Results of Operations

Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006

Oil and natural gas revenues for 2007 increased 52% to $125.8 million from $82.9 million in 2006. Production volumes for oil and natural gas in 2007 increased 49% to 17.5 Bcfe from 11.7 Bcfe in 2006. Realized average natural gas sales price for 2007 increased 3% to $6.77 per Mcf compared to $6.56 per Mcf in 2006, and the average oil sales price for 2007 increased 12% to $71.42 per barrel from $63.62 per barrel in 2006. The increase in natural gas production was primarily due to the production from new wells in the Barnett Shale area and the Baby Ruth and Doberman #1 wells in the Gulf Coast area.

The following table summarizes production volumes, average sales prices and operating revenues for our oil and natural gas operations for the years ended December 31, 2007 and 2006:

Oil and natural gas operating expenses for 2007 increased 50% to $24.7 million (or $1.41 per Mcfe) from $16.4 million (or $1.40 per Mcfe) in 2006. While total costs increased primarily due to increased production, costs per Mcfe remained relativelyunchanged from 2006 to 2007. The increase in total operating expenses was due to (1) approximately $3.3 million in higher transportation gathering and treating costs in the Barnett Shale, (2) higher saltwater disposal costs of $2.2 million, (3) increased compression costs of $1.1 million, (4) higher severance taxes of $0.9 million and (5) increased workover expenses of $0.4 million.

Depreciation, depletion and amortization (“DD&A”) expense for 2007 increased 35% to $41.9 million from $31.1 million in 2006. This increase was primarily due to an increase in production volumes partially offset by a decrease in the DD&A rate primarily due to lower overall finding cost of new reserves added in 2007.

General and administrative (“G&A”) expense for 2007 increased 27% to $18.9 million from $14.9 million for 2006. The increase in G&A was due primarily to (1) increased employee related costs of $2.5 million, (2) increased stock-based compensation expense of $2.0 million due to additional restricted shares issued in 2007 and higher stock prices (3) increased office expense of $0.6 million and (4) increased legal-professional fees of $0.3 million. These increases were partially offsetby decreased bad debt expense of $1.6 million primarily related to a 2006 outside operator bankruptcy filing.

The net loss on derivatives was $1.4 million for the year ended December 31, 2007, comprised of (1) a $8.0 million of unrealized mark-to-market net losses on derivatives ($5.2 million loss on oil and gas derivatives and $2.8 million loss on interest rate swaps) and (2) $6.6 million of net realized gains ($6.4 million gain from oil and gas derivatives and $0.2 milliongain from interest rate swaps).

Interest expense and capitalized interest in 2007 were $26.4 million and ($11.7) million, respectively, as compared to $19.1 million and $(10.0) million in 2006. These increases were attributable to the $75.0 million increase in borrowings under the Second Lien Credit Facility in January 2007, increased borrowings under the Senior Credit Facility and higher effective interest rates.

Income taxes decreased to $9.2 million in 2007 from $10.2 million in 2006 due to the decrease in pre-tax income.