Private Placement”), a 4.7% discount to the close price on the Nasdaq stock market for our common stock the day prior to pricing. The net proceeds from the 2005 Private Placement, after the placement agents’ fees but before offering expenses, were approximately $17.0 million. We used the proceeds from the 2005 Private Placement to fund a portion of our 2005 capital expenditure program, including our drilling programs in the Barnett Shale and onshore Gulf Coast areas.

In July 2006, we sold 1.35 million shares of our common stock to institutional investors at a price of $26.00 per share in a private placement (the “2006 Private Placement”). The number of shares sold was approximately 5.4% of our fully diluted shares outstanding before the offering. The net proceeds, after deducting placement agents’ fees but before paying offering expenses, of approximately $33.7 million were principally used to fund a portion of our 2006 capital expenditures program. In connection with the 2006 Private Placement, we entered into Subscription and Registration Rights Agreements (the “Subscription and Registration Rights Agreements”) with the investors in the 2006 Private Placement. The Subscription and Registration Rights Agreements provide registration rights with respect to the shares purchased in the 2006 Private Placement. We filed a resale shelf registration statement in connection with the 2006 Private Placement that has been declared effective by the SEC. We are generally subject to specified penalties in the event we do not maintain the effectiveness of the registration statement. We are subject to certain covenants under the terms of the Subscription and Registration Rights Agreements, including the requirement that the registration statement be kept effective for resale of shares for two years. In certain situations, we are required to indemnify the investors in the 2006 Private Placement, including without limitation, for certain liabilities under the Securities Act.

Barnett Shale Area

In mid-2003, we became active in the Barnett Shale play located in Tarrant and Parker counties in Northeast Texas. Our activity accelerated as a result of the acquisition on February 27, 2004 of working interests and acreage in certain oil and gas wells located in the Newark East Field in Denton County, Texas in the Barnett Shale trend for $8.2 million (the “Barnett Shale Acquisition”). This acquisition included non-operated working interests in properties ranging from 12.5% to 45% over 3,800 gross acres, or an average working interest of 39%. The acquisition included 21 existing gross wells (6.7 net) and interests in approximately 1,500 net acres.

In April 2005, we acquired leases and producing wells in the Barnett Shale for approximately $4.1 million which consisted of approximately 600 net acres and working interests in 14 existing gross wells (7.3 net) with an estimated 5.4 MMcfe of proved reserves, based upon our internal estimates. All of the interests in the wells acquired related to wells in which we already had an interest. The consideration paid for this acquisition was $2.3 million in cash and 112,697 shares of our common stock.

Initially, we financed our Barnett Shale activities with our available cash on hand. We subsequently financed a portion of our 2004 capital expenditure program for the Barnett Shale area with a portion of the funds from the October 2004 issuance of the 10% Senior Subordinated Secured Notes the 2005 Private Placement, the 2006 Private Placement and the Second Lien Credit Facility.

In the Barnett Shale area, we drilled 33 gross wells (13.7 net) in 2004, 37 gross wells (22.1 net) in 2005 and 46 gross wells (33.9 net) in 2006, all of which were successful. We plan to drill 53 gross wells (47 net) in this area in 2007. At the end of 2006 our net production had risen to approximately 19 MMcfe/d with 92 gross wells on line and another 15 gross wells in various stages of testing, completion and awaiting pipeline hookup. As of March 20, 2007, our estimated net production in this area was 21 MMcfe/d.

In addition to our drilling activity, we have continued to expand our Barnett Shale acreage position, growing our net leasehold acreage from approximately 80,300 to 86,752 acres, at the end of 2005 and 2006, respectively. Similarly, we have increased our estimated number of developmental locations from 58 to 71 horizontal locations, at the end of 2005 and 2006, respectively, and we have increased our estimated number of exploratory drilling locations (horizontal) in the Barnett Shale area from 432 to 609 locations, at the end of 2005 and 2006, respectively.

Pinnacle Gas Resources, Inc.

During the second quarter of 2001, we acquired interests in natural gas and oil leases in Wyoming and Montana in areas prospective for coalbed methane and subsequently began to drill wells on those leases. During the second quarter of 2003, we (through CCBM, our wholly-owned subsidiary) contributed our interests in certain of these leases to a newly formed company, Pinnacle Gas Resources, Inc. (“Pinnacle”). In exchange for this contribution, we received 37.5% of the common stock of Pinnacle and options to purchase additional Pinnacle common stock.

In March 2004, Credit Suisse First Boston Private Equity Entities (the “CSFB Parties”) contributed additional funds of $11.8 million into Pinnacle to fund its 2004 development program, which increased the CSFB Parties’ ownership to 66.7% on a fully diluted basis assuming we and U.S. Energy Corp. each elected not to exercise our available options.