six Mcf of natural gas
      to
      one Bbl of crude oil, condensate or natural gas liquids.




*Boe/d.*  Barrels
      of oil equivalent per day.




*Btu.*  British
      thermal unit, which is the heat required to raise the temperature of a one-pound
      mass of water from 58.5 to 59.5 degrees Fahrenheit.




*Developed
      acreage.*  The number of acres that are allocated or assignable to
      productive wells or wells capable of production.




*Development
      well.*  A well drilled within the proved area of an oil or natural
      gas reservoir to the depth of a stratigraphic horizon known to be
      productive.




*Dry
      hole or well.*  A well found to be incapable of producing
      hydrocarbons in sufficient quantities such that proceeds from the sale of such
      production would exceed production expenses and taxes.




*Exploitation.*  A
      drilling or other project which may target proven or unproven reserves (such
      as
      probable or possible reserves), but which generally has a lower risk than that
      associated with exploration projects.




*Field.*  An
      area consisting of a single reservoir or multiple reservoirs all grouped on
      or
      related to the same individual geological structural feature and/or
      stratigraphic condition.




*Gross
      acres or gross wells.*  The total acres or wells, as the case may
      be, in which a working interest is owned.




*MBbls.*  One
      thousand barrels of crude oil or other liquid hydrocarbons.




*MBoe.*  One
      thousand barrels of crude oil equivalent, using a ratio of six Mcf of natural
      gas to one Bbl of crude oil, condensate or natural gas liquids.




*Mcf.*  One
      thousand cubic feet.




*MMBbls.*  One
      million barrels of crude oil or other liquid hydrocarbons.




*MMBoe.*  One
      million barrels of crude oil equivalent, using a ratio of six Mcf of natural
      gas
      to one Bbl of crude oil, condensate or natural gas liquids.




*MMBtu.*  One
      million British thermal units.




*MMcf.*  One
      million cubic feet.




*Net
      acres or net wells.*  The sum of the fractional working interests
      owned in gross acres or gross wells, as the case may be.




*NGLs
      or natural gas liquids.*  The combination of ethane, propane,
      butane and natural gasolines that when removed from natural gas become liquid
      under various levels of higher pressure and lower temperature.




*NYMEX.*  New
      York Mercantile Exchange.




Page
          3




*Oil.*  Crude
      oil, condensate and natural gas liquids.




*Productive
      well.*  A well that is found to be capable of producing
      hydrocarbons in sufficient quantities such that proceeds from the sale of such
      production exceeds production expenses and taxes.




*Proved
      developed reserves.*  Reserves that can be expected to be
      recovered through existing wells with existing equipment and operating methods.
      Additional oil and natural gas expected to be obtained through the application
      of fluid injection or other improved recovery techniques for supplementing
      the
      natural forces and mechanisms of primary recovery are included in “proved
      developed reserves” only after testing by a pilot project or after the operation
      of an installed program has confirmed through production response that increased
      recovery will be achieved.




*Proved
      developed non-producing or PDN’s.*  Proved oil and natural gas
      reserves that are developed behind pipe, shut-in or can be recovered through
      improved recovery only after the necessary equipment has been installed, or
      when
      the costs to do so are relatively minor. Shut-in reserves are expected to be
      recovered from (1) completion intervals which are open at the time of the
      estimate but which have not started producing, (2) wells that were shut-in
      for market conditions or pipeline connections, or (3) wells not capable of
      production for mechanical reasons. Behind-pipe reserves are expected to be
      recovered from zones in existing wells that will require additional completion
      work or future recompletion prior to the start of production.




*Proved
      reserves.*  Proved oil and natural gas reserves are the estimated
      quantities of natural gas, crude oil and natural gas liquids that geological
      and
      engineering data demonstrates with reasonable certainty to be recoverable in
      future years from known reservoirs under existing economic and operating
      conditions, i.e., prices and costs as of the date the estimate is made. Prices
      include consideration of changes in existing prices provided only by contractual
      arrangements, but not on escalations based on future conditions.




*Proved
      undeveloped drilling location.*  A site on which a development
      well can be drilled consistent with spacing rules for purposes of recovering
      proved undeveloped reserves.




*Proved
      undeveloped reserves or PUDs.*  Proved oil and natural gas
      reserves that are expected to be recovered from new wells on undrilled acreage
      or from existing wells where a relatively major expenditure is required for
      recompletion. Reserves on undrilled acreage shall be limited to those drilling
      units offsetting productive units that are reasonably certain of production
      when
      drilled. Proved reserves for other undrilled units can be claimed only where
      it
      can be demonstrated with certainty that there is continuity of production from
      the existing productive formation. Under no circumstances should estimates
      for
      proved undeveloped reserves be attributable to any acreage for which an
      application of fluid injection or other improved recovery technique is
      contemplated, unless such techniques have been proved effective by actual tests
      in the area and in the same reservoir.




*Recompletion.*  The
      completion for production of an existing wellbore in another formation from
      that
      which the well has been previously completed.




*Reserve
      acquisition cost.*  The total consideration paid for an oil and
      natural gas property or set of properties, which includes the cash purchase
      price and any value ascribed to units issued to a seller adjusted for any
      post-closing items.




*R/P
      ratio (reserve life).*  The reserves as of the end of a period
      divided by the production volumes for the same period.




*Reserve
      replacement.*  The replacement of oil and natural gas produced
      with reserve additions from acquisitions, reserve additions and reserve
      revisions.




*Reserve
      replacement cost.*  An amount per Boe equal to the sum of costs
      incurred relating to oil and natural gas property acquisition, exploitation,
      development and exploration activities (as reflected in our year-end financial
      statements for the relevant year) divided by the sum of all additions and
      revisions to estimated proved reserves, including reserve purchases. The
      calculation of reserve additions for each year is based upon the reserve report
      of our independent engineers. Management uses reserve replacement cost to
      compare our company to others in terms of our historical ability to increase
      our
      reserve base in an economic manner. However, past performance does not
      necessarily reflect future reserve replacement cost performance. For example,
      increases in oil and natural gas prices in recent years have increased the
      economic life of reserves adding additional reserves with no required capital
      expenditures. On the other hand, increases in oil and natural gas prices
      have




Page
          4




increased
      the cost of reserve purchases and reserves added through exploitation. The
      reserve replacement cost may not be indicative of the economic value added
      of
      the reserves due to differing lease operating expenses per barrel and differing
      timing of production.





*Reservoir.*  A
      porous and permeable underground formation containing a natural accumulation
      of
      producible oil and/or natural gas that is confined by impermeable rock or water
      barriers and is individual and separate from other reserves.




*Standardized
      measure.*  The present value of estimated future net revenues to
      be generated from the production of proved reserves, determined in accordance
      with assumptions required by the Financial Accounting Standards Board and the
      Securities and Exchange Commission (using prices and costs in effect as of
      the
      period end date) without giving effect to non-property related expenses such
      as
      general and administrative expenses, debt service and future income tax expenses
      or to depreciation, depletion and amortization and discounted using an annual
      discount rate of 10%. Because we are a limited partnership that allocates our
      taxable income to our unitholders, no provisions for federal or state income
      taxes have been provided for in the calculation of standardized measure.
      Standardized measure does not give effect to derivative
      transactions.




*Undeveloped
      acreage.*  Lease acreage on which wells have not been drilled or
      completed to a point that would permit the production of commercial quantities
      of oil and natural gas regardless of whether such acreage contains proved
      reserves.




*Working
      interest.*  The operating interest that gives the owner the right
      to drill, produce and conduct operating activities on the property and a share
      of production.




*Workover.*  Operations
      on a producing well to restore or increase production.




Page
          5




**Part
      I – FINANCIAL INFORMATION**




**Item
      1.  Financial Statements.**





**LEGACY
                                  RESERVES LP****CONDENSED
                                  CONSOLIDATED BALANCE SHEETS****(UNAUDITED)****ASSETS****December
                                  31,**
                              
                              
                              **September
                                  30,****2006**
                              
                              
                              **2007**Current
                                  assets:Cash
                                  and cash equivalents
                              
                              $
                              1,061,852
                              
                              
                              $
                              4,358,522Accounts
                                  receivable, net:Oil
                                  and natural gas
                              
                              
                              7,599,915
                              
                              
                              
                              12,596,594Joint
                                  interest owners
                              
                              
                              4,345,334
                              
                              
                              
                              3,650,636Affiliated
                                  entities and other (Note 4)
                              
                              
                              21,336
                              
                              
                              
                              9,907Fair
                                  value of derivatives (Note 6)
                              
                              
                              5,102,083
                              
                              
                              
                              301,534Prepaid
                                  expenses and other current assets
                              
                              
                              90,609
                              
                              
                              
                              649,654Total
                                  current assets
                              
                              
                              18,221,129
                              
                              
                              
                              21,566,847Oil
                                  and natural gas properties, at cost:Proved
                                  oil and natural gas properties, at cost, using
                                  thesuccessful
                                  efforts method of accounting:
                              
                              
                              289,518,708
                              
                              
                              
                              406,356,304Unproved
                                  properties
                              
                              
                              68,275
                              
                              
                              
                              78,025Accumulated
                                  depletion, depreciation and amortization
                              
                              
                              (42,006,485
                              )
                              
                              
                              (61,373,332
                              )247,580,498
                              
                              
                              
                              345,060,997Other
                                  property and equipment, net of accumulated depreciaton
                                  andamortization
                                  of $51,108 and $177,166, respectively
                              
                              
                              303,750
                              
                              
                              
                              679,495Deposits
                                  on pending acquisitions
                              
                              
                              -
                              
                              
                              
                              4,637,644Operating
                                  rights, net of amortization of $295,314 and $724,942,respectively
                              
                              
                              6,721,358
                              
                              
                              
                              6,291,730Fair
                                  value of derivatives (Note 6)
                              
                              
                              -
                              
                              
                              
                              25,293Other
                                  assets, net of amortization of $167,179 and $306,883,
                                  respectively
                              
                              
                              541,743
                              
                              
                              
                              738,235Investment
                                  in equity method investee (Note 3)
                              
                              
                              -
                              
                              
                              
                              86,731Total
                                assets
                              
                              $
                              273,368,478
                              
                              
                              $
                              379,086,972*See
                                  accompanying notes to condensed consolidated financial
                                  statements.*


Page
          6




**LEGACY
                                        RESERVES LP****CONDENSED
                                        CONSOLIDATED BALANCE SHEETS****(UNAUDITED)****LIABILITIES
                                        AND UNITHOLDERS' EQUITY****December
                                        31,**
                                    
                                    
                                    **September
                                        30,****2006**
                                    
                                    
                                    **2007**Current
                                        liabilities:Accounts
                                        payable
                                    
                                    $
                                    2,931,627
                                    
                                    
                                    $
                                    681,293Accrued
                                        oil and natural gas liabilities
                                    
                                    
                                    5,881,612
                                    
                                    
                                    
                                    8,566,783Fair
                                        value of derivatives (Note 6)
                                    
                                    
                                    -
                                    
                                    
                                    
                                    8,124,905Asset
                                        retirement obligation (Note 7)
                                    
                                    
                                    553,579
                                    
                                    
                                    
                                    470,518Other
                                        (Note 9)
                                    
                                    
                                    1,466,693
                                    
                                    
                                    
                                    2,882,551Total
                                        current liabilities
                                    
                                    
                                    10,833,511
                                    
                                    
                                    
                                    20,726,050Long-term
                                        debt (Note 2)
                                    
                                    
                                    115,800,000
                                    
                                    
                                    
                                    93,000,000Asset
                                        retirement obligation (Note 7)
                                    
                                    
                                    5,939,201
                                    
                                    
                                    
                                    7,045,527Fair
                                        value of derivatives (Note 6)
                                    
                                    
                                    2,006,547
                                    
                                    
                                    
                                    13,768,328Total
                                        liabilities
                                    
                                    
                                    134,579,259
                                    
                                    
                                    
                                    134,539,905Commitments
                                        and contingencies (Note 5)Unitholders'
                                        equity:Limited
                                        partners' equity - 18,395,233 and 26,021,518
                                        units issuedand
                                        outstanding at December 31, 2006 and September
                                        30, 2007,
                                        respectively
                                    
                                    
                                    138,653,452
                                    
                                    
                                    
                                    244,440,705General
                                        partner's equity (approximately 0.1%)
                                    
                                    
                                    135,767
                                    
                                    
                                    
                                    106,362Total
                                        unitholders' equity
                                    
                                    
                                    138,789,219
                                    
                                    
                                    
                                    244,547,067Total liabilities and unitholders' equity
                                    
                                    $
                                    273,368,478
                                    
                                    
                                    $
                                    379,086,972*See
                                        accompanying notes to condensed consolidated
                                        financial
                                        statements.*


Page
          7





**LEGACY
                                                                                                                                                                                  RESERVES
                                                                                                                                                                                  LP****CONDENSED
                                                                                                                                                                                  CONSOLIDATED
                                                                                                                                                                                  STATEMENTS
                                                                                                                                                                                  OF
                                                                                                                                                                                  OPERATIONS****(UNAUDITED)****Three
                                                                                                                                                                                  Months
                                                                                                                                                                                  Ended**
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              **Nine
                                                                                                                                                                                  Months
                                                                                                                                                                                  Ended****September
                                                                                                                                                                                  30,**
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              **September
                                                                                                                                                                                  30,****2006**
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              **2007**
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              **2006**
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              **2007**Revenues:Oil
                                                                                                                                                                                  sales
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              13,204,380
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              22,441,858
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              32,443,950
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              51,396,169Natural
                                                                                                                                                                                  gas
                                                                                                                                                                                  liquid
                                                                                                                                                                                  sales
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,713,657
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,890,994Natural
                                                                                                                                                                                  gas
                                                                                                                                                                                  sales
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              4,238,937
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,240,788
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              10,822,193
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              13,776,326Realized
                                                                                                                                                                                  and
                                                                                                                                                                                  unrealized
                                                                                                                                                                                  gain
                                                                                                                                                                                  (loss)
                                                                                                                                                                                  on
                                                                                                                                                                                  oil
                                                                                                                                                                                  and
                                                                                                                                                                                  natural
                                                                                                                                                                                  gas
                                                                                                                                                                                  swaps
                                                                                                                                                                                  (Note
                                                                                                                                                                                  6)
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,605,638
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (6,435,752
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,533,553
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (20,151,656
                                                                                                                                                                              )Total
                                                                                                                                                                                  revenues
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              36,048,955
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              22,960,551
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              48,799,696
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              47,911,833Expenses:Oil
                                                                                                                                                                                  and
                                                                                                                                                                                  natural
                                                                                                                                                                                  gas
                                                                                                                                                                                  production
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              4,166,766
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,580,473
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              10,159,887
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,408,152Production
                                                                                                                                                                                  and
                                                                                                                                                                                  other
                                                                                                                                                                                  taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,029,511
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,886,122
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,710,392
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              4,360,881General
                                                                                                                                                                                  and
                                                                                                                                                                                  administrative
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,186,884
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,443,190
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,265,163
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              6,039,371Depletion,
                                                                                                                                                                                  depreciation,
                                                                                                                                                                                  amortization
                                                                                                                                                                                  and
                                                                                                                                                                                  accretion
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,346,432
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              6,959,351
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              12,701,726
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              19,065,064Impairment
                                                                                                                                                                                  of
                                                                                                                                                                                  long-lived
                                                                                                                                                                                  assets
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              8,572,859
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              950,174
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              8,572,859
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,229,874Loss
                                                                                                                                                                                  on
                                                                                                                                                                                  disposal
                                                                                                                                                                                  of
                                                                                                                                                                                  assets
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              156,240
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              387,373Total
                                                                                                                                                                                  expenses
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              20,302,452
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,975,550
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              37,410,027
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              49,490,715Operating
                                                                                                                                                                                  income
                                                                                                                                                                                  (loss)
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,746,503
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,985,001
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              11,389,669
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (1,578,882
                                                                                                                                                                              )Other
                                                                                                                                                                                  income
                                                                                                                                                                                  (expense):Interest
                                                                                                                                                                                  income
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              55,226
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              54,284
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              93,659
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              205,443Interest
                                                                                                                                                                                  expense
                                                                                                                                                                                  (Notes
                                                                                                                                                                                  2
                                                                                                                                                                                  and
                                                                                                                                                                                  6)
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (1,857,331
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (1,905,234
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (4,511,679
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (3,423,286
                                                                                                                                                                              )Equity
                                                                                                                                                                                  in
                                                                                                                                                                                  income
                                                                                                                                                                                  (loss)
                                                                                                                                                                                  of
                                                                                                                                                                                  partnerships
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              29,690
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (317,788
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              40,600Other
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              14,910
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,013Net
                                                                                                                                                                                  income
                                                                                                                                                                                  (loss)
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              13,944,398
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              2,163,741
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              6,668,771
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (4,755,112
                                                                                                                                                                              )Net
                                                                                                                                                                                  income
                                                                                                                                                                                  (loss)
                                                                                                                                                                                  per
                                                                                                                                                                                  unit
                                                                                                                                                                                  -
                                                                                                                                                                                  basic
                                                                                                                                                                                  and
                                                                                                                                                                                  diluted
                                                                                                                                                                                  (Note
                                                                                                                                                                                  8)
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.76
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.08
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.42
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.19
                                                                                                                                                                              )Weighted
                                                                                                                                                                                  average
                                                                                                                                                                                  number
                                                                                                                                                                                  of
                                                                                                                                                                                  units
                                                                                                                                                                                  used
                                                                                                                                                                                  in
                                                                                                                                                                                  computingnet
                                                                                                                                                                                  income
                                                                                                                                                                                  (loss)
                                                                                                                                                                                  per
                                                                                                                                                                                  unit
                                                                                                                                                                                  -basic
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,386,817
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              26,021,518
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,952,509
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              25,492,521diluted
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              18,386,817
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              26,072,886
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,952,509
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              25,492,521*See
                                                                                                                                                                                  accompanying
                                                                                                                                                                                  notes
                                                                                                                                                                                  to
                                                                                                                                                                                  condensed
                                                                                                                                                                                  consolidated
                                                                                                                                                                                  financial
                                                                                                                                                                                  statements.*
 Page
                                                                                                                                    8




**LEGACY
                          RESERVES LP****CONDENSED
                          CONSOLIDATED STATEMENT OF UNITHOLDERS' EQUITY****FOR
                          THE NINE MONTHS ENDED SEPTEMBER 30, 2007****(UNAUDITED)****Total****Number
                          of**
                      
                      
                      **Limited**
                      
                      
                      **General**
                      
                      
                      **Unitholders'****Limited
                          Partner Units**
                      
                      
                      **Partner**
                      
                      
                      **Partner**
                      
                      
                      **Equity**Balance,
                          December 31, 2006
                      
                      
                      18,395,233
                      
                      
                      $
                      138,653,452
                      
                      
                      $
                      135,767
                      
                      
                      $
                      138,789,219Net
                          proceeds from initial publicequity
                          offering
                      
                      
                      6,900,000
                      
                      
                      
                      121,554,464
                      
                      
                      
                      -
                      
                      
                      
                      121,554,464Compensation
                          expense on restrictedunit
                          awards issued to employees
                      
                      
                      -
                      
                      
                      
                      255,492
                      
                      
                      
                      -
                      
                      
                      
                      255,492Vesting
                          of Restricted Units
                      
                      
                      20,038
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Units
                          issued to Greg McCabein
                          exchange for oil andnatural
                          gas properties
                      
                      
                      95,000
                      
                      
                      
                      2,270,500
                      
                      
                      
                      -
                      
                      
                      
                      2,270,500Units
                          issued to Nielson & Associates, Inc.in
                          exchange for oil andnatural
                          gas properties
                      
                      
                      611,247
                      
                      
                      
                      15,751,835
                      
                      
                      
                      -
                      
                      
                      
                      15,751,835Reclass
                          prior period compensation coston
                          unit options granted to employeesto
                          adjust for conversion to liability methodas
                          described in FAS 123-R
                      
                      
                      -
                      
                      
                      
                      (115,199
                      )
                      
                      
                      (115
                      )
                      
                      
                      (115,314
                      )Distributions
                          to unitholders, $1.24 per unit
                      
                      
                      -
                      
                      
                      
                      (29,178,070
                      )
                      
                      
                      (25,947
                      )
                      
                      
                      (29,204,017
                      )Net
                          loss
                      
                      
                      -
                      
                      
                      
                      (4,751,769
                      )
                      
                      
                      (3,343
                      )
                      
                      
                      (4,755,112
                      )Balance,
                          September 30, 2007
                      
                      
                      26,021,518
                      
                      
                      $
                      244,440,705
                      
                      
                      $
                      106,362
                      
                      
                      $
                      244,547,067*See
                          accompanying notes to condensed consolidated financial
                          statements.*




Page
          9




**LEGACY
                          RESERVES LP****CONDENSED
                          CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)****Nine
                          Months Ended September 30,****2006**
                      
                      
                      **2007**Cash
                          flows from operating activities:Net
                          income (loss)
                      
                      $
                      6,668,771
                      
                      
                      $
                      (4,755,112
                      )Adjustments
                        to reconcile net income (loss) to net cash provided by operating
                        activities:Depletion,
                          depreciation, amortization and accretion
                      
                      
                      12,701,726
                      
                      
                      
                      19,065,064Amortization
                          of debt issuance costs
                      
                      
                      318,344
                      
                      
                      
                      139,704Impairment
                          of long-lived assets
                      
                      
                      8,572,859
                      
                      
                      
                      1,229,874(Gain)
                          loss on derivatives
                      
                      
                      (5,533,553
                      )
                      
                      
                      20,426,216Equity
                          in (income) loss of partnership
                      
                      
                      317,788
                      
                      
                      
                      (40,600
                      )Amortization
                          of unit-based compensation
                      
                      
                      457,559
                      
                      
                      
                      (68,673
                      )Loss
                          on disposal of assets
                      
                      
                      -
                      
                      
                      
                      387,373Changes
                        in assets and liabilities:Increase
                          in accounts receivable, oil and natural gas
                      
                      
                      (6,302,693
                      )
                      
                      
                      (4,996,679
                      )(Increase)
                          decrease in accounts receivable, joint interest owners
                      
                      
                      (2,498,932
                      )
                      
                      
                      694,698(Increase)
                          decrease in accounts receivable, other
                      
                      
                      (449,850
                      )
                      
                      
                      11,429Increase
                          in other current assets
                      
                      
                      (702,386
                      )
                      
                      
                      (559,045
                      )Increase
                          (decrease) in accounts payable
                      
                      
                      687,111
                      
                      
                      
                      (2,250,334
                      )Increase
                          in accrued oil and natural gas liabilities
                      
                      
                      3,819,783
                      
                      
                      
                      2,685,171Increase
                          in due to affiliates
                      
                      
                      1,246,811
                      
                      
                      
                      -Increase
                          in other current liabilities
                      
                      
                      2,514,897
                      
                      
                      
                      1,330,260Total
                          adjustments
                      
                      
                      15,149,464
                      
                      
                      
                      38,054,458Net
                          cash provided by operating activities
                      
                      
                      21,818,235
                      
                      
                      
                      33,299,346Cash
                          flows from investing activities:Investment in oil and natural gas properties
                      
                      
                      (45,353,007
                      )
                      
                      
                      (98,267,074
                      )Increase in deposit on pending acquisition
                      
                      
                      -
                      
                      
                      
                      (4,637,644
                      )Investment in other equipment
                      
                      
                      (200,124
                      )
                      
                      
                      (501,804
                      )Investment in operating rights
                      
                      
                      (7,016,672
                      )
                      
                      
                      -Collection of notes receivable
                      
                      
                      924,441
                      
                      
                      
                      -Net cash settlements on oil and natural gas swaps
                      
                      
                      (2,182,065
                      )
                      
                      
                      4,235,726Investment in equity method investee
                      
                      
                      -
                      
                      
                      
                      (46,131
                      )Net
                          cash used in investing activities
                      
                      
                      (53,827,427
                      )
                      
                      
                      (99,216,927
                      )Cash
                          flows from financing activities:Proceeds from long-term debt
                      
                      
                      112,800,000
                      
                      
                      
                      111,000,000Payments of long-term debt
                      
                      
                      (73,189,791
                      )
                      
                      
                      (133,800,000
                      )Payments of debt issuance costs
                      
                      
                      (292,803
                      )
                      
                      
                      (336,196
                      )Proceeds from issuance of units, net
                      
                      
                      77,894,654
                      
                      
                      
                      121,554,464Redemption of Founding Investors' units
                      
                      
                      (69,938,000
                      )
                      
                      
                      -Dividend - reimbursement of offering costs paid by MBN
                          Management
                          LLC
                      
                      
                      (1,200,229
                      )
                      
                      
                      -Capital contributed by owner
                      
                      
                      19,356
                      
                      
                      
                      -Cash not acquired in Legacy formation transactions
                      
                      
                      (3,104,304
                      )
                      
                      
                      -Distributions to unitholders
                      
                      
                      (11,290,387
                      )
                      
                      
                      (29,204,017
                      )Net
                          cash provided by financing activities
                      
                      
                      31,698,496
                      
                      
                      
                      69,214,251Net
                          increase (decrease) in cash and cash equivalents
                      
                      
                      (310,696
                      )
                      
                      
                      3,296,670Cash
                          and cash equivalents, beginning of period
                      
                      
                      1,954,923
                      
                      
                      
                      1,061,852Cash
                          and cash equivalents, end of period
                      
                      $
                      1,644,227
                      
                      
                      $
                      4,358,522*See
                          accompanying notes to condensed consolidated financial
                          statements.*




Page
          10




**LEGACY
                                                        RESERVES LP****CONDENSED
                                                        CONSOLIDATED STATEMENTS OF
                                                        CASH FLOWS - Continued****(UNAUDITED)****Nine
                                                        Months Ended September 30,****2006**
                                                    
                                                    
                                                    **2007**Non-Cash
                                                        Investing and Financing Activities:Asset
                                                        retirement obligation costs
                                                        and liabilities
                                                    
                                                    $
                                                    1,467,241
                                                    
                                                    
                                                    $
                                                    -Asset
                                                        retirement obligations associated
                                                        with property
                                                        acquisitions
                                                    
                                                    $
                                                    1,877,520
                                                    
                                                    
                                                    $
                                                    1,023,447Non-controlling
                                                        interests' share of net financing
                                                        costs of MBNProperties
                                                        LP capitalized to oil and
                                                        natural gas properties
                                                    
                                                    $
                                                    164,202
                                                    
                                                    
                                                    $
                                                    -Units
                                                        issued to MBN Properties
                                                        LP in exchange for thenon-controlling
                                                        interests' share of oil and
                                                        natural gas properties
                                                    
                                                    $
                                                    31,743,934
                                                    
                                                    
                                                    $
                                                    -Units
                                                        issued to Brothers Group
                                                        in exchange for:Oil
                                                        and natural gas properties
                                                    
                                                    $
                                                    105,298,794
                                                    
                                                    
                                                    $
                                                    -Other
                                                        property and equipment
                                                    
                                                    $
                                                    107,275
                                                    
                                                    
                                                    $
                                                    -Units
                                                        issued to H2K Holdings Ltd.
                                                        in exchange for oil andnatural
                                                        gas properties
                                                    
                                                    $
                                                    1,419,483
                                                    
                                                    
                                                    $
                                                    -Oil
                                                        and natural gas hedge liabilities
                                                        assumed from theBrothers
                                                        Group and H2K Holdings Ltd.
                                                    
                                                    $
                                                    3,147,152
                                                    
                                                    
                                                    $
                                                    -Units
                                                        issued in exchange for oil
                                                        andnatural
                                                        gas properties
                                                    
                                                    $
                                                    2,346,000
                                                    
                                                    
                                                    $
                                                    18,022,335Deemed
                                                        dividend to Moriah Group
                                                        owners for accounts not acquiredin
                                                        Legacy formation transaction:Accounts
                                                        receivable, oil and natural
                                                        gas
                                                    
                                                    $
                                                    4,248,157
                                                    
                                                    
                                                    $
                                                    -Accounts
                                                        receivable, joint interest
                                                        owners
                                                    
                                                    $
                                                    249,627
                                                    
                                                    
                                                    $
                                                    -Accounts
                                                        receivable, other
                                                    
                                                    $
                                                    539,968
                                                    
                                                    
                                                    $
                                                    -Other
                                                        assets
                                                    
                                                    $
                                                    891,300
                                                    
                                                    
                                                    $
                                                    -Accounts
                                                        payable
                                                    
                                                    $
                                                    (213,941
                                                    )
                                                    
                                                    $
                                                    -Accrued
                                                        oil and natural gas liabilities
                                                    
                                                    $
                                                    (1,520,709
                                                    )
                                                    
                                                    $
                                                    -Due
                                                        to affiliates
                                                    
                                                    $
                                                    (1,254,215
                                                    )
                                                    
                                                    $
                                                    -Other
                                                        liabilities
                                                    
                                                    $
                                                    (2,166,276
                                                    )
                                                    
                                                    $
                                                    -*See
                                                        accompanying notes to condensed
                                                        consolidated financial
                                                        statements.*




Page
          11




**LEGACY
      RESERVES LP**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**(1)  Organization,
      Basis of Presentation and Description of Business**




Legacy
      Reserves LP and its affiliated entities are referred to as Legacy or LRLP in
      these financial statements.




Certain
      information and footnote disclosures normally included in the financial
      statements prepared in accordance with generally accepted accounting principles
      in the United States (“GAAP”) have been condensed or omitted in this Form 10-Q
      pursuant to the rules and regulations of the SEC. These condensed consolidated
      financial statements should be read in connection with the consolidated
      financial statements and notes thereto included in the Company’s Annual Report
      on Form 10-K for the year ended December 31, 2006.





LRLP,
      a
      Delaware limited partnership, was formed by its general partner, Legacy Reserves
      GP, LLC (“LRGPLLC”), on October 26, 2005 to own and operate oil and natural
      gas properties. LRGPLLC is a Delaware limited liability company formed on
      October 26, 2005, and it owns less than a 0.1% general partner interest in
      LRLP.





On
      March 15, 2006, Legacy, as the successor entity to the Moriah Group
      (defined below), completed a private equity offering in which it (1) issued
      5,000,000 limited partnership units at a gross price of $17.00 per unit,
      netting $76.8 million after initial purchaser’s discount, placement agent’s
      fee and expenses, (2) acquired certain oil and natural gas properties
      (Note 3) and (3) redeemed 4.4 million units for
      $69.9 million from the Brothers Group, H2K Holdings and MBN Properties,
      who, along with the Moriah Group, are its “Founding Investors.” The Moriah Group
      was treated as the acquiring entity in this transaction, hereinafter referred
      to
      as the “Legacy Formation.” Because the combination of the businesses that
      comprised the Moriah Group was a reorganization of entities under common
      control, the combination of these businesses was reflected retroactively at
      carryover basis in these condensed consolidated financial statements. The
      accounts presented for periods prior to the Legacy Formation transaction are
      those of the Moriah Group.




On
      January 18, 2007, Legacy closed its initial public offering (“IPO”) of
      6,900,000 limited partnership units at an IPO price of $19.00 per
      unit. Net proceeds to the partnership after underwriting discounts and estimated
      offering expenses were approximately $122 million, which were used to repay
      all indebtedness outstanding under the partnership’s credit facility and for
      general partnership purposes.





Significant
      information regarding rights of the limited partners includes the
      following:





• Right
      to receive, within 45 days after the end of each quarter, distributions of
      available cash, if distributions are declared.




• No
      limited partner shall have any management power over our business and affairs;
      the general partner shall conduct, direct and manage LRLP’s
      activities.




• The
      general partner may be removed if such removal is approved by the unitholders
      holding at least 66 2/3 percent of the outstanding units, including
      units held by LRLP’s general partner and its affiliates provided that a unit
      majority has elected a successor general partner.




• Right
      to receive information reasonably required for tax reporting purposes within
      90 days after the close of the calendar year.




In
      the
      event of a liquidation, all property and cash in excess of that required to
      discharge all liabilities will be distributed to the unitholders and LRLP’s
      general partner in proportion to their capital account balances, as adjusted
      to
      reflect any gain or loss upon the sale or other disposition of Legacy’s assets
      in liquidation.




As
      used
      herein, the term Moriah Group refers to Moriah Resources, Inc. (“MRI”), Moriah
      Properties, Ltd. (“MPL”), the oil and natural gas interests individually owned
      by Dale A. and Rita Brown and the accounts of MBN Properties LP on a
      consolidated basis unless the context specifies otherwise. Prior to
      March 15, 2006, the accompanying financial statements include the accounts
      of the Moriah Group. From March 15, 2006, the accompanying financial
      statements also include the results of operations of the oil and natural gas
      properties acquired in the Legacy Formation transaction.




Page
          12




All
      significant intercompany accounts and transactions have been eliminated. The
      Moriah Group consolidated MBN Properties LP as a variable interest entity under
      FASB Interpretation Number “FIN” 46R since the Moriah Group was the primary
      beneficiary of MBN Properties LP. The partners, shareholders and owners of
      these
      entities have other investments, such as real estate, that are held either
      individually or through other legal entities that are not presented as part
      of
      these financial statements.





Legacy
      owns and operates oil and natural gas producing properties located primarily
      in
      the Permian Basin of West Texas and southeast New Mexico. Legacy has acquired
      oil and natural gas producing properties and undrilled leasehold.





The
      accompanying financial statements have been prepared on the accrual basis of
      accounting whereby revenues are recognized when earned, and expenses are
      recognized when incurred. These condensed consolidated financial statements
      as
      of September 30, 2007 and for the three and nine months ended September 30,
      2007
      and 2006 are unaudited.  In the opinion of management, such financial
      statements include the adjustments and accruals which are necessary for a fair
      presentation of the results for the interim periods. These interim results
      are
      not necessarily indicative of results for a full year. Certain amounts in the
      prior period financial statements have been reclassified to conform to the
      current period presentation. Certain information and footnote disclosures
      normally included in financial statements prepared in accordance with GAAP
      have
      been condensed or omitted in these financial statements for and as of the three
      and nine months ended September 30, 2007 and 2006.




**(2)  Credit
      Facility**




On
      September 13, 2005, the Moriah Group replaced its existing credit agreement
      with a new senior credit facility (the “New Facility”) with a new lending group
      that permitted borrowings in the lesser amount of (i) the borrowing base,
      or (ii) $75 million. The borrowing base under the New Facility,
      initially set at $40 million, was subject to re-determination every six
      months and was subject to adjustment based upon changes in the fair market
      value
      of the Moriah Group’s oil and natural gas assets. Interest on the New Facility
      was payable monthly and was charged in accordance with the Moriah Group’s
      selection of a LIBOR rate plus 1.5% to 2.0%, or prime rate up to prime rate
      plus
      0.5%, dependent on the percentage of the borrowing base which was drawn.
      Borrowings under this New Facility were due in September 2009. The New Facility
      contained certain loan covenants requiring minimum financial ratio coverages,
      involving the current ratio and EBITDA to interest expense. On
      September 13, 2005, the Moriah Group borrowed $22,123,000 from the new
      lending group to provide for general corporate purposes, to fund a
      $4.2 million distribution to Cary Brown and Dale Brown and to advance
      additional subordinated notes receivable in the amount of $17,598,000 to MBN
      Properties LP, which purchased oil and natural gas producing properties from
      PITCO. The Moriah Group’s interest rate at December 31, 2005 was 6.0%. The
      Moriah Group paid interest expense on this debt of $264,062 for the period
      from
      January 1, 2006 through March 15, 2006. All amounts outstanding under
      the New Facility at March 15, 2006 were repaid in full on that date as part
      of the formation transactions.




On
      September 13, 2005, MBN Properties LP entered into a senior credit facility
      (the “MBN Facility”) with a lending group that permitted borrowings in the
      lesser amount of (i) the borrowing base, or (ii) $75 million. The
      borrowing base under the MBN Facility, initially set at $35 million, was
      subject to re-determination every six months and was subject to adjustment
      based
      upon changes in the fair market value of the MBN Properties LP’s oil and natural
      gas assets. Interest on the MBN Facility was payable monthly and was charged
      in
      accordance with MBN Properties LP’s selection of a LIBOR rate plus 1.5% to 2.0%,
      or prime rate up to prime rate plus 0.50%, dependent on the percentage of the
      borrowing base which was drawn. Borrowings under this MBN Facility were due
      in
      September 2007. The MBN Facility contained certain loan covenants requiring
      minimum financial ratio coverages, involving the current ratio and EBITDA to
      interest expense. On September 13, 2005, MBN Properties LP borrowed
      $33,750,000 from the new lending group to purchase oil and natural gas producing
      properties from PITCO. MBN Properties LP paid interest expense of $1,300,727
      for
      the period from January 1, 2006 through March 15, 2006. All amounts
      outstanding under the MBN Facility at March 15, 2006 were repaid in full on
      that date as part of the formation transactions.




As
      an
      integral part of the Legacy Formation, Legacy entered into a new credit
      agreement with a new senior credit facility (the “Legacy Facility”) with the
      same lending group that participated in the New Facility of the Moriah Group.
      Legacy’s oil and natural gas properties are pledged as collateral for any
      borrowings under the Legacy Facility. The terms of the Legacy Facility permitted
      borrowings in the lesser amount of (i) the borrowing base, or
      (ii) $300 million. The borrowing base under the Legacy Facility, which
      was initially set at $130 million, is re-determined every six months and
      will be adjusted based upon changes in the fair market value of Legacy’s oil and
      natural gas assets. Interest on the Legacy Facility is payable monthly and
      was
      charged in accordance with Legacy’s selection of a LIBOR rate plus 1.25% to
      1.875%, or prime rate up to prime rate plus 0.375%, dependent on the percentage
      of the borrowing base which is drawn. On March 15, 2006, Legacy borrowed
      $65.8 million from the new lending group as part of the Legacy Formation.
      On May 3, 2007, Legacy’s bank group increased Legacy’s borrowing base to $150
      million as part of the semi-annual re-determination. On October 24, 2007, the
      Legacy Facility was amended, increasing the borrowing base to $225 million
      and
      the borrowing capacity to $500 million. Pursuant to this amendment, interest
      on
      debt outstanding is charged based on Legacy’s selection of a LIBOR rate plus
      1.00% to 1.75%, or the alternate base rate which equals the higher of the prime
      rate or the Federal funds effective rate plus 0.50%, plus an applicable margin
      between 0% and 0.25%.




Page
          13




On
      January 18, 2007, Legacy closed its initial public offering of
      6,900,000 units representing limited partner interests at an initial public
      offering price of $19.00 per unit. Net proceeds to the partnership after
      underwriting discounts and estimated offering expenses were approximately
      $122 million, all of which was used to repay all indebtedness outstanding
      under the Legacy Facility and for general partnership purposes.





As
      of September 30, 2007, Legacy had outstanding borrowings of
      $93.0 million at an interest rate of 6.92%. Legacy had approximately
      $101.7 million of availability remaining under the Legacy Facility as of
      September 30, 2007. For the three-month and nine-month period ended
      September 30, 2007, Legacy paid $1,295,619 and $2,258,164 of interest
      expense on the Legacy Facility, respectively. The Legacy Facility contains
      certain loan covenants requiring minimum financial ratio coverages, involving
      the current ratio and EBITDA to interest expense. At December 31, 2006 and
      September 30, 2007, Legacy was in compliance with all aspects of the Legacy
      Facility.





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





**December
                          31,**
                      
                      
                      **September
                          30,****2006**
                      
                      
                      **2007**Legacy
                          facility- due March 2010
                      
                      $
                      115,800,000
                      
                      
                      $
                      93,000,000





**(3)  Acquisitions**




***Legacy
      Formation Acquisition***




On
      March 15, 2006, LRLP completed a private equity offering in which it issued
      5,000,000 units representing limited partner interests at a gross price of
      $17.00 per unit, netting $76.8 million after initial purchaser’s
      discount, placement agent fees and expenses. Simultaneous with the completion
      of
      this offering, Legacy purchased the oil and natural gas properties of the Moriah
      Group, Brothers Group, H2K Holdings Ltd. and the Charitable Support Foundations,
      Inc. and its affiliates. Legacy also purchased the oil and natural gas
      properties owned by MBN Properties, LP. In the case of the Moriah Group, the
      Brothers Group and H2K Holdings Ltd. those entities exchanged their oil and
      natural gas properties for units representing limited partner interests. The
      purchase of the oil and natural gas properties owned by the charitable
      foundations was solely for cash of $7.7 million. The Founding Investors
      exchanged 4.4 million of their units for $69.9 million in cash. The
      Moriah Group has been treated as the acquiring entity in the Legacy Formation.
      Accordingly, the accounts of the businesses acquired from the Moriah Group
      have
      been reflected retroactively at carryover basis in the consolidated financial
      statements, and the units issued to acquire them have been accounted for as
      a
      recapitalization. The net assets of the other businesses acquired and the units
      issued in exchange for them have been reflected at fair value and included
      in
      the statement of operations from the date of acquisition. With the exception
      of
      its assumption of liabilities associated with the oil and natural gas swaps
      it
      acquired, the other depreciable assets of the Brothers Group (office furniture
      and equipment and vehicles) and certain unamortized deferred financing costs
      of
      the Moriah Group, LRLP did not acquire any other assets or liabilities of the
      Moriah Group, the Brothers Group, H2K Holdings Ltd. or the Charitable Support
      Foundations, Inc. and its affiliates. The removal of the other assets and
      liabilities of the Moriah Group was reflected as a deemed dividend in the
      quarter ended March 31, 2006.






The
      following table sets forth the units issued in the Legacy Formation
      transaction:




**Number
                of units**MPL
            
            
            7,334,070DAB
                Resources, Ltd.
            
            
            859,703Moriah
                  Group
            
            
            8,193,773Brothers
                Group
            
            
            6,200,358H2K
                  Holdings Ltd.
            
            
            83,499MBN
                Properties LP
            
            
            3,162,438Other
                  investors
            
            
            600,000Total
                units issued at Legacy Formation
            
            
            18,240,068




In
      addition to the 18,240,068 units issued at Legacy Formation, 52,616
      restricted units were issued to employees of Legacy concurrent with, but not
      as
      a part of, the Legacy Formation (Note 9).




Page
          14




The
      following table sets forth the purchase price of the oil and natural gas
      properties purchased from the Brothers Group, H2K Holdings Ltd. and three
      charitable foundations, which included the assumption of liabilities associated
      with oil and natural gas swaps as of March 14, 2006:




**Number
                of Units**
            
            
            **Purchase
                Price****at
                $17.00 per unit**
            
            
            **of
                Assets Acquired**Brothers
                  Group
            
            
            6,200,358
            
            
            $
            105,406,069H2K
                Holdings Ltd.
            
            
            83,499
            
            
            
            1,419,483Cash
                  paid to three charitable foundations
            
            
            -
            
            
            
            7,682,854Total
                purchase price before liabilities assumed
            
            
            
            
            
            
            114,508,406Plus:Oil
                and natural gas swap liabilities assumed
            
            
            
            
            
            
            3,147,152Asset
                  retirement obligations incurred
            
            
            
            
            
            
            1,467,241Less:Office
                  furniture, equipment and vehicles acquired
            
            
            
            
            
            
            (107,275
            )Total
                purchase price allocated to oil andnatural
                  gas properties acquired
            
            
            
            
            
            $
            119,015,524




In
      addition to the 3,162,438 units issued to MBN Properties LP as part of the
      Legacy Formation transaction, LRLP paid $65.3 million in cash to MBN
      Properties LP to acquire that portion of the oil and natural gas properties
      of
      MBN Properties LP it did not already own by virtue of the Moriah Group’s
      ownership of a 46.22% limited partnership interest in MBN Properties LP. In
      addition, LRLP paid $1,980,468 to MBN Management LLC to reimburse expenses
      incurred by that entity in anticipation of the Legacy Formation. The following
      table sets forth the calculation of the step-up of oil and natural gas property
      basis with respect to this interest acquired:






**Number
                of Units**
            
            
            **Purchase
                Price of****at
                $17.00 per unit**
            
            
            **Assets
                Acquired**Units
                  issued to MBN Properties LP
            
            
            3,162,438
            
            
            $
            53,761,446Cash
                paid to MBN Properties LP
            
            
            -
            
            
            
            65,300,000Total
                  purchase price before liabilities assumed
            
            
            
            
            
            
            119,061,446Plus:Oil
                  and natural gas swap liabilities assumed
            
            
            
            
            
            
            2,539,625ARO
                liabilities assumed
            
            
            
            
            
            
            453,913Less:Net
                book value of other property and equipment onMBN
                  Properties LP at March 14, 2006
            
            
            
            
            
            
            (39,056
            )122,015,928Less:Net
                book value of oil and natural gas assets onMBN
                  Properties LP at March 14, 2006
            
            
            
            
            
            
            (62,990,390
            )Purchase
                price in excess of net book value of assets
            
            
            
            
            
            
            59,025,538Less:Share
                already owned by Moriah via consolidationof
                  MBN Properties LP
            
            
            46.22
            %
            
            
            (27,281,604
            )Non-controlling
                interest share to record
            
            
            
            
            
            
            31,743,934Plus:Elimination
                of deferred financing costs related tonon-controlling
                  interests' share of MBN Properties LP
            
            
            
            
            
            
            164,202Reimbursement
                of Brothers Group's share of  MBNManagement
                  LLC losses from inception throughMarch
                14, 2006
            
            
            
            
            
            
            780,239MBN
                  Properties LP purchase price to allocateto
                oil and natural gas properties
            
            
            
            
            
            $
            32,688,375Units
                  related to purchase of non-controlling interest
            
            
            1,867,290Units
                related to interest previously owned by Moriah Group
            
            
            1,295,148Total
                  units issued to MBN Properties LP
            
            
            3,162,438




Page
          15




***Larron
      Acquisition***




On
      June 29, 2006, Legacy purchased a 100% working interest and an approximate
      82% net revenue interest in producing leases located in the Farmer Field for
      $5.7 million. The conveyance of the leases was effective April 1, 2006. The
      $5.6 million net purchase price was allocated with $4.6 million
      recorded as lease and well equipment and $1.0 million of leasehold costs.
      Asset retirement obligations in the amount of $328,867 were recognized in
      connection with this acquisition. The operations of these Farmer Field
      properties have been included from their acquisition on June 29,
      2006.




***South
      Justis Unit Acquisition***




On
      June 29, 2006, Legacy purchased Henry Holding LP’s 15.0% working interest
      and a 13.1% net revenue interest in the South Justis Unit (“SJU”), two leases
      not in the unit, each with one well, adjacent to the SJU and the right to
      operate these properties. The stated purchase price was $14 million cash
      plus the issuance of 138,000 units on June 29, 2006 and 8,415 units
      on November 10, 2006 at their estimated fair value of $17.00 per unit
      ($2,346,000 and $143,055, respectively) less final adjustments of approximately
      $624,000. The effective date of Legacy’s ownership was May 1, 2006. The
      operating results from this acquisition have been included from July 1,
      2006. The properties acquired are located in Lea County, New Mexico where Legacy
      owns other producing properties. Legacy was elected operator of the SJU
      following the closing of the transaction, which entitles Legacy to a contractual
      overhead reimbursement of approximately $127,500 per month from its
      partners in the SJU. The $15.9 million net purchase price was allocated
      with $2.9 million recorded as lease and well equipment, $6.0 million
      of leasehold costs and $7.0 million capitalized as an intangible asset
      relating to the contract operating rights. The capitalized operating rights
      are
      being amortized over the estimated total well months the wells in the SJU are
      expected to be operated. Asset retirement obligations in the amount of $137,453
      were recognized in connection with this acquisition. The operations of the
      South
      Justis Unit have been included from the acquisition on June 29,
      2006.




***Kinder
      Morgan Acquisition***




On
      July 31, 2006, Legacy purchased certain oil and natural gas properties
      located in the Permian Basin from Kinder Morgan for a net purchase price of
      $17.2 million (“Kinder Morgan Acquisition”). The effective date of this
      purchase was July 1, 2006. The $17.2 million purchase price was
      allocated with $4.1 million recorded as lease and well equipment and
      $13.1 million of leasehold costs. Asset retirement obligations of
      $1,383,180 were recorded in connection with this acquisition. The operations
      of
      these Kinder Morgan Acquisition properties have been included from their
      acquisition on July 31, 2006.




***Binger
      Acquisition***




On
      April
      16, 2007, Legacy purchased certain oil and natural gas properties and other
      interests in the East Binger (Marchand) Unit in Caddo County, Oklahoma from
      Nielson & Associates, Inc. for a net purchase price of $44.2 million
      (“Binger Acquisition”). The purchase price was paid with the issuance of 611,247
      units valued at $15.8 million and $28.4 million paid in cash. The effective
      date
      of this purchase was February 1, 2007. The $44.2 million purchase price was
      allocated with $14.7 million recorded as lease and well equipment, $29.4 million
      of leasehold costs and $0.1 million as investment in equity method investee
      related to the 50% interest acquired in Binger Operations, LLC. Asset retirement
      obligations of $184,636 were recorded in connection with this acquisition.
      The
      operations of these Binger Acquisition properties have been included from their
      acquisition on April 16, 2007.





***Ameristate
      Acquisition***




On
      May 1,
      2007, Legacy purchased certain oil and natural gas properties located in the
      Permian Basin from Ameristate Exploration, LLC for a net purchase price of
      $5.2
      million (“Ameristate Acquisition”). The effective date of this purchase was
      January 1, 2007. The $5.2 million purchase price was allocated with $0.5 million
      recorded as lease and well equipment and $4.7 million of leasehold costs. Asset
      retirement obligations of $51,414 were recorded in connection with this
      acquisition. The operations of these Ameristate Acquisition properties have
      been
      included from their acquisition on May 1, 2007.





***TSF
      Acquisition***




On
      May
      25, 2007, Legacy purchased certain oil and natural gas properties located in
      the
      Permian Basin from Terry S. Fields for a net purchase price of $14.7 million
      (“TSF Acquisition”). The effective date of this purchase was March 1, 2007. The
      $14.7 million purchase price was allocated with $1.8 million recorded as lease
      and well equipment and $12.9 million of leasehold costs. Asset retirement
      obligations of $99,094 were recorded in connection with this acquisition. The
      operations of these TSF Acquisition properties have been included from their
      acquisition on May 25, 2007.





***Raven
      Shenandoah Acquisition***




On
      May
      31, 2007, Legacy purchased certain oil and natural gas properties located in
      the
      Permian Basin from Raven Resources, LLC and Shenandoah Petroleum Corporation
      for
      a net purchase price of $13.0 million (“Raven Shenandoah Acquisition”). The
      effective date of this purchase was May 1, 2007. The $13.0 million purchase
      price was allocated with $6.0 million recorded as lease and well equipment
      and
      $7.0 million of leasehold costs. Asset retirement obligations of $378,835 were
      recorded in connection with this acquisition. The operations of these Raven
      Shenandoah Acquisition properties have been included from their acquisition
      on
      May 31, 2007.




Page
          16





***Raven
      OBO Acquisition***





On
      August
      3, 2007, Legacy purchased certain oil and natural gas properties located
      primarily in the Permian Basin from Raven Resources, LLC and private parties
      for
      a net purchase price of $20.0 million (“Raven OBO Acquisition”). The effective
      date of this purchase was July 1, 2007. The $20.0 million purchase price was
      allocated with $1.6M recorded as lease and well equipment and $18.4 million
      of
      leasehold costs. Asset retirement obligations of $224,329 were recorded in
      connection with this acquisition. The operations of these Raven OBO Acquisition
      properties have been included from their acquisition on August 3,
      2007.





***Pro
      Forma Operating Results***




The
      following table reflects the unaudited pro forma results of operations as though
      the Formation Transactions and the Farmer Field, South Justis Unit, Kinder
      Morgan, Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions
      had
      each occurred on January 1, 2006 and January 1, 2007, respectively. The pro
      forma amounts are not necessarily indicative of the results that may be reported
      in the future:




**September
                                                              30,****2006**
                                                          
                                                          
                                                          **2007****(In
                                                              thousands)**Revenues,
                                                              excluding hedging gains
                                                              and losses
                                                          
                                                          $
                                                          77,416
                                                          
                                                          
                                                          $
                                                          78,525Revenues,
                                                              net of hedging gains
                                                              and losses
                                                          
                                                          $
                                                          81,645
                                                          
                                                          
                                                          $
                                                          58,373Net
                                                              income
                                                          
                                                          $
                                                          13,478
                                                          
                                                          
                                                          $
                                                          (3,345
                                                          )Earnings
                                                              (loss) per unit:Basic
                                                          
                                                          $
                                                          0.71
                                                          
                                                          
                                                          $
                                                          (0.13
                                                          )Diluted
                                                          
                                                          $
                                                          0.71
                                                          
                                                          
                                                          $
                                                          (0.13
                                                          )Units
                                                              used in computing earnings
                                                              (loss) per unit:Basic
                                                          
                                                          
                                                          19,003,210
                                                          
                                                          
                                                          
                                                          25,727,616Diluted
                                                          
                                                          
                                                          19,014,085
                                                          
                                                          
                                                          
                                                          25,727,616




**(4)  Related
      Party Transactions**




Cary
      Brown and Dale Brown, as owners of the Moriah Group, and the Brothers Group
      own
      a combined non-controlling 4.16% interest as limited partners in the partnership
      which owns the building that Legacy occupies. Monthly rent is $14,808, without
      respect to property taxes and insurance. Prior to the Legacy Formation, the
      Moriah Group’s portion of this rent was reimbursed by the Moriah Group to
      Petroleum Strategies, Inc., an affiliated entity which is owned by Cary Brown
      and Dale Brown. The lease expires in August 2011.




The
      Moriah Group did not directly employ any persons or directly incur any office
      overhead. Substantially all general and administrative services were provided
      by
      Petroleum Strategies, Inc. which employed all personnel and paid for all
      employee salaries, benefits, and office expenses. Petroleum Strategies Inc.
      charged the Moriah Group for such services in an amount which was intended
      to be
      equal to the actual expenses it incurred. Amounts charged were $444,827 and
      $0
      for the nine months ended September 30, 2006 and 2007, respectively. On
      April 1, 2006, following the Legacy Formation, certain employees of
      Petroleum Strategies, Inc. and Brothers Production Company Inc. became employees
      of Legacy. For the period from March 15, 2006 to September 30, 2006,
      Brothers Production Company Inc. provided $47,236 of transition administrative
      services to Legacy.




Legacy
      uses Lynch, Chappell and Alsup for legal services. Alan Brown, son of Dale
      Brown
      and brother of Cary Brown, is a less than ten percent shareholder in this firm.
      Legacy paid legal fees to Lynch, Chappell and Alsup of $39,003 and $82,143
      for
      the nine months ended September 30, 2006 and 2007, respectively.




**(5)  Commitments
      and Contingencies**




From
      time
      to time Legacy is a party to various legal proceedings arising in the ordinary
      course of business. While the outcome of lawsuits cannot be predicted with
      certainty, Legacy is not currently a party to any proceeding that it believes,
      if determined in a manner adverse to Legacy, could have a potential material
      adverse effect on its financial condition, results of operations or cash flows.
      Legacy believes the likelihood of such a future event to be remote.




Additionally,
      Legacy is subject to numerous laws and regulations governing the discharge
      of
      materials into the environment or otherwise relating to environmental
      protection. To the extent laws are enacted or other governmental action is
      taken
      that restricts drilling or imposes environmental protection requirements that
      result in increased costs to the oil and natural gas industry in general, the
      business and prospects of Legacy could be adversely affected.




Legacy
      has employment agreements with its officers that specify that if the officer
      is
      terminated by Legacy for other than cause or following a change in control,
      the
      officer shall receive severance pay ranging from 24 to 36 months salary
      plus bonus and COBRA benefits.




Page
          17




**(6)  Derivative
      Financial Instruments**




Due
      to
      the volatility of oil and natural gas prices, Legacy periodically enters into
      price-risk management transactions (e.g., swaps) for a portion of its oil and
      natural gas production to achieve a more predictable cash flow, as well as
      to
      reduce exposure from price fluctuations. While the use of these arrangements
      limits Legacy’s ability to benefit from increases in the price of oil and
      natural gas, it also reduces Legacy’s potential exposure to adverse price
      movements. Legacy’s arrangements, to the extent it enters into any, apply to
      only a portion of its production, provide only partial price protection against
      declines in oil and natural gas prices and limit Legacy’s potential gains from
      future increases in prices. None of these instruments are used for trading
      or
      speculative purposes.




All
      of
      these price-risk management transactions are considered derivative instruments
      and accounted for in accordance with SFAS No. 133 —
*Accounting for Derivative Instruments and Hedging Activities.* These
      derivative instruments are intended to reduce Legacy’s price risk and may be
      considered hedges for economic purposes but Legacy has chosen not to designate
      them as cash flow hedges for accounting purposes. Therefore, all derivative
      instruments are recorded on the balance sheet at fair value with changes in
      fair
      value being recorded in current period earnings.




By
      using
      derivative instruments to mitigate exposures to changes in commodity prices,
      Legacy exposes itself to credit risk and market risk. Credit risk is the failure
      of the counterparty to perform under the terms of the derivative contract.
      When
      the fair value of a derivative contract is positive, the counterparty owes
      Legacy, which creates repayment risk. Legacy minimizes the credit or repayment
      risk in derivative instruments by entering into transactions with high-quality
      counterparties.




For
      the
      three and nine months ended September 30, 2006 and 2007, Legacy included in
      revenue realized and unrealized losses related to its oil and natural gas
      derivatives. The impact on total revenue from hedging activities was as
      follows:





**Three
                          Months Ended**
                      
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      
                      **September
                          30,****2006**
                      
                      
                      **2007**
                      
                      
                      **2006**
                      
                      
                      **2007**Crude
                          oil derivative contract settlements
                      
                      $
                      (5,798,140
                      )
                      
                      $
                      (845,744
                      )
                      
                      $
                      (6,897,833
                      )
                      
                      $
                      1,198,916Natural
                          gas liquid derivative contract settlements
                      
                      
                      -
                      
                      
                      
                      (118,044
                      )
                      
                      
                      -
                      
                      
                      
                      (159,395
                      )Natural
                          gas derivative contract settlements
                      
                      
                      1,669,838
                      
                      
                      
                      1,372,154
                      
                      
                      
                      4,715,768
                      
                      
                      
                      3,196,205Unrealized
                          change in fair value - oil contracts
                      
                      
                      19,770,172
                      
                      
                      
                      (7,677,256
                      )
                      
                      
                      1,342,276
                      
                      
                      
                      (20,860,444
                      )Unrealized
                          change in fair value - natural gas liquid contracts
                      
                      
                      -
                      
                      
                      
                      (650,285
                      )
                      
                      
                      -
                      
                      
                      
                      (940,557
                      )Unrealized
                          change in fair value - natural gas contracts
                      
                      
                      2,963,768
                      
                      
                      
                      1,483,423
                      
                      
                      
                      6,373,342
                      
                      
                      
                      (2,586,381
                      )$
                      18,605,638
                      
                      
                      $
                      (6,435,752
                      )
                      
                      $
                      5,533,553
                      
                      
                      $
                      (20,151,656
                      )




As
      of
      September 30, 2007, Legacy had the following NYMEX West Texas Intermediate
      crude
      oil swaps paying floating prices and receiving fixed prices for a portion of
      its
      future oil production as indicated below:





**Annual**
                  
                  **Average**
                  
                  **Price****Calendar
                      Year**
                  
                  **Volumes
                      (Bbls)**
                  
                  **Price
                      per Bbl**
                  
                  **Range
                      per Bbl**2007
                  
                  273,578
                  
                  $                 68.81
                  
                  $64.15
                      - $75.702008
                  
                  1,025,249
                  
                  $                 68.57
                  
                  $62.25
                      - $73.452009
                  
                  948,013
                  
                  $                 66.65
                  
                  $61.05
                      - $71.402010
                  
                  883,445
                  
                  $                 65.26
                  
                  $60.15
                      - $71.152011
                  
                  665,040
                  
                  $                 70.17
                  
                  $67.33
                      - $71.402012
                  
                  549,600
                  
                  $                 70.04
                  
                  $67.72
                      - $71.15




As
      of
      September 30, 2007, Legacy had the following NYMEX Henry Hub, ANR-OK and
      Waha natural gas swaps paying floating natural gas prices and receiving fixed
      prices for a portion of its future natural gas production as indicated
      below:





**Annual**
                  
                  **Average**
                  
                  **Price****Calendar
                      Year**
                  
                  **Volumes
                      (MMBtu)**
                  
                  **Price
                      per MMBtu**
                  
                  **Range
                      per MMBtu**2007
                  
                  656,192
                  
                  $                   8.59
                  
                  $6.85
                      - $10.012008
                  
                  2,402,970
                  
                  $                   8.17
                  
                  $6.85
                      - $10.582009
                  
                  2,217,470
                  
                  $                   8.01
                  
                  $6.85
                      - $10.182010
                  
                  1,962,755
                  
                  $                   7.74
                  
                  $6.85
                      - $9.732011
                  
                  694,024
                  
                  $                   7.21
                  
                  $6.85
                      - $7.512012
                  
                  404,436
                  
                  $                   7.07
                  
                  $6.85
                      -  $7.30




Page
          18




As
      of
      September 30, 2007, Legacy had the following gas basis swaps in which it
      receives floating NYMEX prices less a fixed basis differential and pay prices
      on
      the floating Waha index, a natural gas hub in West Texas. The prices that Legacy
      receives for its natural gas sales follow Waha more closely than
      NYMEX:





**Annual**
                  
                  **Basis****Calendar
                      Year**
                  
                  **Volumes
                      (Mcf)**
                  
                  **Differential
                      per Mcf**2007
                  
                  390,000
                  
                  ($0.88)2008
                  
                  1,422,000
                  
                  ($0.84)2009
                  
                  1,320,000
                  
                  ($0.68)2010
                  
                  1,200,000
                  
                  ($0.57)




As
      of
      September 30, 2007, Legacy had the following Mont Belvieu, Non-Tet OPIS natural
      gas liquids swaps paying floating natural gas liquids prices and receiving
      fixed
      prices for a portion of its future natural gas liquids production as indicated
      below:





**Annual**
                
                **Average**
                
                **Price****Calendar
                    Year**
                
                **Volumes
                    (Gal)**
                
                **Price
                    per Gal**
                
                **Range
                    per Gal**2007
                
                1,682,838
                
                $                   1.32
                
                $0.79
                    - $1.682008
                
                6,458,004
                
                $                   1.27
                
                $0.66
                    - $1.622009
                
                2,265,480
                
                $                   1.15
                
                $1.15





On
      August 29, 2007, Legacy entered into
      LIBOR interest rate swaps beginning in October of 2007 and extending through
      November 2011. The swap transaction has Legacy paying its counterparty floating
      rates and receiving fixed rates ranging from 4.8075% to 4.82%, per annum, on
      a
      total notional amount of $54 million. The swaps are settled on a quarterly
      basis, beginning  in January of 2008 and ending in November of 2011.
      The table below summarizes the interest rate swap position as of September
      30,
      2007.





Legacy
      accounts for these interest rate swaps pursuant to FAS No. 133 – *Accounting
      for Derivative Insruments and Hedging Activities*, as amended. This
      statement establishes accounting and reporting standards requiring that
      derivative instruments be recorded at fair market value and included in the
      balance sheet as assets or liabilities.





As
      the
      term of Legacy’s interest rate swaps extend through November of 2011, a period
      that extends beyond the term of the credit agreement, which expires on March
      15,
      2010, Legacy did not specifically designate these derivatives as cash flow
      hedges, even though they reduce its exposure to changes in interest rates.
      Therefore, the mark-to-market of these instruments is recorded in current
      earnings.





**Estimated****Fair
                          Market Value****Fixed**
                      
                      **Effective**
                      
                      **Maturity**
                      
                      **at
                          September 30,****Notional
                          Amount**
                      
                      **Rate**
                      
                      **Date**
                      
                      **Date**
                      
                      **2007**$29,000,000
                      
                      4.8200%
                      
                      10/16/2007
                      
                      10/17/2011
                      
                      ($149,901)$13,000,000
                      
                      4.8100%
                      
                      11/16/2007
                      
                      11/16/2011
                      
                      (64,927)$12,000,000
                      
                      4.8075%
                      
                      11/28/2007
                      
                      11/28/2011
                      
                      (59,732)Total
                          Fair Market Value
                      
                      
                      
                      
                      
                      
                      
                      ($274,560)





**(7)  Asset
      Retirement Obligation**




Statement
      of Financial Accounting Standards “SFAS” No. 143 requires that an
      asset retirement obligation (“ARO”) associated with the retirement of a tangible
      long-lived asset be recognized as a liability in the period in which it is
      incurred and becomes determinable. Under this method, when liabilities for
      dismantlement and abandonment costs, excluding salvage values, are initially
      recorded, the carrying amount of the related oil and natural gas properties
      is
      increased. The fair value of the ARO asset and liability is measured using
      expected future cash outflows discounted at Legacy’s credit-adjusted risk-free
      interest rate. Accretion of the liability is recognized each period using the
      interest method of allocation, and the capitalized cost is depleted over the
      useful life of the related asset.




The
      following table reflects the changes in the ARO during the year ended
      December 31, 2006 and nine months ended September 30, 2007.





**December
                        31,**
                    
                    
                    **September
                        30,****2006**
                    
                    
                    **2007**Asset
                        retirement obligation - beginning of period
                    
                    $
                    2,302,147
                    
                    
                    $
                    6,492,780Liabilities
                        incurred in Legacy formation
                    
                    
                    1,467,241
                    
                    
                    
                    -Liabilities
                        incurred with properties acquired
                    
                    
                    1,888,954
                    
                    
                    
                    1,026,335Liabilities
                        incurred with properties drilled
                    
                    
                    22,882
                    
                    
                    
                    -Liabilities
                        settled during the period
                    
                    
                    (213,343
                    )
                    
                    
                    (297,338
                    )Current
                        period accretion
                    
                    
                    242,432
                    
                    
                    
                    294,268Current
                        period revisions to oil and natural gas properties
                    
                    
                    782,467
                    
                    
                    
                    -Asset
                        retirement obligation - end of period
                    
                    $
                    6,492,780
                    
                    
                    $
                    7,516,045




Page
          19




**(8)  Earnings
      Per Unit**





The
      following table sets forth the computation of basic and diluted net earnings
      per
      unit (in thousands, except per unit):





**Three
                                    Months Ended**
                                
                                
                                **Nine
                                    Months Ended****September
                                    30,**
                                
                                
                                **September
                                    30,****2006**
                                
                                
                                **2007**
                                
                                
                                **2006**
                                
                                
                                **2007**Income
                                    available to unitholders
                                
                                $
                                13,944
                                
                                
                                $
                                2,164
                                
                                
                                $
                                6,669
                                
                                
                                $
                                (4,755
                                )Weighted
                                    average number of units outstanding
                                
                                
                                18,386,817
                                
                                
                                
                                26,021,518
                                
                                
                                
                                15,952,509
                                
                                
                                
                                25,492,521Effect
                                    of dilutive securities:Unit
                                    options
                                
                                
                                -
                                
                                
                                
                                30,700
                                
                                
                                
                                -
                                
                                
                                
                                -Restricted
                                    units
                                
                                
                                -
                                
                                
                                
                                20,668
                                
                                
                                
                                -
                                
                                
                                
                                -Weighted
                                    average units and potential units outstanding
                                
                                
                                18,386,817
                                
                                
                                
                                26,072,886
                                
                                
                                
                                15,952,509
                                
                                
                                
                                25,492,521Basic
                                    earnings per unit
                                
                                $
                                0.76
                                
                                
                                $
                                0.08
                                
                                
                                $
                                0.42
                                
                                
                                $
                                (0.19
                                )Diluted
                                    earnings per unit
                                
                                $
                                0.76
                                
                                
                                $
                                0.08
                                
                                
                                $
                                0.42
                                
                                
                                $
                                (0.19
                                )





**(9)  Unit-Based
      Compensation**




***Long
      Term Incentive Plan***




Concurrent
      with the Legacy Formation on March 15, 2006, a Long-Term Incentive Plan
      (“LTIP”) for Legacy was created and Legacy adopted
      SFAS No. 123(R)-*Share-Based Payment*. Legacy adopted the
      Legacy Reserves LP Long-Term Incentive Plan for its employees, consultants
      and
      directors, its affiliates and its general partner. The awards under the LTIP
      may
      include unit grants, restricted units, phantom units, unit options and unit
      appreciation rights. The LTIP permits the grant of awards covering an aggregate
      of 2,000,000 units. As of September 30, 2007 grants of awards net of
      forfeitures covering 392,460 units had been made. The LTIP is administered
      by the compensation committee of the board of directors of Legacy’s general
      partner.





SFAS No. 123(R)
      requires companies to measure the cost of employee services in exchange for
      an
      award of equity instruments based on a grant-date fair value of the award (with
      limited exceptions), and that cost must generally be recognized over the-vesting
      period of the award. Prior to April of 2007, Legacy utilized the equity method
      of accounting as described in SFAS No. 123(R) to recognize the cost associated
      with unit options. However, SFAS No. 123(R) stipulates that “if an entity that
      nominally has the choice of settling awards by issuing stock predominately
      settles in cash, or if the entity usually settles in cash whenever an employee
      asks for cash settlement, the entity is settling a substantive liability rather
      than repurchasing an equity instrument.”





The
      initial vesting of options occurred on March 15, 2007, with initial option
      exercises occurring in April 2007. At the time of the initial exercise Legacy
      settled these exercises in cash and determined it was likely to do so for future
      option exercises. Consequently, in April 2007, Legacy began accounting for
      unit
      option grants by utilizing the liability method as described in SFAS No. 123(R).
      The liability method requires companies to measure the cost of the employee
      services in exchange for a cash award based on the fair value of the underlying
      security at the end of the period. Compensation cost is recognized based on
      the
      change in the liability between periods.




As
      described below, Legacy has also issued phantom units under the LTIP. Because
      Legacy’s current intent is to settle these awards in cash, Legacy is accounting
      for the phantom units by utilizing the liability method.





On
      June
      27, 2007, Legacy granted 3,000 phantom units to an employee. On July 16, 2007,
      Legacy granted 5,000 phantom units to an employee. The phantom units awarded
      vest ratably over a five year period, beginning on the date of grant. In
      conjunction with this grant, the employees are entitled to dividend equivalent
      rights (“DER’s”) for unvested units held at the date of dividend payment.
      Compensation expense related to the phantom units and associated DER’s was
      $22,027 for the nine months ended September 30, 2007.





On
      August
      20, 2007, the board of directors of Legacy’s general partner, upon
      recommendation from the Compensation Committee, approved phantom unit awards
      which may award up to 175,000 units to five key executives of Legacy based
      on
      achievement of targeted annual MLP distribution levels over a base amount of
      $1.64 per unit.  These awards are to be determined annually based
      solely on the annualized level of per unit distributions for the fourth quarter
      of each calendar year and subsequently vested over a 3 year period. There is
      a
      range of 0% to 100% of the distribution levels at which the performance
      condition may be met. For each quarter, management recommends to the board
      an
      appropriate level of per unit distribution based on available cash of Legacy.
      This level of distribution is approved by the board subsequent to management’s
      recommendation. Probable issuances for the purposes of calculating compensation
      expense associated therewith are determined based on management’s determination
      of probable future distribution levels. Expense associated with probable vesting
      is recognized over the period from the date probable vesting is determined
      to
      the end of the three year vesting period. Compensation expense related to the
      phantom units was $8,435 for the nine months ended September 30,
      2007.




Page
          20




On
      March 15, 2006, Legacy issued an aggregate of 52,616  restricted units
      to two employees. The restricted units awarded vest ratably over a three-year
      period, beginning on the date of grant. On May 5, 2006, Legacy issued
      12,500  restricted units to an employee. The restricted units awarded vest
      ratably over a five-year period, beginning on the date of grant. Compensation
      expense related to restricted units was $184,875 and $255,492 for the nine
      months ended September, 30, 2006 and 2007, respectively. As of
      September 30, 2007, there was a total of $581,439 of unrecognized
      compensation expense related to the non-vested portion of these restricted
      units. At September 30, 2007, this cost was expected to be recognized over
      a weighted-average period of 2.0 years. Pursuant to the provisions of
      SFAS 123(R), Legacy’s issued units, as reflected in the accompanying
      consolidated balance sheet at September 30, 2007 does not include
      45,078 units related to unvested restricted unit awards.




On
      May 1, 2006, Legacy granted and issued 1,750 units to each of its five
      non-employee directors as part of their annual compensation for serving on
      the
      board of directors of Legacy’s general partner. The value of each unit was
      $17.00 at the time of grant.




During
      the year ended December 31, 2006, Legacy issued 273,000 unit option awards
      to officers and employees which vest ratably over a three-year period. All
      options granted in 2006 expire five years from the grant date and are
      exercisable when they vest. During the nine month period ended
      September 30, 2007, Legacy issued 83,000 unit option awards to employees
      which vest ratably over a three-year period. During the nine-month period ended
      September 30, 2007, Legacy issued 66,116 unit option awards which cliff-vest
      at
      the end of a three-year period. All options granted in 2007 expire five years
      from the grant date and are exercisable when they vest.




For
      the
      nine-month period ended September 30, 2007, Legacy recorded $855,345 of
      compensation expense based on its use of the Black-Scholes model to estimate
      the
      September 30, 2007 fair value of these unit option awards and options exercised
      during the period. As of September 30, 2007, there was a total of
      $1,262,999 of unrecognized compensation costs related to the non-vested portion
      of these unit option awards. At September 30, 2007, this cost was expected
      to be
      recognized over a weighted-average period of 2.10 years. Compensation
      expense is based upon the fair value as of September 30, 2007 and is recognized
      as a percentage of the service period satisfied. Since Legacy is a new public
      company and has minimal trading history, it has used an estimated volatility
      factor of approximately 42% based upon the historical trends of a representative
      group of publicly-traded companies in the energy industry and employed the
      fair
      value method to estimate the September 30, 2007 fair value to be realized as
      compensation cost based on the percentage of service period satisfied. In the
      absence of historical data, Legacy has assumed an estimated forfeiture rate
      of
      5%. As required by SFAS No. 123(R), the Company will adjust the
      estimated forfeiture rate based upon actual experience. Legacy has assumed
      an
      annual distribution rate of $1.68 per unit.




A
      summary
      of option activity for the nine months ended September 30, 2007 is as
      follows:





**Weighted****Weighted**
                  
                  **Average****Average**
                  
                  **Remaining****Exercise**
                  
                  **Contractual****Units**
                  
                  **Price**
                  
                  **Term**Outstanding
                    at January 1, 2007
                  
                  260,000
                  
                  $          17.01Granted
                  
                  149,116
                  
                  $          23.28Exercised
                  
                  (23,038)
                  
                  $          17.00Forfeited
                  
                  (16,656)
                  
                  $          17.09Outstanding
                      at September 30, 2007
                  
                  369,422
                  
                  $          19.54
                  
                  4.1
                      yearsOptions
                      exercisable at September 30, 2007
                  
                  61,798
                  
                  $          17.01
                  
                  -




The
      following table summarizes the status of the Legacy’s non-vested unit options
      since January 1, 2007:




**Non-Vested
                          Options****Weighted-****Number
                          of**
                      
                      
                      **Average
                          Fair****Units**
                      
                      
                      **Value**Non-vested
                          at January 1, 2007
                      
                      
                      260,000
                      
                      
                      $
                      2.62Granted
                      
                      
                      149,116
                      
                      
                      $
                      4.54Vested
                          - Unexercised
                      
                      
                      (61,798
                      )
                      
                      $
                      6.10Vested
                          - Exercised
                      
                      
                      (23,038
                      )
                      
                      $
                      10.14Forfeited
                      
                      
                      (16,656
                      )
                      
                      $
                      9.56Non-vested
                          at September 30, 2007
                      
                      
                      307,624
                      
                      
                      $
                      5.47




Legacy
      has used a weighted-average risk free interest rate of 4.6% in its Black-Scholes
      calculation of fair value, which approximates the U.S. Treasury
      interest rates at September 30, 2007 whose term is consistent with the expected
      life of the unit options. Expected life represents the period of time that
      options are expected to be outstanding and is based on Legacy’s best estimate.
      The following table represents the weighted average assumptions used for the
      Black-Scholes option-pricing model.





**Nine
                      Months Ended****September
                      30,****2007**Expected
                      life (years)
                  
                  
                  5Annual
                      interest rate
                  
                  
                  4.6
                  %Annual
                      distribution rate per unit
                  
                  $
                  1.68Volatility
                  
                  
                  42
                  %




Page
          21




**(10)  Subsequent
      Events**





On
      August
      30, 2007, Legacy entered into a definitive purchase agreement to acquire certain
      oil and natural gas producing properties from a private party for a cash
      purchase price of $15.3 million, subject to customary purchase price
      adjustments. The properties are located in the Permian Basin. The acquisition
      closed on October 1, 2007. This acquisition will be accounted for as a purchase
      of oil and natural gas assets.





On
      September 4, 2007, Legacy entered into a definitive purchase agreement to
      acquire certain oil and natural gas producing properties from private parties
      for a cash purchase price of $60.5 million, subject to customary purchase price
      adjustments. The properties are located in the Permian Basin. The acquisition
      closed on October 1, 2007. This acquisition will be accounted for as a purchase
      of oil and natural gas assets.





On
      October 24, 2007, Legacy entered into a Third Amendment to Credit Agreement
      (the
“Third Amendment”) to the Legacy Facility. Pursuant to the Third Amendment, the
      maximum credit amount has been increased to $500 million and the borrowing
      base
      has been increased to $225 million.  Additionally, the Legacy Facility
      provides that Legacy may elect that borrowing be comprised entirely of alternate
      base rate (ABR) loans or Eurodollar Loans. Under the Third Amendment, interest
      on the loans is determined, with respect to ABR Loans, the alternate base rate
      equals the higher of the prime rate or the Federal funds effective rate plus
      0.50%, plus an applicable margin between 0% and 0.25%; and with respect to
      Eurodollar loans, interest is calculated using the London interbank rate (LIBOR)
      plus an applicable margin between 1.00% and 1.75%.





On
      October 18, 2007, Legacy’s Board of Directors approved a distribution of $0.43
      per unit payable on November 14, 2007 to unitholders of record on October 31,
      2007.




Legacy
        entered into a Unit Purchase Agreement (the “Purchase Agreement”), dated
        effective as of November 7, 2007, with Legacy Reserves GP, LLC and certain
        institutional investors (the “Purchasers”) to sell an aggregate of 3,642,369
        units representing limited partner interests in LRLP (the “Units”) in a private
        placement (the “Private Placement”). The negotiated purchase price for the Units
        in the Purchase Agreement was $20.50 per unit, or approximately $75 million
        in
        the aggregate.
 
 The
        Private Placement closed, and 3,642,369 Units were issued, on November 8,
        2007.
        LRLP will use the net proceeds from the Private Placement primarily to reduce
        debt currently outstanding under the Legacy Facility.  The borrowings
        were used to finance the acquisition of properties in the Texas Panhandle
        and
        Permian Basin which closed during October 2007 for approximately $74
        million.  The Private Placement pursuant to the Purchase Agreement is
        being made in reliance upon an exemption from the registration requirements
        of
        the Securities Act of 1933, as amended, pursuant to Section 4(2)
        thereof.
  In
        connection
        with the Purchase Agreement, LRLP also entered into a Registration Rights
        Agreement dated November 8, 2007 (the “Registration Rights Agreement”) with
        the Purchasers. The Registration Rights Agreement requires LRLP to file a
        shelf
        registration statement with the Securities and Exchange Commission (“SEC”) to
        register the Units as soon as practicable after the closing date of the Private
        Placement, but in any event within 90 days after the closing, which
        occurred on November 8, 2007. In addition, the Registration Rights
        Agreement requires LRLP to use its commercially reasonable efforts to cause
        the
        shelf registration statement to become effective no later than 180 days
        after the closing date of the Private Placement (the “Target Effective Date”).
        If the registration statement covering the Units is not declared effective
        by
        the SEC within 180 days after the closing date of the Private Placement
        (the “Target Effective Date”), then LRLP will be liable to each Purchaser for
        liquidated damages, and not as a penalty, of 0.25% of the product of $20.50
        (the
        purchase price) times the number of Units purchased by the Purchaser (the
        “Liquidated Damages Amount”) per the 30-day period for the first 30 days
        following the Target Effective Date, increasing by an additional 0.25% of
        the
        Liquidated Damages Amount per each non-overlapping 30-day period for each
        subsequent 30-day period subsequent to the 30 days following the Target
        Effective Date, up to a maximum of 1.00% of the Liquidated Damages Amount
        per
        each non-overlapping 30-day period (i.e., 0.25% for 1-30 days; 0.5% for
        31-60 days; 0.75% for 61-90 days; and 1.0% thereafter);
*provided*, that the aggregate amount of liquidated damages payable by
        LRLP under the Registration Rights Agreement to each Purchaser shall not
        exceed
        10.0% of the Liquidated Damages Amount with respect to such Purchaser. The
        Registration Rights Agreement also provides for the payment of liquidated
        damages in the event LRLP suspends the use of the shelf registration statement
        in excess of permitted periods. The Registration Rights Agreement also gives
        certain Purchasers piggyback registration rights with other shelf registration
        statements under certain circumstances.


Page
          22




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





**Cautionary
      Statement Regarding Forward Looking Information**





This
      document contains
      forward-looking statements that are subject to a number of risks and
      uncertainties, many of which are beyond our control, which may include
      statements about our:




•           business
      strategy;





•           financial
      strategy;





•           drilling
      locations;





•           oil
      and natural gas reserves;




•           technology;





•           realized
      oil and natural gas prices;





•           production
      volumes;





•           lease
      operating expenses, general and administrative costs and finding and development
      costs;





•           future
      operating results; and





•           plans,
      objectives, expectations and intentions.





All
      of these types of statements,
      other than statements of historical fact included in this document, are
      forward-looking statements. In some cases, you can identify forward-looking
      statements by terminology such as “may,” “could,” “should,” “expect,” “plan,”
“project,” “intend,” “anticipate,” “believe,” “estimate,” “predict,”
“potential,” “pursue,” “target,” “continue,” the negative of such terms or other
      comparable terminology.





The
      forward-looking statements
      contained in this document are largely based on our expectations, which reflect
      estimates and assumptions made by our management. These estimates and
      assumptions reflect our best judgment based on currently known market conditions
      and other factors. Although we believe such estimates and assumptions to be
      reasonable, they are inherently uncertain and involve a number of risks and
      uncertainties that are beyond our control. In addition, management’s assumptions
      about future events may prove to be inaccurate. All readers are cautioned that
      the forward-looking statements contained in this document are not guarantees
      of
      future performance, and we cannot assure any reader that such statements will
      be
      realized or the forward-looking events and circumstances will occur. Actual
      results may differ materially from those anticipated or implied in the
      forward-looking statements due to factors described in Legacy’s Annual Report on
      Form 10-K for the year ended December 31, 2006 in Item 1A under “Risk Factors.”
The forward-looking statements in this document speak only as of the date of
      this document; we disclaim any obligation to update these statements unless
      required by securities law, and we caution you not to rely on them unduly.
      These
      cautionary statements qualify all forward-looking statements attributable to
      us
      or persons acting on our behalf.




**Overview**




We
      were
      formed in October 2005. Upon completion of our private equity offering and
      as a
      result of the related Legacy Formation on March 15, 2006, we acquired oil
      and natural gas properties and business operations from our Founding Investors
      and three charitable foundations. Although we were the surviving entity for
      legal purposes, the formation transactions are treated as a purchase with Moriah
      Properties, Ltd. and its affiliates, or the Moriah Group, being considered,
      on a
      combined basis, as the acquiring entity for accounting purposes. Therefore,
      the
      accounts reflected in our historical financial statements prior to
      March 15, 2006 are those of the Moriah Group.




On
      January 18, 2007, we closed our IPO of 6,900,000 units representing
      limited partner interests at an IPO price of $19.00 per unit. Net proceeds
      to the partnership after underwriting discounts and estimated offering expenses
      were approximately $122 million, all of which were used to repay the $115.8
      million of indebtedness outstanding under our credit facility and for general
      partnership purposes.





The
      Moriah Group owned and operated oil and natural gas producing properties located
      primarily in the Permian Basin of West Texas and southeast New Mexico. The
      Moriah Group included the accounts of Moriah Resources, Inc. as the general
      partner of Moriah Properties, Ltd., the oil and natural gas interests
      individually owned by Dale A. and Rita Brown until October 1, 2005 when
      those interests were transferred to DAB Resources, Ltd., DAB Resources, Ltd.
      and
      the accounts of MBN Properties LP. The Moriah Group consolidated MBN Properties
      LP as a variable interest entity with the portion of net income (loss)
      applicable to the other owners’ equity interests eliminated through a
      non-controlling interest adjustment. Although MBN Management, LLC, the general
      partner of MBN Properties LP, is also a variable interest entity, it was
      accounted for by the Moriah Group using the equity method.




Page
          23




Because
      of our rapid growth through acquisitions and development of properties,
      historical results of operations and period-to-period comparisons of these
      results and certain financial data may not be meaningful or indicative of future
      results.




The
      operating results of the properties acquired in the Legacy Formation are
      included in the results of operations from March 15, 2006, the operating
      results of the South Justis Unit properties and the Farmer Field properties
      acquired on June 29, 2006 have been included from July 1, 2006, the
      operating results of the Kinder Morgan properties have been included from
      August 1, 2006, the operating results of the Binger properties have been
      included from April 16, 2007, the operating results of the Ameristate properties
      have been included from May 1, 2007, the operating results of the TSF properties
      have been included from May 25, 2007, the operating results of the Raven
      Shenandoah properties have been included from May 31, 2007 and the operating
      results of the Raven OBO properties have been included from August 3,
      2007.




Acquisitions
      have been financed with a combination of proceeds from bank borrowings,
      issuances of units and cash flow from operations. Post-acquisition activities
      are focused on evaluating and exploiting the acquired properties and evaluating
      potential add-on acquisitions.




Our
      revenues, cash flow from operations and future growth depend substantially
      on
      factors beyond our control, such as economic, political and regulatory
      developments and competition from other sources of energy. Oil and natural
      gas
      prices historically have been volatile and may fluctuate widely in the
      future.




Sustained
      periods of low prices for oil or natural gas could materially and adversely
      affect our financial position, our results of operations, the quantities of
      oil
      and natural gas reserves that we can economically produce and our access to
      capital.




Higher
      oil and natural gas prices have led to higher demand for drilling rigs,
      operating personnel and field supplies and services, and have caused increases
      in the costs of those goods and services. To date, the higher sales prices
      have
      more than offset the higher drilling and operating costs. Given the inherent
      volatility of oil and natural gas prices, which are influenced by many factors
      beyond our control, we plan our activities and budget based on sales price
      assumptions which historically have been lower than the average sales prices
      received. We focus our efforts on increasing oil and natural gas production
      and
      reserves while controlling costs at a level that is appropriate for long-term
      operations.




We
      face the challenge of natural
      production declines. As initial reservoir pressures are depleted, oil and
      natural gas production from a given well or formation decreases. We attempt
      to
      overcome this natural decline by utilizing multiple types of recovery techniques
      such as secondary (waterflood) and tertiary (CO2) recovery methods to repressure
      the reservoir and recover additional oil, drilling to find additional reserves,
      restimulating existing wells and acquiring more reserves than we produce. Our
      future growth will depend on our ability to continue to add reserves in excess
      of production. We will maintain our focus on adding reserves through
      acquisitions and exploitation projects. Our ability to add reserves through
      acquisitions and exploitation projects is dependent upon many factors including
      our ability to raise capital, obtain regulatory approvals and contract drilling
      rigs and personnel.




Our
      revenues are highly sensitive to changes in oil and natural gas prices and
      to
      levels of production. As set forth under “Cash Flow from Operations” below, we
      have hedged a significant portion of our expected production, which allows
      us to
      mitigate, but not eliminate, oil and natural gas price risk. We continuously
      conduct financial sensitivity analyses to assess the effect of changes in
      pricing and production. These analyses allow us to determine how changes in
      oil
      and natural gas prices will affect our ability to execute our capital investment
      programs and to meet future financial obligations. Further, the financial
      analyses allow us to monitor any impact such changes in oil and natural gas
      prices may have on the value of our proved reserves and their impact, if any,
      on
      any redetermination to our borrowing base under our credit
      facility.




Legacy
      does not specifically designate derivative instruments as cash flow hedges;
      therefore, the mark-to-market adjustment reflecting the unrealized gain or
      loss
      associated with these instruments is recorded in current earnings.




**Production
      and Operating Costs Reporting**




We
      strive
      to increase our production levels to maximize our revenue and cash available
      for
      distribution. Additionally, we continuously monitor our operations to ensure
      that we are incurring operating costs at the optimal level. Accordingly, we
      continuously monitor our production and operating costs per well to determine
      if
      any wells or properties should be shut in, recompleted or sold.




Such
      costs include, but are not limited to, the cost of electricity to lift produced
      fluids, chemicals to treat wells, field personnel to monitor the wells, well
      repair expenses to restore production, well workover expenses intended to
      increase production and ad valorem taxes. We incur and separately report
      severance taxes paid to the states and counties in which our properties are
      located. These taxes are reported as production taxes and are a percentage
      of
      oil and natural gas revenue. Ad valorem taxes are a percentage of property
      valuation. Gathering and transportation costs are generally borne by the
      purchasers of our oil and natural gas as the price paid for our products
      reflects these costs.




Page
          24




**Operating
      Data**




The
      following table sets forth selected financial and operating data of Legacy
      for
      the periods indicated.





**Three
                        Months Ended September 30,**
                    
                    
                    **Nine
                        Months Ended September 30,****2006**
                    
                    
                    **2007**
                    
                    
                    **2006
                        (a)**
                    
                    
                    **2007**Revenues:Oil
                        sales
                    
                    $
                    13,204,380
                    
                    
                    $
                    22,441,858
                    
                    
                    $
                    32,443,950
                    
                    
                    $
                    51,396,169Natural
                        gas liquid sales
                    
                    
                    -
                    
                    
                    
                    1,713,657
                    
                    
                    
                    -
                    
                    
                    
                    2,890,994Natural
                        gas sales
                    
                    
                    4,238,937
                    
                    
                    
                    5,240,788
                    
                    
                    
                    10,822,193
                    
                    
                    
                    13,776,326Realized
                        gain (loss) on oil swaps
                    
                    
                    (5,798,140
                    )
                    
                    
                    (845,744
                    )
                    
                    
                    (6,897,833
                    )
                    
                    
                    1,198,916Realized
                        loss on natural gas liquid swaps
                    
                    
                    -
                    
                    
                    
                    (118,044
                    )
                    
                    
                    -
                    
                    
                    
                    (159,395
                    )Realized
                        gain on natural gas swaps
                    
                    
                    1,669,838
                    
                    
                    
                    1,372,154
                    
                    
                    
                    4,715,768
                    
                    
                    
                    3,196,205Unrealized
                        gain (loss) on oil swaps
                    
                    
                    19,770,172
                    
                    
                    
                    (7,677,256
                    )
                    
                    
                    1,342,276
                    
                    
                    
                    (20,860,444
                    )Unrealized
                        loss on natural gas liquid swaps
                    
                    
                    -
                    
                    
                    
                    (650,285
                    )
                    
                    
                    -
                    
                    
                    
                    (940,557
                    )Unrealized
                        gain (loss) on natural gas swaps
                    
                    
                    2,963,768
                    
                    
                    
                    1,483,423
                    
                    
                    
                    6,373,342
                    
                    
                    
                    (2,586,381
                    )Total
                        revenue
                    
                    $
                    36,048,955
                    
                    
                    $
                    22,960,551
                    
                    
                    $
                    48,799,696
                    
                    
                    $
                    47,911,833Expenses:Oil
                        and natural gas production
                    
                    $
                    4,166,766
                    
                    
                    $
                    7,580,473
                    
                    
                    $
                    10,159,887
                    
                    
                    $
                    18,408,152Production
                        and other taxes
                    
                    $
                    1,029,511
                    
                    
                    $
                    1,886,122
                    
                    
                    $
                    2,710,392
                    
                    
                    $
                    4,360,881General
                        and administrative
                    
                    $
                    1,186,884
                    
                    
                    $
                    1,443,190
                    
                    
                    $
                    3,265,163
                    
                    
                    $
                    6,039,371Depletion,
                        depreciation, amortization  and accretion
                    
                    $
                    5,346,432
                    
                    
                    $
                    6,959,351
                    
                    
                    $
                    12,701,726
                    
                    
                    $
                    19,065,064Production:Oil
                        - barrels
                    
                    
                    202,952
                    
                    
                    
                    312,433
                    
                    
                    
                    516,057
                    
                    
                    
                    813,906Natural
                        gas liquids - gallons
                    
                    
                    -
                    
                    
                    
                    1,344,553
                    
                    
                    
                    -
                    
                    
                    
                    2,303,892Natural
                        gas - Mcf
                    
                    
                    571,246
                    
                    
                    
                    800,936
                    
                    
                    
                    1,598,909
                    
                    
                    
                    2,107,376Total
                        (Boe)
                    
                    
                    298,160
                    
                    
                    
                    477,936
                    
                    
                    
                    782,542
                    
                    
                    
                    1,219,990Average
                        daily production (Boe/d)
                    
                    
                    3,241
                    
                    
                    
                    5,195
                    
                    
                    
                    2,866
                    
                    
                    
                    4,469Average
                        sales price per unit (including hedges) (b):Oil
                        price per barrel
                    
                    $
                    133.91
                    
                    
                    $
                    44.55
                    
                    
                    $
                    52.10
                    
                    
                    $
                    38.99Natural
                        gas liquid price per gallon
                    
                    $
                    -
                    
                    
                    $
                    0.70
                    
                    
                    $
                    -
                    
                    
                    $
                    0.78Natural
                        gas price per Mcf
                    
                    $
                    15.53
                    
                    
                    $
                    10.11
                    
                    
                    $
                    13.70
                    
                    
                    $
                    6.83Combined
                        (per Boe)
                    
                    $
                    120.90
                    
                    
                    $
                    48.04
                    
                    
                    $
                    62.36
                    
                    
                    $
                    39.27Average
                        sales price per unit (including realized hedge gains/losses)
                        (c):Oil
                        price per barrel
                    
                    $
                    36.49
                    
                    
                    $
                    69.12
                    
                    
                    $
                    49.50
                    
                    
                    $
                    64.62Natural
                        gas liquid price per gallon
                    
                    $
                    -
                    
                    
                    $
                    1.19
                    
                    
                    $
                    -
                    
                    
                    $
                    1.19Natural
                        gas price per Mcf
                    
                    $
                    10.34
                    
                    
                    $
                    8.26
                    
                    
                    $
                    9.72
                    
                    
                    $
                    8.05Combined
                        (per Boe)
                    
                    $
                    44.66
                    
                    
                    $
                    62.36
                    
                    
                    $
                    52.50
                    
                    
                    $
                    59.26Average
                        sales price per unit (excluding hedges):Oil
                        price per barrel
                    
                    $
                    65.06
                    
                    
                    $
                    71.83
                    
                    
                    $
                    62.87
                    
                    
                    $
                    63.15Natural
                        gas liquid price per gallon
                    
                    $
                    -
                    
                    
                    $
                    1.27
                    
                    
                    $
                    -
                    
                    
                    $
                    1.25Natural
                        gas price per Mcf
                    
                    $
                    7.42
                    
                    
                    $
                    6.54
                    
                    
                    $
                    6.77
                    
                    
                    $
                    6.54Combined
                        (per Boe)
                    
                    $
                    58.50
                    
                    
                    $
                    61.51
                    
                    
                    $
                    55.29
                    
                    
                    $
                    55.79NYMEX
                        oil index prices per barrel:Beginning
                        of Period
                    
                    $
                    73.93
                    
                    
                    $
                    70.68
                    
                    
                    $
                    61.04
                    
                    
                    $
                    61.05End
                        of Period
                    
                    $
                    62.91
                    
                    
                    $
                    81.66
                    
                    
                    $
                    62.91
                    
                    
                    $
                    81.66NYMEX
                        gas index prices per Mcf:Beginning
                        of Period
                    
                    $
                    6.10
                    
                    
                    $
                    6.77
                    
                    
                    $
                    11.18
                    
                    
                    $
                    6.30End
                        of Period
                    
                    $
                    5.62
                    
                    
                    $
                    6.87
                    
                    
                    $
                    5.62
                    
                    
                    $
                    6.87Average
                        unit costs per Boe:Production
                        costs, excluding production and other taxes
                    
                    $
                    13.97
                    
                    
                    $
                    15.86
                    
                    
                    $
                    12.98
                    
                    
                    $
                    15.09Production
                        and other taxes
                    
                    $
                    3.45
                    
                    
                    $
                    3.95
                    
                    
                    $
                    3.46
                    
                    
                    $
                    3.57General
                        and administrative
                    
                    $
                    3.98
                    
                    
                    $
                    3.02
                    
                    
                    $
                    4.17
                    
                    
                    $
                    4.95Depletion,
                        depreciation, amortization and accretion
                    
                    $
                    17.93
                    
                    
                    $
                    14.56
                    
                    
                    $
                    16.23
                    
                    
                    $
                    15.63




(a)
              Reflects
                  the production and operating results of the oil and natural gas
                  properties
                  acquired in the March 15, 2006 formation transaction.(b)
              Includes
                  both the realized and unrealized hedge gains and losses from Legacy’s oil
                  and natural gas swaps. Since Legacy does not specifically designate
                  its
                  commodity derivative instruments as cash flow hedges, current earnings
                  reflect a mark-to-market adjustment for commodity derivatives which
                  will
                  be settled in future periods.(c)
              Includes
                  only the realized hedge gains (losses) from Legacy’s oil and natural gas
                  swaps.


Page
          25




**Results
      of Operations**




**Three-Month
      Period Ended September  30, 2007 Compared to Three-Month Period Ended
      September 30, 2006**




Legacy’s
      revenues from the sale of oil were $22.4 million and $13.2 million for
      the three-month periods ended September 30, 2007 and 2006, respectively.
      Legacy’s revenues from the sale of natural gas liquids were $1.7 million and $0
      for the three-month periods ended September 30, 2007 and 2006, respectively.
      Legacy’s revenues from the sale of natural gas were $5.2 million and
      $4.2 million for the three-month periods ended September 30, 2007 and 2006,
      respectively. The $9.2 million increase in oil revenues reflects an
      increase in oil production of 109 MBbls (54%) due primarily to the Binger,
      Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions and the increase
      in
      realized price excluding the effects of hedging of $6.77 per Bbl. The $1.7
      million increase in natural gas liquids is due primarily to the Binger
      acquisition in 2007. The $1.0 million increase in natural gas revenues
      reflects an increase in natural gas production of approximately 230 MMcf
      (40%) due primarily to the Binger, Ameristate, TSF, Raven Shenandoah and Raven
      OBO acquisitions, while the realized price per Mcf excluding the effects of
      hedging decreased $0.88 per Mcf.





For
      the
      three-month period ended September 30, 2007, Legacy recorded $6.4 million
      of net losses on oil and natural gas swaps comprised of realized gains of
      $0.4 million from net cash settlements of oil and natural gas swap
      contracts and net unrealized losses of $6.8 million. Legacy had unrealized
      net losses from oil swaps because the fixed prices of its oil swap contracts
      were below the NYMEX index prices at September 30, 2007. As a point of
      reference, the NYMEX price for light sweet crude oil for the near-month close
      at
      September 30, 2007 was $81.66 per Bbl, a price which is greater than the
      average contract prices of Legacy’s outstanding oil swap contracts. Due to the
      increase in oil prices during the quarter, the differential between Legacy’s
      fixed price oil swaps and NYMEX increased, resulting in losses for the quarter.
      Legacy had unrealized net losses from natural gas liquids swaps because the
      fixed prices of its natural gas liquids swap contracts were below the NYMEX
      index prices at September 30, 2007. Legacy had unrealized net gains from natural
      gas swaps because the fixed prices of its natural gas swap contracts were above
      the NYMEX index prices at September 30, 2007. In addition, the NYMEX price
      for
      natural gas for the near-month close at September 30, 2007 was $6.87 per
      MMbtu, a price which is less than the average contract prices of Legacy’s
      outstanding natural gas swap contracts. Due to the addition of natural gas
      swap
      contracts during the quarter at prices greater than the NYMEX natural gas price
      at September 30, 2007, the increase in natural gas prices during the quarter
      did
      not result in unrealized losses for the quarter. For the three-month period
      ended September 30, 2006, Legacy recorded $18.6 million of net gains on oil
      and natural gas swaps comprised of a realized loss of $5.8 million from net
      cash
      settlements of oil swap contracts, a realized gain of $1.7 million from net
      cash
      settlements of natural gas swap contracts, a net unrealized gain of $19.8
      million on oil swap contracts, due to the decrease in oil prices during the
      quarter which increased the differential between the NYMEX oil index price
      and
      our fixed price oil swaps, and a net unrealized gain of $3.0 million on
      natural gas swap contracts, due to the decrease in natural gas prices which
      increased the differential between the NYMEX natural gas index price and our
      fixed price natural gas swaps. Unrealized gains and losses represent a current
      period mark-to-market adjustment for commodity derivatives which will be settled
      in future periods.




Legacy’s
      oil and natural gas production expenses, excluding production and other taxes,
      increased to $7.6 million ($15.86 per Boe) for the three-month period
      ended September 30, 2007, from $4.2 million ($13.97 per Boe) for the three
      month period ended September 30, 2006. Production expenses increased primarily
      because of (i) $1.8 million related to the Binger, Ameristate, TSF,
      Raven Shenandoah and Raven OBO acquisitions, (ii) $0.3 million related to
      increases in ad valorem expenses from increased well counts and periods of
      ownership. In addition, the increase in production costs per Boe is consistent
      with industry-wide costs increases, particularly those related to oil operations
      that require lifting produced oil and water or involve enhanced recovery
      projects. Due to the rising oil and natural gas prices subsequent to September
      30, 2007, Legacy believes production expenses could continue to rise in the
      fourth quarter, to the extent that production costs correlate to oil and natural
      gas prices.




Legacy’s
      production and other taxes were $1.9 million and $1.0 million for the
      three-month periods ended September 30, 2007 and 2006, respectively. Production
      and other taxes increased primarily because of approximately
      $0.5 million of taxes related to the Binger, Ameristate, TSF Raven
      Shenandoah and Raven OBO acquisitions. The increase in production and other
      taxes per Boe is primarily due to the increase in realized prices excluding
      the
      effects of oil and natural gas swaps. As production and other taxes are a
      function of price and volume, the increase in cost per unit  is
      consistent with the increase in realized prices.




Legacy’s
      general and administrative expenses were $1.4 million and $1.2 million
      for the three-month periods ended September 30, 2007 and 2006, respectively.
      General and administrative expenses increased approximately
      $256,000 between periods primarily due to increased employee costs related
      to business expansion.




Legacy’s
      depletion, depreciation, amortization and accretion expense, or DD&A, was
      $6.9 million and $5.3 million for the three-month periods ended
      September 30, 2007 and 2006, respectively, reflecting primarily
      $1.7 million of DD&A related to recent acquisitions. In addition, the
      decrease in DD&A expense per Boe, from $17.93 to $14.56 for the three-month
      periods ended September 30, 2006 and 2007, respectively, reflects the higher
      cost basis of the producing oil and natural gas properties acquired in the
      Legacy Formation relative to the cost basis of recent acquisitions.




Impairment
      expense was $950,174 for the three-month period ended September 30, 2007
      involving seventeen separate producing fields. The impairment is primarily
      due
      to additional costs incurred during the quarter ended September 30, 2007 on
      fields from which the future estimated production revenues did not exceed these
      costs. Impairment expense was $8.6 million for the three-month period ended
      September 30, 2006, involving 22 separate producing fields, due primarily to
      the
      decline in natural gas prices from the dates at which the purchase prices for
      the PITCO acquisition and the Legacy Formation were allocated among the
      purchased properties.




Legacy
      recorded interest income of $54,285 for the three-month period ended September
      30, 2007 and $55,226 for the three-month period ended September 30, 2006. The
      decrease of $941 is a result of lower average cash balances for the current
      period.




Page
          26




Interest
      expense was $1.9 million for each of the three-month periods ended
      September 30, 2007 and 2006, reflecting lower average borrowings and higher
      average interest rates in the current period. For example, the average debt
      balance outstanding was $83 million and $98 million for the three month periods
      ended September 30, 2007 and 2006, respectively. In addition, Legacy incurred
      $275,000 in non-cash interest expense related to the mark-to-market of its
      interest rate swaps for the three-month period ended September 30,
      2007.





Legacy
      recognized $29,690 in income
      from non-controlling interest of Binger Operations, LLC (“BOL”) for the
      three-month period ended September 30, 2007. This income is primarily derived
      from BOL’s less than 1% interest in the Binger Unit.





**Nine-Month
      Period Ended September 30, 2007 Compared to Nine-Month Period Ended
      September 30, 2006**





Legacy’s
      revenues from the sale of oil were $51.4 million and $32.4 million for
      the nine-month periods ended September 30, 2007 and 2006, respectively. Legacy’s
      revenues from the sale of natural gas liquids were $2.9 million for the
      nine-month period ended September 30, 2007. Legacy’s revenues from the sale of
      natural gas were $13.8 million and $10.8 million for the nine-month
      periods ended September 30, 2007 and 2006, respectively. The $19.0 million
      increase in oil revenues reflects an increase in oil production of
      298 MBbls (58%) due primarily to the Binger, Ameristate, TSF, Raven
      Shenandoah, Raven OBO, Kinder Morgan, Larron and South Justis acquisitions,
      and
      the increase in the realized price excluding the effects of hedging of
      $0.28 per Bbl. The $2.9 million in natural gas liquids is due primarily to
      the Binger acquisition in 2007. The $3.0 million increase in natural gas
      revenues reflects an increase in natural gas production of approximately
      508 MMcf (32%) due primarily to the Binger, Ameristate, TSF, Raven OBO,
      Raven Shenandoah, Kinder Morgan, Larron and South Justis acquisitions, while
      the
      realized price per Mcf excluding the effects of hedging decreased $0.23 per
      Mcf.





For
      the
      nine-month period ended September 30, 2007, Legacy recorded $20.2 million
      of net losses on oil and natural gas swaps comprised of realized gains of
      $4.2 million from net cash settlements of oil, natural gas liquids and
      natural gas swap contracts and net unrealized losses of $24.4 million.
      Legacy had unrealized net losses from its oil swaps because the fixed prices
      of
      its oil swap contracts were below the NYMEX index prices at September 30, 2007.
      As a point of reference, the NYMEX price for light sweet crude oil for the
      near-month close at September 30, 2007 was $81.66 per Bbl, a price which is
      greater than the average contract prices of Legacy’s outstanding oil swap
      contracts. Due to the increase in oil prices during the nine-month period ended
      September 30, 2007, the differential between Legacy’s fixed price oil swaps and
      NYMEX increased, resulting in unrealized losses for the nine-month period ended
      September 30, 2007. Legacy had unrealized net losses from its natural gas liquid
      swaps because the fixed prices of its natural gas liquid swap contracts during
      the nine-month period ended September 30, 2007, were below the NYMEX index
      prices during that timeframe. Legacy had unrealized net losses from its natural
      gas swaps because the fixed prices of its natural gas swap contracts during
      the
      nine-month period ended September 30, 2007 were below the NYMEX index prices
      during that timeframe. In addition, the NYMEX price for natural gas for the
      near-month close at September 30, 2007 was $6.87 per MMbtu, a price which
      is less than the average contract prices of Legacy’s outstanding natural gas
      swap contracts. For the nine-month period ended September 30, 2006, Legacy
      recorded $5.5 million of net gains on oil and natural gas swaps comprised
      of a realized loss of $6.9 million from net cash settlements of oil swap
      contracts, a realized gain of $4.7 million from net cash settlements of natural
      gas swap contracts, a net unrealized gain of $1.3 million on oil swap contracts,
      due to the increase in oil prices during the nine-month period ended September
      30, 2007 which increased the differential between the NYMEX oil index price
      and
      our fixed price oil swaps, and a net unrealized gain of $6.4 million on
      natural gas swap contracts, due to the decrease in natural gas prices which
      increased the differential between the NYMEX natural gas index price and our
      fixed price natural gas swaps. Unrealized gains and losses represent a current
      period mark-to-market adjustment for commodity derivatives which will be settled
      in future periods.




Legacy’s
      oil and natural gas production expenses, excluding production and other taxes,
      increased to $18.4 million ($15.09 per Boe) for the nine-month period
      ended September 30, 2007, from $10.2 million ($12.98 per Boe) for the
      nine-month period ended September 30, 2006. Production expenses increased
      primarily because of (i) $2.8 million related to the Binger,
      Ameristate, TSF, Raven Shenandoah and Raven OBO acquisitions, (ii) $0.8
      million related to increases in ad valorem expenses from increased well counts
      and periods of ownership, (iii) $1.3 million related to the Legacy Formation
      and
      (iv) $1.6 million related to the South Justis, Farmer Field and Kinder Morgan
      acquisitions. In addition, the increase in production costs per Boe is
      consistent with industry-wide costs increases, particularly those related to
      oil
      operations that require lifting produced oil and water or involve enhanced
      recovery projects. Due to the rising oil and natural gas prices subsequent
      to
      September 30, 2007, Legacy believes production expenses could continue to rise
      in the fourth quarter, to the extent that production costs correlate to oil
      and
      natural gas prices.




Legacy’s
      production and other taxes were $4.4 million and $2.7 million for the
      nine-month periods ended September 30, 2007 and 2006, respectively. Production
      and other taxes increased primarily because of approximately
      $0.3 million of taxes related to the Legacy Formation and $0.8 million
      related to the Binger, Ameristate, TSF, Raven Shenandoah and Raven OBO
      acquisitions. The increase in production and other taxes per Boe is primarily
      due to the increase in realized prices excluding hedges. As production and
      other
      taxes are a function of price and volume, the increase in unit cost is
      consistent with the increase in realized prices.




Legacy’s
      general and administrative expenses were $6.0 million and $3.3 million
      for the nine-month periods ended September 30, 2007 and 2006, respectively.
      General and administrative expenses increased approximately $2.7 million
      between periods primarily due to increased employee costs related to business
      expansion, $0.9 million of costs incurred in connection with awards granted
      under the LTIP due to a $0.6 million non-cash expense related to the change
      in
      estimated fair value of the unit-based compensation liability related to unit
      options and unit appreciation rights and $0.3 million of cash payments to
      employees exercising unit options and approximately $0.5 million of costs
      incurred in connection with the preparation of the 2006 federal income tax
      return and related Form K-1’s.




Legacy’s
      depletion, depreciation, amortization and accretion expense, or DD&A, was
      $19.1 million and $12.7 million for the nine-month periods ended
      September 30, 2007 and 2006, respectively, reflecting primarily (i)
      $2.7 million of DD&A related to the Binger, Ameristate, TSF, Raven
      Shenandoah and Raven OBO acquisitions, (ii) $1.1 million of DD&A related to
      the Legacy Formation and (iii) $1.6 million related to the South Justis, Farmer
      Field and Kinder Morgan acquisitions. In addition, the decrease in DD&A
      expense per Boe, from $16.23 to $15.63 for the nine-month periods ended
      September 30, 2006 and 2007, respectively, reflects the higher cost basis of
      the
      producing oil and natural gas properties acquired in the Legacy Formation
      relative to the cost basis of recent acquisitions.




Impairment
      expense was $1.2 million for the nine-month period ended September 30, 2007
      involving thirty separate producing fields. The impairment is primarily due
      to
      additional costs incurred during the nine months ended September 30, 2007 on
      fields from which the future estimated production revenues did not exceed these
      costs. Impairment expense was $8.6 million for the nine-month period ended
      September 30, 2006, involving 22 separate producing fields, due primarily to
      the
      decline in natural gas prices from the dates at which the purchase prices for
      the PITCO acquisition and the Legacy Formation were allocated among the
      purchased properties.




Legacy
      recorded interest income of $205,443 for the nine-month period ended September
      30, 2007 and $93,659 for the nine-month period ended September 30, 2006. The
      increase of $111,784 is a result of higher average cash balances in the current
      period.




Page
          27




Interest
      expense was $3.4 million and $4.5 million for the nine-month periods
      ended September 30, 2007 and 2006, respectively, reflecting lower average
      borrowings and higher average interest rates in the current period. For example,
      the average debt balance outstanding was $50.2 million and $59.6 million for
      the
      nine month periods ended September 30, 2007 and 2006, respectively. In addition,
      Legacy incurred $275,000 in non-cash interest expense related to the
      mark-to-market on its interest rate swaps for the nine-month period ended
      September 30, 2007.




Legacy
      recorded equity in loss of partnership of $317,788 for the nine-month period
      ended September 30, 2006. The recorded equity in loss of partnership was related
      to Legacy’s investment in MBN Management, LLC, which was formed in July 2005.
      Legacy did not acquire any interest in MBN Management, LLC as part of the Legacy
      Formation. Accordingly, no such loss was incurred in the current
      period.





Legacy
      recognized $40,600 in income
      from non-controlling interest of BOL for the nine-month period ended September
      30, 2007. This income is primarily derived from BOL’s less than 1% interest in
      the Binger Unit.




**Capital
      Resources and Liquidity**




Legacy’s
      primary sources of capital and liquidity have been bank borrowings, cash flow
      from operations, its private offering in March 2006 and the IPO in January
      2007.
      To date, Legacy’s primary use of capital has been for acquisitions, repayment of
      bank borrowings and exploitation of oil and natural gas properties.




As
      we
      pursue growth, we continually monitor the capital resources available to us
      to
      meet our future financial obligations and planned capital expenditures. Our
      future success in growing reserves and production will be highly dependent
      on
      capital resources available to us and our success in acquiring and exploiting
      additional reserves. We actively review acquisition opportunities on an ongoing
      basis. If we were to make significant additional acquisitions for cash, we
      would
      need to borrow additional amounts under our credit facility, if available,
      or
      obtain additional debt or equity financing. Our credit facility imposes certain
      restrictions on our ability to obtain additional debt financing. Based upon
      current oil and natural gas price expectations for the year ending
      December 31, 2007, we anticipate that our cash on hand, cash flow from
      operations and available borrowing capacity under our credit facility will
      provide us sufficient working capital to meet our planned capital expenditures
      of $12.5 million and planned cash distributions of $40.4 million,
      which reflects the $7.6 million of distributions paid in the first quarter
      of 2007, $10.7 million paid in the second quarter of 2007, $10.9 million
      paid in  the third quarter of 2007 and $11.2 million of planned
      distributions in the fourth quarter of 2007. Please read “— Financing
      Activities — Our Revolving Credit Facility.”





On
      October 24, 2007, Legacy’s bank group increased Legacy’s borrowing base to $225
      million as part of the Third Amendment to the Credit Agreement.




**Cash
      Flow from Operations**




Legacy’s
      net cash provided by operating activities was $33.3 million and
      $21.8 million for the nine-month periods ended September 30, 2007 and
      2006, respectively, with the 2007 period being favorably impacted by higher
      sales volumes, offset by the higher working capital needs of our growing
      business.




Our
      cash
      flow from operations is subject to many variables, the most significant of
      which
      is the volatility of oil and natural gas prices. Oil and natural gas prices
      are
      determined primarily by prevailing market conditions, which are dependent on
      regional and worldwide economic activity, weather and other factors beyond
      our
      control. Our future cash flow from operations will depend on our ability to
      maintain and increase production through acquisitions and exploitation projects,
      as well as the prices of oil and natural gas.




We
      enter
      into oil and natural gas derivative contracts to reduce the impact of oil and
      natural gas price volatility on our operations. Currently, we use swaps, based
      on a NYMEX pricing index, to reduce our exposure to changes in oil, natural
      gas
      liquids and natural gas prices, which do not include the additional net discount
      that we typically experience in the Permian Basin. At September 30, 2007,
      we had in place oil, natural gas liquids and natural gas swaps covering
      significant portions of our estimated 2007 through 2011 oil and natural gas
      production. We have swap contracts covering approximately 77% of our remaining
      expected oil, natural gas liquid and natural gas production for 2007. We also
      have swap contracts covering approximately 67% of our currently expected oil
      and
      natural gas production for 2008 through 2010 from existing estimated total
      proved reserves.




By
      reducing the cash flow effects of price volatility from a significant portion
      of
      our oil and natural gas production, we have mitigated, but not eliminated,
      the
      potential effects of changing prices on our cash flow from operations for those
      periods. While mitigating negative effects of falling commodity prices, these
      derivative contracts also limit the benefits we would receive from increases
      in
      commodity prices. It is our policy to enter into derivative contracts only
      with
      counterparties that are major, creditworthy financial institutions deemed by
      management as competent and competitive market makers.




Page
          28




The
      following tables summarize, for the periods indicated, our oil and natural
      gas
      swaps currently in place through December 31, 2012. We use swaps as our
      mechanism for offsetting the cash flow effects of changes in commodity prices
      whereby we pay the counterparty floating prices and receive fixed prices from
      the counterparty, which serves to reduce the effects on cash flow of the
      floating prices we are paid by purchasers of our oil and natural gas. These
      transactions are settled based upon the NYMEX price of oil at Cushing, Oklahoma,
      and NYMEX price of natural gas at Henry Hub and ANR-OK on the average of
      the three final trading days of the month and settlement occurs on the fifth
      day
      of the production month.





**Annual**
                
                **Average**
                
                **Price****Calendar
                    Year**
                
                **Volumes
                    (Bbls)**
                
                **Price
                    per Bbl**
                
                **Range
                    per Bbl**2007
                
                273,578
                
                $                 68.81
                
                $64.15
                    - $75.702008
                
                1,025,249
                
                $                 68.57
                
                $62.25
                    - $73.452009
                
                948,013
                
                $                 66.65
                
                $61.05
                    - $71.402010
                
                883,445
                
                $                 65.26
                
                $60.15
                    - $71.152011
                
                665,040
                
                $                 70.17
                
                $67.33
                    - $71.402012
                
                549,600
                
                $                 70.04
                
                $67.72
                    - $71.15





**Annual**
                
                **Average**
                
                **Price****Calendar
                    Year**
                
                **Volumes
                    (MMBtu)**
                
                **Price
                    per MMBtu**
                
                **Range
                    per MMBtu**2007
                
                656,192
                
                $                   8.59
                
                $6.85
                    - $10.012008
                
                2,402,970
                
                $                   8.17
                
                $6.85
                    - $10.582009
                
                2,217,470
                
                $                   8.01
                
                $6.85
                    - $10.182010
                
                1,962,755
                
                $                   7.74
                
                $6.85
                    - $9.732011
                
                694,024
                
                $                   7.21
                
                $6.85
                    - $7.512012
                
                404,436
                
                $                   7.07
                
                $6.85
                    -  $7.30




In
      July
      2006, we entered into basis swaps to receive floating NYMEX prices less a fixed
      basis differential and pay prices based on the floating Waha index, a natural
      gas hub in West Texas. The prices that we receive for our natural gas sales
      follow Waha more closely than NYMEX. The basis swaps thereby provide a better
      match between our natural gas sales and the settlement payments on our natural
      gas swaps. The following table summarizes, for the periods indicated, our NYMEX
      basis swaps currently in place through December 31, 2010.




**Annual**
                  
                  **Basis****Calendar
                      Year**
                  
                  **Volumes
                      (Mcf)**
                  
                  **Differential
                      per Mcf**2007
                  
                  390,000
                  
                  ($0.88)2008
                  
                  1,422,000
                  
                  ($0.84)2009
                  
                  1,320,000
                  
                  ($0.68)2010
                  
                  1,200,000
                  
                  ($0.57)





On
      March
      30, 2007, we entered into natural gas liquids swaps to hedge the impact of
      volatility in the spot prices of natural gas liquids. On September 7, 2007,
      we entered into additional natural gas liquids swaps for the fourth quarter
      of
      2007 and calendar year 2008. These swaps hedge the spot prices for ethane,
      propane, iso-butane, normal butane and natural gasoline tracked on the Mont
      Belvieu, Non-Tet OPIS exchange. We entered into these swaps as anticipatory
      asset hedges related to our acquisition of the East Binger (Marchand) Unit
      in
      Caddo County, Oklahoma.  The following table summarizes, for the
      periods indicated, our Mont Belvieu, Non-Tet Opis natural gas liquids swaps
      currently in place through December 31, 2009.





**Annual**
                  
                  **Average**
                  
                  **Price****Calendar
                      Year**
                  
                  **Volumes
                      (Gal)**
                  
                  **Price
                      per Gal**
                  
                  **Range
                      per Gal**2007
                  
                  1,682,838
                  
                  $                   1.32
                  
                  $0.79
                      - $1.682008
                  
                  6,458,004
                  
                  $                   1.27
                  
                  $0.66
                      - $1.622009
                  
                  2,265,480
                  
                  $                   1.15
                  
                  $1.15




Page
          29




**Investing
      Activities — Acquisitions and Capital Expenditures**




Legacy’s
      cash capital expenditures were $98.3 million for the nine-month period
      ended September 30, 2007. The total includes $88.0 million for
      acquisition of oil and natural gas properties in five acquisitions and
      $10.3 million of exploitation projects.




Legacy’s
      cash capital expenditures were $45.4 million for the nine-month period
      ended September 30, 2006. The total includes $7.7 million paid to three
      charitable foundations in the Legacy Formation for oil and natural gas
      properties, $8.8 million, $5.6 million and $17.2 million for the purchase of
      oil
      and natural gas properties in the South Justis Unit from Henry Holding LP,
      the
      Farmer Field from Larron Oil Corporation and various oil and natural gas
      properties from Kinder Morgan, respectively, and $7.0 million of capitalized
      operating rights related to the South Justis Unit.




We
      currently anticipate that our drilling budget, which predominantly consists
      of
      drilling, recompletion and refracture stimulation projects and one tertiary
      (CO2) recovery project, will be $12.5 million for the year ending
      December 31, 2007. Our borrowing capacity under our revolving credit
      facility is $59.7 million as of November 9, 2007. The amount and
      timing of our capital expenditures is largely discretionary and within our
      control, with the exception of certain projects managed by other operators.
      If
      oil and natural gas prices decline below levels we deem acceptable, we may
      defer
      a portion of our planned capital expenditures until later periods. Accordingly,
      we routinely monitor and adjust our capital expenditures in response to changes
      in oil and natural gas prices, drilling and acquisition costs, industry
      conditions and internally generated cash flow. Matters outside our control
      that
      could affect the timing of our capital expenditures include obtaining required
      permits and approvals in a timely manner and the availability of rigs and labor
      crews. Based upon current oil and natural gas price expectations for the year
      ending December 31, 2007, we anticipate that we will have sufficient
      sources of working capital, including our cash flow from operations and
      available borrowing capacity under our credit facility, to meet our cash
      obligations including our planned capital expenditures of $12.5 million and
      planned cash distributions of $40.4 million for the year ending
      December 31, 2007. However, future cash flows are subject to a number of
      variables, including the level of oil and natural gas production and prices.
      There can be no assurance that operations and other capital resources will
      provide cash in sufficient amounts to maintain planned levels of capital
      expenditures.




**Financing
      Activities**





**Initial
      Public Offering**




On
      January 18, 2007, Legacy completed its IPO of 6,900,000 units at an
      IPO price of $19.00 per unit. Net proceeds to Legacy after underwriting
      discounts and estimated offering expenses were approximately $122 million,
      all of which were used to repay in full the indebtedness outstanding under
      Legacy’s credit facility and for general partnership purposes.





**Our
      Revolving Credit Facility**




At
      the
      closing of our private equity offering on March 15, 2006, we entered into a
      new, four-year, $300 million revolving credit facility with BNP Paribas as
      administrative agent. On October 24, 2007, the maximum credit amount was
      increased to $500 million as part of the Third Amendment to the credit
      agreement. Our obligations under the credit facility are secured by mortgages
      on
      more than 80% of our oil and gas properties as well as a pledge of all of our
      ownership interests in our operating subsidiaries. The amount available for
      borrowing at any one time is limited to the borrowing base, which was initially
      set at $130 million and was increased on October 24, 2007 to $225 million.
      The borrowing base is subject to semi-annual re-determinations on April 1
      and October 1 of each year. Additionally, either Legacy or the lenders may,
      once during each calendar year, elect to re-determine the borrowing base between
      scheduled re-determinations. We also have the right, once during each calendar
      year, to re-determine the borrowing base upon the proposed acquisition of
      certain oil and gas properties where the purchase price is greater than 10%
      of
      the borrowing base. Any increase in the borrowing base requires the consent
      of
      all the lenders and any decrease in the borrowing base must be approved by
      the
      lenders holding 66 2/3 % of the outstanding aggregate principal amounts of
      the
      loans or participation interests in letters of credit issued under the credit
      facility. If the required lenders do not agree on an increase or decrease,
      then
      the borrowing base will be the highest borrowing base acceptable to the lenders
      holding 66 2/3 % of the outstanding aggregate principal amounts of the loans
      or
      participation interests in letters of credit issued under the credit facility
      so
      long as it does not increase the borrowing base then in effect. Outstanding
      borrowings in excess of the borrowing base must be prepaid, and, if mortgaged
      properties represent less than 80% of total value of oil and gas properties
      evaluated in the most recent reserve report, we must pledge other oil and
      natural gas properties as additional collateral.




We
      may
      elect that borrowings be comprised entirely of alternate base rate (ABR) loans
      or Eurodollar loans. Interest on the loans is determined as
      follows:




•
              with
                  respect to ABR loans, the alternate base rate equals the higher
                  of the
                  prime rate or the Federal funds effective rate plus 0.50%, plus
                  an
                  applicable margin between 0% and 0.250%, or•
              with
                  respect to any Eurodollar loans for any interest period, the London
                  interbank rate, or LIBOR plus an applicable margin between 1.00%
                  and
                  1.75% per annum.




Page
          30




Interest
      is generally payable quarterly for ABR loans and on the last day of the
      applicable interest period for any Eurodollar loans.




Our
      revolving credit facility also contains various covenants that limit our ability
      to:




•
              incur
                  indebtedness;•
              enter
                  into certain leases;•
              grant
                  certain liens;•
              enter
                  into certain swaps;•
              make
                  certain loans, acquisitions, capital expenditures and
                  investments;•
              make
                  distributions other than from available cash;•
              merge,
                  consolidate or allow any material change in the character of its
                  business;
                  or•
              engage
                  in certain asset dispositions, including a sale of all or substantially
                  all of our assets.




Our
      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 and other similar charges excluding unrealized gains
                and
                losses under SFAS No. 133, 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; and•
            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 oil, natural gas and interest rate
                swaps.




If
      an
      event of default exists under our revolving credit facility, the lenders will
      be
      able to accelerate the maturity of the credit agreement and exercise other
      rights and remedies. Each of the following would be an event of
      default:




•
            failure
                to pay any principal when due or any reimbursement amount, 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 or conditions contained
                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
                $1.0 million, or any event occurs that permits or causes the
                acceleration of the indebtedness;•
            bankruptcy
                or insolvency events involving us or any of our
                subsidiaries;•
            the
                loan documents cease to be in full force and effect as a result of
                our
                failing to create a valid lien, except in limited
                circumstances;•
            a
                change of control, which will occur upon (i) the acquisition by any
                person or group of persons of beneficial ownership of more than 35%
                of the
                aggregate ordinary voting power of our equity securities, (ii) the
                first day on which a majority of the members of the board of directors
                of
                our general partner are not continuing directors (which is generally
                defined to mean members of our board of directors as of March 15,
                2006 and persons who are nominated for election or elected to our
                general
                partner’s board of directors with the approval of a majority of the
                continuing directors who were members of such board of directors
                at the
                time of such nomination or election), (iii) the direct or indirect
                sale, transfer or other disposition in one or a series of related
                transactions of all or substantially all of the properties or assets
                (including equity interests of subsidiaries) of us and our subsidiaries
                to
                any person, (iv) the adoption of a plan related to our liquidation or
                dissolution or (v) Legacy Reserves GP, LLC ceasing to be our sole
                general partner;•
            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; and•
            specified
                ERISA events relating to our employee benefit plans that could reasonably
                be expected to result in liabilities in excess of $1,000,000 in any
                year.




At
      September 30, 2007, Legacy was in compliance with all financial and other
      covenants of the Legacy Facility.





Page
          31




Legacy
        entered into a Unit Purchase Agreement (the “Purchase Agreement”), dated
        effective as of November 7, 2007, with Legacy Reserves GP, LLC and certain
        institutional investors (the “Purchasers”) to sell an aggregate of 3,642,369
        units representing limited partner interests in LRLP (the “Units”) in a private
        placement (the “Private Placement”). The negotiated purchase price for the Units
        in the Purchase Agreement was $20.50 per unit, or approximately $75 million
        in
        the aggregate.
 
 The
        Private Placement closed, and 3,642,369 Units were issued, on November 8,
        2007.
        LRLP will use the net proceeds from the Private Placement primarily to reduce
        debt currently outstanding under the Legacy Facility.  The borrowings
        were used to finance the acquisition of properties in the Texas Panhandle
        and
        Permian Basin which closed during October 2007 for approximately $74
        million.  The Private Placement pursuant to the Purchase Agreement is
        being made in reliance upon an exemption from the registration requirements
        of
        the Securities Act of 1933, as amended, pursuant to Section 4(2)
        thereof.
 
 In
        connection with the Purchase Agreement, LRLP also entered into a Registration
        Rights Agreement dated November 8, 2007 (the “Registration Rights
        Agreement”) with the Purchasers. The Registration Rights Agreement requires LRLP
        to file a shelf registration statement with the Securities and Exchange
        Commission (“SEC”) to register the Units as soon as practicable after the
        closing date of the Private Placement, but in any event within 90 days
        after the closing, which occurred on November 8, 2007. In addition, the
        Registration Rights Agreement requires LRLP to use its commercially reasonable
        efforts to cause the shelf registration statement to become effective no
        later
        than 180 days after the closing date of the Private Placement (the “Target
        Effective Date”). If the registration statement covering the Units is not
        declared effective by the SEC within 180 days after the closing date of the
        Private Placement (the “Target Effective Date”), then LRLP will be liable to
        each Purchaser for liquidated damages, and not as a penalty, of 0.25% of
        the
        product of $20.50 (the purchase price) times the number of Units purchased
        by
        the Purchaser (the “Liquidated Damages Amount”) per the 30-day period for the
        first 30 days following the Target Effective Date, increasing by an
        additional 0.25% of the Liquidated Damages Amount per each non-overlapping
        30-day period for each subsequent 30-day period subsequent to the 30 days
        following the Target Effective Date, up to a maximum of 1.00% of the Liquidated
        Damages Amount per each non-overlapping 30-day period (i.e., 0.25% for
        1-30 days; 0.5% for 31-60 days; 0.75% for 61-90 days; and 1.0%
        thereafter); *provided*, that the aggregate amount of liquidated damages
        payable by LRLP under the Registration Rights Agreement to each Purchaser
        shall
        not exceed 10.0% of the Liquidated Damages Amount with respect to such
        Purchaser. The Registration Rights Agreement also provides for the payment
        of
        liquidated damages in the event LRLP suspends the use of the shelf registration
        statement in excess of permitted periods. The Registration Rights Agreement
        also
        gives certain Purchasers piggyback registration rights with other shelf
        registration statements under certain circumstances.
 
 Page
            32




**Off-Balance
      Sheet Arrangements**




None.





**Critical
      Accounting Policies and Estimates**




The
      discussion and analysis of our financial condition and results of operations
      is
      based upon the consolidated financial statements, which have been prepared
      in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires us to make estimates
      and
      assumptions that affect the reported amounts of assets, liabilities, revenues
      and expenses, and related disclosure of contingent assets and liabilities.
      Certain accounting policies involve judgments and uncertainties to such an
      extent that there is a reasonable likelihood that materially different amounts
      could have been reported under different conditions, or if different assumptions
      had been used. Estimates and assumptions are evaluated on a regular basis.
      Legacy based its estimates on historical experience and various other
      assumptions that are believed to be reasonable under the circumstances, the
      results of which form the basis for making




judgments
      about the carrying values of assets and liabilities that are not readily
      apparent from other sources. Actual results may differ from these estimates
      and
      assumptions used in preparation of the financial statements. Changes in these
      estimates and assumptions could materially affect our financial position,
      results of operations or cash flows. Management considers an accounting estimate
      to be critical if:




•
            it
                requires assumptions to be made that were uncertain at the time the
                estimate was made, and•
            changes
                in the estimate or different estimates that could have been selected
                could
                have a material impact on our consolidated results of operations
                or
                financial condition.




Please
      read Note 1 of the Notes to the Consolidated Financial Statements for a
      detailed discussion of all significant accounting policies that we employ and
      related estimates made by management.




*Nature
      of Critical Estimate Item:*  Oil and Natural Gas Reserves —
Our estimate of proved reserves is based on the quantities of oil and
      gas which
      geological and engineering data demonstrate, with reasonable certainty, to
      be
      recoverable in future years from known reservoirs under existing economic and
      operating conditions. LaRoche Petroleum Consultants, Ltd., annually prepares
      a
      reserve and economic evaluation of all our properties in accordance with SEC
      guidelines on a lease, unit or well-by-well basis, depending on the availability
      of well-level production data. The accuracy of our reserve estimates is a
      function of many factors including the following: the quality and quantity
      of
      available data, the interpretation of that data, the accuracy of various
      mandated economic assumptions, and the judgments of the individuals preparing
      the estimates. For example, we must estimate the amount and timing of future
      operating costs, severance taxes, development costs, and workover costs, all
      of
      which may in fact vary considerably from actual results. In addition, as prices
      and cost levels change from year to year, the economics of producing the
      reserves may change and therefore the estimate of proved reserves also may
      change. Any significant variance in these assumptions could materially affect
      the estimated quantity and value of our reserves. Despite the inherent
      imprecision in these engineering estimates, our reserves are used throughout
      our
      financial statements. Reserves and their relation to estimated future net cash
      flows impact our depletion and impairment calculations. As a result, adjustments
      to depletion rates are made concurrently with changes to reserve
      estimates.




*Assumptions/Approach
      Used:*  Units-of-production method to deplete our oil and natural
      gas properties — The quantity of reserves could significantly impact our
      depletion expense. Any reduction in proved reserves without a corresponding
      reduction in capitalized costs will increase the depletion rate.




*Effect
      if Different Assumptions Used:*  Units-of-production method to
      deplete our oil and natural gas properties — A 10% increase or decrease in
      reserves would have decreased or increased, respectively, our depletion expense
      for the three-month period ended September 30, 2007 by approximately
      10%.




*Nature
      of Critical Estimate Item:*  Asset Retirement Obligations —
We have certain obligations to remove tangible equipment and restore land
      at the
      end of oil and gas production operations. Our removal and restoration
      obligations are primarily associated with plugging and abandoning wells. We
      adopted Statement of Financial Accounting Standards (“SFAS”) No. 143,
      Accounting for Asset Retirement Obligations effective January 1, 2003.
      SFAS No. 143 significantly changed the method of accruing for costs an
      entity is legally obligated to incur related to the retirement of fixed assets
      (“asset retirement obligations” or “ARO”). Primarily, SFAS No. 143
      requires us to estimate asset retirement costs for all of our assets, adjust
      those costs for inflation to the forecast abandonment date, discount that amount
      using a credit-adjusted-risk-free rate back to the date we acquired the asset
      or
      obligation to retire the asset and record an ARO liability in that amount with
      a
      corresponding addition to our asset value. When new obligations are incurred,
      i.e. a new well is drilled or acquired, we add a layer to the ARO liability.
      We
      then accrete the liability layers quarterly using the applicable period-end
      effective credit-adjusted-risk-free rates for each layer. Should either the
      estimated life or the estimated abandonment costs of a property change
      materially upon our quarterly review, a new calculation is performed using
      the
      same methodology of taking the abandonment cost and inflating it forward to
      its
      abandonment date and then discounting it back to the present using our
      credit-adjusted-risk-free rate. The carrying value of the ARO is adjusted to
      the
      newly calculated value, with a corresponding offsetting adjustment to the asset
      retirement cost. Thus, abandonment costs will almost always approximate the
      estimate. When well obligations are relieved by sale of the property or plugging
      and abandoning the well, the related liability and asset costs are removed
      from
      our balance sheet.




Page
          33




*Assumptions/Approach
      Used:*  Estimating the future asset removal costs is difficult and
      requires management to make estimates and judgments because most of the removal
      obligations are many years in the future and contracts and regulations often
      have vague descriptions of what constitutes removal. Asset removal technologies
      and costs are constantly changing, as are regulatory, political, environmental,
      safety and public relations considerations. Inherent in the estimate of the
      present value calculation of our AROs are numerous assumptions and judgments
      including the ultimate settlement amounts, inflation factors,
      credit-adjusted-risk-free-rates, timing of settlement, and changes in the legal,
      regulatory, environmental and political environments.




*Effect
      if Different Assumptions Used:*  Since there are so many variables
      in estimating AROs, we attempt to limit the impact of management’s judgment on
      certain of these variables by developing a standard cost estimate based on
      historical costs and industry quotes updated annually. Unless we expect a well’s
      plugging to be significantly different than a normal abandonment, we use this
      estimate. The resulting estimate, after application of a discount factor and
      some significant calculations, could differ from actual results, despite our
      efforts to make an accurate estimate. We engage independent engineering firms
      to
      evaluate our properties annually. We use the remaining estimated useful life
      from the year-end reserve report by our independent reserve engineers in
      estimating when abandonment could be expected for each property. We expect
      to
      see our calculations impacted significantly if interest rates continue to rise,
      as the credit-adjusted-risk-free rate is one of the variables used on a
      quarterly basis.




*Nature
      of Critical Estimate Item:*  Derivative Instruments and Hedging
      Activities — We periodically use derivative financial instruments to
      achieve a more predictable cash flow from our oil and natural gas production
      by
      reducing our exposure to price fluctuations. Currently, these transactions
      are
      swaps whereby we exchange our floating price for our oil and natural gas for
      a
      fixed price with qualified and creditworthy counterparties (currently BNP
      Paribas, Bank of America, Key Bank and Wachovia). Our existing oil and natural
      gas swaps are with members of our lending group which enables us to avoid margin
      calls for out-of-the money mark-to-market positions.




We
      do not
      specifically designate derivative instruments as cash flow hedges, even though
      they reduce our exposure to changes in oil and natural gas prices. Therefore,
      the mark-to-market adjustments of these instruments is recorded in current
      earnings. While we are not internally preparing an estimate of the current
      market value of these derivative instruments, we use market value statements
      from each of our counterparties as the basis for these end-of-period
      mark-to-market adjustments. When we record a mark-to-market adjustment resulting
      in a loss in a current period, these unrealized losses represent a current
      period mark-to-market adjustment for commodity derivatives which will be settled
      in future periods. As shown in the tables above, we have hedged a significant
      portion of our future production through 2011. As oil and natural gas prices
      rise and fall, our future cash obligations related to these derivatives will
      rise and fall.




**Item 3. 
      Quantitative and Qualitative Disclosure About Market Risk.**




The
      primary objective of the following information is to provide forward-looking
      quantitative and qualitative information about our potential exposure to market
      risks. The term “market risk” refers to the risk of loss arising from adverse
      changes in oil and 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 oil and natural gas
      production. Realized pricing is primarily driven by the spot market prices
      applicable to our natural gas production and the prevailing price for crude
      oil.
      Pricing for oil and natural gas 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 of our control, such
      as
      the strength of the global economy.




We
      periodically enter into, and anticipate entering into hedging arrangements
      in
      the future with respect to a portion of our projected oil and natural gas
      production through various transactions that hedge the future prices received.
      These transactions may include price swaps whereby we will receive a fixed
      price
      for our production and pay a variable market price to the contract counterparty.
      Additionally, we may enter into put options, whereby we pay a premium in
      exchange for the right to receive a fixed price at a future date. At the
      settlement date we receive the excess, if any, of the fixed floor over the
      floating rate. These hedging activities are intended to support oil and natural
      gas prices at targeted levels and to manage our exposure to oil and natural
      gas
      price fluctuations. We do not hold or issue derivative instruments for
      speculative trading purposes.




As
      of
      September 30, 2007, the fair market value of Legacy’s derivative positions
      was a net liability of $21.6 million. As of December 31, 2006, the
      fair market value of Legacy’s derivative positions was an asset of
      $3.1 million. The oil and natural gas swaps for 2007 through
      December 31, 2012 are tabulated in the tables presented above under “Item
      2.  Management’s Discussion and Analysis of Financial Condition and
      Results of Operations — Cash Flow from Operations.”





At
      September 30, 2007, we have oil swaps in place covering future oil production
      of
      approximately 4.3 million barrels. Subsequent to September 30, 2007, oil futures
      prices have increased significantly. These increases in oil price futures will
      require us to make larger net settlement payments under commodity swap
      contracts. While these payments should not significantly affect our cash flow
      since payments made to counterparties to these contracts should be more than
      offset by increased commodity prices received on the sale of our production
      (some of which is unhedged), the increase in oil prices, should they continue,
      will negatively affect the fair value of our commodities contracts as recorded
      in our balance sheet at December 31, 2007 and during future periods and,
      consequently, our reported net earnings. Changes in the recorded fair value
      of
      commodity derivatives are marked to market through earnings and are likely
      to
      result in substantial charges to earnings for the decrease in the fair value
      of
      these contracts during the fourth quarter of 2007. If oil prices continue to
      increase, this negative effect on earnings will become more significant. We
      are
      currently unable to estimate the effects on earning s the fourth quarter of
      2007, but the effects may be substantial.




**Interest
      Rate Risks**




At
      September 30, 2007,
      Legacy had debt outstanding of $93.0 million, which incurred interest at
      floating rates in accordance with its revolving credit facility and the
      subordinated notes payable. The average annual interest rate incurred by Legacy
      for the nine-month period ended September 30, 2007 was 8.02%. A 1% increase
      in LIBOR on Legacy’s outstanding debt as of September 30, 2007 would result
      in an estimated $390,000 increase in annual interest expense. Legacy has entered
      into interest rate derivative transactions to mitigate its interest rate risk
      on
      $54 million of its outstanding debt balance by exchanging floating rates for
      fixed rates ranging from 4.8075% to 4.82%.




Page
          34




**Item 4. 
      Controls and Procedures.**




We
      maintain disclosure controls and procedures (as defined in Rules 13a-15(e)
      and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the
      “Exchange Act”) that are designed to ensure that information required to be
      disclosed in Exchange Act reports is recorded, processed, summarized, and
      reported within the time periods specified in the rules and forms of the SEC
      and
      that such information is accumulated and communicated to our management,
      including our General Partner’s Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure. Any controls and procedures, no matter how well designed and
      operated, can provide only reasonable assurance of achieving the desired control
      objectives.




Our
      management, with the participation of our General Partner’s Chief Executive
      Officer and Chief Financial Officer, has evaluated the effectiveness of the
      design and operation of our disclosure controls and procedures as of
      September 30, 2007. Based upon that evaluation and subject to the
      foregoing, our General Partner’s Chief Executive Officer and Chief Financial
      Officer concluded that our disclosure controls and procedures were effective
      to
      accomplish their objectives.




Our
      General Partner’s Chief Executive Officer and Chief Financial Officer do not
      expect that our disclosure controls or our internal controls will prevent all
      error and all fraud. The design of a control system must reflect the fact that
      there are resource constraints and the benefit of controls must be considered
      relative to their cost. Because of the inherent limitations in all control
      systems, no evaluation of controls can provide absolute assurance that we have
      detected all of our control issues and all instances of fraud, if any. The
      design of any system of controls also is based partly on certain assumptions
      about the likelihood of future events and there can be no assurance that any
      design will succeed in achieving our stated goals under all potential future
      conditions.




There
      have been no changes in our internal control over financial reporting that
      occurred during our fiscal quarter ended September 30, 2007, that have
      materially affected, or are reasonably likely to materially affect, our internal
      control over financial reporting.






**PART
      II – OTHER INFORMATION**





**Item 1A.  *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 governmental
      proceedings against us, or contemplated to be brought against us, under the
      various environmental protection statutes to which we are subject.





**Item 1A.  *RISK
      FACTORS***





In
      addition to the other
      information set forth in this report, you should carefully consider the factors
      discussed under, “Item 1A. Risk Factors” in our Annual Report on Form 10-K
      for the year ended December 31, 2006, which could materially affect our
      business, financial condition or future results.  The risks described in
      our Annual Report on Form 10-K for the year ended December 31, 2006 are not
      the
      only risks we face.  Additional risks and uncertainties not currently known
      to us or that we currently deem to be immaterial also may materially adversely
      affect our business, financial condition and/or operating results.




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





On
      April
      16, 2007, we issued 611,247 units in consideration for our acquisition of
      producing oil and natural gas properties in the East Binger (Marchand) Unit
      in
      Caddo County, Oklahoma. The issuance of these units was exempt from registration
      under Section 4(2) of the Securities Act.





**Issuer
                                  Purchases of Equity Securities****(c
                                  ) Total**
                              
                              **(d)
                                  Maximum****Number
                                  of**
                              
                              **Number
                                  (or****Units**
                              
                              **Approximate****Purchased
                                  as**
                              
                              **Dollar
                                  Value) of****Part
                                  of**
                              
                              **Units
                                  that****Publicly**
                              
                              **May
                                  Yet Be****(a)
                                  Total**
                              
                              **(b)
                                  Average**
                              
                              **Announced**
                              
                              **Purchased
                                  Under****Number
                                  of**
                              
                              **Price**
                              
                              **Plans
                                  or**
                              
                              **the
                                  Plans or****Period**
                              
                              **Units
                                  Purchased**
                              
                              **Paid
                                  per Unit**
                              
                              **Programs**
                              
                              **Programs**April
                                  2007
                              
                              17,256
                              
                              $28.01
                              
                              -
                              
                              -May
                                  2007
                              
                              5,782
                              
                              $27.96
                              
                              -
                              
                              -Total
                              
                              23,038
                              
                              $28.00
                              
                              -
                              
                              -





On
      April
      11, 2007, employees of Legacy exercised 17,256 vested unit options granted
      under
      the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and
      immediately following such exercise transferred the units received upon such
      exercise to Legacy in exchange for a payment by Legacy of $28.01 per unit,
      the
      closing price of Legacy’s units on the NASDAQ Global Market on such
      date.





On
      May
      17, 2007, employees of Legacy exercised 4,008 vested unit options granted under
      the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and
      immediately following such exercise transferred the units received upon such
      exercise to Legacy in exchange for a payment by Legacy of $28.00 per unit,
      the
      closing price of Legacy’s units on the NASDAQ Global Market on such
      date.





On
      May
      18, 2007, employees of Legacy exercised 904 vested unit options granted under
      the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and
      immediately following such exercise transferred the units received upon such
      exercise to Legacy in exchange for a payment by Legacy of $27.92 per unit,
      the
      closing price of Legacy’s units on the NASDAQ Global Market on such
      date.





On
      May
      22, 2007, employees of Legacy exercised 870 vested unit options granted under
      the Legacy Reserves LP LTIP at an exercised price of $17.00 per unit and
      immediately following such exercise transferred the units received upon such
      exercise to Legacy in exchange for a payment by Legacy of $27.84 per unit,
      the
      closing price of Legacy’s units on the NASDAQ Global Market on such
      date.




Page
          35




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





None.





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





None.


**Item 5. 
      Other Information.**





None.




Page
          36




**Item 6. 
      Exhibits.**




The
      following documents are filed as a part of this quarterly report on Form 10-Q
      or
      incorporated by reference:






**Exhibit
                Number**
            **Description**3.1
            Certificate
                of Limited Partnership of Legacy Reserves LP (Incorporated by reference
                to
                Legacy Reserves LP’s Registration Statement on Form S-1 (File
                No. 333-134056) filed May 12, 2006,
                Exhibit 3.1)3.2
            Amended
                and Restated Limited Partnership Agreement of Legacy Reserves LP
                (Incorporated by reference to Legacy Reserve LP’s Registration Statement
                on Form S-1 (File No. 33-134056) filed May 12, 2006,
                included as Appendix A to the Prospectus and including specimen unit
                certificate for the units)3.3
            Certificate
                of Formation of Legacy Reserves GP, LLC (Incorporated by reference
                to
                Legacy Reserves LP’s Registration Statement on Form S-1 (File
                No. 333-134056) filed May 12, 2006,
                Exhibit 3.3)3.4
            Amended
                and Restated Limited Liability Company Agreement of Legacy Reserves
                GP,
                LLC (Incorporated by reference to Legacy Reserves LP’s Registration
                Statement on Form S-1 (File No. 333-134056) filed May 12,
                2006, Exhibit 3.4)4.1
            Registration
                Rights Agreement dated as of March 15, 2006 by and among Legacy
                Reserves LP, Legacy Reserves GP, LLC and Friedman, Billings,
                Ramsey & Co. (Incorporated by reference to Legacy Reserves LP’s
                Registration Statement on Form S-1 (File No. 333-134056) filed
                May 12, 2006, Exhibit 4.1)4.2
            Registration
                Rights Agreement dated June 29, 2006 between Henry Holding LP and
                Legacy Reserves LP and Legacy Reserves GP, LLC (the “Henry Registration
                Rights Agreement”) (Incorporated by reference to Legacy Reserves LP’s
                Registration Statement on Form S-1 (File No. 333-134056) filed
                September 5, 2006, Exhibit 4.2)4.3
            Registration
                Rights Agreement dated March 15, 2006 by and among Legacy Reserves
                LP, Legacy Reserves GP, LLC and the other parties thereto (the “Founders
                Registration Rights Agreement”) (Incorporated by reference to Legacy
                Reserves LP’s Registration Statement on Form S-1 (File
                No. 333-134056) filed September 5, 2006,
                Exhibit 4.3)4.4
            Registration
                Rights Agreement dated April 16, 2007 by and among Nielson &
                Associates, Inc., Legacy Reserves GP, LLC and Legacy Reserves LP
                (Incorporated by reference to Legacy Reserves LP Quarterly Report
                on Form
                10-Q (File No. 001-33249) filed May 14, 2007, Exhibit
                4.4)10.1*
            Purchase,
                Sale and Contribution Agreement dated July 11, 2007, by and among
                Raven
                Resources, LLC and Legacy Reserves Operating LP10.2
            Amended
                and Restated Legacy Reserves LP Long-Term Incentive Plan (Incorporated
                by
                reference to Legacy Reserves LP Current Report on Form 8-K (File
                No.
                001-33249) filed August 23, 2007, Exhibit 10.1)10.3*
            Purchase,
                Sale and Contribution Agreement dated August 28, 2007, by and among
                Summit
                Petroleum Management Corporation and Legacy Reserves Operating
                LP10.4*
            Purchase,
                Sale and Contribution Agreement dated August 30, 2007, by and among
                The
                Operating Company and Legacy Reserves Operating LP31.1*
            Rule 13a-14(a)
                Certifications (under Section 302 of the Sarbanes-Oxley Act of
                2002)31.2*
            Rule 13a-14(a)
                Certifications (under Section 302 of the Sarbanes-Oxley Act of
                2002)32.1*
            Section 1350
                Certifications (under Section 906 of the Sarbanes-Oxley Act of
                2002)




*
      Filed herewith




Page
          37