General

We are a 'Pure Play', E & P company that has significant Haynesville / Bossier Shale acreage in East Texas and North Louisiana. We have 435 Bcfe in proved reserves at December 31, 2007 that are 94% natural gas. We have 480 net undrilled Haynesville /Bossier 80 acre horizontal locations, 177.4 net Cotton Valley ("CV") producers; and 1,974 net CV un-drilled locations. As of November, 2008, four drilling rigs were currently developing our contiguous, multi-layer gas resource play on the Sabine Uplift; Carthage, North Field, in Panola & Harrison County of East Texas, and Caddo Parish of North Louisiana. We have invested $80 million in infrastructure which has contributed to very low finding and development costs. Our properties also have 31 net Travis Peak/Hosston Sands & Pettit producers. These multiple resource layers provide high probability and repeatable, organic growth with 100% drilling success. Headquartered in Oklahoma City, Oklahoma, we have interests in 227 net producing wells and operate 81% of our reserves. Our strategy is to grow shareholder value through Haynesville/Bossier Shale horizontal well development as well as Cotton Valley Sand ("CVS") vertical wells, to continue acreage acquisitions, to focus on operational growth around our core area, and to convert our natural gas reserves to proved, while maintaining balanced prudent financial management.

In addition to continuing to drill Cotton Valley wells in our core area during the nine months of 2008, we also began to focus on expansion of our acreage in or around the core area.

As of April 1, 2008, we completed natural gas processing agreements with PVR East Texas Gas Processing, LLC and Waskom Gas Processing Company which resulted in our natural gas production from our core area being processed beginning in April 1, 2008.

The Company will complete its first Haynesville/Bossier ("H/B") horizontal well in late November, 2008. Two operated rigs are currently drilling the H/B and should reach total depth in late December. Two more operated rigs will spud H/B wells in the fourth quarter. Four rigs in our operated area will be drilling H/B wells going into 2009. The first 17 permitted H/B horizontals will average 3,700 foot laterals and 12 stage fracture treatments. The Company continues to drill CVS vertical wells with two additional operated rigs. This shift in drilling focus to H/B from the CVS and the extended drilling time for horizontal wells will bring our planned wells to 93 gross (64.6 net) wells for 2008.

We completed in July 2008, an acquisition of 7,300 net predominantly undeveloped acres in Harrison, Marion, and Cass counties in East Texas and Caddo Parish, Louisiana, which includes rights in the Haynesville/Bossier formation. In addition, we purchased an additional 10,955 net Haynesville acres bringing our total Haynesville prospective acreage to 38,455 net acres as of September 30, 2008. Our overall net operated acreage position has grown 130% in 2008 to a total of 41,347 net operated Cotton Valley, Travis Peak acres as of September 30, 2008. For the quarter ending September 30, 2008, we drilled a total of 18 gross (13.87 net) Cotton Valley and Travis Peak vertical wells.

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

Summary Operating Data



                                                       Three months ended         Nine months ended
                                                         September 30,              September 30,
                                                        2007         2008          2007        2008
Production:
Oil (MBbls)                                                  31          51             89        150
Natural gas (MMcf)                                        2,018       3,204          5,509      8,733
Gas equivalent production (MMcfe)                         2,201       3,513          6,040      9,632
Average daily (MMcfe)                                      23.9        38.2           22.1       35.2

Average Sales Price:
Oil (per Bbl)
Wellhead price                                       $    73.27    $ 114.97     $    63.17   $ 110.91
Effect of hedges                                             -       (15.14 )           -      (11.97 )

Total                                                $    73.27    $  99.83     $    63.17   $  98.94
Natural gas (per Mcf)
Wellhead price                                       $     6.60    $  10.42     $     7.01   $  10.61
Effect of hedges                                           0.74       (0.66 )         0.45      (0.67 )

Total                                                $     7.34    $   9.76     $     7.46   $   9.94

Average sales price (per Mcfe)                       $     7.75    $  10.36     $     7.73   $  10.55

Operating and Overhead Costs (per Mcfe):
Lease operating                                      $     1.14    $   1.17     $     1.03   $   1.11
Production and severance taxes                             0.33        0.47           0.32       0.49
General and administrative                                 0.93        1.31           0.98       1.24

Total                                                $     2.40    $   2.95     $     2.33   $   2.84

Cash Operating Margin (per Mcfe)                     $     5.35    $   7.41     $     5.40   $   7.71

Other (per Mcfe):
Depreciation, depletion and amortization-oil and
natural gas properties                               $     1.82    $   2.00     $     1.84   $   2.01

Results of Operations-Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Oil and Natural Gas Sales. Oil and natural gas sales in the three months ended September 30, 2008 increased 113% to $36,408,000 compared to the three months ended

September 30, 2007. Of the increase, 59% was due to higher natural gas and oil production and 34% from higher natural gas and oil prices. The average price per barrel of oil and mcf of natural gas received in the three months ended September 30, 2008 was $99.83 and $9.76, respectively, compared to $73.27 and $7.34, respectively, in the three months ended September 30, 2007. Production of oil for the three months ended September 30, 2008 increased to 51 MBbls compared to 31 MBbls for the three months ended September 30, 2007. Natural gas production for the three months ended September 30, 2008 increased to 3,204 MMcf compared to 2,018 MMcf for the three months ended September 30, 2007, an increase of 58.8%. Greater production of oil and natural gas in the three months ended September 30, 2008 was the result of an increase in the number of producing wells in 2008. We expect continued increases in production for the rest of the year based on continued drilling success. Increases in revenues are also expected but may be moderated by declines in oil and natural gas prices in the fourth quarter.

In the three months ended September 30, 2008, as a result of hedging activities, we recognized a decrease in oil and natural gas sales of $777,000 and $2,116,000, respectively, compared to an increase in natural gas sales of $1,499,000 in the three months ended September 30, 2007. In the third quarter of 2008, hedging reduced the average natural gas and oil sales price by $0.66 per Mcf and $15.14 per Bbl compared to an increase in natural gas sales price of $0.74 per Mcf in the third quarter of 2007.

Lease Operations. Lease operations expense increased $1,601,000, or 64%, for the three months ended September 30, 2008 to $4,111,000, compared to the three months ended September 30, 2007. The increased expense resulted from a greater number of producing wells, in addition to expenses related to several well workovers and road and compressor repairs incurred during the three months ended September 30, 2008. Lease operations expense on an equivalent unit of production basis was $1.17 per Mcfe in the three months ended September 30, 2008 compared to $1.14 per Mcfe for the three months ended September 30, 2007. Lease operations expense will continue to grow throughout the year as the number of producing wells increase. We expect lease operations expense on a per unit basis to decline in the fourth quarter barring any unplanned workover or repair expenses and if our H/B drilling program is successful.

Production and Severance Taxes. Production and severance taxes increased 126% to $1,651,000 in the three months ended September 30, 2008 compared to $732,000 in the three months ended September 30, 2007. Production and severance taxes are assessed on the value of the oil and natural gas produced. The increase resulted from higher oil and natural gas sales and sales price as described above, offset by a severance tax refund of approximately $334,000 recorded in the third quarter of 2008. There were no severance tax refunds recognized in the third quarter of 2007. A growing number of wells with natural gas production are exempt from severance taxes or have reduced severance tax rates. 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.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $3,657,000, or 79%, to $8,287,000 in the three months ended September 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 $2.00 per Mcfe in the three months ended September 30, 2008 compared to $1.82 per Mcfe in the three months ended September 30, 2007. The depletion rate increase was largely the result of higher drilling and completion costs. Depreciation, depletion and amortization expense is 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 September 30, 2008 was $4,592,000 compared to $2,037,000 for the three months ended September 30, 2007. The increase of $2,555,000, or 125%, was largely the result of hiring additional administrative and supervisory personnel needed to manage our growth and compensation increases implemented on July 1, 2008 to align our compensation more closely with our peers. Approximately $1.2 million of the general and administrative expenses in the third quarter of 2008 was related to non-cash compensation expense compared to $474,000 in the third quarter of 2007. Additionally, we recorded a $422,000 reduction to bad debt expense during the third quarter of 2008 related to our estimated exposure from a bankruptcy filed by one of our oil purchasers based on recent positive developments related to our recoverability. General and administrative expense per equivalent unit of production was $1.31 per Mcfe for the three months ended September 30, 2008 compared to $0.93 per Mcfe for the comparable period in 2007. We expect general and administrative expense to increase for the remainder of the year due to personnel additions and related employee benefits and compensation. Over the longer term, these costs should decline on a per unit basis as our production increases.

Interest. Interest expense for the three months ended September 30, 2008 was $2,591,000 compared to $1,215,000 for the three months ended September 30, 2007. This increase is due to a greater amount of outstanding debt during the three months ended September 30, 2008.

Results of Operations-Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Oil and Natural Gas Sales. Oil and natural gas sales in the nine months ended September 30, 2008 increased 118% to $101,647,000 compared to the nine months ended September 30, 2007. Of the increase, 60% is due higher natural gas and oil production and 36% to an increase in natural gas and oil prices. The average prices per barrel of oil and mcf of natural gas received in the nine months ended September 30, 2008 were $98.94 and $9.94, respectively, compared to $63.17 and $7.46, respectively, in the nine months ended September 30, 2007. Production of oil for the first nine months of 2008 increased to 150 MBbls compared to 89 MBbls for the first nine months of 2007. Natural gas production increased to 8,733 MMcf for the first nine months of 2008 compared to 5,509 MMcf for the first nine months of September 30, 2007, an increase of 59%.

In the nine months ended September 30, 2008, as a result of hedging activities, we recognized a decrease in oil and natural gas sales of $1,794,000 and $5,796,000, respectively, compared to an increase in natural gas sales of $2,493,000 in the nine months ended September 30, 2007. In the nine months ended September 30, 2008, hedging reduced the average natural

gas and oil sales price by $0.67 per Mcf and $11.97 per Bbl compared to an increase in natural gas sales price of $0.45 per Mcf in the nine months ended September 30, 2007. Lease Operations. Lease operations expense increased $4,422,000 in the nine months ended September 30, 2008 to $10,651,000, a 71% increase compared to the nine months ended September 30, 2007. Increased expense resulted from a greater number of producing wells in addition to maintenance expenses for the Company's growing field operations. Lease operations expense on an equivalent unit of production basis was $1.11 per Mcfe in the nine months ended September 30, 2008 compared to $1.03 per Mcfe for the nine months ended September 30, 2007.

Production and Severance Taxes. Production and severance taxes increased 145% to $4,709,000 in the nine months ended September 30, 2008 compared to $1,919,000 in the nine months ended September 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 offset by severance tax refunds of approximately $691,000 recorded in the first nine 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 nine 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.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization expense increased $10,179,000 to $22,743,000 in the nine months ended September 30, 2008, up 81% from the nine months ended September 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 $2.01 per Mcfe in the nine months ended September 30, 2008 compared to $1.84 per Mcfe in the nine months ended September 30, 2007. The depletion rate increase was largely the result of higher drilling and completion costs. Depreciation, depletion and amortization expense is expected to increase for the remainder of the year as production increases.

General and Administrative Expense. General and administrative expense for the nine months ended September 30, 2008 was $11,958,000 compared to $5,914,000 for the nine months ended September 30, 2007, an increase of 102%. The increase of $6,044,000 was largely the result of hiring additional administrative and supervisory personnel to manage our growth and compensation increases implemented on July 1, 2008 to align our compensation more closely with our peers. Approximately $2.3 million of the general and administrative expenses in the first nine months of 2008 was related to non-cash compensation expense compared to $1.1 million in the first nine months of 2007. Additionally, we recorded a $748,000 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 $1.24 per Mcfe for the nine months ended September 30, 2008 compared to $0.98 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 $1.16 per Mcfe for the first nine months of 2008. Longer term, general and administrative costs should decline on a per unit basis as our production increases.

Interest. Interest expense for the nine months ended September 30, 2008 was $8,595,000 compared to $2,081,000 for the nine months ended September 30, 2007. This increase is due to a greater amount of outstanding debt during the first nine months of 2008.

Net Income and Net Income Per Share

For the three months ended September 30, 2008 and 2007, we reported net income of $10.3 million and $3.6 million, respectively, an increase of 189%. Net income applicable to common stock for the three months ended September 30, 2008 and 2007 was $9.1 million and $2.4 million, respectively, an increase of 280%. Net income per basic and fully diluted share was $0.61 and $0.53 respectively, for the third quarter of 2008 compared to $0.18 per basic and fully diluted share for the third quarter of 2007. Weighted average fully-diluted shares outstanding increased by 28% from 13,396,694 shares in the third quarter of 2007 to 17,099,929 shares in the third quarter of 2008.

For the nine months ended September 30, 2008 and 2007, we reported net income of $29.3 million and $12.0 million, respectively, an increase of 144%. Net income applicable to common stock for the nine months ended September 30, 2008 and 2007 was $25.9 million and $8.5 million, respectively, an increase of 203%. Net income per basic and fully diluted share was $1.87 and $1.70 respectively, for the nine months of 2008 compared to $.66 and $.65 respectively, for the nine months of 2007. Weighted average fully-diluted shares outstanding increased by 16% from 13,142,720 shares in the first nine months of 2007 to 15,224,742 shares in the first nine months of 2008.

We recognized additional dilutive shares of 1,828,046 and 1,159,558 for the three and nine months ended September 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 notes varies based on our stock price and for purposes of computing dilutive shares outstanding was based on the average stock price for the three and nine months ended September 30, 2008 of $61.94 and $46.53, respectively. The number of shares issuable increases as our common stock price increases and is finally determined based on the volume weighted average stock price for a specified 60-day measurement period ending on or about the actual conversion date.

Capital Resources and Liquidity

During the third quarter of 2008, we completed a 2,000,000 share common stock offering that netted the Company $134 million. The proceeds of the offering were used to repay our bank line of credit in full and to fund continuing operations. The line of credit remained undrawn until late in the third quarter when we drew down $50 million to provide liquidity and to minimize our risk to the on-going banking and financial crisis. We made this draw to be conservative about our liquidity. We do not, at this time believe we have any material risks associated with our bank group's ability to continue funding as agreed. We plan to maintain approximately six

months of operating funds on-hand in the near term. In October 2008, we received a $50 million increase to our bank borrowing base under our revolving bank credit facility that raises the total borrowing base to $190 million. We expect to fund future capital expenditures with operating cash flows and borrowings under the bank line of credit. Entering into 2009, we anticipate having capital resources of approximately $160 million through a combination of cash and available funds under our revolving bank credit facility. Based on what we believe to be conservative production and price estimates, we expect to have sufficient cash flow and additional availability under our bank credit facility, if necessary, to fund our 2009 projected capital expenditures of $400 million.

Cash Flow-Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

In the nine months ended September 30, 2008 and 2007, we spent $216.1 million and $138.6 million, respectively, in oil and gas acquisitions and development activities, including the acquisition of property and equipment. These investments were funded for the nine months ended September 30, 2008 by proceeds from our convertible senior note offering in February 2008, working capital borrowings under our credit facility, proceeds from our July 2008 equity offering and cash flow. Cash flow provided by operating activities in the nine months ended September 30, 2008 and 2007 was $58.8 million and $32.4 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 on 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 September 30, 2008, the debt amount outstanding was $50 million with a borrowing base of $140 million. In October 2008, we received a $50 million increase in our borrowing base under our revolving bank credit facility which raises our total borrowing base to $190 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 September 30, 2008. Our lending bank groups consists of Capital One, N.A., BNP Paribas, Union Bank of California, N.A., Compass Bank, and Fortis Capital Corp. and we had no difficulty in the borrowing base increase in October despite volatile conditions in the credit markets.

We are in the process of finalizing an amendment to our revolving bank credit facility to (i) increase the hedging limitation from 80% to 85% of proved development producing reserves (ii) modify the interest rate provisions to be higher (instead of lesser) of the designated base rate or LIBOR; and
(iii) address issues if one of the banks fails to fund. We expect to finalize this amendment in November of 2008.

Secured and Unsecured Notes. In July 2007, we issued $30 million of 7.58% Series A Notes due July 31, 2012 (the "Series A Notes") which are secured by a second lien on all of our assets. We also issued $125 million of 5.00% Senior Convertible Notes due 2013 (the "Convertible Notes") in February 2008. These Senior Notes are unsecured and due to the fact that the Senior Notes are convertible after June 30, 2008, are classified as current liabilities in the consolidated balance sheet as of September 30, 2008. The terms of the Series A Notes and the Senior Notes are more fully described in our 2007 10-K. We were in compliance with the terms of the Series A Notes and Senior Notes at September 30, 2008.

Working Capital

At September 30, 2008, we had a working capital deficit of $86.7 million. Including availability under our credit facility and excluding the reclassification of the convertible notes to current, our working capital as of September 30, 2008 would have been $128.3 million.

Common Stock Offering

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 $134 million. 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 nine months ended September 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 aircraft and two three year drilling contracts with Helmerich & Payne, Inc. for two flex drilling rigs beginning in April and May of 2009. In August 2008, two additional three year drilling contracts were entered into with Helmerich & Payne, Inc. beginning in August and October of 2009. In September 2008, a two year drilling contract was entered into with Unit Texas Drilling, LLC beginning in June 2009. The following table describes these obligations:

                                             Payments due by Period(1)
                                          Less                                   More
                                          than                                   than
                              Total      1 year     1-3 years     3-5 years     5 years
                                                   (in thousands)
       Aircraft lease       $   2,795   $    147   $     1,177   $     1,177   $     294
       Drilling contracts     145,489         -         72,212        73,277          -

       Total                $ 148,284   $    147   $    73,389   $    74,454   $     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 and capital expenditure guidance as of
the date of filing of this report:



                     2008 Production Guidance
                     Fourth quarter 2008             3.4 Bcfe
. . .