The table below summarizes information concerning our activities in the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007.

Summary Operating Data

                                           Three Months Ended              Six Months Ended
                                                June 30,                       June 30,
                                          2007            2008            2007           2008
Production:
Oil (MBbls)                                    32              50              58             98
Natural gas (MMcf)                          1,856           2,949           3,491          5,529
Gas equivalent production (MMcfe)           2,049           3,254           3,839          6,119
Average daily (MMcfe)                        22.5            35.7            21.2           33.6

Average Sales Price:
Oil (per Bbl)
Wellhead price                         $    61.27       $  121.21      $    57.85      $  108.79
Effect of hedges                                -          (13.11 )             -         (10.32 )

Total                                  $    61.27       $  108.10      $    57.85      $   98.47
Natural gas (per Mcf)
Wellhead price                         $     7.63       $   12.22      $     7.25      $   10.71
Effect of hedges                              .18           (1.19 )           .28          (0.67 )

Total                                  $     7.81       $   11.03      $     7.53      $   10.04

Average sales price (per Mcfe)         $     8.04       $   11.70      $     7.72      $   10.66

Operating and Overhead Costs (per
Mcfe):
Lease operating                        $     1.04       $     .97      $      .97      $    1.07
Production and severance taxes                .34             .46             .31            .50
General and administrative                   1.03            1.47            1.01           1.20

Total                                  $     2.41       $    2.90      $     2.29      $    2.77


Cash Operating Margin (per Mcfe)       $     5.63       $    8.80      $     5.43      $    7.89


Other (per Mcfe):
Depreciation, depletion and
amortization - oil and natural gas
properties                             $     1.82       $    2.02      $     1.81      $    2.02

Results of Operations-Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007
Oil and Natural Gas Sales. Oil and natural gas sales in the three months ended June 30, 2008 increased 131.0% to $38,040,000 compared to the three months ended June 30, 2007. This increase was due to greater production of gas and natural oil, accounting for 58.7% of the increase, and higher oil and natural gas prices of 45.5%. The average price per barrel of oil and mcf of natural gas received in the three months ended June 30, 2008 was $108.10 and $11.03, respectively, compared to $61.27 and $7.81, respectively, in the three months ended June 30, 2007. Production of oil for the three months ended June 30, 2008 increased to 50 MBbls compared to 32 MBbls for the three months ended June 30, 2007. Natural gas production for the three months ended June 30, 2008 increased to 2,949 MMcf compared to 1,856 MMcf for the three months ended June 30, 2007, an increase of 58.9%. Greater production of oil and natural gas in the three months ended June 30, 2008 resulted from an increase in the number of producing wells in 2008. We expect continued increases in production and revenues, assuming no significant decline in prices, for the rest of the year resulting from continued drilling.
In the three months ended June 30, 2008, as a result of hedging activities, we recognized a decrease in oil and natural gas sales of $667,000 and $3,495,000, respectively, compared to an increase in natural gas sales of $344,000 in the three months ended June 30, 2007. In the second quarter of 2008, hedging reduced the average natural gas and oil sales price by $1.19 per Mcf and $13.11 per Bbl compared to an increase in natural gas sales price of $0.18 per Mcf in the second quarter of 2007. We intend to add additional oil and natural gas hedges in the future as production increases.
Lease Operations. Lease operations expense increased $1,023,000, or 48.0%, for the three months ended June 30, 2008 to $3,156,000, compared to the three months ended June 30, 2007. The increased expense resulted from a greater number of producing wells. Lease operations expense on an equivalent unit of production basis was $0.97 per Mcfe in the three months ended June 30, 2008 compared to $1.04 per Mcfe for the three months ended June 30, 2007. Lease operations expense will continue to grow throughout the year as the number of producing wells increase. However, we expect that lease operations expense will continue at this level on a per unit basis.
Production and Severance Taxes. Production and severance taxes increased 116.7% to $1,506,000 in the three months ended June 30, 2008 compared to $695,000 in the three months ended June 30, 2007. Production and severance taxes are assessed on the value of the oil and natural gas produced. The above increase resulted from higher oil and natural gas sales and sales price as described above, off-set by a severance tax refund of approximately $630,000 recorded in the second quarter of 2008. A growing number of wells with natural gas production are exempt from severance taxes or have reduced severance tax rates. In the second quarter of 2007, we recognized severance tax refunds of approximately $190,000. Upon approval from the State of Texas, certain wells are exempt from severance taxes or eligible for a reduced severance tax rate for a period of ten years and this exemption will reduce our expense on a per unit basis going forward.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $3,456,000, or 81.2%, to $7,713,000 in the three months ended June 30, 2008. This increase is due to higher production levels and higher costs. The oil and gas properties depreciation, depletion and amortization rate per equivalent unit of production was $2.02 per Mcfe in the three months ended June 30, 2008 compared to $1.82 per Mcfe in the three months ended June 30, 2007. The depletion rate increased primarily from the effects of higher drilling and completion costs. Depreciation, depletion and amortization expense is also expected to increase for the remainder of the year as production increases.

General and Administrative Expense. General and administrative expense for the three months ended June 30, 2008 was $4,786,000 compared to $2,113,000 for the three months ended June 30, 2007. This increase of $2,673,000, or 126.5%, was the result of additional administrative and supervisory personnel needed to manage our growth. Additionally, we recorded a $1,170,000 charge to bad debt expense related to our estimated exposure from a bankruptcy filed by one of our oil purchasers. General and administrative expense per equivalent unit of production was $1.47 per Mcfe for the three months ended June 30, 2008 compared to $1.03 per Mcfe for the comparable period in 2007. Excluding the charge to bad debt expense, general and administrative expense on a per equivalent unit of production would have been $1.11 per Mcfe for the second quarter of 2008. We expect general and administrative expense will increase for the remainder of the year due to increases in personnel and related employee benefit costs and compensation increases implemented on July 1, 2008 to align our compensation more closely with our peers. We expect these costs to decline on a per unit basis as our production increases.
Interest. Interest expense for the three months ended June 30, 2008 was $2,905,000 compared to $522,000 for the three months ended June 30, 2007. This increase was primarily attributable to a greater amount of outstanding debt during the three months ended June 30, 2008.
Results of Operations-Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Oil and Natural Gas Sales. Oil and natural gas sales in the six months ended June 30, 2008 increased 120.1% to $65,239,000 compared to the six months ended June 30, 2007. This increase is due to an increase in production of natural gas and oil, accounting for 59.4% of the increase, and an increase in oil and natural gas prices of 38.1%. The average prices per barrel of oil and mcf of natural gas received in the six months ended June 30, 2008 were $98.47 and $10.04, respectively, compared to $57.85 and $7.53, respectively, in the six months ended June 30, 2007. Production of oil for the first six months ended 2008 increased to 98 MBbls compared to 58 MBbls for the first six months of 2007. Natural gas production increased to 5,529 MMcf for the first six months of 2008 compared to 3,491 MMcf for the first six months ended June 30, 2007, an increase of 58.4%.
In the six months ended June 30, 2008, as a result of hedging activities, we recognized a decrease in oil and natural gas sales of $1,017,000 and $3,680,000, respectively, compared to an increase in natural gas sales of $994,000 in the six months ended June 30, 2007. In the six months ended June 30, 2008, hedging reduced the average natural gas and oil sales price by $0.67 per Mcf and $10.32 per Bbl compared to an increase in natural gas sales price of $0.28 per Mcf in the six months ended June 30, 2007. We intend to add additional oil and natural gas hedges in the future as production increases.
Lease Operations. Lease operations expense increased $2,822,000 in the six months ended June 30, 2008 to $6,540,000, a 75.9% increase compared to the six months ended June 30, 2007. Increased expense resulted from a greater number of producing wells. Lease operations expense on an equivalent unit of production basis was $1.07 per Mcfe in the six months ended June 30, 2008 compared to $0.97 per Mcfe for the six months ended June 30, 2007.

Production and Severance Taxes. Production and severance taxes increased 157.4% to $3,058,000 in the six months ended June 30, 2008 compared to $1,188,000 in the six months ended June 30, 2007. Production and severance taxes are assessed on the value of the oil and natural gas produced. The above increase resulted from higher oil and natural gas sales described above off-set by severance tax refunds of approximately $630,000 recorded in the first six months of 2008. A growing number of wells with natural gas production are exempt from severance taxes or have reduced severance tax rates. In the first six months of 2007, we recognized severance tax refunds of approximately $369,000. Upon approval from the State of Texas certain wells are exempt from severance taxes or eligible for a reduced severance tax rate for a period of ten years and this will reduce our expense on a per unit basis going forward.
Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $6,522,000 to $14,456,000 in the six months ended June 30, 2008, up 82.2% from the six months ended June 30, 2007. This increase is due to higher production levels and higher costs. The oil and gas properties depreciation, depletion and amortization rate per equivalent unit of production was $2.02 per Mcfe in the six months ended June 30, 2008 compared to $1.81 per Mcfe in the six months ended June 30, 2007. The depletion rate increased primarily from the effect of higher drilling and completion costs. Depreciation, depletion and amortization expense is also expected to increase for the remainder of the year as production increases.
General and Administrative Expense. General and administrative expense for the six months ended June 30, 2008 was $7,366,000 compared to $3,877,000 for the six months ended June 30, 2007, an increase of 90.0%. This increase of $3,489,000 was the result of additional administrative and supervisory personnel needed to manage our growth. Additionally, we recorded a $1,170,000 charge to bad debt expense related to our estimated exposure from a bankruptcy filed by one of our oil purchasers. General and administrative expense per equivalent unit of production was $1.20 per Mcfe for the six months ended June 30, 2008 compared to $1.01 per Mcfe for the comparable period in 2007. Excluding the charge to bad debt expense, general and administrative expense on a per unit of production would have been $1.01 per Mcfe for the first half of 2008. We expect general and administrative expense will increase for the remainder of the year due to increases in personnel and related employee benefit costs and compensation increases implemented on July 1, 2008 to align our compensation more closely with our peers. We expect these costs to decline on a per unit basis as our production increases.
Interest. Interest expense for the six months ended June 30, 2008 was $6,004,000 compared to $866,000 for the six months ended June 30, 2007. This increase is primarily attributable to a greater amount of outstanding debt during the first six months of 2008.
Net Income and Net Income Per Share
For the three months ended June 30, 2008 and 2007, we reported net income of $12,553,000 and $4,637,000, respectively, an increase of 170.7%. Net income applicable to common stock for the three months ended June 30, 2008 and 2007 was $11,396,000 and $3,481,000, respectively, an increase of 227.4%. Net income per basic and fully diluted share was $0.86 and $0.77 respectively, for the second quarter of 2008 compared to $0.26 for the second quarter of 2007. Weighted average fully-diluted shares outstanding increased by 9.8% from 13,407,477 shares in the second quarter of 2007 to 14,724,564 shares in the second quarter of 2008.

For the six months ended June 30, 2008 and 2007, we reported net income of $19,049,000 and $8,451,000, respectively, an increase of 125.4%. Net income applicable to common stock for the six months ended June 30, 2008 and 2007 was $16,736,000 and $6,138,000, respectively, an increase of 172.7%. Net income per basic and fully diluted share was $1.26 and $1.19 respectively, for the first half of 2008 compared to $0.48 and $0.47 respectively, for the first half of 2007. Weighted average fully-diluted shares outstanding increased by 7.9% from 13,014,414 shares in the first half of 2007 to 14,037,223 shares in the first half of 2008.
We recognized additional dilutive shares of 1,204,447 and 610,859 for the three and six months ended June 30, 2008, respectively, from the February 2008 issuance of net share settlement 5.00% Senior Convertible Notes due 2013. The dilutive effect of the convertible bonds varies based on the Company's stock price and for purposes of computing dilutive shares outstanding was based on the average stock price for the Company for the three and six months ended June 30, 2008 of $47.32 and $38.64, respectively. The number of shares issuable increases as the Company's common stock price increases and is finally determined based on the Company's volume weighted average stock price for a specified 60 day measurement period ending on or about the actual conversion date. Capital Resources and Liquidity
Our business is capital intensive. Our ability to grow our reserve base is dependent upon our ability to obtain outside capital and generate cash flows from operating activities to fund our investment activities. Our cash flows from operating activities are substantially dependent upon oil and gas prices and significant decreases or increases in market prices result in variations of cash flow and affect the amount of our liquidity. We do not expect to enter into drilling commitments unless we have the funding available.
As a result of recent oil and natural gas price increases providing additional cash flow and increases in our borrowing base under our revolving bank credit facility, we have increased our capital expenditure budget for 2008 to $271 million from $195 million. In the third quarter, we plan to direct the majority of our development focus to Haynseville/Bossier horizontal wells. We expect to drill and operate 4 -6 gross and net wells. We also expect our joint development partner, Penn Virginia Oil & Gas, L.P. will drill 2 gross (0.8 net) Haynesville/Bossier horizontal wells on our jointly owned acreage in the second half of 2008. This shift in drilling focus to Haynesville/Bossier versus Cotton Valley wells and the extended drilling time for horizontal wells will bring our planned wells to a range of 68.3 to 78.8 net wells for all of 2008. Funding for these budgeted capital expenditures are expected to be primarily provided by cash flow, working capital, borrowing under our revolving bank credit facility and net proceeds from our common stock offering completed in July 2008. As of June 30, 2008, we had $63.5 million outstanding on our credit facility that has a borrowing base of $140 million. In July 2008, the revolving bank credit facility was repaid with proceeds from our common stock offering which we received $133.7 million, net of offering expenses. Our borrowing base will be redetermined in the fourth quarter of 2008 and we expect additional increases in the borrowing base as additional production is established.

We are actively pursuing acquisition of additional acreage in and around our core area which may include producing properties. If we are successful in any of these, we may need additional debt and equity financing in 2008 depending on the size of any prospective transactions.
Cash Flow-Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
In the six months ended June 30, 2008 and 2007, we spent $120.9 and $91.7 million, respectively, in oil and gas acquisitions and development activities, including the acquisition of property and equipment. These investments were funded for the six months ended June 30, 2008 by working capital borrowings under our credit facility and cash flow. Cash flow provided by operating activities in the six months ended June 30, 2008 and 2007 was $39.6 million and $23.9 million, respectively. The increase in 2008 was a result of more production from new wells drilled and higher commodity prices. Revolving Bank Credit Facility and Other Debt Revolving Bank Credit Facility. We have a secured revolving bank credit facility, which matures in July 15, 2011 and provides for a line of credit of up to $250 million (the "commitment"), subject to a borrowing base which is based on a periodic evaluation of oil and gas reserves ("borrowing base"). The amount of credit available at any one time under the credit facility is the lesser of the borrowing base or the amount of the commitment. At June 30, 2008, the debt amount outstanding was $63.5 million with a borrowing base of $140 million. The terms of the credit facility are more fully described in our 2007 10-K. The credit facility contains various affirmative and restrictive covenants. These covenants, among other things, prohibit additional indebtedness, sale of assets, mergers and consolidations, dividends and distributions, changes in management and require the maintenance of various financial ratios. We were in compliance with all financial and nonfinancial covenants at June 30, 2008. Secured and Unsecured Notes. In July 2007, we issued $30 million of 7.58% Series A Notes due July 31, 2012 ("Series A Notes") which are secured by a second lien on all of our assets. We also issued $125 million of 5.00% Convertible Notes due 2013 (the "Convertible Notes") in February 2008. The Convertible Notes are unsecured and due to the fact that the Convertible Notes are convertible after June 30, 2008, are classified as current liabilities in the consolidated balance sheet as of June 30, 2008. The terms of the Series A Notes and the Convertible Notes are more fully described in our 2007 10-K. We were in compliance with the terms of the Series A Notes and Convertible Notes at June 30, 2008.

Working Capital
At June 30, 2008, we had a working capital deficit of $153.0 million. Including availability under our credit facility and excluding the reclassification of the Convertible Notes to current, our working capital as of June 30, 2008 would have been $48.5 million.
Subsequent Events
In July 2008, we completed an offering of 2,000,000 shares of common stock for $70.50 per share. Net proceeds to us were approximately $133,700,000. We repaid outstanding indebtedness under our revolving bank credit facility. The balance of the net proceeds will be used to fund the development of oil and natural gas properties, acquisitions of additional properties and for general corporate purposes. We anticipate reborrowing under our revolving bank credit facility for the same purpose.
Price Risk Management
See Part I, Item 3 - Quantitative and Qualitative Disclosure about Market Risk. Critical Accounting Policies
Our critical accounting policies are summarized in our 2007 10-K. There have been no changes in those policies.
Contractual Obligations
In the three and six months ended June 30, 2008, there have been no material changes outside the ordinary course of business in the contractual obligations listed in our 2007 10-K, except as set forth below.
In June 2008, we entered into an operating lease for a fractional interest in an airplane and two 3 year drilling contracts with Helmerich & Payne, Inc. for two flex drilling rigs beginning in March and April of 2009. We anticipate entering into additional drilling contracts in the future. The following table describes these obligations:

                                               Payments due by Period(1)
                                            Less                                   More
                                            than         1-3          3-5          than
                              Total        1 year       years        years        5 years
                                                    (in thousands)
        Aircraft lease       $  2,942     $    294     $  1,177     $  1,177     $     294
        Drilling contracts     64,166            -       36,539       27,627             -

        Total                $ 67,108     $    294     $ 37,716     $ 28,804     $     294

(1) Periods beginning January 1, 2008 and assume drilling rigs are fully used during the contract term.

Recently Issued Accounting Standards
See Note A to our financial statements included in Part I, Item 1.
Guidance
The following is our updated production guidance as of the date of filing of
this report:

                    Production
                    Second half 2008               7.8 Bcfe
                    Full year 2008                13.8 Bcfe
                    Daily exit rate at year end   60.0 Mmcfe/d

Forward-Looking Statements
All statements made in this document and accompanying supplements other than purely historical information are ''forward looking statements'' within the meaning of the federal securities laws. These statements reflect expectations and are based on historical operating trends, proved reserve positions and other currently available information. Forward looking statements include statements regarding future plans and objectives, future exploration and development expenditures and number and location of planned wells, statements regarding the quality of our properties and potential reserve and production levels. These statements may be preceded or followed by or otherwise include the words ''believes'', ''expects'', ''anticipates'', ''intends'', "continues", ''plans'', ''estimates'', ''projects'' or similar expressions or statements that events ''will'', "should", "could", "might", or ''may'' occur. Except as otherwise specifically indicated, these statements assume that no significant changes will occur in the operating environment for oil and gas properties and that there will be no material acquisitions or divestitures except as otherwise described. The forward looking statements in this report are subject to all the risks and uncertainties which are described in our 2007 10-K and in this document. We may also make material acquisitions or divestitures or enter into financing . . .