**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 March 31, 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




26,066,596 units
      representing limited partner interest in the registrant were outstanding as
      of
      May 14, 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 March
                  31, 2007 (Unaudited)
              
              6Condensed
                  Consolidated Statements of Operations for the three months ended
                  March 31,
                  2006and
                  2007 (Unaudited)
              
              
              8Condensed
                  Consolidated Statement of Unitholders' Equity for the three months
                  ended
                  March 31,2007
                  (Unaudited)
              
              
              9Condensed
                  Consolidated Statements of Cash Flows for the three months ended
                  March 31,
                  2006 and2007
                  (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.
              
              
              35Item
                  1A.
              
              Risk
                  Factors.
              
              
              35Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds.
              
              35Item
                  3.
              
              Defaults
                  Upon Senior Securities.
              
              35Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders.
              
              35Item
                  5.
              
              Other
                  Information.
              
              
              35Item
                  6.
              
              Exhibits.
              
              
              36




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.




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
        pilotproject or after the
        operation of an installed program has confirmed through production response
        that
        increased recovery will be achieved.




*Proved
        developed non-producing or PDNP’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
  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.




5




**Part
      I – FINANCIAL INFORMATION**




**Item
      1.Financial
      Statements.**




**LEGACY
                            RESERVES LP****CONDENSED
                            CONSOLIDATED BALANCE SHEETS****(UNAUDITED)****ASSETS****December
                            31,**
                        
                        
                        **March
                            31,****2006**
                        
                        
                        **2007**Current
                            assets:Cash
                            and cash equivalents
                        
                        $
                        1,061,852
                        
                        
                        $
                        1,690,443Accounts
                            receivable, net:Oil
                            and natural gas
                        
                        
                        7,599,915
                        
                        
                        
                        6,974,731Joint
                            interest owners
                        
                        
                        4,345,334
                        
                        
                        
                        5,378,596Affiliated
                            entities and other (Note 4)
                        
                        
                        21,336
                        
                        
                        
                        54,376Fair
                            value of oil and natural gas swaps (Note 6)
                        
                        
                        5,102,083
                        
                        
                        
                        343,995Prepaid
                            expenses and other current assets
                        
                        
                        90,609
                        
                        
                        
                        675,146Total
                            current assets
                        
                        
                        18,221,129
                        
                        
                        
                        15,117,287Oil
                            and natural gas properties, at cost:Proved
                            oil and natural gas properties, at cost, using thesuccessful
                            efforts method of accounting:
                        
                        
                        289,518,708
                        
                        
                        
                        295,873,482Unproved
                            properties
                        
                        
                        68,275
                        
                        
                        
                        78,742Accumulated
                            depletion, depreciation and amortization
                        
                        
                        (42,006,485
                        )
                        
                        
                        (47,124,125
                        )247,580,498
                        
                        
                        
                        248,828,099Other
                            property and equipment, net of accumulated depreciaton
                            andamortization
                            of $51,108 and $77,440, respectively
                        
                        
                        303,750
                        
                        
                        
                        289,088Deposit
                            on pending acquisition
                        
                        
                        -
                        
                        
                        
                        2,250,000Operating
                            rights, net of amortization of $295,314 and $441,877,respectively
                        
                        
                        6,721,358
                        
                        
                        
                        6,574,795Other
                            assets, net of amortization of $167,179 and $208,758,
                            respectively
                        
                        
                        541,743
                        
                        
                        
                        500,165$
                        273,368,478
                        
                        
                        $
                        273,559,434*See
                            accompanying notes to condensed consolidated financial
                            statements.*




6




**LEGACY
                                RESERVES LP****CONDENSED
                                CONSOLIDATED BALANCE SHEETS****(UNAUDITED)****December
                                31,**
                            
                            
                            **March
                                31,****2006**
                            
                            
                            **2007****LIABILITIES
                                AND UNITHOLDERS' EQUITY**Current
                                liabilities:Accounts
                                payable
                            
                            $
                            2,931,627
                            
                            
                            $
                            479,606Accrued
                                oil and natural gas liabilities
                            
                            
                            5,881,612
                            
                            
                            
                            4,413,088Fair
                                value of oil and natural gas swaps (Note 6)
                            
                            
                            -
                            
                            
                            
                            244,098Asset
                                retirement obligation (Note 7)
                            
                            
                            553,579
                            
                            
                            
                            533,579Other
                            
                            
                            1,466,693
                            
                            
                            
                            759,244Total
                                current liabilities
                            
                            
                            10,833,511
                            
                            
                            
                            6,429,615Long-term
                                debt (Note 2)
                            
                            
                            115,800,000
                            
                            
                            
                            4,000,000Asset
                                retirement obligation (Note 7)
                            
                            
                            5,939,201
                            
                            
                            
                            6,000,590Fair
                                value of oil and natural gas swaps (Note 6)
                            
                            
                            2,006,547
                            
                            
                            
                            6,692,806Total
                                liabilities
                            
                            
                            134,579,259
                            
                            
                            
                            23,123,011Commitments
                                and contingencies (Note 5)Unitholders'
                                equity:Limited
                                partners' equity - 18,395,233 and 25,407,771 units
                                issuedand
                                outstanding at December 31, 2006 and March 31, 2007,
                                respectively
                            
                            
                            138,653,452
                            
                            
                            
                            250,311,651General
                                partner's equity (approximately 0.1%)
                            
                            
                            135,767
                            
                            
                            
                            124,772Total
                                unitholders' equity
                            
                            
                            138,789,219
                            
                            
                            
                            250,436,423$
                            273,368,478
                            
                            
                            $
                            273,559,434*See
                                accompanying notes to condensed consolidated financial
                                statements.*




7




**LEGACY
                                              RESERVES LP****CONDENSED
                                              CONSOLIDATED STATEMENTS OF OPERATIONS****(UNAUDITED)****Three
                                              Months Ended****March
                                              31,****2006**
                                          
                                          
                                          **2007**Revenues:Oil
                                              sales
                                          
                                          $
                                          7,439,840
                                          
                                          
                                          $
                                          12,405,812Natural
                                              gas sales
                                          
                                          
                                          2,995,417
                                          
                                          
                                          
                                          3,525,874Realized
                                              and unrealized loss on oil and natural
                                              gas swaps (Note 6)
                                          
                                          
                                          (3,896,182
                                          )
                                          
                                          
                                          (7,222,669
                                          )Total
                                              revenues
                                          
                                          
                                          6,539,075
                                          
                                          
                                          
                                          8,709,017Expenses:Oil
                                              and natural gas production
                                          
                                          
                                          2,676,767
                                          
                                          
                                          
                                          4,739,552Production
                                              and other taxes
                                          
                                          
                                          738,157
                                          
                                          
                                          
                                          993,573General
                                              and administrative
                                          
                                          
                                          955,856
                                          
                                          
                                          
                                          1,827,136Depletion,
                                              depreciation, amortization and accretion
                                          
                                          
                                          2,387,866
                                          
                                          
                                          
                                          5,295,056Impairment
                                              of long-lived assets
                                          
                                          
                                          -
                                          
                                          
                                          
                                          89,970Total
                                              expenses
                                          
                                          
                                          6,758,646
                                          
                                          
                                          
                                          12,945,287Operating
                                              loss
                                          
                                          
                                          (219,571
                                          )
                                          
                                          
                                          (4,236,270
                                          )Other
                                              income (expense):Interest
                                              income
                                          
                                          
                                          33,347
                                          
                                          
                                          
                                          104,308Interest
                                              expense (Note 2)
                                          
                                          
                                          (1,444,762
                                          )
                                          
                                          
                                          (625,383
                                          )Equity
                                              in loss of partnership
                                          
                                          
                                          (317,788
                                          )
                                          
                                          
                                          -Other
                                          
                                          
                                          14,910
                                          
                                          
                                          
                                          680Net
                                              loss
                                          
                                          $
                                          (1,933,864
                                          )
                                          
                                          $
                                          (4,756,665
                                          )Loss
                                            per unit - basic and diluted
                                          
                                          $
                                          (0.17
                                          )
                                          
                                          $
                                          (0.19
                                          )Weighted
                                            average number of units used in computing
                                            loss per unit - basic and
                                            diluted
                                          
                                          
                                          11,141,915
                                          
                                          
                                          
                                          24,519,601*See
                                              accompanying notes to condensed consolidated
                                              financial
                                              statements.*




8




**LEGACY
                              RESERVES LP****CONDENSED
                              CONSOLIDATED STATEMENT OF UNITHOLDERS' EQUITY****FOR
                              THE THREE MONTHS ENDED MARCH 31, 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 unitoptions
                              granted to employees
                          
                          
                          -
                          
                          
                          
                          62,484
                          
                          
                          
                          -
                          
                          
                          
                          62,484Compensation
                              expense on restrictedunit
                              awards issued to employees
                          
                          
                          -
                          
                          
                          
                          85,164
                          
                          
                          
                          -
                          
                          
                          
                          85,164Vesting
                              of Restricted Units
                          
                          
                          17,538
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Units
                              issued to Greg McCabein
                              exchange for oil andnatural
                              gas properties
                          
                          
                          95,000
                          
                          
                          
                          2,270,500
                          
                          
                          
                          -
                          
                          
                          
                          2,270,500Distributions
                              to unitholders, $0.41 per unit
                          
                          
                          -
                          
                          
                          
                          (7,561,174
                          )
                          
                          
                          (7,569
                          )
                          
                          
                          (7,568,743
                          )Net
                              loss
                          
                          
                          -
                          
                          
                          
                          (4,753,239
                          )
                          
                          
                          (3,426
                          )
                          
                          
                          (4,756,665
                          )Balance,
                              March 31, 2007
                          
                          
                          25,407,771
                          
                          
                          $
                          250,311,651
                          
                          
                          $
                          124,772
                          
                          
                          $
                          250,436,423*See
                              accompanying notes to condensed consolidated financial
                              statements.*




9




**LEGACY
                        RESERVES LP****CONDENSED
                        CONSOLIDATED STATEMENTS OF CASH FLOWS****(UNAUDITED)****Three
                        Months Ended March 31,****2006**
                    
                    
                    **2007**Cash
                        flows from operating activities:Net
                      loss
                    
                    $
                    (1,933,864
                    )
                    
                    $
                    (4,756,665
                    )Adjustments
                        to reconcile net income to net cash provided by operating
                        activities:Depletion,
                        depreciation, amortization and accretion
                    
                    
                    2,387,866
                    
                    
                    
                    5,295,056Amortization
                        of debt issuance costs
                    
                    
                    228,092
                    
                    
                    
                    41,578Impairment
                        of long-lived assets
                    
                    
                    -
                    
                    
                    
                    89,970Loss
                        on oil and natural gas swaps
                    
                    
                    3,896,182
                    
                    
                    
                    7,222,669Equity
                        in loss of partnership
                    
                    
                    317,788
                    
                    
                    
                    -Amortization
                        of unit-based compensation
                    
                    
                    14,080
                    
                    
                    
                    147,648Changes
                        in assets and liabilities(Increase)
                        decrease in accounts receivable, oil and natural gas
                    
                    
                    (789,284
                    )
                    
                    
                    625,184Increase
                        in accounts receivable, joint interest owners
                    
                    
                    (135,790
                    )
                    
                    
                    (1,033,262
                    )Increase
                        in accounts receivable, other
                    
                    
                    (930,761
                    )
                    
                    
                    (33,040
                    )Increase
                        in other current assets
                    
                    
                    (474,720
                    )
                    
                    
                    (584,537
                    )Decrease
                        in accounts payable
                    
                    
                    (237,711
                    )
                    
                    
                    (2,452,021
                    )Decrease
                        in accrued oil and natural gas liabilities
                    
                    
                    (793,966
                    )
                    
                    
                    (1,468,524
                    )Increase
                        in due to affiliates
                    
                    
                    1,059,308
                    
                    
                    
                    -Increase
                        (decrease) in other current liabilities
                    
                    
                    2,198,405
                    
                    
                    
                    (773,576
                    )Total
                        adjustments
                    
                    
                    6,739,489
                    
                    
                    
                    7,077,145Net
                        cash provided by operating activities
                    
                    
                    4,805,625
                    
                    
                    
                    2,320,480Cash
                        flows from investing activities:Investment
                        in oil and natural gas properties
                    
                    
                    (9,491,019
                    )
                    
                    
                    (4,081,716
                    )Increase
                        in deposit on pending acquisition
                    
                    
                    -
                    
                    
                    
                    (2,250,000
                    )Investment
                        in other equipment
                    
                    
                    (32,437
                    )
                    
                    
                    (11,670
                    )Collection
                        of notes receivable
                    
                    
                    924,441
                    
                    
                    
                    -Net
                        cash settlements on oil and natural gas swaps
                    
                    
                    1,396,936
                    
                    
                    
                    2,465,776Net
                        cash used in investing activities
                    
                    
                    (7,202,079
                    )
                    
                    
                    (3,877,610
                    )Cash
                        flows from financing activities:Proceeds
                        from long-term debt
                    
                    
                    65,800,000
                    
                    
                    
                    6,000,000Payments
                        of long-term debt
                    
                    
                    (67,189,791
                    )
                    
                    
                    (117,800,000
                    )Payments
                        of debt issuance costs
                    
                    
                    (150,204
                    )
                    
                    
                    -Proceeds
                        from issuance of units, net
                    
                    
                    78,728,631
                    
                    
                    
                    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
                    
                    
                    (2,296,914
                    )
                    
                    
                    (7,568,743
                    )Net
                        cash provided by financing activities
                    
                    
                    668,545
                    
                    
                    
                    2,185,721Net
                        increase (decrease) in cash and cash equivalents
                    
                    
                    (1,727,909
                    )
                    
                    
                    628,591Cash
                        and cash equivalents, beginning of period
                    
                    
                    1,954,923
                    
                    
                    
                    1,061,852Cash
                        and cash equivalents, end of period
                    
                    $
                    227,014
                    
                    
                    $
                    1,690,443*See
                        accompanying notes to condensed consolidated financial
                        statements.*




10




**LEGACY
                      RESERVES LP****CONDENSED
                      CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued****(UNAUDITED)****Three
                      Months Ended March 31,****2006**
                  
                  
                  **2007**Non-Cash
                      Investing and Financing Activities:Asset
                      retirement obligation costs and liabilities
                  
                  $
                  1,467,241
                  
                  
                  $
                  -Asset
                      retirement obligations associated with property
                      acquisitions
                  
                  $
                  -
                  
                  
                  $
                  13,025Non-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
                  
                  $
                  -
                  
                  
                  $
                  2,270,500Deemed
                      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.*


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 was 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.
  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. 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.





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.





These
        condensed consolidated financial statements as of March 31, 2007 and for
        the
        three months ended March 31, 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 generally accepted accounting principles in the
        United States (“GAAP”) have been condensed or omitted in these financial
        statements for and as of the three months ended March 31, 2007 and
        2006.


**(2)  Credit
        Facility**


On
        July 29, 1999, the Moriah Group entered into a Credit Facility (the
“Agreement”) that permitted borrowings up to the lesser of (i) the
        borrowing base, or (ii) $20 million. On September 13, 2005, the
        Moriah Group replaced its 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 $220,638
        for the year ended December 31, 2005 and $264,062 for the period from
        January 1, 2006 through March 15, 2006. At December 31, 2005, the
        Moriah Group was in compliance with all aspects of the New Facility. 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 new 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. The MBN Properties LP’s interest rate at
        December 31, 2005 was 6.33%. MBN Properties LP paid interest expense of
        $431,085 on this debt for the period from inception to December 31, 2005
        and $1,300,727 for the period from January 1, 2006 through March 15,
        2006. At December 31, 2005, MBN Properties LP was in compliance with all
        aspects of the MBN Facility. All amounts outstanding under the MBN Facility
        at
        March 15, 2006 were repaid in full on that date as part of the formation
        transactions.




13




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 permits
        borrowings in the lesser amount of (i) the borrowing base, or
        (ii) $300 million. The borrowing base under the Legacy Facility,
        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
        is
        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 October 16, 2006, Legacy’s bank group reaffirmed its $130 million
        borrowing base. 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
        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 March  31, 2007, Legacy had outstanding borrowings of $4.0 million
        at an interest rate of 8.25%, Legacy had approximately $125.7 million of
        availability remaining under the Legacy Facility as of March 31, 2007. For
        the
        three month period ended March 31, 2007, Legacy paid $773,306 of interest
        expense on the Legacy Facility. 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 March 31,
        2007, Legacy was in compliance with all aspects of the Legacy
        Facility.





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


**December
                                31,**
                            
                            
                            **March
                                31,****2006**
                            
                            
                            **2007**Legacy
                                Facility- due March 2010
                            
                            $
                            115,800,000
                            
                            
                            $
                            4,000,000
  **(3)  Acquisitions**




***Legacy
        Formation Acquisition***


On
        March 15, 2006, LRLP completed a private equity offering in which it 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
        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
        limited partnership units. The purchase of the oil and natural gas properties
        owned by the charitable foundations was solely for cash of $7.7 million.
        The owners of the Moriah Group, the Brothers Group and H2K Holdings Ltd.
        (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.


14


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 management units were issued to employees of Legacy concurrent
        with,
        but not as a part of, the Legacy Formation (Note 8).




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 common 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:


15
  **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


***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
  16
  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 has been 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. 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.




***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 and Kinder
        Morgan acquisitions had each occurred on January 1, 2006. The pro forma
        amounts are not necessarily indicative of the results that may be reported
        in
        the future:
 **March 31,****2006**Revenues,
                                          excluding hedging gains and losses
                                      
                                      $
                                      13,254,062Revenues,
                                          net of hedging gains and losses
                                      
                                      $
                                      9,357,880Net
                                          income
                                      
                                      $
                                      (973,952
                                      )Earnings
                                          per unit - basic and diluted:Net
                                          income
                                      
                                      $
                                      (0.05
                                      )Units
                                          used in computing earnings per unit
                                      
                                      
                                      18,386,482


**(4)  Related
        Party Transactions**




Cary
        Brown and Dale Brown, as owners of the Moriah Group, and the Brothers Group
        own
        a combined non-controlling 18% interest as limited partners in the partnership
        which owns the building that Legacy occupies. Monthly rent is $6,838, 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 $444,233 and
        $0
        for the quarters ended March 31, 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 March 31, 2006, Brothers Production Company
        Inc. provided $47,236 of transition administrative services to
        Legacy.




17


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 of $16,173 and $32,945 for the quarters ended Match
        31,
        2006 and 2007, respectively.





Legacy
        has a receivable of $42,444 from one of its employees at March 31, 2007 related
        to federal income tax withholding on the vesting of a portion of his restricted
        units of Legacy Reserves LP. Any distributions on his unvested units are
        treated
        as compensation subject to withholding.


**(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.


**(6)  Oil
        and Natural Gas Swaps**




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 hedge 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 hedge 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 months ended March 31, 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:




18




**Three
                        Months Ended****March
                        31,****2006**
                    
                    
                    **2007**Crude
                        oil derivative contract settlements
                    
                    $
                    (120,614
                    )
                    
                    $
                    1,202,034Natural
                        gas derivative contract settlements
                    
                    
                    1,517,550
                    
                    
                    
                    1,263,742Unrealized
                        change in fair value - oil contracts
                    
                    
                    (8,293,478
                    )
                    
                    
                    (5,087,147
                    )Unrealized
                        change in fair value - natural gas contracts
                    
                    
                    3,000,360
                    
                    
                    
                    (4,601,298
                    )$
                    (3,896,182
                    )
                    
                    $
                    (7,222,669
                    )


As
        of
        March 31, 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
                  
                  
                  572,232
                  
                  
                  $
                  67.32
                  
                  
                  $
                  64.15
                      - $75.702008
                  
                  
                  715,649
                  
                  
                  $
                  67.23
                  
                  
                  $
                  62.25
                      - $73.452009
                  
                  
                  660,613
                  
                  
                  $
                  64.96
                  
                  
                  $
                  61.05
                      - $71.402010
                  
                  
                  575,045
                  
                  
                  $
                  62.94
                  
                  
                  $
                  60.15
                      - $67.802011
                  
                  
                  44,640
                  
                  
                  $
                  67.33
                  
                  
                  $
                  67.33




As
        of
        March 31, 2007, Legacy had the following NYMEX Henry Hub and
        ANR-OK  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
                  
                  
                  1,353,612
                  
                  
                  $
                  8.95
                  
                  
                  $
                  7.35
                      - $10.012008
                  
                  
                  1,675,374
                  
                  
                  $
                  8.46
                  
                  
                  $
                  7.59
                      - $10.582009
                  
                  
                  1,556,354
                  
                  
                  $
                  8.27
                  
                  
                  $
                  7.64
                      - $10.182010
                  
                  
                  1,353,899
                  
                  
                  $
                  7.94
                  
                  
                  $
                  7.36
                      - $9.732011
                  
                  
                  130,000
                  
                  
                  $
                  7.23
                  
                  
                  $
                  7.23


As
        of
        March 31, 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
                      
                      
                      1,170,000
                      
                      
                      $
                      (0.88)2008
                      
                      
                      1,422,000
                      
                      
                      $
                      (0.84)2009
                      
                      
                      1,320,000
                      
                      
                      $
                      (0.68)2010
                      
                      
                      1,200,000
                      
                      
                      $
                      (0.57)


As
      of
      March 31, 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**
                    
                    
                    **Price****Calendar
                        Year**
                    
                    **Volumes
                        (Gal)**
                    
                    
                    **per
                        Gal**2007
                    
                    
                    1,909,656
                    
                    
                    $
                    1.152008
                    
                    
                    2,509,248
                    
                    
                    $
                    1.152009
                    
                    
                    2,265,480
                    
                    
                    $
                    1.15
  19


**(7)  Asset
        Retirement Obligation**




In
        June
        2001, the FASB issued FAS No. 143, which 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 three months ended March 31, 2007.




**December
                            31,**
                        
                        
                        **March
                            31,****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
                        
                        
                        
                        13,025Liabilities
                            incurred with properties drilled
                        
                        
                        22,882
                        
                        
                        
                        -Liabilities
                            settled during the period
                        
                        
                        (213,343
                        )
                        
                        
                        (66,128
                        )Current
                            period accretion
                        
                        
                        242,432
                        
                        
                        
                        94,492Current
                            period revisions to oil and natural gas properties
                        
                        
                        782,467
                        
                        
                        
                        -Asset
                            retirement obligation - end of period
                        
                        $
                        6,492,780
                        
                        
                        $
                        6,534,169


**(8)  Unit-Based
        Compensation**




***Long
        Term Incentive Plan***




Concurrent
        with the Formation Transaction 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
        long-term incentive plan may include unit grants, restricted units, phantom
        units, unit options and unit appreciation rights. The long-term incentive
        plan
        permits the grant of awards covering an aggregate of 2,000,000 units. As of
        March  31, 2007 grants of awards covering 274,000 units have been
        made. The plan 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. Since Legacy had no restricted or unit option awards prior
        to
        March 15, 2006, there were no adoption or transition consequences as
        contemplated by SFAS No. 123(R). Pursuant to the provisions of
        SFAS 123(R), Legacy’s issued units, as reflected in the accompanying
        consolidated balance sheet at March 31, 2007 does not include
        47,578 units related to unvested restricted unit awards.




On
        March 15, 2006, Legacy issued 52,616 units of restricted unit awards
        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 units of restricted unit awards 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 $14,080 and $85,164
        for the
        three months ended March, 31, 2006 and 2007, respectively. As of March 31,
        2007, there was a total of $751,768 of unrecognized compensation costs related
        to the non-vested portion of these restricted units. At March 31, 2007,
        this cost was expected to be recognized over a weighted-average period of
        2.4 years.




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
        Legacy’s general partner’s board. The value of each unit was $17.00 at the time
        of grant.




20


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 three month period ended March 31,
        2007, Legacy issued 14,000 unit option awards to officers and employees which
        vest ratably over a three-year period. All options granted in 2007 expire
        five
        years from the grant date and are exercisable when they vest.




For
        the
        three-month period ended March 31, 2007, Legacy recorded $62,484 of
        compensation expense based on its use of the Black-Scholes model to estimate
        the
        grant-date fair value of these unit option awards. As of March 31, 2007,
        there was a total of $522,711 of unrecognized compensation costs related
        to the
        non-vested portion of these unit option awards. At March 31, 2007, this cost
        was
        expected to be recognized over a weighted-average period of 2.08 years.
        Compensation expense is based upon straight line amortization of the grant-date
        fair value over the vesting period of the underlying unit option. Since Legacy
        is a newly public company and has minimal trading history, it has used an
        estimated volatility factor of approximately 37% 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 grant-date fair
        value to be amortized over the vesting periods of the unit options awarded.
        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 $1.64 per unit.




A
        summary
        of option activity for the three months ended March 31, 2007 is as
        follows:





**Weighted****Weighted**
                                    
                                    **Average****Average**
                                    
                                    **Remaining****Exercise**
                                    
                                    **Contractual****Units**
                                    
                                    
                                    **Price**
                                    
                                    **Term**Outstanding
                                        at January 1, 2007
                                    
                                    
                                    260,000
                                    
                                    
                                    $
                                    17.01Granted
                                    
                                    
                                    14,000
                                    
                                    
                                    $
                                    20.97Exercised
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Forfeited
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Outstanding
                                        at March 31, 2007
                                    
                                    
                                    274,000
                                    
                                    
                                    $
                                    17.21
                                    
                                    4.0
                                        yearsOptions
                                        exercisable at March 31, 2007
                                    
                                    
                                    62,667
                                    
                                    
                                    $
                                    17.00
                                    
                                    -


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
                      
                      
                      14,000
                      
                      
                      
                      4.26Vested
                      
                      
                      (62,667
                      )
                      
                      
                      2.62Forfeited
                      
                      
                      -
                      
                      
                      
                      -Non-vested
                          at March 31, 2007
                      
                      
                      211,333
                      
                      
                      $
                      2.78


Legacy
        has used a weighted-average risk free interest rate of 4.9% in its Black-Scholes
        calculation of grant-date fair value, which approximates
        the U.S. Treasury interest rates at the time of the grant 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.
 21


**Three
                        Months Ended****March
                        31,****2007**Expected
                        life (years)
                    
                    
                    4Annual
                        interest rate
                    
                    
                    4.9
                    %Annual
                        distribution rate per unit
                    
                    $
                    1.64Volatility
                    
                    
                    37
                    %
  **(9)  Subsequent
        Events**





On
        March 20, 2007, Legacy entered into a definitive purchase agreement to
        acquire certain oil and natural gas producing properties from Nielson &
Associates, Inc., for an aggregate purchase price of $45 million, subject
        to customary purchase price adjustments, in which we paid $30 million in
        cash with the remainder paid with the issuance of 611,247 units at closing.
        The
        properties are located in the East Binger (Marchand) Unit in Caddo County,
        Oklahoma. The acquisition closed on April 16, 2007. This acquisition will
        be
        accounted for as a purchase of oil and natural gas assets.





On
        March 29, 2007, Legacy entered into a definitive purchase agreement to
        acquire certain oil and natural gas producing properties from Ameristate
        Exploration, LLC, for an aggregate purchase price of $5.5 million, subject
        to
        customary purchase price adjustments, which was paid in cash at closing.
        The
        properties are located in Lea and Eddy counties of New Mexico. The acquisition
        closed on May 1, 2007. This acquisition will be accounted for as a purchase
        of
        oil and natural gas assets.





On
        April
        10, 2007, Legacy entered into a definitive purchase agreement to acquire
        certain
        oil and natural gas producing properties from Terry S. Fields for an aggregate
        purchase price of $15.3 million, subject to customary purchase price
        adjustments, to be paid in cash at closing. The properties are located in
        Midland, Reagan and Upton counties in west Texas. The acquisition is subject
        to
        customary closing conditions and is expected to close in mid-May 2007. This
        acquisition will be accounted for as a purchase of oil and natural gas
        assets.





On
        April
        17, 2007, the board of directors of Legacy’s general partner declared a
        $0.41 per unit cash distribution payable to all unitholders of record on
        April 30, 2007. This distribution will be paid on May 14,
        2007.





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
      May 7,
      2007, Legacy entered into a definitive purchase agreement to acquire certain
      oil
      and natural gas producing properties from private parties for a purchase price
      of $12.9 million, subject to customary purchase price adjustments, to be paid
      at
      closing. The properties are located in the Slaughter and Rocker A fields in
      Cochran and Garza counties, respectively, in West Texas. The acquisition is
      subject to customary closing conditions and is expected to close during June.
      This acquisition will be accounted for as a purchase of oil and natural gas
      assets.




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 Reserves’ 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 formation transactions on March 15, 2006, we acquired
        oil and natural gas properties and business operations from our Founding
        Investors and three charitable foundations (“Legacy Formation”). 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 was 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.




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.
  23
  The
        operating results of the properties acquired in the Formation Transaction
        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 and the
        operating results of the Kinder Morgan properties have been included from
        August 1, 2006.




Acquisitions
        have been financed with a combination of proceeds from bank borrowings and
        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 (CO
      2) 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.


24


**Operating
        Data**




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




**Three
                          Months Ended March 31,****2006
                          (a)**
                      
                      
                      **2007**Revenues:Oil
                          sales
                      
                      $
                      7,439,840
                      
                      
                      $
                      12,405,812Natural
                          gas sales
                      
                      
                      2,995,417
                      
                      
                      
                      3,525,874Realized
                          gain (loss) on oil swaps
                      
                      
                      (120,614
                      )
                      
                      
                      1,202,034Realized
                          gain on natural gas swaps
                      
                      
                      1,517,550
                      
                      
                      
                      1,263,742Unrealized
                          loss on oil swaps
                      
                      
                      (8,293,478
                      )
                      
                      
                      (5,087,147
                      )Unrealized
                          gain (loss) on natural gas swaps
                      
                      
                      3,000,360
                      
                      
                      
                      (4,601,298
                      )Total
                          revenue
                      
                      $
                      6,539,075
                      
                      
                      $
                      8,709,017Expenses:Oil
                          and natural gas production
                      
                      $
                      2,676,767
                      
                      
                      $
                      4,739,552Production
                          and other taxes
                      
                      $
                      738,157
                      
                      
                      $
                      993,573General
                          and administrative
                      
                      $
                      955,856
                      
                      
                      $
                      1,827,136Depletion,
                          depreciation, amortization  and accretion
                      
                      $
                      2,387,866
                      
                      
                      $
                      5,295,056Production:Oil
                          - barrels
                      
                      
                      129,011
                      
                      
                      
                      230,852Natural
                          gas - Mcf
                      
                      
                      433,960
                      
                      
                      
                      588,346Total
                          (Boe)
                      
                      
                      201,338
                      
                      
                      
                      328,910Average
                          daily production (Boe/d)
                      
                      
                      2,237
                      
                      
                      
                      3,655Average
                          sales price per unit (including heges) (b):Oil
                          price per barrel
                      
                      $
                      (7.55
                      )
                      
                      $
                      36.91Natural
                          gas price per Mcf
                      
                      $
                      17.31
                      
                      
                      $
                      0.32Combined
                          (per Boe)
                      
                      $
                      32.48
                      
                      
                      $
                      26.48Average
                          sales price per unit (including realized hedge gains/losses)
                          (c):Oil
                          price per barrel
                      
                      $
                      56.73
                      
                      
                      $
                      58.95Natural
                          gas price per Mcf
                      
                      $
                      10.40
                      
                      
                      $
                      8.14Combined
                          (per Boe)
                      
                      $
                      58.77
                      
                      
                      $
                      55.93Average
                          sales price per unit (excluding hedges):Oil
                          price per barrel
                      
                      $
                      57.67
                      
                      
                      $
                      53.74Natural
                          gas price per Mcf
                      
                      $
                      6.90
                      
                      
                      $
                      5.99Combined
                          (per Boe)
                      
                      $
                      51.83
                      
                      
                      $
                      48.44NYMEX
                          oil index prices per barrel:Beginning
                          of Quarter
                      
                      $
                      61.04
                      
                      
                      $
                      61.05End
                          of Quarter
                      
                      $
                      66.63
                      
                      
                      $
                      65.87NYMEX
                          gas index prices per Mcf:Beginning
                          of Quarter
                      
                      $
                      11.18
                      
                      
                      $
                      6.30End
                          of Quarter
                      
                      $
                      7.21
                      
                      
                      $
                      7.73Average
                          unit costs per Boe:Production
                          costs, excluding production and other taxes
                      
                      $
                      13.29
                      
                      
                      $
                      14.41Production
                          and other taxes
                      
                      $
                      3.67
                      
                      
                      $
                      3.02General
                          and administrative
                      
                      $
                      4.75
                      
                      
                      $
                      5.56Depletion,
                          depreciation, amortization and accretion
                      
                      $
                      11.86
                      
                      
                      $
                      16.10


(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.





25


**Results
        of Operations**




**Three-Month
        Period Ended March  31, 2007 Compared to Three-Month Period Ended March 31,
        2006**




Legacy’s
        revenues from the sale of oil were $12.4 million and $7.4 million for
        the three month periods ended March 31, 2007 and 2006, respectively. Legacy’s
        revenues from the sale of natural gas were $3.5 million and
        $3.0 million for the three month periods ended March 31, 2007 and 2006,
        respectively. The $5.0 million increase in oil revenues reflects an
        increase in oil production of 102 MBbls (79%) due primarily to Legacy’s
        purchase of the oil and natural gas properties acquired in the March 15,
        2006 Legacy Formation transactions, and the South Justis, Farmer Field and
        Kinder Morgan acquisitions while the realized price excluding the effects
        of
        hedging decreased $3.93 per Bbl. The $0.5 million increase in natural
        gas revenues reflects an increase in natural gas production of approximately
        154 MMcf (36%) due primarily to the Legacy Formation, while the realized
        price per Mcf excluding the effects of hedging decreased $0.91 per Mcf.
        Since the Legacy Formation occurred on March 15, 2006, Legacy’s revenues
        and related volumes for the three month period ended March 31, 2006 do not
        reflect the 50 MBbls and 119 MMcf produced by the oil and natural gas
        properties acquired in that transaction from January 1, 2006 to
        March 15, 2006.





For
        the
        three-month period ended March 31, 2007, Legacy recorded $7.2 million of
        net losses on oil and natural gas swaps comprised of realized gains of
        $2.5 million from net cash settlements of oil and natural gas swap
        contracts and net unrealized losses of $9.7 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 March 31, 2007. As a point of reference,
        the NYMEX price for light sweet crude oil for the near-month close at March
        31,
        2007 was $65.87 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 its natural gas swaps because the fixed prices
        of its
        natural gas swap contracts were below the NYMEX index prices at March 31,
        2007.
        In addition, the NYMEX price for natural gas for the near-month close at
        March
        31, 2007 was $7.73 per MMbtu, a price which is greater than the average
        contract prices of Legacy’s outstanding natural gas swap contracts. Due to the
        increase in natural gas prices during the quarter, the differential between
        Legacy’s fixed price natural gas swaps and NYMEX increased, resulting in losses
        for the quarter. For the three month period ended March 31, 2006, Legacy
        recorded $3.9 million of net losses on oil and natural gas swaps comprised
        of a realized loss of $121,000 from net cash settlements of oil swap contracts,
        a realized gain of $1.5 million from net cash settlements of natural gas
        swap
        contracts, a net unrealized loss of $8.3 million on oil swap contracts, due
        to
        the increase 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 $4.7 million ($14.41 per Boe) for the three month period
      ended March 31, 2007, from $2.7 ($13.29 per Boe) million for the three
      month period ended March 31, 2006. Production expenses increased primarily
      because of (i) $1.3 million related to the Legacy Formation and,
      (ii) $0.8 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.




Legacy’s
        production and other taxes were $1.0 million and $0.7 million for the
        three month periods ended March 31, 2007 and 2006, respectively. Production
        and
        other taxes increased primarily because of approximately $0.3 million
        of taxes related to the Legacy Formation. The decrease in production and
        other
        taxes per Boe is primarily due to the decrease in realized prices excluding
        hedges. As production and other taxes are a function of price and volume,
        the
        decrease in unit cost is consistent with the decrease in realized
        prices.




Legacy’s
        general and administrative expenses were $1.8 million and $1.0 million
        for the three month periods ended March 31, 2007 and 2006, respectively.
        General
        and administrative expenses increased approximately $0.8 million between
        periods primarily due to increased employee costs related to business expansion
        and approximately $423,000 of costs incurred in connection with the preparation
        of the 2006 federal income tax return and related Form K-1’s.




26




Legacy’s
        depletion, depreciation, amortization and accretion expense, or DD&A, was
        $5.3 million and $2.4 million for the three month periods ended March
        31, 2007 and 2006, respectively, reflecting primarily $1.1 million of
        DD&A related to the Legacy Formation and $0.6 million to recent
        acquisitions. In addition, the increase in DD&A expense per Boe reflects the
        higher cost basis of the producing oil and natural gas properties acquired
        in
        the Formation Transaction and in the three acquisitions of oil and natural
        gas
        properties in the second and third quarters of 2006.




Impairment
        expense was $89,970 for the three month period ended March 31, 2007 involving
        five separate producing fields. The impairment is primarily due to additional
        costs incurred during the quarter ended March 31, 2007 on fields from which
        the
        future estimated production revenues did not exceed these
        costs.




Legacy
        recorded interest income of $104,308 for the three-month period ended March
        31,
        2007 and $33,347 for the three-month periods ended March 31, 2006. The increase
        of $70,961 is a result of higher average cash balances for the current
        period.




Interest
        expense was $0.6 million and $1.4 million for the three-month periods
        ended March 31, 2007 and 2006, respectively, reflecting lower average borrowings
        and higher average interest rates in the current period. Legacy repaid the
        entire $115.8 million outstanding under its revolving credit facility at
        the close of its initial public offering on January 18, 2007.




Legacy
        recorded equity in loss of partnership of $317,788 for the three-month period
        ended March 31, 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.




**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 its initial public
        offering 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 $10.3 million and planned cash distributions of $38.9 million,
        which reflects the $7.6 million of distributions paid in the first quarter
        of 2007 and $10.4 million of planned distributions during each of the
        second, third and fourth quarters of 2007. Please read “— Financing
        Activities — Our Revolving Credit Facility.”





On
        May 3,
        2007, Legacy’s bank group increased Legacy’s borrowing base to $150 million as
        part of the semi-annual re-determination.




**Cash
        Flow from Operations**




Legacy’s
        net cash provided by operating activities was $2.3 million and
        $4.8 million for the three month periods ended March 31, 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.




27




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 hedging arrangements to reduce the impact of oil and natural gas price
        volatility on our operations. Currently, we use swaps to hedge NYMEX oil
        and
        natural gas prices, which do not include the additional net discount that
        we
        typically realize in the Permian Basin. At March 31, 2007, we had in place
        oil and natural gas swaps covering significant portions of our estimated
        2007
        through 2011 oil and natural gas production. We have hedged approximately
        70% of
        our remaining expected oil and natural gas production for 2007. We have also
        hedged approximately 63% of our currently expected oil and natural gas
        production for 2008 through 2010 from existing total proved
        reserves.




By
        removing the 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.




The
      following
      tables summarize, for the periods indicated, our oil and natural gas swaps
      currently in place through December 31, 2011. We use swaps as our mechanism
      for hedging commodity prices whereby we pay the counterparty floating prices
      and
      receive fixed prices from the counterparty, which serves to hedge 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
                  
                  
                  572,232
                  
                  
                  $
                  67.32
                  
                  
                  $
                  64.15
                      - $75.702008
                  
                  
                  715,649
                  
                  
                  $
                  67.23
                  
                  
                  $
                  62.25
                      - $73.452009
                  
                  
                  660,613
                  
                  
                  $
                  64.96
                  
                  
                  $
                  61.05
                      - $71.402010
                  
                  
                  575,045
                  
                  
                  $
                  62.94
                  
                  
                  $
                  60.15
                      - $67.802011
                  
                  
                  44,640
                  
                  
                  $
                  67.33
                  
                  
                  $
                  67.33


**Annual**
                  
                  
                  **Average**
                  
                  
                  **Price****Calendar
                      Year**
                  
                  **Volumes
                      (MMBtu)**
                  
                  
                  **Price
                      per MMBtu**
                  
                  
                  **Range
                      per MMBtu**2007
                  
                  
                  1,353,612
                  
                  
                  $
                  8.95
                  
                  
                  $
                  7.35
                      - $10.012008
                  
                  
                  1,675,374
                  
                  
                  $
                  8.46
                  
                  
                  $
                  7.59
                      - $10.582009
                  
                  
                  1,556,354
                  
                  
                  $
                  8.27
                  
                  
                  $
                  7.64
                      - $10.182010
                  
                  
                  1,353,899
                  
                  
                  $
                  7.94
                  
                  
                  $
                  7.36
                      - $9.732011
                  
                  
                  130,000
                  
                  
                  $
                  7.23
                  
                  
                  $
                  7.23




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
                    
                    
                    1,170,000
                    
                    
                    $
                    (0.88)2008
                    
                    
                    1,422,000
                    
                    
                    $
                    (0.84)2009
                    
                    
                    1,320,000
                    
                    
                    $
                    (0.68)2010
                    
                    
                    1,200,000
                    
                    
                    $
                    (0.57)
  28





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.  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 aniticipatory 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**
                    
                    
                    **Price****Calendar
                        Year**
                    
                    **Volumes
                        (Gal)**
                    
                    
                    **per
                        Gal**2007
                    
                    
                    1,909,656
                    
                    
                    $
                    1.152008
                    
                    
                    2,509,248
                    
                    
                    $
                    1.152009
                    
                    
                    2,265,480
                    
                    
                    $
                    1.15


**Investing
        Activities — Acquisitions and Capital
        Expenditures**




Legacy’s
        cash capital expenditures were $4.1 million for the three month period
        ended March 31, 2007. The total includes $.4 million for acquisition
        of oil and natural gas properties in small acquisitions and $3.7 million of
        exploitation projects.




Legacy’s
        cash capital expenditures were $9.5 million for the three month period
        ended March 31, 2006. The total for the three month period ended March 31,
        2006 includes $7.7 million paid to three charitable foundations in the
        Legacy Formation for oil and natural gas properties.




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 $10.3 million for the year ending December 31, 2007. Our
        borrowing capacity under our revolving credit facility is $103.7 million as
        of May 14, 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 $10.3 million and planned cash distributions of
        $38.9 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
        representing limited partner interests 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. 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 increased on May 3, 2007 to $150
        million. The borrowing base is subject to semi-annual
  29
  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 redetermine the
        borrowing base between scheduled redeterminations. We also have the right,
        once
        during each calendar year, to redetermine 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 662/3
        % 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 662/3
        % 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 0.375%, or•
            with
                respect to any Eurodollar loans for any interest period, the London
                interbank rate, or LIBOR plus an applicable margin between 1.25%
and
                1.875% per annum.




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.




30




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 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
      March 31, 2007, Legacy
      was in compliance with all financial and other covenants of the Legacy
      Facility.





**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
  31
  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 March 31, 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.




*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
  32
  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 and Bank of America). 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 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 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.




33


As
        of
        March 31, 2007, the fair market value of Legacy’s derivative positions was
        a net liability of $6.6 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, 2011 are
        tabulated in the tables presented above under “— Cash Flow from
        Operations.”




**Interest
        Rate Risks**




At
      March 31, 2007, Legacy had debt outstanding of $4.0 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 three month period ended March 31, 2007 was
      8.01%. A 1% increase in LIBOR on Legacy’s outstanding debt as of March 31,
      2007 would result in an estimated $40,000 increase in annual interest expense.
      Historically, Legacy has not entered into interest rate derivative transactions
      to mitigate its interest rate risk.





**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
        March 31, 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 March 31, 2007, that have
        materially affected, or are reasonably likely to materially affect, our internal
        control over financial reporting.


34


**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 in Part I, “Item 1A. Risk Factors” in our 2006 Annual
      Report, which could materially affect our business, financial condition or
      future results.  The risks described in our 2006 Annual Report 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
        January 11, 2007 we issued options to purchase 9,000 units to
        employees pursuant to the Legacy Reserves LP Long-Term Incentive Plan. These
        options vest ratably over a three-year period, expire five years from the
        grant
        date and are exercisable when they vest. The issuance of these options was
        exempt from the registration requirements of the Securities Act pursuant
        to
        Rule 701.




On
        January 30, 2007, we issued 95,000 units in consideration for our
        acquisition of producing oil and natural gas properties in West Texas. The
        issuance of these units was exempt from registration under Section 4(2) of
        the Securities Act.





On
        February 26, 2007 we issued options to purchase 2,000 units to an employee
        pursuant to the Legacy Reserves LP Long-Term Incentive Plan. These options
        vest
        ratably over a three-year period, expire five years from the grant date and
        are
        exercisable when they vest. The issuance of these options was exempt from
        the
        registration requirements of the Securities Act pursuant to
        Rule 701.





On
        March
        15, 2007 we issued options to purchase 3,000 units to an employee pursuant
        to the Legacy Reserves LP Long-Term Incentive Plan. These options vest ratably
        over a three-year period, expire five years from the grant date and are
        exercisable when they vest. The issuance of these options was exempt from
        the
        registration requirements of the Securities Act pursuant to
        Rule 701.





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.





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





None.





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





None.





**Item 5. 
        Other Information.**





None.




35
  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
                      LP10.1*
                  Purchase,
                      Sale and Contribution Agreement dated March 20, 2007, by and
                      among Nielson
                      & Associates, Inc. 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
   36