Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005

Oil and natural gas revenues for 2006 increased 6% to $82.9 million from $78.2 million in 2005. Production volumes for oil and natural gas in 2006 increased 22% to 11.7 Bcfe from 9.6 Bcfe in 2005. Realized average natural gas sales price for 2006 decreased 17% to $6.56 per Mcf compared to $7.90 per Mcf in 2005, and the average oil sales price for 2006 increased 13% to $63.62 per barrel from $56.36 per barrel in 2005. The increase in natural gas production was primarily due to the production from the three Galloway Gas Unit wells and new wells in the Barnett Shale area. The gas production volume increases were partially offset by production declines from the Delta Farms #1 and the Beach House #1 wells.

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, 2006 and 2005:

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 partiallyoffset 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 newintegrated 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 milliongain 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.