Oil and natural gas operating expenses for 2006 increased 57% to $16.4 million from $10.4 million in 2005. Oil and natural gas operating expenses increased primarily due to (i) increased production, (ii) increased well count of Barnett Shale wells, (iii) higher workover expenses, (iv) higher ad valorem taxes and (v) rising costs of oil field services. This was partially offset by a $0.6 million decrease in severance taxes due to lower average natural gas prices in 2006 and a lower effective severance tax rate for our Barnett Shale wells which qualify for high cost gas tax well credits.

Depreciation, depletion and amortization (“DD&A”) expense for 2006 increased 46% to $31.1 million from $21.4 million in 2005. This increase was primarily due to (1) an increase in production volumes and (2) an increase in the DD&A rate primarily due to additions to the proved property cost base.

General and administrative (“G&A”) expense for 2006 increased 33% to $14.9 million from $11.2 million for 2005. The increase in G&A was due primarily to (i) higher incentive compensation and base salary costs of $0.6 million, (ii) increased contract labor cost of $1.0 million to cover certain accounting staff vacancies and to support the continued phase-in of our new integrated software system, (iii) $0.2 million in higher audit fees primarily related to the Company’s 2005 financial restatement for mark-to-market accounting derivatives and (iv) increased bad debt expenses of $1.5 million primarily due to an outside operator bankruptcy filing.

The net gain on derivatives was $16.5 million for the year ended December 31, 2006, comprised of (1) a $9.3 million of unrealized mark-to-market net gains on derivatives ($9.9 million gain on oil and gas derivatives and $0.6 million losses on interest rate swaps) and (2) a $7.2 million of net realized gains ($5.6 million gain from oil and gas derivatives, $1.0 million gain from interest rate swaps and $0.6 million gain from the sell down of the interest rate swap position as a result of an amendment to the Company’s second lien credit facility in December 2006).

Interest expense and capitalized interest in 2006 were $19.1 million and ($10.0) million, respectively, as compared to $11.0 million and $(5.8) million in 2005. These increases were attributable to the debt refinancing in July 2005 and borrowings under the Company’s Senior Secured Credit Facility beginning in May 2006.

Income taxes increased to $10.2 million in 2006 from $7.5 million in 2005 due to the increase in pre-tax income.

Year Ended December 31, 2005 Compared to the Year Ended December 31, 2004

Oil and natural gas revenues for 2005 increased 49% to $78.2 million from $52.4 million in 2004. Production volumes for natural gas in 2005 increased 27% to 8,206 MMcf from 6,462 MMcf in 2004. Realized average natural gas prices increased 29% to $7.90 per Mcf in 2005 from $6.14 per Mcf in 2004. Production volumes for oil in 2005 decreased 24% to 234 MBbls from 309 MBbls in 2004. The increase in natural gas production was primarily due to the commencement of production from the Galloway #1 and new wells in the Barnett Shale, Encinitas Project and Peters Ranch areas. The gas production volume increases were partially offset by: (1) production declines from the Delta Farms #1 and the Beach House #1 wells, which were shut-in for workovers during the second and third quarters of 2005; (2) the temporary shut-in of a number of wells as a result of the Katrina and Rita hurricanes; and (3) the sale of the Shadyside #1 in the first quarter of 2005. The decrease in oil production volume was principally due to production declines from the aforementioned workovers, the hurricane related shut-ins, and a natural production decline for the Hankamer #1.